Discussions surrounding Bitcoin’s four-year cycle have intensified in recent years, becoming a hot topic among crypto enthusiasts and market analysts. The cycle is marked by significant events and trends in the cryptocurrency market, which arouse the curiosity of experienced players and newbies alike.
However, the reason and significance of Bitcoin’s 4-year cycle is often misunderstood or oversimplified. Therefore, it may be beneficial for investors to focus on cyclical factors such as halvings, macroeconomic impacts, and human behavior.
Bitcoin Halving: Decisive Catalyst or Self-Fulfilling Prophecy?
One of the most interesting aspects of Bitcoin’s behavior is the “halving”. This is a predefined event where the number of newly created and allocated BTC is halved.
Currently, approximately 900 bitcoins are produced per day. In the upcoming halving, which is expected to drop to 450 by the end of the first quarter or the beginning of the second quarter of next year. The previous halvings in 2012, 2016 and 2020 marked important turning points for the cryptocurrency king.
The halving affects the price of Bitcoin due to the simple principle of supply and demand.
Bitcoin Issuance | Source: macro micro
When the halving occurs, even if demand for Bitcoin remains steady, the reduction in supply can cause an imbalance that pushes up the price. Such a rally could spark a multi-year bull market for Bitcoin.
As the cycle progressed, the initial momentum of the halving waned but continued, driving the market north.
The Ripple Effect: The Fragmentation of Liquidity in the Cryptocurrency Market
As the bull market matures, liquidity spreads from Bitcoin to other cryptocurrencies such as ETH, and eventually to riskier assets.
Due to the correlation with major coins and newly created projects, this fragmentation continues until the new inflow to the cryptocurrency market cannot sustain the growing number of assets.
The Bitcoin Halving Effect | Source: glass node
When this unsustainable point is reached, the market crashes and the dispersion of liquidity reverses. Funds are flowing back into Bitcoin and Ethereum from long-tail assets, providing a reset point for the liquidity cycle.
This liquidity flow pattern is not only seen in the cryptocurrency market, but is also characteristic of traditional financial markets.
Human Factors: Behavioral Dynamics and Market Psychology
In addition to the halving cycle and liquidity, another important factor affecting Bitcoin market behavior is the psychological dynamics of market participants. To better understand this, it is necessary to take a closer look at Bitcoin’s on-chain data.
The Bitcoin price and the returns of active network participants significantly influence market dynamics. In fact, market participants who have accumulated large unrealized gains are more likely to sell during market downturns, for fear of losing those gains.
NUPL Bitcoin | Source: Investigate Bitcoin
In addition, individuals who enter the market after significant price increases are often inexperienced or less convinced of the asset’s long-term value. These factors have resulted in a holder base that is more volatile than it has been during bear markets.
Profitability and Holder Base: Key Drivers Behind
When discussing profit, people usually refer to a series of metrics classified by cost. Include fair value, representing the total cost basis of the network and the fair value of short and long-term owners.
These indicators help to understand the state of the market – be it losses or unrealized gains.
MVRV Bitcoin | Source: mood
The change between the market price and the combined cost basis can be measured using the market value to fair value (MVRV) ratio.
A high MVRV indicates a large amount of unrealized profit. Historically, this marks the top of a 4-year Bitcoin cycle.
Miner Influence: Bitcoin’s 4-Year Cycle Decline
Historically, Bitcoin miners have had a significant impact on the market, acting as a force in support of the cycle.
They accumulate Bitcoin during bull market profits and are forced to sell during bear markets.
Bitcoin Return on Fees | Source: encryption quantization
However, market capitalization data shows that their influence on the market has declined.
The global macro picture: growing influence
Historically, Bitcoin has remained somewhat insulated from global macroeconomic factors. However, as it becomes more integrated with the traditional financial system and attracts more institutional investors, it becomes more sensitive to these effects.
For example, fluctuations in the strength of the U.S. dollar, changes in monetary policy, and geopolitical tensions can now directly affect Bitcoin’s market behavior.
Bitcoin and DXY | Source: TradingView
Bitcoin is often seen as gold, a safe-haven asset during economic crisis or financial market turmoil.
Therefore, during times of heightened global economic risk or uncertainty, demand for BTC could see a surge, pushing prices higher.
Regulations: don’t know
The role of regulatory factors in shaping Bitcoin market behavior is enormous and often unpredictable. While some countries accept bitcoin and other cryptocurrencies, others have imposed strict regulations or banned them outright.
Positive regulatory news can drive bitcoin prices higher, while negative news can lead to sharp drops.
Cryptocurrency regulations around the world | Source: Statista
For example, when countries such as Japan and South Korea recognized Bitcoin as a legal payment method, its price had a significant positive impact.
In contrast, when China announced a crackdown on bitcoin mining and trading, the market crashed badly.
Preparing for Bitcoin’s Next 4-Year Cycle
The above factors interact to shape the market behavior of Bitcoin. These include available halving mechanisms, liquidity cycles, the psychology and behavior of market participants, the influence of miners, global macroeconomic factors, and regulatory developments.
Understanding these factors can provide investors and market participants with valuable insights into Bitcoin’s underlying price movement.
Even so, given the highly volatile and unpredictable nature of the cryptocurrency market, these factors should not be considered accurate predictions. Instead, they should be used as tools for probability assessment and risk management.
As Bitcoin continues to develop and mature, factors affecting market behavior may also change. Therefore, it is important to stay abreast of the latest developments in Bitcoin and the broader digital currency market.
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