Investors and cryptocurrency enthusiasts have long been fascinated by Bitcoin's four-year cycle, carefully tracking these recurring price action patterns to predict upcoming market movements. However, given the changing dynamics of the Bitcoin market and economic environment, we must acknowledge that the traditional four-year capital flow cycle may be nearing its end. Here, we’ll explore whether the end of Bitcoin’s four-year cycle should be considered a possibility, and whether this theory is well-supported by evidence or is just speculation.
1. Interpret Bitcoin’s four-year cycle
Bitcoin’s four-year cycle is primarily driven by Bitcoin halving events, which occur approximately every four years. During a halving event, the mining rewards for Bitcoin transactions are cut in half, reducing the velocity of new Bitcoins. In the past, these halving events have triggered bull/bear cycles in Bitcoin price:
Halving event: The supply of new Bitcoins is cut in half.
Post-halving bull run: Typically followed by 12-18 months of price increases.
Bear Market: A period of falling prices after a price peak.
Transition period: Slow recovery until the next halving.
These cycles have been well documented, with several models such as the Stock-to-Flow model demonstrating these patterns. Therefore, our current price trends suggest that the four-year cycle is still running. However, historically price increases have become less pronounced and the peaks have been less pronounced than in previous cycles.
2. Stable MVRV Z score
The MVRV Z-score compares Bitcoin’s market capitalization to its realized market capitalization, providing insights into market valuation. The downward trend in the Z-score peak suggests that the volatility of the market response has diminished over time. This suggests that while Bitcoin still follows cyclical patterns, the magnitude of these cycles may decrease as the market matures and market capitalization grows. The chart below shows the MVRV Z-score (orange line) and its peak decline over the first two cycles (red line).
Source: Bitcoin Magazine Pro
3. Focus on the inventory-to-flow model
The stock-to-flow model, a popular architecture for predicting Bitcoin prices based on scarcity, takes these tapering inflations into account. The model compares the existing inventory of Bitcoins (existing supply) to the flow (newly minted Bitcoins). Due to the halving event and constant block additions, Bitcoin's flow decreases and its stock-to-flow ratio increases, indicating increased scarcity and theoretically higher value.
It is obvious that Bitcoin’s price trend after the 2024 halving will be similar to previous cycles. The model shown in the chart below suggests that the reduction in supply could push the price to approximately $440,000 within a year after the halving (red line). Such a high spike would break the trend in the chart below, which is a continued decline in deviations from S2F's "fair valuation", as well as a reduction in peak volatility seen in the oscillator below.
Until we see conclusive evidence that the model no longer works, we still need to treat it as a possibility. Keep in mind that if this model continues indefinitely, it will eventually predict that Bitcoin is worth more than the total value of global currencies; while this is not technically impossible, is hyper-Bitcoinization inevitable?
Source: Bitcoin Magazine Pro
4. Impact of reduced inflation
Halving events significantly reduce miners' Bitcoin earnings and have historically driven price increases. However, as block rewards decrease over time, the halving’s impact on Bitcoin’s price may diminish. For example, the change from 6.25 Bitcoins per block to 3.125 Bitcoins is quite significant, but future halvings will see smaller reductions, potentially weakening their impact on the market.
When Bitcoin’s last halving occurred in May 2020, the circulating supply was approximately 18.37 million Bitcoins. The block reward at the time was 6.25 Bitcoins and the annual inflation rate was approximately 1.82%. Over the next four years, this ratio gradually declined as supply increased. When the most recent 2024 halving occurred, inflation had fallen by about 6% to about 1.71%. After the 2024 halving, the block reward will be halved to 3.125 Bitcoins. As total supply continues to increase, annual inflation has fallen to less than 1% (currently around 0.85%). This continued decline emphasizes the foresight that went into Bitcoin’s design, but its impact is gradually becoming less significant.
