Bitcoin Cycles: Fundamentals

To start, it’s important to note that although Bitcoin is a unique decentralized currency, it still operates based on two fundamental economic principles: supply and demand. Similar to other tradable assets like gold, blue-chip stocks, and government bonds, a reduction in supply generally increases demand and drives prices higher. Conversely, a decrease in demand leads to oversupply and a drop in value. How do these principles apply to Bitcoin cycles?

Bitcoin cycles are known to occur approximately once every four years. Each cycle can be broken down into four distinct stages. It’s helpful to examine each phase before diving further into the concept.

The Accumulation Phase: This initial stage of a Bitcoin cycle sees traders purchasing tokens at a low price and holding them in anticipation of a coming bull run. Essentially, these traders are focused on buying at low prices and selling at higher ones.
The Mark-Up Phase: As more BTC tokens are bought and accumulated, their price begins to rise significantly. This phase is known as the mark-up phase. The extent of the price increase will depend on the demand from both institutional investors and individual traders. Analysts generally agree that this phase represents the “peak” of any Bitcoin cycle.
The Distribution Phase: This phase can be described as “selling at the right time.” Investors who bought BTC during the accumulation and mark-up phases typically see substantial profits, prompting them to sell. As a result, the market sees an increase in Bitcoin supply, which leads to reduced demand and a drop in price. Some might describe this phase as a “correction.”
The Mark-Down Phase: In this final phase, the market adjusts to the downward trend from the distribution phase. This can lead to a sharp and significant drop in Bitcoin prices. With fewer buyers in the market during this time, the market can become stagnant, with minimal movement. The mark-down phase can persist for several months until the supply-demand balance is restored.

What Does Bitcoin “Halving” Mean?

Next, we need to address another critical factor influencing Bitcoin cycles: “halving.” But what exactly is halving?

Bitcoin operates on a decentralized network, and digital “ledgers” track transactions. When these transactions are processed, new tokens are created. This process is referred to as Bitcoin mining. In theory, the Bitcoin supply would continuously grow in line with the number of new tokens generated through mining.

This could lead to oversupply and, consequently, a drastic reduction in Bitcoin’s value. To prevent such an outcome, Bitcoin has introduced the halving event.

Halving events reduce Bitcoin mining rewards by 50 percent, which happens every 210,000 blocks. A “block” refers to a set of Bitcoin transactions that occur over a defined period. Halving events occur approximately every four years, with previous halvings taking place in 2009, 2012, 2016, and 2020.

So, when is the next halving event? The next halving is scheduled for April 26, 2024, which will occur when block 840,000 is generated.

Immediate Aftermath of Halving: What to Expect?

Given our understanding of how halving relates to Bitcoin’s four-year cycle, it’s logical to assume that the period leading up to April 2024 won’t witness any major price changes—assuming no unforeseen external factors come into play. Some of these factors could include:

• Governmental intervention in the crypto sector
• Unexpected economic data from specific countries or regions
• Interest rate hikes by central banks
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Unless these or similar factors arise, many investors may take a wait-and-see approach, recognizing that we’re in the mark-down phase and demand is weak. Others might hold their assets, speculating that Bitcoin’s price will surge immediately after the halving event.

Impact of Bitcoin Cycles on Other Cryptocurrencies

Until now, we’ve treated Bitcoin cycles as a closed system, making it easier to understand the internal dynamics. But do these cycles influence the prices of other cryptocurrencies? This brings us to the concept of “crypto correlation.”

Crypto correlation describes how the movements of one token can affect others. Generally speaking, cryptocurrencies are positively correlated, meaning they tend to follow similar price trends. This is not unlike other tradable assets, like precious metals. When the price of gold rises, other metals like silver, copper, and palladium often follow suit.

So, why do Bitcoin cycles influence other cryptocurrencies such as Ethereum (ETH), Litecoin (LTC), and Dogecoin (DOGE)? The key takeaway is that investors often use Bitcoin to gauge the market’s overall sentiment. Positive Bitcoin price movements indicate a strong market outlook, which in turn prompts more buying activity. This is why Bitcoin is often called the “barometer” of the crypto ecosystem.

Cryptocurrencies Unaffected by Bitcoin Price Movements?

At this point, some readers might be wondering if there are any tokens that remain unaffected by Bitcoin’s price fluctuations. Are there any cryptocurrencies that can act as hedges against Bitcoin’s cycles and general price movement?

You might be surprised to learn that out of more than 5,000 cryptocurrencies, only a few manage to stay independent of the general market sentiment. These include:

• връзка
• Атом
• Тезос (XTZ)

What makes these assets unique? While there is still debate on the matter, it is most likely due to their relatively low exposure compared to assets tied to larger and more established blockchains.

Think of it like the difference between owning stocks in a large multinational company, exposed to various market risks, and holding shares in a small-cap IPO within a niche sector.

Anticipating the Outcome of the Upcoming Halving Event

To wrap up, let’s address the final question: How will the price of Bitcoin react to the next halving event?

Most industry experts are optimistic about the long-term outlook. Bitcoin’s popularity has surged since the 2016-2020 cycle, and even casual traders now understand its mechanics. These factors point to a significant influx of active traders during the early stages (accumulation) of the upcoming cycle. With a reduced supply and increasing demand, there’s little doubt that Bitcoin prices will enter a bullish phase once again.

However, much can happen between now and then. One concern is the potential for future market regulations by the U.S. Securities and Exchange Commission (SEC). If such regulations are imposed, many U.S.-based crypto platforms might relocate abroad, potentially impacting Bitcoin’s price and other tokens.

Nevertheless, the team at CryptoChipy will continue to provide timely updates and price predictions to help readers navigate Bitcoin’s four-year cycles.