Author: Darko Bosnjak, Momir Amidzic from IOSG Ventures

TL;DR

• IOSG research indicates that we are currently in the sixth cryptocurrency bull market cycle, which has been ongoing for over a year.
• Based on historical market cycle patterns, IOSG believes that we are currently in the middle to later stages of a medium-length bull market cycle, transitioning into the climbing phase from the accumulation phase, followed by the upward phase, distribution phase, and downward phase.
• Recently, the cryptocurrency market has seen the second occurrence of the 50-day moving average crossing above the 200-day moving average, which represents a positive signal. This technical indicator has a stable historical backtesting data, with over 80% of cases showing positive returns in the medium term.
• Compared to previous cycles, the current Bitcoin bull market cycle is unusually stable, but referencing historical patterns, IOSG expects at least 10 more corrective pullbacks (exceeding -5%) before reaching the peak of this cycle.
• Before and after the Bitcoin halving event, the price of Bitcoin often experiences significant increases.
• IOSG: Although the Bitcoin halving event coincides with changes in market cycles, it may not be the direct cause of market changes, but rather aligns with broader global economic trends.

Research Motivation

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

By referencing the lessons learned from past market cycles, we can gain a deeper understanding of market behavior. Furthermore, understanding the duration, magnitude, and characteristics of past cycles can help evaluate the current market conditions and identify potential turning points in the market.

About Cyclicality

Market cycles are generally defined as the period between two major lows of a broader market index (such as the S&P 500 index). Global market cycles are influenced by business cycles, economic conditions, and investor sentiment. At a more micro level, various industries, sectors, and assets bear the imprint of these macro cycles, but are still influenced by their own unique factors.

In general, cycles have four distinct stages or periods that describe the behavior of market participants: accumulation period (attracting chips), marking the upward phase, distribution period (distributing chips), and marking the downward phase.

In the initial stage, the accumulation period marks the end of the downtrend. The prevailing sentiment is one of distrust and uncertainty, as market participants cautiously navigate an environment of low price fluctuations.

Transitioning to the upward phase, the bull market takes center stage. Investor sentiment is optimistic and active, and the market exhibits an upward trend in price movements.

In the distribution stage of the market cycle, the narrative of sentiment begins to change, with market sentiment being dominated by overconfidence and greed.

Finally, the marking of the downward phase signals the arrival of a bear market. Anxiety and panic dominate market sentiment, and the trend of price movements continues to decline. The shadow cast by unfavorable economic conditions further intensifies investor unease during this stage.

In this section, we focus on analyzing the inherent cyclicality of the cryptocurrency market, with a particular focus on Bitcoin. Bitcoin has the highest market capitalization, a large market value, and high trading volume, occupying an important position in the digital currency market. The price fluctuations of Bitcoin often lead to corresponding adjustments in the prices of other cryptocurrencies that are usually highly correlated with it.

Since its inception, BTC has averaged an annual increase of over 2 times, however, with a more macro perspective, we can identify clear cycles.

Source: IOSG Ventures

So far, we have experienced five (including the current cycle, six) bull market cycles (green area) and five bear market cycles (blue area).

It appears that the cryptocurrency market is currently in the middle of the sixth bull market cycle, experiencing the upward phase. The accumulation period—the initial stage of the cycle—extended from the end of 2022 to the summer of 2023, during which Bitcoin's volatility reached historic lows.

Exploring Parallel Performances of History and the Present

There is currently a school of thought that denies the effectiveness of technical analysis, arguing that historical price and volume data lack the consistent predictive ability required to forecast future stock prices. Their view suggests that relying on past price trends and trading volume does not provide inherent advantages in predicting market trends. We tend to agree with this view, especially when evaluating the performance of individual assets in isolation.

However, on the contrary, we also believe that analyzing historical information is valuable for understanding the cyclicality of the market. While it may not provide precise predictions of future price trends, analyzing historical data can cultivate intuition and help avoid bias. By carefully studying market cycles, it can help avoid unnecessary bullish enthusiasm, such as holding supercycle narratives during market upswings (greedy phase), and counteracting bearish narratives during market downturns (panic phase). This can cultivate a resilient and insightful mindset, approaching market fluctuations with rationality and prudence, unaffected by temporary market sentiment.

Basic Data Statistics

In the tables below, we present the statistical data for each historical bull and bear market cycle.

Source: IOSG Ventures

Analyzing past cycles, the median decline in bear market cycles was -77% (average decline was approximately -75%). The recent bear market cycle saw a decline of exactly 77%. On the other hand, the median price increase in bull market cycles was 15 times (average increase was approximately 60 times).

As for the duration of the cycles, the median duration of bear market cycles was 354 days, with an average duration of 293 days. The recent bear market cycle lasted for 354 days. For bull market cycles, the median duration was 604 days, with an average duration of 571 days.

Bull Market Countdown

The current bull market cycle has been ongoing for about a year. Below, we will compare the returns of Bitcoin in this cycle with the previous cycles within a similar time window.

Source: IOSG Ventures

The bull market cycle of 2018-2019 ended in less than a year, with a return rate of approximately 3.9 times. The cycles of 2020-2021 and 2015-2017 lasted for over a year, with respective return rates of 11 times and 1.9 times within the initial 365 days. Essentially, the return of the 2020-2021 cycle was mainly achieved in the first year of the bull market, while the 2015-2017 cycle accelerated performance after the first year.

