Caleb & Brown

July 2, 2023  ·  4 min

Bitcoin's Market Cycle

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 can be a steep increase in price, assuming the demand for Bitcoin remains the same or increases after a halving.

What are the Bitcoin Market Cycle Phases?

Phase 1 – Accumulation

Occurs when prices are low, but small signs of growth appear. During this phase 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 – Continuation

The price continues moving towards the all time high. A halving event has historically 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 – Parabolic

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 has exceeded the previous landmark by a significant factor. 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 – Correction

Following the euphoria of the Parabolic 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.

Bitcoin's Market Cycle
Bitcoin's Market Cycle

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.

Bitcoin Exchange Reserve - All Exchanges
Bitcoin Exchange Reserve - All Exchanges

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.

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.

Interest in Bitcoin over time.  Source: Google Trends
Interest in Bitcoin over time. Source: Google Trends

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 0.51, 0.43 & 0.53, in that order respectively from 2020 to 2022. Taking 2022 as an example, for every 10% BTC rose the benchmark index moved up 5.1%.

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.

BTC Pearson Correlation.  Source: TheBlock
BTC Pearson Correlation. Source: TheBlock

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 $164bn traded on the platform in January 2023. Over this period, Bitcoin has proven itself to a growing community of retail and, crucially, institutional investors, including public companies: Tesla held $2.48 billion in BTC in the first quarter of 2021, while Microstrategy’s BTC holding as of January 2023 stood at 130k – equating to 0.6% of all BTC in supply, according to CoinGecko.

Only time will tell how Bitcoin’s and crypto’s mainstream adoption continues. While institutional interest has increased, alongside a growing retail base, large-scale destructive events in the crypto ecosystem, such as the FTX collapse, have highlighted a lack of regulation.

The lack of a legal framework for crypto is 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.

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.

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

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Disclaimer: This assessment does not consider your personal circumstances, and should not be construed as financial, legal or investment advice. These thoughts are ours only and should only be taken as educational by the reader. Under no circumstances do we make recommendation or assurance towards the views expressed in the blog-post. The Company disclaims all duties and liabilities, including liability for negligence, for any loss or damage which is suffered or incurred by any person acting on any information provided.

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