Bitcoin Exception! Has the 4-Year Cycle Been Broken?

What’s going on with Bitcoin? Despite a lot of very positive and bullish news, it just can’t catch on. What is the problem? What else do we have to fear? Is it possible that we should evaluate this four-year cycle that we’ve seen throughout Bitcoin’s history differently than we have in the past? What should we pay attention to now in the short term, but especially in the long term?

The question on many investors’ minds is whether the traditional four-year cycle of Bitcoin (BTC) will continue or if it will be disrupted due to new factors such as Exchange-Traded Funds (ETFs). Before delving into this, let’s first understand what the four-year cycle theory entails.

The Four-Year Cycle Explained

The four-year cycle is primarily based on Bitcoin halving events, which occur approximately every 210,000 blocks, or roughly every four years. During a Bitcoin halving, the block rewards (essentially the inflation rate of Bitcoin) are halved. This means that after each halving, the number of new Bitcoins entering the network every 10 minutes is reduced by half.

Initially, miners received 50 BTC per block. This reward has since been reduced to 3.25 BTC per block following the most recent halving. Before April’s halving, the reward was 6.5 BTC every 10 minutes. Consequently, Bitcoin’s inflation rate, in contrast to the inflation of traditional fiat currencies, continues to decrease as fewer new Bitcoins are introduced into the network.

Currently, the inflation rate of Bitcoin is approximately 0.8%, which is lower than the gold inflation rate. In the past, this reduction in new supply has led to a supply shock, assuming demand remains constant, which in turn has driven up the price of Bitcoin.

Evaluating the Cycle’s Impact

Long-term, a lower inflation rate should have a significant effect on Bitcoin’s price. During Bitcoin’s early history, the reduction of the block rewards likely had a substantial impact on the price, given the higher initial inflation rates. However, in the current context, I believe that the four-year cycle might not be the primary driver of Bitcoin’s price movements.

The Role of Global Liquidity

Instead, I argue that global liquidity plays a more crucial role. Historical data shows a strong correlation between Bitcoin’s price movements and global liquidity levels. When global liquidity increases, so does the price of Bitcoin, and vice versa.

Recent months have highlighted this relationship. We are currently at a high point in the interest rate cycle, with relatively high rates compared to Bitcoin’s history, and a stagnant level of new money entering the system. This has made it difficult for Bitcoin to gain upward momentum.

The Intersection of Halving and Liquidity

While the halving events and the resulting reduction in new Bitcoin supply are important, they must be viewed in conjunction with global liquidity trends. The expansion or contraction of global liquidity has a significant impact on Bitcoin’s price. For instance, the recent plateau in global liquidity has coincided with Bitcoin’s struggle to break out of its current price range.

The Influence of ETFs

The introduction of Bitcoin ETFs, particularly spot ETFs, has the potential to attract significant institutional investment. This influx of capital from well-capitalized market participants such as asset managers could amplify Bitcoin’s price movements. In this sense, the four-year cycles might become even more pronounced, not necessarily in terms of greater price increases and corrections, but in terms of increased capital flow into the market.

Future Outlook

As we look ahead, it is essential to consider both the traditional four-year cycle and the broader macroeconomic factors at play. We are currently at a pivotal point where interest rates are high, and global liquidity is uncertain. The expectation is that interest rates will eventually be lowered, which historically leads to increased market liquidity—a favorable condition for Bitcoin.

Conclusion

In summary, while the Bitcoin halving events play a role in the price dynamics, they should not be viewed in isolation. The broader context of global liquidity and macroeconomic trends is equally, if not more, important. The introduction of Bitcoin ETFs adds another layer of complexity and potential for increased market participation.

Investors should therefore focus not only on the halving events but also on the overall economic environment, including global liquidity trends and interest rate policies. Understanding these factors will provide a more comprehensive view of Bitcoin’s future price movements.