For the current bull market cycle, the price of Bitcoin has increased by 2.6 times from the bottom, roughly in the middle of a medium-duration bull market cycle.

Source: IOSG Ventures

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

Source: IOSG Ventures

At that time, after the second 50/200-day MA crossover in the 2015-2017 bull market cycle, the results for BTC were as follows:

• 90 days later - return rate of 1.27 times
• 180 days later - return rate of 1.43 times
• 365 days later - return rate of 2.26 times

Looking at the entire history of Bitcoin prices, the 50-day MA has only crossed the 200-day MA in 6 instances. From a probabilistic standpoint, it can be predicted with over 80% likelihood (5 out of 6 instances in history) that there will be a positive return one year after the crossover occurs.

Source: IOSG Ventures

On average, after bull market crossover events, the expected Bitcoin (BTC) return rates are as follows:

• 90 days later: 1.1 times
• 180 days later: 1.33 times
• 365 days later: 2.5 times

Rough Road Ahead

According to IOSG observations, the smoothness exhibited by this bull market cycle exceeds that of any previous cycle in Bitcoin's history.

In the process of Bitcoin reaching its peak, 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 shorter-duration cycles had more corrections than this cycle.

So far, no bull market cycle has ended with fewer than 20 daily corrections of 5% or more. Therefore, if this bull market cycle is similar to previous ones, we expect at least 10 corrections to occur as the market continues to rise before transitioning to bearish sentiment.

Source: IOSG Ventures

Impact of BTC Halving

Bitcoin halving is a pre-programmed event within the network, occurring approximately every four years, especially when 210,000 blocks are mined. During halving, the rate of new BTC generation is halved.

This has a significant impact on Bitcoin miners, as their mining rewards are also halved. Therefore, mining competition becomes more intense, prompting miners to seek more cost-effective energy to sustain their operations.

Additionally, halving significantly reduces the quantity of new Bitcoin entering the market, leading many market participants to view halving as a bullish catalyst.

To illustrate the impact of halving, let's look at the issuance of Bitcoin before and after each halving. Before the first halving, the issuance of Bitcoin exceeded 10 million. Before the second halving, the issuance was slightly over 5 million, and before the third halving, the issuance was approximately 2.5 million.

These statistics highlight the decreasing issuance of new Bitcoin over time, emphasizing the scarcity of cryptocurrencies and their long-term appreciation potential.

Source: IOSG Ventures

While analyzing only three historical halving events may not provide a statistically significant sample size to draw definitive conclusions, the importance of halving events in the Bitcoin community and the widespread discussion of their role as a bullish catalyst cannot be ignored. Therefore, we will delve into the relevant data of historical halving events in the following sections.

Source: IOSG Ventures

The next halving is expected to occur around April 2024 at block 840,000. The mining reward will decrease to 3.125 BTC.

These cycles clearly show a correlation with halving events, and from the graph below, the changes in BTC price after halving events are clearly visible:

Source: IOSG Ventures

Percentage-wise, as BTC becomes a more mature asset, the impact of halving gradually diminishes. After the last halving event, the price rose by over 6 times one year after halving.

Source: IOSG Ventures

Analysis of Pre-Halving Periods

In the expected halving events, we also observed strong BTC price trends, although not as intense as after halving. Similarly, in each new cycle, the increases were moderate, ranging from 400% to 150%, and then to 25% before reaching the peak.

Source: IOSG Ventures

Overlapping Analysis of Macro and Cryptocurrency Bull Market Cycles

Before determining the impact of halving events on the cyclicality of the cryptocurrency market, we should attempt to separate the influence of the global macro cycle on cryptocurrencies.

Source: IOSG Ventures

As shown in the above graph, there is a lot of overlap, especially in recent years. Therefore, we cannot say that halving events play a decisive role in determining the start time of a new cycle. While a positive macro environment may be the main factor determining the cyclicality of cryptocurrencies, halving cycles and other specific cryptocurrency events may also have a significant impact on the scale of bull markets.

Source: IOSG Ventures

Cryptocurrency traders may closely monitor the macro environment, as the outcomes of interest rates, oil prices (energy costs), and ongoing geopolitical conflicts will have significant impacts on the overall macro cycle.

In the cryptocurrency space, the major bullish triggers so far have been a series of high-profile bank bankruptcies, speculation on cryptocurrency ETF products, and the resolution between Binance and regulatory authorities, eliminating one of the biggest potential black swan events.

Conclusion

While we remain optimistic for the next few months, historical trends from prosperity to correction periods remind us that reaching overvalued levels is not uncommon. We are at a point of overconfidence and greed, where overconfidence and greed often dominate, potentially leading to a volatile environment and irrational valuations.

While this analysis suggests that enthusiasm for cryptocurrency investment is expected to grow further and positive momentum will continue, caution is also warranted.

After all, Bitcoin's current state is a more mature asset compared to earlier cycles. Concerns about the increasing institutionalization and maturity of this asset class have raised questions about the effectiveness of historical pattern analysis due to the efficient market hypothesis coming into play. We recognize that as the asset matures, historical pattern analysis may become less applicable. Therefore, approaching and analyzing the market with a balanced and realistic perspective is invaluable.

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