TL;DR I guess we will have weaker and irregular cycles in the future Cycles will remainEverything moves in cycles: You have the business cycle, the long term and short term debt cycle, even my kid's emotions have cycles. The usage of leverage supports volatility. Leverage is not only financial (CFDs or futures) but you also have operational leverage. Multiple companies have more volatile fee revenue than salary expenses, therefore some companies in the crypto space tend to break (become insolvent) during a downturn.
Cycle duration of 4 years unlikelyThe Bitcoin ecosystem supply comes not only from miners (sell block reward, buy electricity), but also exchanges (sell trading fees, pay salaries) and ETFs (Fees). Additionally the police gets their hands on Bitcoin from time to time and sells. Then we have the Bitcoin owners, who will sell for major purchases especially after accumulating high unrealized gains. Thanks to saving in Bitcoin some people may marry, buy a house and start a family. They will then sell some of their Bitcoin for their wedding, their down payment or their kids education.
I think the halving may already be overrated, but going forward I expect the halving to have almost no impact on the price. I expect the main impact will be central bank liquidity, regulation and time.
Since I still believe in a cyclical nature of markets / humans, how long can a cycle be? We still need some time to go from overvaluation to undervaluation, so I would guess a cycle will be still between 3 and 6 years or at least between 2 and 8 years.
Cycles will become weakerWe can observe:
- lower realized daily price volatility
- lower realized daily price volatility relative to stocks
- lower option implied volatility
- less extreme cycles above trend
We can't observe less extreme cycles below trend, which might be due to extraordinary events like FTX or Luna.
Lower volatility around in combination with a unchanged Bitcoin price trend would be definitely good news for most. Not only would this stabilize your assets, but also lead to more inflows into Bitcoin. Less volatility means higher allocation for most investors, which in return increases the price of Bitcoin.
Weaker cycles endangers timing the cycle.During the last cycles we saw 1000+ days overvaluation and trend close to e^⁻0.9.
I suggested Bitcoin to be expensive at Trendprice+750 days, Bitcoin to be cheap at Trend*e^-0.5. This gives some reasonable stability for lower Bitcoin cycle volatility during the next cycle.
The yield from timing the cycle (blue arrow) is already declining:
What do we learn?1.) We can see that the
red lines have a declining slope. You get better 1-year forward returns by buying bitcoin cheaply. This makes sense as the mean of the cycle reverses around the trend. It is still interesting to see this result on a time horizon of only 12 months, not 2 or 4 years.
1st orange arrow2.) We can see that the red line (2010-2013) is the highest, the red line (2014-2017) is lower, the red line (2018-2021) is even slightly lower and the last line (2022-March 2023) is even lower. As time goes on, you can expect less return on your bitcoin investment for the same level of overvaluation relative to the trend. This makes sense as the price trend of bitcoin flattens out.
2nd orange arrow3.) We can see the red lines crossing the x-axis at lower and lower values.
2nd orange arrow 2010-2013 we cross at 1.5, 2014-2021 at 0.6 and recently at 0. Buying relatively expensive bitcoin (trend +0 to trend +1.5) in 2010-2013 still gave you positive returns, recently buying only slightly expensive bitcoin gave you negative returns.
3rd blue arrow4.) In our four charts we see
2 grey lines. We can see 2 different trend lines for each 4y cycle. One trend is on the way to the top. The second trend is on the way from the top to the bottom. Obviously you can get a better return the way up vs. on the way down. Unfortunately, it is only partly tradable:
Falling from the
green peaks, we could assume that we are on the way down. Excessive overvaluation can be traded. At the
yellow tops, however, we could have assume in real time that we were still climbing to a
green top. Only in hindsight we would have realized we missed the
yellow top. Since we can't tell the yellow tops in real time moderate overvaluation is not tradable.
Looking at our most recent dot plot, we can see that the
red line crosses 0/0. Does only the cycle matter now? Bitcoin price trend growth is declining. Maybe it is declining much quicker than the cycle? Is trading the Bitcoin cycle more important than holding Bitcoin? The answer is no.
It is true that the yield from owning Bitcoin (red arrow) declines faster (from 1200% to 300%) than the yield from trading the cycle (blue arrow, 350% to 200% to 100%) and therefore the cycle matters relatively more. However the return from just holding Bitcoin is still much higher than the yield from timing the Bitcoin cycle. The main take away is: trading the cycle can juice your returns, but the most imposant decision is buying Bitcoin at all.
The red line crosses 0/0, not because the cycle dominates the returns, but because it represents a bear market. Therefore the line is naturally lower than a bull market line (see: what can we learn #4, the two grey lines).
Benefiting from cycles is difficultBenefiting from cycles looks good on paper. However during a economic downturn you might become unemployed, or have difficulties rolling over your debt, due having lower net worth or more restrictive loan decisions. Imagine a recession with lower house prices, lowering the amount you can refinance. In this case you would be forced to liquidate other assets.