Halving Cycle Theory (e.g. Stock-to-flow): How to explain the deep bear markets?

[d5000]

The halving cycle is basically a religion at this point.

I agree with that take if this means it's basically a mass psychology phenomenon and an effect of a self-fulfilling prophecy, and the more people believing in it, the stronger this kind of cycle becomes.

The "halving cycle theory" only proves that Bitcoin is a financial bubble, which keeps growing and bursting every once in a while.

Yes, this is also my interpretation. The question here is about the timing. I.e. one had too look for patterns which hint at a price top every four years approximately (2013-2017-2021 and potentially 2025).

Until now I don't see a "technical" explanation.

- Miner behaviour tends to be pro-cyclic, but not taking into account halvings but instead price movements. Miners react to price, not the other way around, and difficulty changes always compensate for an eventual reward reduction (in purchasing power) due to halvings.
- The scarcity pattern isn't modified substantially by halvings anymore because miners only make up less than 1% of the daily BTC sales on exchanges.
- An alternative explanation for the 4 year cycle is a dependency on the cycles of cycles in the fiat economy, such as the M2 expansion, but it would be pure coincidence that it's every 4 years.

[doomloop]

Or to say it in other words: Why is the price increase after the halving "natural", but the crash afterwards can only be explained by panic and mass profit taking? Isn't the price increase around and after a halving also an effect of herd behaviour (FOMO) and mass psychology induced dynamics?

The "halving cycle theory" only proves that Bitcoin is a financial bubble, which keeps growing and bursting every once in a while.
I don't see anything weird with the "halving cycle theory". Bitcoin acts the same way as every scarce financial asset in the history of finance(maybe gold is the only exception). The BTC price crashes/bear markets in the past can be explained with a lack of market liquidity, combined with panic selling and FUD. The same thing happens every time a financial bubble bursts. Everyone panics and starts selling, nobody wants to buy. The good thing is Bitcoin's ability to recover after a price crash/bear market and to start pumping again.

"Bubble" means it's something that has no value, and yet increases in value, without anything to support it. One of the greatest and most famous example was the "tulip" bubble for example, it went up a lot and made one tulip worth as much as some of the houses, not because one tulip itself was that much valuable as is, but because with one tulip, you can spread the seeds, and can get more etc.

But a tulip is a tulip, we know how easy it is to make one, so it was always obvious that the more tulips sprout from those seeds, the lesser it would become in value. However, bitcoin doesn't have that kind of value, is it 100 dollars? 1 million? We have no idea, and we can't spread its seeds to make more like that neither, so it only appears as whatever price, as we want it to be.

[Wind_FURY]

But where to base that demand? I believe it could based from M2 Money Supply. If it goes up, risk assets such as Bitcoin also go up weeks/months later. The same when it's going down.

Yes, that's another discussion, in another thread I found out that while there is some correlation, if we take into account GDP (and look at the variable M2 divided by GDP) this correlation becomes very weak.

It's not actually just about "some correlation", IT ACTUALLY MAKES SENSE. Because if M2 money supply is surging, then inflation goes up, and therefore prices of goods and commodities go up, INCLUDING asset prices.

I'm not entirely sure why divide M2 by the GDP and why it matters if, Surging M2 = Increased Liquidity for assets such as Bitcoin already makes sense.

[d5000]

I'm not entirely sure why divide M2 by the GDP and why it matters if, Surging M2 = Increased Liquidity for assets such as Bitcoin already makes sense.

Because money circulation grows naturally with GDP. There are not only more people wanting to save money (which is why M2 could matter in this case) but also more people making payments, taking/paying loans etc.. You are however correct that even if GDP grows and M2 grows at the same rhythm, then there would often be an increase in liquidity for "saving" too. But this liquidity increase is stronger if M2 grows faster than GDP. At the contrary, if instead M2 grows slower than GDP, as it has been the case in many areas (e.g. Europe) after the COVID pandemic (during the pandemic itself M2/GDP was much higher), then there is probably none or at most a very slow growth (and in many cases, a contraction) of the liquidity variable.

Also you have to take interest rates into account: when interest rates surge as a consequence of high inflation, then liquidity for high risk assets like Bitcoin becomes typically weaker. So "in theory" the most amount of liquidity should be available at the start of a high inflation/high M2 phase.

I think this was the last relevant thread to this topic, so we could continue the discussion there if you want.

[OgNasty]

The halving cycle is basically a religion at this point.

