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Gate.io Blog - The Case for Lengthening Cycles and Diminishing Returns

28 September 17:06

There are many theories and models that aim to predict market trends and pricing, using all types of significant references as a starting point. The Bitcoin Halving has always been one of these references, as it is deeply ingrained in the asset’s fundamentals. Block rewards being divided by two and a steady or increased demand eventually drive the price up. Common sense. Therefore, we notice a recurring emphasis on this once-every-four-years event to estimate Bitcoin’s future price.

Bitcoin & Prediction Models

Some of these prediction models are well known, perhaps the most famous being the Stock-to-Flow (S2F) model, which offers an average with deviations that are quite consistent in predicting market bottoms or tops. Very focussed around linear cycles, as patterns would repeat every four years. More recently, other theories have gathered attention such as a “supercycle” that would break this four-year tendency, leading Bitcoin to no longer repeat bull runs as in 2013 or 2017 with a subsequent apocalyptic cryptowinter after a massive crash. Instead, Bitcoin will be so established and achieve a fortitude that makes it immune to boom and bust cycles that imply 90%+ price action in a short period and a clear distinction between bear and bull markets. This narrative is mostly sustained by indicators such as the exponential adoption (number of active wallets or newcomers, etc) or fundamental developments including institutions buying Bitcoin, high profile investors or even countries adopting it as legal tender. The ability to move the price becomes reduced as Bitcoin’s market cap increases.

However, if looking only at the data, one could question if Bitcoin does follow four-year cycles or if 2021 is leading to a new paradigm, invaliding any resemblance to cycles with bottoms and peaks that will invariably repeat over time with the same pattern. Some reputed analysts, such as Benjamin Cowen, defend the idea of a variance in the cycle behaviour of Bitcoin, with the consequence of lengthening of these cycles and diminishing returns.

Predictions forwarded by different models are not necessarily incompatible. As an example, reaching the symbolic price of 100k in December would be in line with the S2F model. What would happen afterwards could be anything. A major correction and extended bear market as in 2013 and 2017? A support area before reaching even further highs in 2022 for a lengthened cycle? Or the confirmation of a future supercycle? All theories may share, to some extent, the same underlying idea.

The 2020 Cycle

The current cycle, started after the halving in May 2020, has had its fair share of uniqueness. With a very strong start during the last months of 2020 and the beginning of 2021, many were as bullish as possible when looking at the chart below, as if the first few months of the bull run was repeating a similar move as in 2017 or even shortening the cycle. As experienced afterwards, subsequent corrections due to multiple factors such as speculative pumps by personalities such as Elon Musk or clear signs of an overbought market with no significant pullbacks for months heralded important corrections of more than 50% during the summer.

Source: twitter.com/100trillionUSD

The case for lengthening cycles suggests that even after a prolonged price decrease, the bull market is not necessarily over. On-chain data still display bullish signs, such as the amount of Bitcoin held by exchanges being very low, and most prediction models seem to agree on this point despite other discrepancies. Indeed, if $64k in mid-April was the market top, it would only mean approximately 2000% gain during the cycle with a duration of 850 days, which is considerably less than the previous 2017 cycle, and a shortened duration as well. Underwhelming, to say the least, for Bitcoin.

Source: CryptoQuant

The question would rather be whether the market top will follow the pattern of 2017, with a blowoff top in December, as some assure, or instead maintain a sustained price (i.e. not losing 80% kicking off a multi-year bear market) going into 2022 or even 2023 as proposed by the lengthening cycle theory. If it were to reach new all-time highs by December with targets around $100k as shown on the S2F model, Bitcoin would have to increase 2,5 times its price in less than 3 months. Not unlikely, considering the price appreciation during the first months of 2021.

