Bitcoin's Market Cycle

What is the Bitcoin Market Cycle?

The Bitcoin market cycle refers to the recurring pattern of price behaviour in the Bitcoin market, characterised by alternating periods of appreciation and depreciation. This cycle is a result of market participants' perceptions and actions, such as buying and selling, and is influenced by a variety of factors, including market sentiment, regulatory changes, technological developments and the wider economy.

Historically, Bitcoin has followed a four-year cycle tied to Bitcoin halving events, which happen approximately every 4 years. A halving event marks a 50% cut in the Bitcoin reward miners receive for mining new blocks and verifying transactions; in effect Bitcoin supply continues to increase, but at a slower rate. The knock-on effect has seen steep price increases off the back off speculation and the decreased supply of new Bitcoin entering circulation. The last halving took place on April 19th April 2024, seeing the block reward shrink from 6.25 to 3.125 bitcoins. The next halving is expected in April 2028.

What are the Bitcoin Market Cycle Phases?

Phase 1 – Accumulation

Occurs when prices are (relatively) low, but small signs of growth appear. During this phase, forward-thinking buyers will accumulate cheaper Bitcoin and so it represents the point of maximal financial opportunity.

Typically, there is bearish sentiment in the market so volume is low and prices are fluctuating in a tight range, near the bottom.

Phase 2 – Growth

The price continues moving towards the all time high. Halving events in the past have occurred here, coinciding with shrinking exchange reserves as buyers hoover up supply as they look to capture rising prices in anticipation of new all-time highs.

Phase 3 – Bubble

When the price eclipses the previous all-time high, price action will start to move exponentially to the upside pushing the price to a new all-time high, which exceeds the previous landmark by an appreciable difference. This phase is extremely volatile, with rapid price increases followed by large corrections.

Sell volume builds as a portion of investors lock in healthy profits, while many market participants will continue buying believing the bull market has more room to run. As a result, price volatility is low given the buy and sell volumes begin to balance against a backdrop of overconfidence. At this point, many investors would see the Fear & Greed Index flashing Extreme Greed.

Phase 4 – Crash

Following the euphoria of the bubble phase, this is when the market will see a major correction to the downside. Previous bear market periods have resulted in approximately 80% drawdowns from the top and negative price action for approximately a year. The most recent example saw the price tumble from an all-time high of $69,000 (November 2021) to $15,476 (November 2022).

The chart below shows the cyclical nature of Bitcoin’s price and how it has played out in the past.

Telling Signs in Historical Bitcoin Cycle Patterns

In anticipation of a new all-time high, the amount of Bitcoin held in exchange wallets is low, highlighting that investors are holding out for higher prices. This HODLing reduces available supply (even further in a high-demand period) and as seen below, this results in sharp price increases.

Gauging the Cycle with New Interest in Bitcoin

Peak interest in Bitcoin, as measured by Google search activity, was reached in December 2017 in tandem with a bull market run up to an all-time high. Since then, Google trends show search volume for 'Bitcoin' hasn’t reached the same levels of the 2017 bull run, despite delivering multiple all-time highs since.

However, interest in crypto at large has surged since. Google search volume for ‘crypto’ topped out during the 2021 bull run; attention is now given to the whole ecosystem, which has evolved dramatically since the days of Bitcoin dominance.

Macro & Bitcoin Correlation

The relationship between Bitcoin and the S&P 500 – referred to as a correlation – is largely positive. In other words, the prices of Bitcoin and the S&P 500 generally rise and fall together. However, they don’t always follow one another and when they do it’s not always to a similar degree or high correlation.

In recent years, as the cryptocurrency market has become more mainstream and institutional investors have entered the ecosystem, the positive correlation between Bitcoin and the S&P 500 has been noticeable. Based on coefficient readings taken on the first week day of each month, the average annual correlation to Bitcoin for the S&P 500 was 0.51in 2024 (January to May).. That means this year, for every 10% BTC rose the benchmark index moved up 5.1%. However, in 2024 the correlation has been varied, with periods of negative correlation.

It's important to note that correlation can change over time and the relationship between Bitcoin and the S&P 500 can be influenced by a variety of factors, including macroeconomic events, geopolitical tensions, and regulatory developments.

Mainstream Adoption of Bitcoin

Mainstream adoption of Bitcoin has been on a steep curve. In January 2018, the value of BTC trading on Binance surpassed $11bn – a fraction of the Bitcoin traded on the platform in March 2024 when the exchange saw over $1trillion worth of volume across all assets. Over this period, Bitcoin has proven itself to a growing community of retail and, crucially, institutional investors, including public companies: which held over 1.5% supply as of May. The largest holder, Microstrategy, holds 439,000 units – purchased at an average price of $61,725 according to Investopedia. Famously, Tesla also holds a stack of BTC on its balance sheet with over 10,500 units.

Bitcoin’s mainstream adoption pace following the c the successful launch of 10+ Bitcoin Spot ETFs. In turn, this has inflated the retail base with the investment vehicle bringing legitimacy to the biggest cryptocurrency by market cap.

Lacking legal framework for crypto is still holding back many investors from entering the space. However, governments globally are ramping up their regulation efforts, which the results of will hopefully grant crypto the legitimacy many investors are waiting on to invest. The Bitcoin ETF could prove a watershed moment, with expectations of an Ethereum Spot ETF to follow.

Beyond investors, there are companies accepting BTC as forms of payment such as Ferrari and countries, too. Beyond investors, there are countries backing Bitcoin. In June 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender. The country's legislature approved a law that requires businesses to accept Bitcoin as a form of payment for goods and services, in addition to the country's official currency, the US dollar. If other countries were to follow suit, mainstream adoption would spike and render Bitcoin a very appealing investment vehicle. The El Salvador Bitcoin experiment is still its infancy so crypto commentators are yet to draw meaningful conclusions.

Recommended reading: Crypto Portfolio Basics: The Key to a Well-Balanced Portfolio

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