Original author: Darko Bosnjak, Momir Amidzic, IOSG Ventures

TL;DR

• IOSG research shows that we are currently in the sixth cryptocurrency bull cycle and have been going on for more than a year.

• According to the historical market cycle pattern, IOSG believes that: we are currently in the middle and early stages of a medium-length bull market cycle, and are entering the middle and late stages (accumulation period -> rising period -> distribution period -> declining period), and are entering Climb period.

• Recently, for the second time in the crypto cycle, the 50-day moving average broke above the 200-day moving average, which represents a positive sign. This technical indicator has stable historical backtest data, and more than 80% of the cases have positive returns in the medium term.

• The current Bitcoin bull cycle is unusually smooth compared to previous cycles, but if historical patterns are followed, IOSG expects at least 10 more corrections (over -5%) before reaching the peak of this cycle.

• The price of Bitcoin tends to rise significantly in the period leading up to and following the Bitcoin halving event.

• IOSG: Although Bitcoin halving events coincide with changes in market cycles, they may not be the direct cause of market changes, but are consistent with broader global economic trends.

Research motivation

In order to better understand and respond to current market conditions, we need to study the formation and development of market cycles in history, as well as the various factors that influence these cycles.

By referring to lessons learned from past market cycles, we can gain a deeper understanding of market behavior. Additionally, understanding the duration, magnitude, and characteristics of past cycles can inform assessment of current market conditions and identify potential market turning points.

About cyclicality

A market cycle is typically defined as the period between two major lows in a broader market index, such as the SP 500. Global market cycles are influenced by business cycles, economic conditions and investor sentiment. At a more micro level, each industry, industry and asset carries the imprint of these macro cycles, but is still affected by its own industry and its own unique factors.

Generally speaking, cycles have four distinct phases or periods that describe the behavior of market participants: the accumulation period (attracting chips), the mark-up period, the distribution period (distributing chips), and the mark-down period.

In the initial phase, the accumulation period marks the end of the downtrend. The prevailing sentiment is one of distrust and uncertainty, with market participants cautiously navigating an environment of low price volatility.

Transitioning to an upward period, the bull market becomes the protagonist. Investor sentiment is upbeat and positive, and the market is moving out of an upward trending price k-line.

During the distribution phase of the market cycle, the emotional narrative begins to change, and market sentiment begins to be dominated by overconfidence and greed.

Finally, the marked down period signals the onset of a bear market. Anxiety and panic dominate market sentiment, and the trend of the K-line chart continues to decline. The shadow cast by unfavorable economic conditions has further aggravated investors sense of unease at this stage.

In this section, we focus on analyzing the inherent cyclicality of the cryptocurrency market, with a special focus on Bitcoin. Bitcoin has the highest degree of market capitalization, large market value, and high transaction volume, and occupies an important position in the digital currency market. Bitcoins price fluctuations are often highly correlated with other cryptoassets, and the prices of other cryptoassets often adjust accordingly as Bitcoin rises and falls.

Since its birth, BTC has risen more than 2 times per year on average. However, if we use a more macro perspective, we can identify obvious cycles.

Source: IOSG Ventures

To date, we have experienced five (six if you count the current cycle) bull cycles (green zone) and five bear cycles (blue zone).

It currently appears that the cryptocurrency market is in the middle of its sixth bull market cycle and is experiencing an upswing. The accumulation period—the initial phase of the cycle—extends from late 2022 to the summer of 2023, when Bitcoin volatility fell to historic lows.

Explore parallel representations of history and the present

There is currently a school of thought that denies the validity of technical analysis, arguing that historical price and volume data lack the consistent predictive power needed to predict future stock prices. Its view is that relying on past price movements and trading volumes does not provide an inherent advantage in predicting market trends. We relatively agree with this sentiment, especially when evaluating the performance of individual assets in isolation.

But conversely, we also believe that analyzing historical information is valuable in understanding market cyclicality. Although it cannot provide an accurate prediction of future price movements, doing analysis of historical data can develop intuition and help avoid bias. By carefully studying market cycles, you can help avoid unnecessary bullish enthusiasm, such as supercycle arguments, that hold when markets are rising (greed periods) and offset pessimistic bearish arguments when markets are falling (panic periods). This can cultivate a mentality that is both resilient and insightful, respond to market fluctuations more rationally and prudently, and not be swayed by temporary market sentiments.

Basic statistics

In the table below, we present statistics for each historical bull and bear market cycle.

Source: IOSG Ventures

Analyzing past cycles, the median drawdown in previous bear market cycles was -77% (the average drawdown was around -75%). The most recent bear market cycle was down exactly 77%. On the other hand, the median price increase during bull market cycles is 15x (the average increase is about 60x).

As for the duration of the cycle, the median duration of a bear market cycle is 354 days and the average duration is 293 days. The most recent bear market cycle lasted 354 days. For bull market cycles, the median duration is 604 days and the average duration is 571 days.

Bull Market Countdown

The current bull market cycle lasts about a year. Below we will compare Bitcoin’s returns in this cycle with previous cycles within a similar time window.

Source: IOSG Ventures

The 2018-2019 bull cycle ended in less than a year, with returns of about 3.9x. The 2020-2021 and 2015-2017 cycles lasted more than a year and returned 11x and 1.9x respectively in the first 365 days. Essentially, the returns in the 2020-2021 cycle were primarily realized in the first year of the bull market, while the 2015-2017 cycle accelerated performance after the first year.

