Bitcoin's Cyclic Behavior: Insights for Investors

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The recurring theory of Bitcoin's four-year cycle continues to gain validation with the passage of each four-year span. The pattern of three years of upward movement followed by a year of decline has persisted over three distinct cycles since 2011. Examining the annual returns for the four-year periods of 2011-2014, 2015-2018, and 2019-2023 provides further insight into this cyclic phenomenon.

Bitcoin Annual Returns by Year

Year Return

2011 1467%

2012 187%

2013 5870%

2014 -61%

2015 35%

2016 124%

2017 1338%

2018 -73%

2019 94%

2020 302%

2021 60%

2022 -64%

2023 YTD 75%

Source: Bankrate Bitcoin Price History

 

Pattern recognition serves as a cornerstone for success across numerous domains, including investment. Sir John Templeton famously cautioned against the assumption that "it's different this time" – a sentiment echoed by the consistent historical price data pattern. The onus is on skeptics to explain why this established 12-year pattern would falter now.

Several value investors contest Bitcoin's potential due to its lack of current cash flow and assumed absence of future cash flow. By the same token, such a stance would entail a rejection of various investments in commodities, art, vehicles, and even housing. It is worth considering the extent to which value investing, growth investing, arbitrage, and other strategies are essentially subsets of pattern recognition.

Investors select undervalued stocks based on recognizing their tendency to revert to cash flow multiples akin to peers. The purchase of the S&P 500 index hinges on recognizing a consistent average return pattern. Growth stocks are favored due to the pattern of rapid revenue and net income growth. Denying pattern recognition as a basis for investment negates not only value investing but also all other investment philosophies.

Is the Data Sufficient to Predict Future Continuity?

While acknowledging the unmistakable four-year pattern in Bitcoin's price movement and its relevance as an investment rationale, some may argue that three 4-year cycles over 12 years are insufficient to project future trends. However, a paradox emerges: the clearer and more undeniable the pattern becomes, the more the market incorporates it, diminishing future returns. This underpins the "diminishing returns" concept in cryptocurrency, where each cycle yields a lower percentage return than its predecessor. This trend has held true through three cycles thus far.

Investing in 2011 carried the highest risk due to the lack of annual price data for pattern analysis. Waiting until 2015 provided a single cycle, hardly indicative of a pattern. Those waiting until 2019 had two cycles to draw upon, enough to formulate a theory but not sufficient for certainty. While waiting for a pattern to be utterly certain is tempting, it also caps potential upside. Ironically, when the market fully embraces the cycles, they might cease to exist.

Unpriced Factors: Halving and 4-Year Cycles

Two factors underscore the underpricing of the halving and 4-year cycles. Firstly, technical analysis remains a prevalent tool for assessing Bitcoin's bullish or bearish stance, overshadowing the simple cycle-based analysis. Secondly, the market hasn't universally accepted the four-year cycle theory. The presence of sell ratings and bearish comments contradicts full market assimilation.

Despite a 75% YTD increase, this doesn't necessarily indicate pricing of the halving. Previous cycle pre-halving years, like 2015 and 2019, displayed comparable or higher growth rates. If historical precedence stands, the forthcoming halving year could potentially lead to a substantial increase.

Unique Twist this Cycle: Bitcoin ETF Filings

Historically, any assertions of a deviation from established cycles have proven incorrect. The author avoids conjecturing a "super-cycle" but points to the influx of institutional interest, contrary to previous cycle peaks. Notable financial entities, including BlackRock, WisdomTree, Fidelity, Invesco, and others, have submitted applications for BTC ETFs. The narrative of Bitcoin remains consistent: increasing demand driven by a burgeoning younger generation and stable supply, complemented by institutional entry.

Not So Simple for a Commodity to Plummet

The assertion that Bitcoin could plunge to zero – or soar to millions – is a frequent argument among both bears and some bulls. In reality, commodities like Bitcoin are more resilient in this regard compared to equities or currencies. Long-term currency debasement and inflation can erode currencies to near worthlessness. Bankruptcy can swiftly obliterate equities. Bitcoin, however, presents a distinct challenge to such zero predictions, surviving even the turmoil of COVID-19.

Shifting Outlook: When the Pattern Breaks

While Bitcoin's cyclic pattern is central to the bullish thesis, any breakdown of this cycle would warrant a reassessment. If the years 2023, 2024, or 2025 buck the trend and yield downturns, it would signal a rupture in the four-year cycle's consistency.

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