Coin World Report:
Investors and cryptocurrency enthusiasts have always been interested in Bitcoin’s four-year cycle. They carefully track these recurring price patterns to predict upcoming market trends. However, considering the constantly changing dynamics of the Bitcoin market and the economic environment, we must admit that the traditional four-year capital flow cycle may be nearing its end. Here, we will explore the possibility of the end of the four-year cycle for Bitcoin and whether there is sufficient evidence to support this theory or if it is just speculation.
1. Interpreting Bitcoin’s Four-Year Cycle
Bitcoin’s four-year cycle is primarily driven by the Bitcoin halving events, which occur approximately every four years. During these events, the mining rewards for Bitcoin transactions are halved, reducing the circulation speed of new Bitcoins. In the past, these halving events have triggered bullish/bearish cycles in the Bitcoin price:
– Halving Event: The new Bitcoin supply is reduced by half.
– Post-Halving Bull Market: Typically accompanied by a price increase lasting 12-18 months.
– Bear Market: A period of price decline after reaching its peak.
– Transition Period: Slow recovery until the next halving event.
These cycles have been well-documented, and various models such as the Stock-to-Flow model have displayed these patterns. Therefore, our current price trend suggests that the four-year cycle is still in progress. However, the magnitude of price increases has gradually decreased in historical cycles, and the peaks are not as pronounced as in previous cycles.
2. Stable MVRV Z-Score
The MVRV Z-Score compares the market value of Bitcoin to its realized value, providing insights into market valuation. The declining trend of the Z-Score peaks suggests a decrease in market volatility over time. This indicates that while Bitcoin still follows cyclical patterns, the magnitude of these cycles may decrease as the market matures and the market cap grows. The graph below shows the MVRV Z-Score (orange line) and the declining peaks in the previous two cycles (red line).
3. Focus on the Stock-to-Flow Model
The Stock-to-Flow model is a popular framework for predicting Bitcoin prices based on scarcity, considering the gradually decreasing inflation. This model compares Bitcoin’s existing stock (existing supply) with its flow (newly minted Bitcoins). Due to halving events and constant block increments, the flow of Bitcoin decreases, resulting in an increase in the stock-to-flow ratio, indicating increased scarcity and theoretically higher value.
It is evident that the price trend of Bitcoin after the 2024 halving is similar to previous cycles. The model shown in the graph below suggests that the decrease in supply may push the price to around $440,000 within a year after the halving (red line). Such a high peak would break the trend depicted in the graph, where deviations above the S2F “fair value” continue to decrease, while the volatility in the oscillator below also decreases.
Before we have conclusive evidence that this model is no longer effective, we should still consider it as a possibility. It is important to remember that if this model continues indefinitely, it would eventually predict a value for Bitcoin that exceeds the total value of global currencies. While this is technically not impossible, is the super-monetization of Bitcoin inevitable?
4. Impact of Decreasing Inflation
Halving events significantly reduce miners’ BTC income and have historically driven price increases. However, as block rewards decrease over time, the impact of halving events on Bitcoin prices may weaken. For example, the change from 6.25 BTC per block to 3.125 BTC is quite significant, but future halvings will see smaller reductions that may weaken their impact on the market.
In May 2020, when the last Bitcoin halving occurred, the circulating supply was approximately 18.37 million BTC. The block reward at that time was 6.25 BTC, resulting in an annual inflation rate of about 1.82%. Over the next four years, as the supply increases, this ratio gradually decreases. By the time of the recent 2024 halving, the inflation rate had decreased by about 6% to around 1.71%. After the 2024 halving, the block reward was halved to 3.125 BTC. With the continuous increase in total supply, the annual inflation rate has dropped to less than 1% (currently around 0.85%). This continuous decline highlights the foresight in Bitcoin’s design, but its impact is becoming less significant.
Currently, there are approximately 19.7 million Bitcoins in circulation, with a block reward of 3.125 BTC generated every ten minutes. This means that 94% of the total supply has already been mined, and the remaining 1.3 million BTC will be mined over the next 120 years. The graph below shows the daily BTC income miners receive solely from block rewards (orange line) and its trend towards approaching zero.
5. Miner Income and the Shift to Fee-Based Incentives
As block rewards decrease, transaction fees offset the gap in miner income. On the day of the 2024 halving, the total transaction fees reached 1,257.72 BTC, more than three times the block reward of that day (409.38 BTC). This was the first time that miners’ revenue from fees exceeded the block reward, marking a trend towards a fee-based mining model.
As miners’ income from transaction fees increases, the importance of halving events in shaping miner incentives may decrease. If transaction fees account for a larger proportion of miner income (as shown in the yellow shaded area in the graph below), miners may be less concerned about the 50% reduction in block rewards (block reward income represented by the blue shaded area in the graph). This shift suggests that the dominant impact of halving events on miner behavior and Bitcoin prices may weaken over time.
6. Impact of HODLing
The trend of long-term Bitcoin holders is increasing, which is another factor that may weaken the cyclical price volatility of Bitcoin. Data shows that over 30% of the supply has not moved in the past 5 years, and this proportion may continue to rapidly rise at the macro level, as shown in the graph below; the orange line represents the percentage of Bitcoins that have not moved for at least half a century. Whether these Bitcoins are lost or held by long-term investors, this behavior reduces the circulating supply, surpassing the impact of the new supply reduction brought by halving events.
If 10% of these investors holding Bitcoin for more than 5 years (approximately 3.2% of the circulating BTC supply) decide to take profits during this cycle, it would result in 630,400 BTC entering the open market. During the entire four-year halving cycle, only 656,250 new Bitcoins were minted, clearly depicting the new market dynamics.
7. Prospects for an Extended Market Cycle
The decreasing inflation may attract more institutional and sovereign investors. Institutions like BlackRock and countries like El Salvador recognize the increasing scarcity of Bitcoin and its potential for price appreciation. With more investors realizing the unique monetary properties of Bitcoin, demand is expected to surge. However, this demand may synchronize more with traditional liquidity cycles and macroeconomic-driven risk preferences, rather than being driven solely by retail speculation as in previous cycles.
Considering the diminishing impact of Bitcoin’s intrinsic factors, the increasing influence of new market participants, and the historically strong positive correlation between Bitcoin and traditional assets and indices such as the S&P 500, Bitcoin may start to follow more traditional market cycles, such as the typical 8-10 year stock market cycles. In the graph below, we can see the price trends of Bitcoin (black line) and the S&P 500 (blue line).
These parallel trends can be measured on a scale from -1 (inverse correlation) to 1 (positive correlation). In the past 5 years, the 6-month correlation between these assets often exceeded 0.6, indicating a strong correlation between the two. When one moves, the other usually follows.
8. Evolving Bitcoin Market
Until we observe significant deviations from historical patterns, such as Bitcoin failing to reach new all-time highs after a halving, the four-year cycle remains a valuable framework for understanding Bitcoin market behavior. The decreasing impact of halving events does not necessarily mean they turn bearish. Instead, their impact may weaken.
The recent Bitcoin halving event is still bullish and may continue to have a positive impact on Bitcoin prices after 2024 and beyond, although the returns may decrease, and price volatility may lessen. While there is currently no conclusive evidence that the impact of halving events has stopped, it is expected that the overall impact of future halving events will weaken, affecting the predictable four-year cycle.
