Info reaching us says Bitcoin (BTC-USD) moves in relatively predictable four-year price cycles based on its supply halving. The figure below shows each price cycle beginning with the halving date. Those who claim that Bitcoin entered a bear market in April are also arguing that the cycle hypothesis no longer holds, despite little to no on-chain evidence to suggest so.
I believe that a new all-time high will occur in Q4 2021 or Q1 2022 for several reasons: 1) on-chain data shows that Bitcoin is finding a floor at its current price range. 2) a Q4 rally post-halving typified every bull market cycle to date. 3) The market is shrugging off news of the China ban and SEC crackdown with reason.
Finding a Floor
Bitcoin has remained resilient despite an avalanche of negative sentiment regarding environmental concerns, another China ban, and remarks from the SEC’s Gary Gensler. Negative headlines have overshadowed Twitter installing a Bitcoin tipping feature on the Lightning Network, Panama introducing a Bitcoin legal tender bill, and rumblings that the SEC could approve a Bitcoin ETF as early as October, opening institutional floodgates for adoption.
Glassnode’s on-chains newsletter provided interesting insight into the state of the network. Firstly, Bitcoin supply held by short-term holders reached 20% this week. Short-term holders are addresses with an average purchase date of less than 155 days. Why is this relevant? 20% tends to signify the bottom of a selloff. In fact, the depths of the 2018 bear market and the March 2020 selloff are the last instances in which this metric touched 20%.
Conversely, this also means that addresses with an average purchase date over 155 days hold 80% of the Bitcoin supply. High conviction HODLers have accumulated during this consolidation period and are establishing a price floor. Unless the HODLers uncharacteristically dump their supply on the market, 80% of Bitcoin supply is essentially illiquid. This is a bullish sign, as long-term holders tend to only sell at bull market peaks.
This Happened Before
We are still in the exponential phase of the bull market cycle. Bitcoin tends to rally the most one year after its halving event. The last halving occurred in May 2020. Bitcoin rallied 8,946% to reach its all-time high following the 2012 halving and 2,845% following the 2016 halving. Below are the monthly returns going into the end of the year for 2013, 2017, and the present cycles. Note that September has historically been a negative month for Bitcoin before witnessing a massive Q4 rally.
(source: author, data from bybt.com)
Another way to examine the lengths of rallies is using the number of blocks mined since the halving. The 2013 cycle peaked roughly 65,000 blocks mined post-halving. The 2017 cycle peaked at roughly 81,000 blocks. Taking blocks mined and percent gain into account, the clear trend is longer cycles with less price appreciation. There are roughly 144 blocks mined per day. If this bull market cycle peaks between 81,000 and 97,000 blocks since the halving, with 97,000 attained from extrapolating the difference between the 2013 and 2017 cycles, the cycle high will be anywhere from November 25, 2021, to March 15, 2022.
Is the Cycle Framework Broken?
I fail to see a reason why this time is different. Bitcoin is at a $42,000 price level after having shaken out nearly all traders and retail speculators. For those who believe that the China ban is significant enough to end the cycle early, I remind you that China has banned Youtube, Facebook, Google, Instagram, and Netflix. It has even banned Justin Bieber and Winnie the Pooh. For one, a decentralized blockchain protocol can never truly be banned, hence the multiple attempts to do so. Secondly, this is a bullish sign given that the “Chinese 51% attack” was a relevant thesis when China had over 80% of the global mining hashrate. With much of the hash rate moving to North America, China has little power to threaten the network.
Additionally, as mentioned in my previous article, SEC chair Gary Gensler’s regulatory target is clearly derivative tokens and stablecoins. The Commodity Futures Trading Commission (CFTC) already defines Bitcoin as a commodity according to the Commodity Exchange Act of 2015, giving credence to the digital gold characterization. I believe the regulations on Bitcoin are clear compared to DeFi tokens. Bitcoin is characterized as an asset akin to a commodity or property by multiple agencies. Those who believe it is threatened by Gensler’s crusade against DeFi have clearly misread his statements.
On-chain data comparing short-term to long-term holders demonstrates a likeness to the 2018 and 2020 local bottoms. Given that the current price is at $42,000, this is a bullish sign for a rally to all-time highs. Additionally, Bitcoin’s lackluster September price action is completely normal. Though this price cycle is slightly longer and more subdued than previous cycles, I see no reason to believe that this time is different. Narratives of a China ban and SEC crusade are distractions in the continued institutional adoption of the discovery of digital scarcity. The fact that the market shrugged off this news is a bullish sign.
I dollar-cost average into Bitcoin and will occasionally buy dips when I feel it is oversold. If the data led me to believe this was the beginning of a bear market, I would certainly say so. However, a confluence of factors leads me to believe that we will see a Q4 rally.
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