I agree with that take if this means it's basically a mass psychology phenomenon and an effect of a self-fulfilling prophecy, and the more people believing in it, the stronger this kind of cycle becomes.

That is certainly one school of thought. I would counter it with one word. Math.

The four year cycle is rooted in the most basic business sense. Supply and demand. Every four years the new supply gets halved while demand increases, causing a jump in price every four years. This will continue until the market cannot support the price jump anymore, at which point the system will crash. Those calling for the end of the four year cycle are also calling for an end to Bitcoin, they just don’t realize it.

[Wind_FURY]

I'm not entirely sure why divide M2 by the GDP and why it matters if, Surging M2 = Increased Liquidity for assets such as Bitcoin already makes sense.
 

Because money circulation grows naturally with GDP. There are not only more people wanting to save money (which is why M2 could matter in this case) but also more people making payments, taking/paying loans etc.. You are however correct that even if GDP grows and M2 grows at the same rhythm, then there would often be an increase in liquidity for "saving" too. But this liquidity increase is stronger if M2 grows faster than GDP. At the contrary, if instead M2 grows slower than GDP, as it has been the case in many areas (e.g. Europe) after the COVID pandemic (during the pandemic itself M2/GDP was much higher), then there is probably none or at most a very slow growth (and in many cases, a contraction) of the liquidity variable.

Also you have to take interest rates into account: when interest rates surge as a consequence of high inflation, then liquidity for high risk assets like Bitcoin becomes typically weaker. So "in theory" the most amount of liquidity should be available at the start of a high inflation/high M2 phase.

I think this was the last relevant thread to this topic, so we could continue the discussion there if you want.

I believe you may have misunderstood my point that money printing = surge in M2, then THEREFORE an increase in inflation.

There was never a time in financial history wherein the printing of money never had an increase in inflation, it ALWAYS had an increase in inflation <- which is my main point.

[d5000]

The four year cycle is rooted in the most basic business sense. Supply and demand. Every four years the new supply gets halved while demand increases, causing a jump in price every four years.

Yep, that's basically the theory I'm questioning here, at least a bit

I'll try to get a bit more precise.

- Demand is long term in a surplus with respect to supply. This can be deducted by the long term price trend.
- Supply is still growing, but each 4 years the (supply) inflation rate is halving.
- According the halving cycle theory, the demand/supply equation becomes different after each halving. This means, the halving inflation rate drop is significant enough to "boost" the price and cause the "price jumps".
- However, in the last halving the inflation drop went from 1.6% yearly to 0.8% yearly. My theory is that this is not enough anymore to create this price boost on its own (it may have been enough in 2012 and 2016, but I think the prices boosts 2020+ weren't caused by halvings).
- The regular crashes (the main topic of this thread) are also not really coherent with the halving theory. The crashes are an indicator that the demand fluctuates much more than the supply inflation reduction, because it shows this fluctuation "outcompetes" the previous "price boost". This means, for me, that also the "price boost" is caused not by supply mechanics but by other factors influencing demand.

Thus my conclusion is:

- Scarcity and supply inflation reduction does matter. This is not what I'm questioning.
- But the exact timing of price boosts and crashes is more dependant on demand fluctuations (e.g. caused by the attention economy) than the halvings themselves.
- That we saw a correlation 2 times now in a row between halvings and boosts/crashes, is a consequence of a self-fulfilling prophecy and mass psychology which makes demand fluctuate much more than the supply inflation.

This is even a much more optimist theory than the halving cycle theory, because it means that Bitcoin demand is not depending on the halving cycles. It means also that Bitcoin, if it converges to a stable state eventually, could sustain a high price.

I believe you may have misunderstood my point that money printing = surge in M2, then THEREFORE an increase in inflation.

But what you describe as "money printing" I would describe as "increase of M2 in relation to GDP". This means, a "lax" monetary policy by the central bank (like quantitative easing or low interest rates) which increases "money printing".

Money is "printed" all the time by banks when they give out loans, and if GDP grows it is completely normal that there are more loans and thus more money in circulation. But if the Central Bank decides to increase the money supply (generally because inflation is below the goal of ~2% or the economy is in recession) lowering the interest rates or deciding QE programs (like when they buy bonds with newly printed central bank money) then we'll see a M2 growth which is higher than the GDP growth. And that's what matters for me here. The correlation to the BTC price isn't clear in this case, as I wrote above.