For the current bull cycle, Bitcoin price has increased 2.6 times since the bottom, which is roughly in the middle of a medium-duration bull cycle.

Source: IOSG Ventures

In the past few weeks, the 50-day price moving average (MA) crossed above the 200-day MA for the second time since the start of this cycle. In fact, we have rarely seen this pattern happen twice in a short period of time in the past. Historically, this event has only occurred once during the bull market of 2015-2017.

Source: IOSG Ventures

At that time, following the second 50/200-day MA crossover of the 2015-2017 bull cycle, BTC’s results were as follows:

• After 90 days - 1.27x return

• After 180 days - 1.43x return

• After 365 days - 2.26x return

Throughout the entire history of Bitcoin price, the 50-day MA has crossed the 200-day MA in only 6 instances. Probabilistically, one can predict a greater than 80% probability (5 out of 6 historical events) of a positive return one year after the crossover occurs.

Source: IOSG Ventures

On average, the expected Bitcoin (BTC) returns following a bull crossover event are as follows:

• After 90 days: 1.1x

• 180 days later: 1.33x

• After 365 days: 2.5x

bumpy road ahead

According to IOSG observations, the smoothness of this bull market cycle exceeds any cycle in the history of Bitcoin.

On the way to the top of Bitcoin, the previous cycle experienced nearly 115 daily corrections of 5% or more (here we refer to negative returns as corrections), while this cycle has only experienced 10 such corrections. Even cycles of shorter duration have more corrections than current cycles.

To date, no bull market cycle has ended with fewer than 20 daily corrections above 5%. Therefore, if this bull cycle has similar characteristics to previous bull cycles, we would expect at least 10 more corrections as the market continues to rise before the market transitions into bearish sentiment.

Source: IOSG Ventures

The impact of BTC halving

The Bitcoin halving is a scheduled event within the network that occurs approximately every four years, specifically when the 210,000th block is mined. During the halving period, the rate at which new BTC is generated will be halved.

This has a significant impact on Bitcoin miners as their mining rewards will also be halved. As a result, mining has become more competitive, prompting miners to seek more cost-effective energy sources to sustain their operations.

In addition, the halving also significantly reduced the amount of new Bitcoin flowing into the market, which led many market participants to view the halving as a bullish catalyst.

To illustrate the impact of halvings, let’s look at the issuance of Bitcoin before and after each halving. Before the first halving, the supply of Bitcoin exceeded 10 million. Before the second halving, the number of Bitcoins issued was just over 5 million, and before the third halving, the number of Bitcoins issued was about 2.5 million.

These statistics highlight the dwindling number of new Bitcoin issuances over time, emphasizing the cryptocurrency’s scarcity and long-term appreciation potential.

Source: IOSG Ventures

While an analysis of just three historic halving events may not provide a statistically significant sample size to draw firm conclusions, the importance of halving events in the Bitcoin community and their widespread discussion as bullish catalysts cannot be ignored . With this in mind, we’ll dive into the relevant data from historical halving events below.

Source: IOSG Ventures

The next halving is expected to occur around April 2024 at block 840,000. Mining rewards will be reduced to 3.125 BTC.

These cycles are clearly visible and seem to be related to the halving event. The changes in BTC price after the halving event can be clearly seen in the figure below:

Source: IOSG Ventures

On a percentage basis, the impact of the halving gradually decreases as BTC becomes a more mature asset. After the last halving event, the price increased more than 6 times a year after the halving.

Source: IOSG Ventures

Analysis of the pre-halving period

We also observed strong BTC price action in anticipation of the halving event, although not to the post-halving intensity. Again, in each new cycle, the gains were more modest, from 400% to 150% to 25% before capping.

Source: IOSG Ventures

Macro and crypto bull cycle overlap analysis

Before determining the impact of halving events on cryptocurrency market cyclicality, we should try to isolate the impact of global macro cycles on cryptocurrencies.

Source: IOSG Ventures

As the chart above shows, theres a lot of overlap, especially in recent years. Therefore, we cannot say that the halving event plays a decisive role in the timing of the start of the new cycle. While a positive macro environment may be the primary factor in determining cryptocurrency cyclicality, halving cycles, as well as other specific cryptocurrency events, may also have a significant impact on the size of a bull market.

Source: IOSG Ventures

Cryptocurrency traders are likely to keep a close eye on the macro environment, with interest rates, oil prices (energy costs) and the outcome of ongoing geopolitical wars having a significant impact on the overall macro cycle.

On the cryptocurrency side, the main bullish triggers so far have been a series of high-profile large bank bankruptcies, speculation on cryptocurrency ETF products, and a settlement between Binance and regulators that removed the biggest potential blackmail One of the swan events.

in conclusion

While we remain optimistic about the coming months, the historical trend of cycles moving from boom to correction reminds us that it is not uncommon to reach the point of overvaluation. We are at a tipping point where overconfidence and greed tend to take over, potentially leading to volatile environments and valuations that defy rationality.

While this analysis suggests that enthusiasm for cryptocurrency investment is expected to grow further and the positive momentum will continue, it also needs to be treated with caution.

After all, Bitcoin’s current state is a more mature asset than it was in earlier cycles. The increasing institutionalization and sophistication of this asset class has raised concerns about the effectiveness of the efficient markets hypothesis. We recognize that as an asset matures, historical pattern analysis may become less applicable. With this in mind, viewing and analyzing the market with a balanced and realistic perspective is invaluable.