Of course, chart analysis and deterministic data approaches are not the only factor to keep in mind. The current global events are good evidence of this. The correlation between all financial sectors throws out the window of any possible Bitcoin technical analysis or bullish on-chain metrics whenever the stock market gets a correction and pessimistic news shakes up the global economy. The bullish case for this Bitcoin cycle cannot happen without the cooperation from the rest of financial entities, given their increasing ties to the crypto coin space and the proportionally small market capitalization of the whole cryptocurrencies sector compared to traditional finance, resulting in more violent price action.

Cycle Correlation?

When looking into previous Bitcoin cycles, we notice that neither 2013 nor 2017 were the same and 2021 appears to be going yet again in a different direction. The halvings clearly have a fundamental impact on Bitcoin but the general pattern is still subject to many other factors. As mentioned, global economics, politics, and social situations play a relevant role. Or simply the exponential effect of Bitcoin becoming a worldwide phenomenon (following Metcalfe's law) will invariably cause profound discrepancies between cycles. It is not the same to move an asset worth a few hundred million rather than almost a trillion.

Source: youtube.com/BenjaminCowen

As shown above, the ROI since the halving results did suggest that the 2020 cycle was ahead of 2017 but throughout the summer and now into September, the trend has reversed below and continues to maintain this tendency. Each cycle is currently offering diminished ROI.
Exactly the same situation emerges if using other metrics such as the ROI based on days since the previous bottom. Indeed, as seen below, the trend lines are similar.

Source: youtube.com/Benjamin Cowen

The data is even more compelling when looking into the ratio of ROI % based on the duration of the cycle in days since the previous bottom. From bottom to top in 2013, the results show almost a 60000% increase in 784 days while the 2017 cycle had around 12500% return in 1071 days. For sure, we can say that the period lengthened and the returns diminished.

Source: youtube.com/Benjamin Cowen

This trend seems to continue in 2020-2021 as we apply the same process of bottom-to-top comparison with the following results. From the bottom of the previous cycle in December 2018 to the (current) top in April 2021, the increase has been approximately 2000% in 850 days. If it were the top, it would mean a shortened cycle with a severely diminished return.

If the cycle extends to a new top, the current length would be 1022 days. To match the previous cycle (as it is already too late to repeat a 2013 pattern), the peak would be at the end of 2021. But the odds of getting close to 12500% return are improbable in such a short timeframe, considering the most recent price action. As such, there would still be a possibility to repeat the cycle length, although in such a case, diminishing returns are likely a given.

Going beyond 2021 entails lengthening cycles but leaves open the opportunity for increased price action, and maybe not have diminishing returns.

Source: TradingView

To expand on this idea, we may draw a parallel with altcoins. Many altcoins have parabolic moves upwards when gaining some traction on the market. As market caps remain (very) low for most of them compared to BTC, their moves are similar to what the first cryptocurrency was doing a few years ago. The 2017 bullrun shows that now established cryptos such as Ethereum went through the same phase as Bitcoin back in 2011 or even 2013 in terms of price discovery. Similarly, once established, these altcoins also present diminishing returns even if proportionally higher than Bitcoin, as a quick glance to the ETH/BTC pair shows.

However, this data is probably not enough to have a solid prediction model as there have been only three halvings, which is not enough to discern a specific repeating pattern, especially if the cycle behaviour is different on every occasion (besides the broad outcome of Bitcoin going higher in price).

Conclusion

If the top was not last April and Bitcoin does not pull a parabolic move during these last 2-3 months that exhaust the market and crash the price, continuing this bullish trend into 2022 would confirm lengthening cycles. Moreover, the returns over time have generally been diminished: from 2013 to 2017, and from 2017 to current valuations. Regardless of the length of the cycle, Bitcoin would require a top near the $350,000 - 400,000 range if comparing 2017 to 2020, to not result in notable diminishing returns.

But as George Box would say, we should not forget that all models are wrong, but some are useful.

*This article only represents the views of observers and does not constitute any investment advice.
*The content of this article is original and the copyright belongs to Gate.io. If you need to reprint, please indicate the author and source, otherwise legal responsibility will be pursued.

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