[sana54210]

Bubble isn't what you guys think it is, bubble is something that is extra ballooned up in price for only financial reasons, and not have any value. Bitcoin has value, even though it may not be some intrinsic value in Benjamin Graham sense, it has value to people.

This means that the value it has, is the digitalized decentralized preference that we all have. If we can prove that to the world, then we are going to not drop to a low level like a bubble would. What you can explain bear markets with, is the fact that the people who make so much profit from it, sell, and when they do, buying becomes secondary for all of us when it is going down. Plus, we all act together, so it becomes an easier subject to move forward about.

[philipma1957]

And what about the 10 year hodl pattern ie buy btc hold it 10 years and always make money.


the dow jones index  had that same 10 year buy hold 10 and always make a profit pattern.

in fact it lasted from around 1936 to 2008

on any given day 10 year made profit.

To me this far outweighs the 4 year cycle.

I see the 4 year cycle as a manipulation used by larger players so that they get more coins in order for them to practice

the so far perfect  10 year hodl move.

[tygeade]

I believe you may have misunderstood my point that money printing = surge in M2, then THEREFORE an increase in inflation.

There was never a time in financial history wherein the printing of money never had an increase in inflation, it ALWAYS had an increase in inflation <- which is my main point.

Well, that makes sense, inflation means the products require more money to buy, what costs 10 dollars today, will cost 12 dollars tomorrow. The item itself, doesn't change in value, because we had 10 trillion money, and now have 12 trillion money, because we printed, so the same 10 dollar product, would be 12 dollar, and would take the same amount of % from the overall amount we have.

So as you can see, when you print money, we ALL have more money, so everything goes up in value. If tomorrow, USA decided to print 100 trillion dollars because they have gone crazy, then everything would go up in price that much too. That's just how math works, so there is nothing shocking about the change in price of all things in the world.

[Wind_FURY]

I believe you may have misunderstood my point that money printing = surge in M2, then THEREFORE an increase in inflation.

But what you describe as "money printing" I would describe as "increase of M2 in relation to GDP". This means, a "lax" monetary policy by the central bank (like quantitative easing or low interest rates) which increases "money printing".

Money is "printed" all the time by banks when they give out loans, and if GDP grows it is completely normal that there are more loans and thus more money in circulation. But if the Central Bank decides to increase the money supply (generally because inflation is below the goal of ~2% or the economy is in recession) lowering the interest rates or deciding QE programs (like when they buy bonds with newly printed central bank money) then we'll see a M2 growth which is higher than the GDP growth. And that's what matters for me here. The correlation to the BTC price isn't clear in this case, as I wrote above.

Obviously if I say "Money Printing, it's the BRRRRRR Money-Printing done by the Federal Reserve when they pivot from Monetary Tightening to Monetary Expansion to stimulate a slowing economy/avoid a recession and to do one of their core mandates during economic downturns - To maintain good employment conditions/avoid excessive unemployment.

THAT is inflationary and brings asset prices surging. Study 2020's COVID-19 Money Printing Event.

 👀

[philipma1957]

I believe you may have misunderstood my point that money printing = surge in M2, then THEREFORE an increase in inflation.

But what you describe as "money printing" I would describe as "increase of M2 in relation to GDP". This means, a "lax" monetary policy by the central bank (like quantitative easing or low interest rates) which increases "money printing".

Money is "printed" all the time by banks when they give out loans, and if GDP grows it is completely normal that there are more loans and thus more money in circulation. But if the Central Bank decides to increase the money supply (generally because inflation is below the goal of ~2% or the economy is in recession) lowering the interest rates or deciding QE programs (like when they buy bonds with newly printed central bank money) then we'll see a M2 growth which is higher than the GDP growth. And that's what matters for me here. The correlation to the BTC price isn't clear in this case, as I wrote above.

Obviously if I say "Money Printing, it's the BRRRRRR Money-Printing done by the Federal Reserve when they pivot from Monetary Tightening to Monetary Expansion to stimulate a slowing economy/avoid a recession and to do one of their core mandates during economic downturns - To maintain good employment conditions/avoid excessive unemployment.

THAT is inflationary and brings asset prices surging. Study 2020's COVID-19 Money Printing Event.

 👀

Well we did go to 69k in 2021.

But we did not print like mad this year and are at 118k.


So we can gain without a money printing event like 2020.

Now what is interesting is do we get money printed like mad in next six months thus making btc go over 222k next year.?