Is Bitcoin’s Traditional Four-Year Cycle Coming to an End?

Investors and cryptocurrency enthusiasts have long been interested in Bitcoin's four-year cycle, carefully tracking these recurring price action patterns to predict upcoming market moves. However, given the changing dynamics of the Bitcoin market and the economic environment, we must acknowledge that the traditional four-year capital flow cycle may be coming to an end. Here, we will explore whether we should consider the possibility of the end of Bitcoin's four-year cycle, and whether this theory is well-supported by evidence or just speculation.

1. Interpretation of Bitcoin's Four-Year Cycle

Bitcoin's four-year cycle is mainly driven by Bitcoin halving events, which occur approximately every four years. During a halving event, the mining reward for Bitcoin transactions is halved, thereby reducing the circulation rate of new Bitcoins. In the past, these halving events have triggered bull/bear cycles in Bitcoin prices:

• Halving event: The new Bitcoin supply is reduced by half.

• Post-halving bull run: usually accompanied by 12-18 months of price increases.

• Bear run: after the price peaks, there is a period of price decline.

• Transition period: slow recovery until the next halving.

These cycles have been well documented, and multiple models such as the Stock-to-Flow model demonstrate these patterns. Therefore, our current price trend suggests that the four-year cycle is still in operation. However, the historical price increases have gradually decreased, and the peaks are not as obvious as in previous cycles.

2. Stable MVRV Z-score

The MVRV Z-score compares Bitcoin's market value to its realized market value, providing insights into market valuation. The downward trend in the Z-score peaks indicates that the volatility of market reactions has weakened over time. This suggests that while Bitcoin still follows a cyclical pattern, the amplitude of these cycles may decrease as the market matures and the market value grows. The figure below shows the MVRV Z-score (orange line) and its declining peaks (red line) in the first two cycles.

3. Focus on the stock-to-flow model

The stock-to-flow model is a popular framework for predicting Bitcoin prices based on scarcity, which takes into account these gradual reductions in inflation. The model compares Bitcoin's existing stock (existing supply) with its flow (newly minted Bitcoin). Due to the halving event and constant block increase, Bitcoin's flow decreases and its stock-to-flow ratio increases, indicating that scarcity increases and theoretically value will also increase.

It is clear that Bitcoin's price trend after the 2024 halving is similar to previous cycles. The model shown in the figure below suggests that the reduction in supply could push the price to about $440,000 (red line) within a year after the halving. Such a high peak would break the trend in the figure below, which is the continued decline in deviations above S 2 F "fair valuation", and the decreasing volatility of peaks in the oscillator below.

Until we see hard evidence that the model is no longer valid, we still need to consider it as a possibility. Remember, if the model continues indefinitely, it will eventually predict that Bitcoin is worth more than the total value of the world's currency; while this is not technically impossible, is hyperbitcoinization inevitable?

4. The impact of reduced inflation

Halving events significantly reduce miners' BTC revenue and have historically driven price increases. However, as block rewards decrease over time, the impact of halvings on Bitcoin prices may weaken. For example, the change from 6.25 BTC per block to 3.125 BTC was quite significant, but future halvings will see smaller reductions, potentially weakening their impact on the market.

When Bitcoin's last halving occurred in May 2020, the circulating supply was approximately 18.37 million BTC. The block reward at the time was 6.25 BTC, with an annual inflation rate of about 1.82%. Over the next four years, this rate gradually decreased as supply increased. When the most recent 2024 halving occurred, the inflation rate had fallen by about 6% to about 1.71%. After the 2024 halving, the block reward was halved to 3.125 BTC. As the total supply continues to increase, the annual inflation rate has fallen to less than 1% (currently about 0.85%). This continued decline emphasizes the foresight in Bitcoin's design, but its impact is gradually becoming less significant.

Currently, there are approximately 19.7 million Bitcoins in circulation, generating a block reward of 3.125 BTC every ten minutes. This means that we have mined 94% of the total supply, and the remaining 1.3 million BTC will be mined in the next 120 years. The figure below shows the BTC income that miners receive from block rewards alone every day (orange line), and its trend towards 0.

5. Changes in miners' income and fee-based incentive mechanisms

As block rewards decrease, transaction fees make up for the gap in miners' income. On the day of the halving on April 20, 2024, the total transaction fees reached 1257.72 BTC, which exceeded the block reward (409.38 BTC) by more than 3.07 times. This is the first time that miners have earned more from transaction fees than from block rewards, signaling a shift toward a fee-based mining model.

As miners earn more from transaction fees, the importance of halving events in shaping miner incentives may decrease. If transaction fees account for a larger share of miner income (as shown in the yellow shaded area in the figure below), miners may be less concerned about the impact of a 50% reduction in block rewards (block reward income is shown in the blue shaded area in the figure below). This shift suggests that the dominant impact of halving events on miner behavior and Bitcoin prices may weaken over time.

6. The impact of holding coins

The increasing trend of holding Bitcoin for a long time is another factor that may weaken the cyclical fluctuations in Bitcoin prices. Data shows that more than 30% of the supply has not moved in the past 5 years, and this proportion may continue to rise rapidly at the macro level, as shown in the figure below; the orange line shows the percentage of Bitcoin that has not moved for at least half a century. Whether these Bitcoins are lost or held by long-term investors, this behavior reduces the circulating supply and has now exceeded the impact of the reduction in new supply brought about by the halving event.

If 10% of these investors who hold for more than 5 years (about 3.2% of the circulating BTC supply) decide to take profits during this cycle, 630,400 BTC will flow into the open market. During the entire four-year halving cycle, only 656,250 new Bitcoins were minted. This small difference clearly depicts the new market dynamics.

7. The prospect of extended market cycles

This decreasing inflation may attract more institutional investors and even sovereign investment. Institutions like BlackRock and countries like El Salvador recognize the potential for Bitcoin’s rising scarcity and price appreciation. It is expected that as more investors recognize Bitcoin’s unique monetary properties, demand will surge. However, this demand will likely be more in sync with traditional liquidity cycles and macroeconomic-driven risk appetite, rather than driven by retail speculation as in previous cycles.

Given the likely weakening impact of Bitcoin’s own fundamentals, the increasing influence of new market participants, and Bitcoin’s historically strong positive correlation with traditional assets and indices such as the S&P 500, Bitcoin may begin to follow more traditional market cycles, such as those of the stock market, which typically last 8-10 years.

In the chart below, we can see Bitcoin price action (black line) versus S&P 500 price action (blue line).

These parallel movements can be measured on a scale of -1 (inverse correlation) to 1 (positive correlation).

Over the past 5 years, the 6-month correlation of these assets has often reached above 0.6, showing a strong correlation between the two. When one moves, the other usually follows.

8. Evolving Bitcoin Market

Until we observe significant deviations from historical patterns, such as Bitcoin's failure to reach new all-time highs after the halving, the four-year cycle remains a valuable framework for understanding Bitcoin market behavior. The reduced impact of halving events does not mean that they will become bearish. On the contrary, their impact may weaken.

The recent Bitcoin halving event remains bullish and may continue to have a positive impact on Bitcoin prices in 2024 and beyond, although the returns may be smaller and the price volatility will be reduced. While there is no hard evidence that the impact of halving events has ceased, the overall impact of future halving events is expected to weaken, affecting a predictable four-year cycle.