There are currently approximately 19.7 million Bitcoins in circulation, with a block reward of 3.125 Bitcoins being generated every ten minutes. This means that we have mined 94% of the total supply, leaving the remaining 1.3 million Bitcoins to be mined over the next 120 years. The chart below shows the daily Bitcoin revenue that miners receive from block rewards alone (orange line), and its trend towards 0.
Source: Bitcoin Magazine Pro
5. Changes in miner income and fee-based incentive mechanisms
As block rewards decrease, transaction fees make up for the shortfall in miners’ income. On the day of the halving on April 20, 2024, the total transaction fees reached 1,257.72 Bitcoins, which exceeded the block reward (409.38 Bitcoins) on that day by more than 3.07 times. This is the first time that miners have earned more from fees than block rewards, symbolizing the shift toward a fee-based mining model.
As the revenue miners receive from transaction fees increases, the halving event may become less important in shaping miner incentives. If transaction fees represent an increasing portion of miner revenue (shown in the yellow shaded area below), miners may be less concerned about the impact of a 50% reduction in block rewards (block reward revenue is shaded in blue in the chart below) The shaded area indicates). This shift suggests that the halving event’s dominant influence on miner behavior and therefore the price of Bitcoin may diminish over time.
Source: Bitcoin Magazine Pro
6. The impact of hodling
The growing trend to hold Bitcoin for the long term is another factor that may attenuate cyclical price swings. Data shows that more than 30% of the supply has not moved in the past 5 years, and this proportion is likely to continue to rise rapidly at the overall economic level, as shown in the chart below; the orange line represents the percentage of Bitcoin that has not moved for at least half a century . Whether these Bitcoins are lost or held by long-term investors, this action reduces the circulating supply and now outweighs the impact of the reduction in new supply brought about by the halving event.
If 10% of these investors who have held for 5+ years (approximately 3.2% of the circulating Bitcoin supply) decide to take profits during this cycle, 630,400 Bitcoins will flow into the open market. Only 656,250 new Bitcoins have been minted over the entire four-year halving cycle, a small difference that clearly paints a picture of the new market dynamics.
Source: Bitcoin Magazine Pro
7. Prospects of expanded function market cycle
This decreasing inflation may attract more institutional investors and even sovereign investments. Institutions like BlackRock and countries like El Salvador recognize Bitcoin’s rising scarcity and potential for price growth. Demand is expected to surge as more investors recognize Bitcoin's unique monetary properties. However, this demand is likely to be more in sync with traditional liquidity cycles and overall economic-driven risk appetite, rather than being driven by retail speculation as in previous cycles.
Given the likely diminishing influence of Bitcoin’s own fundamentals, the increased influence of new market participants, and Bitcoin’s historically strong positive correlation with traditional assets and indices such as the S&P 500, Bitcoin may begin to follow the lead of more traditional market cycles, such as those that typically last 8-10 years. In the chart below, we can see Bitcoin price action (black line) versus S&P 500 price action (blue line).
These parallel movements can be evaluated on a scale of -1 (inverse correlation) to 1 (positive correlation). Over the past 5 years, the 6-month correlation of these assets has often reached above 0.6, showing a strong correlation between the two. When one moves, the other usually follows.
Source: Bitcoin Magazine Pro
8. The evolving Bitcoin market
Until we observe significant deviations from historical patterns, such as Bitcoin's failure to reach new all-time highs after the halving, the four-year cycle remains a valuable construct for understanding Bitcoin market behavior. The reduced impact of halving events does not mean they will become bearish. Instead, their impact may be diminished.
The recent Bitcoin halving event remains bullish and may continue to have a positive impact on Bitcoin prices in 2024 and beyond, albeit with potentially smaller returns and less price volatility. While there is currently no conclusive evidence that the impact of halving events has ceased, it is expected that the overall impact of future halving events will weaken, affecting the predictable four-year cycle.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Foresight News"
Original author: Bitcoin Magazine Pro
