10 October 2023
Everyone has heard about the 4-year cycle that Bitcoin is going through, but have you ever thought of the idea that Bitcoin might be going through a bigger cycle? And could this bigger cycle reflect the way humans adopt new technologies? And is it possible we have seen something similar before with another technology like the internet? In this article, we will be diving into a new theory that suggests that Bitcoin is moving through a larger 16-year cycle which can help us predict the direction of the Bitcoin price in the coming years.
The Regular 4 Year Cycle
Bitcoin tends to go through 4-year cycles which are divided into 2 parts, the uptrend and the downtrend. A regular 4-year cycle consists of a 3-year uptrend followed by a 1-year downtrend also known as a bear market. So far Bitcoin has completed 4-year cycles and they’ve shown incredible accuracy which catches the attention of the market participants.
Chart from TradingView.
The DOTCOM Cycle
One can’t ignore the similarities between the market structure of the S&P500 during the DOTCOM cycle and the Bitcoin cycle. The regular financial markets also went through clear 4-year cycles with the majority of the cycle being in an uptrend and the downtrend, also known as a bear market, shortly lived. From my perspective, the DOTCOM cycle started around 1986 as this was the moment that Microsoft went public, one of the biggest companies of the DOTCOM cycle. The first 3 4-year cycles of Bitcoin look very similar to the first 3 4-year cycles of the S&P500 starting from 1986.
Chart from TradingView.
This really spiked my interests as both periods are based on the adoption of a completely new technology that shifts the way our society perceives and uses information. The personal computer and the internet changed our lives completely to the point that it’s almost unthinkable to be unconnected to the internet for more than 24 hours. In the future it will as well be unthinkable to not own and use any Bitcoin, we’re just still in the early phase of its adoption.
So could the structure of the DOTCOM cycle help us to determine a potential path for Bitcoin? First of all, I would like to emphasize the fact that market cycles in my honest opinion are one of the best ways to use rough price predictions and ascertaining when to enter and when to exit a particular market. But I really want to emphasize the word “rough”. There goes a saying, “history
doesn’t repeat itself but it sure does rhyme”, and I think this applies to cycles too. Nothing is ever a 100% replication of anything that happened before, but it can give us a rough estimate of what might happen.
As you can see in the structure of the DOTCOM cycle, the first 3 4-year cycles are very similar, a long bull market followed by a short but sometimes shallow bear market or correction. It’s only that the last 4-year cycle is different, the tables are flipped upside down. It starts with an acceleration in the price which doesn’t last that long and is followed by a multi-year long bear market. Could Bitcoin do something similar, disappointing the ones who expect a regular 4-year cycle and surprise the majority with a multi-year-long bear market?
Microsoft is following a similar path. It starts with 3 4-year cycles that are right-translated, followed by a 4-year cycle that is left-translated, so a prolonged bear market in an asset that has been in a strong bull market for years.
Chart from TradingView.
Microsoft topped in the year 2000, marking a long-term top in the price at approximately $60. And it wasn’t until 2015 that that level was broken again. It took 15 years from that high to completely recover and surpass that level again. If we were to take the money supply into consideration it actually takes longer for Microsoft to recover and break the high 21 years later in May 2021.
Chart from TradingView.
Both of these charts, Microsoft and the S&P500, really demonstrate the magnitude of a correction after a prolonged bull-market. It’s challenging to imagine from one’s perspective a prolonged bear market of an asset you’ve experienced mostly going up. Is it possible that we’re going to see, in rough terms, something similar with Bitcoin?
Confluence Between Cycles
So let’s have a look at what these cycles are forecasting for Bitcoin and how we potentially could prepare for these outcomes. First of all, it’s interesting to note that one date is forecasting the same outcome in the regular 4-year cycle, the 16-year cycle.
A regular 4-year cycle would suggest that we’re staying in an uptrend until 2025, followed by a 1- year decline. This is a typical 4-year cycle which we’ve seen 3 times in the history of Bitcoin.
The 16-year cycle would suggest that we would follow a similar path as the DOTCOM bubble as mentioned above. Bitcoin would peak within the first half of the cycle, so by the latest at the end of 2024, this would be followed by a multi-year-long decline going into 2026 to form new lows.
How To Spot A Top
One of the best indicators a Bitcoin trader can use are the Bitcoin funding rates. The funding rates are showing basically whether the majority of the market participants on derivative markets are shorting or longing for Bitcoin. I’ve found this indicator very useful to spot a top in the Bitcoin price as in a healthy bull market when the funding rates are negative, the price tends to trend up. In a bear market, when the funding is positive, the price tends to decline. So we can use this metric to spot which market conditions the market is trading in and if anything has changed. One of the first signals when Bitcoin entered a bear market in 2022 was that the price of Bitcoin was declining with negative funding rates, and that does generally not happen in a healthy bull market.
Another way to look for the cycle top is timing, whenever Bitcoin is in the period of topping for let’s say the 16-year cycle and we break below a swing-low, chances increase that a cycle top is in. This would then be invalidated by breaking back above that specific level, to re-claim this level. To view the period of a potential cycle top, one can have a look at the Bitcoin cycles progression bars. Once the yellow dot enters the red zone, it means that based on that specific cycle we are in the topping period. Again, it is important to mention that cycles can help to give a rough estimate of potential outcomes, they often don’t unfold very accurately and there is room
Further Considerations
There are more factors at play here that influence the price of Bitcoin other than these cycles. The fact that the Federal Reserve started to print huge amounts of money in 2020, really spiked the risk appetite for many investors to look for a safe haven like the financial markets and Bitcoin. It’s very clear that the moment the Federal Reserve started to inject money into the economy, the price of Bitcoin and the financial markets started to go up until the money printer halted again in 2022 and the price of Bitcoin entered a 1-year declining phase. These fundamental changes in the economy will most likely have an impact on Bitcoin and the way these cycles could unfold.
Chart from Blockchain.com
This is a guest post by Jeroen van Lang. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.