Original Title: Research Weekly - Charting Drawdowns During Up Cycles

IN TODAY’S ISSUE:

• As BTC continues its pullback from the all-time highs, we look at the frequency and magnitude of drawdowns during past major price cycles.
• Drawdowns of greater than 10% are regular occurrences, even during bitcoin’s rises from a cyclical trough to a peak.
• While the current drawdown is currently shallower than the average (but potentially yet to conclude), investors should be prepared for regular drawdowns of greater than 10%.

Drawdowns During “Up” Cycles

Bitcoin experienced a significant drop in price last week, falling from a peak of $73,835 (on Coinbase) to a low of $60,771, a correction of 17.7%. This decline was triggered by the first consecutive days of outflows from spot ETFs since the end of January, leaving many to question if the bitcoin rally has come to a halt or is simply pausing for a breather. Our analysis this week delves into historical trough-to-peak cycles and intra-cycle drawdowns to provide insights into the current price correction.

Defining Past Cycles

Bitcoin has experienced 4 significant price cycles in its history, peaking in 2011, 2013, 2017, and 2021, with these peaks centered about reward halvings. Following these peaks, there were extended and sharp drawdowns of 75% or more from peak to trough. While there is ongoing debate about the reasons behind these cycles (and whether they truly exist), the presence of recurring price patterns challenges even the weakest form of the efficient market hypothesis (EMH). Despite this, we can use these cycles to identify the “up” phase, starting from bitcoin’s low point, its trough, to its peak.

We currently find ourselves in this stage of the cycle, from the trough to perhaps an eventual peak (with timing and price uncertain). After hitting a low of $15,460 on 11/21/22 amidst FTX’s collapse, bitcoin has since entered the “up” phase of a new cycle, reclaiming previous losses and reaching a new all-time high on March 4th.

Against this backdrop, we explore how past “up” cycle drawdowns unfolded and what insights they might offer about the current cycle.

A Look at the Cycles

2013

Analyzing the 2013 cycle (we have skipped over 2011 because of bitcoin’s newness at the time), which saw a peak at the end of November, it becomes evident that there were multiple significant and extended downturns, including two exceeding 40% and one surpassing 70% (during the spring of 2013). Our focus is on documenting drawdowns greater than 10% from close price to close price (midnight UTC). The low point of the spring 2013 downturn was reached quickly, within just 7 days, yet it took a full 7 months, until November, for bitcoin’s price to fully recover and eventually go on to reach a new high in the cycle.

2017

The 2017 cycle was when bitcoin entered the zeitgeist of the professional investment community. While bitcoin would ultimately reach almost $20K at the peak, the cycle was pockmarked with drawdowns of greater than 10%. Unlike the 2013 cycle with only 5 such instances, the 2017 cycle experienced 13 drawdowns of similar magnitude. This made the 2017 cycle much more turbulent compared to 2013, although lacking a single massive drawdown event.

2021

The 2021 cycle, which reached its peak in November right after the launch of the BITO futures-based ETF, was the latest complete cycle (unless we have seen the current cycle high, but we don’t think so). Starting at the low point of $3,128 in December 2018, bitcoin surged to over $13,000 in the first half of 2019. Afterward, it experienced a significant decline over the next 9 months, hitting a low at the onset of the Covid-19 crisis in March 2020, racking up a 62.4% drawdown. Bitcoin then surged as a result of the economic response to Covid-19, boosted by monetary and fiscal stimulus measures. The cycle concluded in November 2021 at $69,000. Throughout the 2021 cycle, bitcoin encountered 10 significant drawdowns of 10% or more.

Current Cycle

The ongoing cycle, started at the low point in November 2022, has experienced 5 significant downturns exceeding 10%, including the current one we find ourselves in. The present decline has already hit 15.4% based on closing prices, or 17.7% when considering intraday highs and lows.

Putting it all Together

Looking at all of the greater than 10% drawdowns across all the previous cycles, and we see that they are a regular feature of up cycles. And the current drawdown, while possibly not over, has thus far been more shallow than prior drawdowns. Our analysis includes drawdowns both as measured by close prices as well as measured by intraday highs and lows, which are more severe.

The current pullback, although challenging, is completely in keeping with bitcoin’s prior price cycles. Investors should be prepared for the inevitability of such events as like all other financial markets, progress is not always in a straight line. Our analysis of blockchain data from two weeks ago (link) shows little signs that the end of a cycle is near.

Market Update

Bitcoin ended the week down 5.8%, pulling back from the all-time high set a few weeks ago, as ETF inflows that were driving price have flipped to outflows. GBTC investors have yet to let up on the outflows front, now processing $13.6B outflows since the fund converted to an open-ended ETF, and inflows into challenger funds have slowed dramatically. GBTC is still top of the leaderboard in term of AUM with $22.9B, but BlackRock’s IBIT has closed a significant gap and currently sits at $15.9B. Fidelity’s FBTC is distant third place at $8.9B.

A dovish Fed, which left interest rates unchanged but kept open the possibility of future cuts, helped most assets climb higher this week. For equities, the S&P 500 rallied 1.8% and Nasdaq Composite climbed 1.7%. Bonds fared well on rate news, with investment grade corporate bonds up 0.5%, high yield corporate bonds up 0.5%, and long term US Treasuries up 0.1%. Oil fell slightly, 0.2%, while gold rallied, up 0.8%.

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