It’s hard not to notice that crypto goes through boom and bust cycles. Absolute mania followed by deep dark despair. Why is this happening? What’s going on? And will it happen again!?
I’ve suffered though (and enjoyed!) three of these cycles now starting in 2013. At first, none of us knew this would keep happening. But as history keeps repeating, and as I learn more about markets and history of adoption in other industries - it’s starting to make more sense.
There’s no guarantee that another boom is coming. And past performance never guarantees future results. But there are many forces at play which lead me to believe these booms (and busts) will keep happening.
- Tech Adoption Cycle - The benefits of crypto are an undeniable innovation, but mass adoption takes a lot longer than you’d expect - especially when you’re early.
- Human Emotions - The emotional rollercoaster of greed/fear is a key driver of both the boom and the bust, and we can only handle it for so long before we forget those feelings and dive back in.
- Media Hype - The media is quick to notice a bull market and helps fuel crypto while things are good and they can’t wait to shit all over it when things turn.
- The Bitcoin Halving - The bitcoin halving creates a supply shock which kicks off a bull market every 4 years.
- Development Cycle - It sometimes seems like these new technologies appear overnight, but in reality they take years to build and dial in.
- Leverage - During bull markets, cheap credit flows and investors “lever up” by borrowing money to invest in crypto.
Technology Adoption Life Cycle
Just because you’ve stumbled on a life changing technology doesn’t mean everyone else has. In fact, if you’re reading this, even 10 years after the start of crypto, you’re still early according to a lot of metrics.
We might not be in the “Innovation” stage any longer, but if you’ve suffered through setting up a wallet or trying to figure out DeFi you know how difficult it still is. That puts us squarely in the “Early Adopters” stage of the tech adoption cycle.
The internet itself, arguably the most disruptive innovation of our lifetime, took 20 years to reach 80% of the developed world. 10 years in, internet adoption had only penetrated ~20% of the global population.
For the most part, Internet adoption is a fairly straight line up and to the right (although what happened in 2005!?). Looks very different from crypto price charts, but why?
When money gets involved, innovation still drives the fundamental growth over the long term, but fear, greed and emotions cause bubbles (or booms) along the way.
“The Tech Bubble” was the first major rise of public internet investment opportunities which ballooned the Nasdaq from 750 to 5,000 before crashing down to 1,100 over the course of 5 years from 1995-2000.
But was that the end? Was this technology’s Beanie Baby moment? Or is something else going on here? If we zoom out, we see “The Tech Bubble” was hardly a blip in the overall technology adoption cycle. Look more familiar?
Fear/Greed & Human Emotions
Price isn’t volatile, we are! Prices simply reflect what we’re willing to pay for something at any given point. And until you’ve experienced your net worth 10X over a short period of time, its hard to explain the feeling. I call it The Selling Feeling only because it helps force me to remember that I should probably be selling when I feel it!
Within each of these bubbles, we experience a range of emotions from feeling optimistic, to maximum euphoria, to deep dark depression and back again.
There’s nothing fun about this (ok, maybe some of it is fun). It’s draining. It shakes out everyone who isn’t in it for the long term. And the saddest part, is that the excitement/thrill/euphoria is what attracts most investors to the market and causes them to inevitably buy the top.
Kicking Off A Crypto Cycle
So it seems we’re going to boom and bust our way up and to the right in an emotion fueled rollercoaster ride forever, but how long does it take for each of these “cycles” to play out? Unlike traditional markets which are big, slow moving, and built on a shaky foundation (fiat money), the crypto markets follow Bitcoin, which has a secret catalyst programmed in - The Halving.
Every 210,000 blocks, or roughly every 4 years, the number of new bitcoins being created each block gets cut in half in an event known as The Halving. This is a big deal.
Currently, in 2023, the Bitcoin network issues 6.25 new BTC per block to miners, and miners sell a lot of their BTC to pay their expenses. Since blocks happen every 10 minutes, that’s 144 blocks per day or 900 () BTC per day! This oversimplifies things a bit, but that means 900 more BTC needs to be bought vs sold everyday just for the price to stay stable! At $25k per BTC, that’s $22.5M () of net daily BTC purchases!
When the BTC price is going up, that means more than 900 net BTC are being bought each day - and then The Halving hits and now there’s only 450 new BTC being issued every day. So instead of buying new BTC from miners, buyers have to buy from other sellers which bids up the price. This “supply shock” kicks Bitcoin into a bull market and the rest of the crypto market follows suite.
As you can see in the chart below, Bitcoin has reached a new all time high roughly 200 days after the last two halvings.
The “supply shock” caused by The Halving should have less and less of an impact over time as the amount of new bitcoins being issued becomes negligible. But as it stands, we still have a couple cycles left of halving’s directly impacting price.
Stages Of The Four Year Crypto Cycle
So what happens next? Having been through a few crypto cycles now, here’s what inevitably happens step by step through a crypto cycle:
- The Halving causes a supply shock which causes BTC’s price to rise
- BTC hits a new all time high ~6 months after The Halving
- The first round of media hype focused on BTC’s new ATH begins
- Investors from past cycles return to check in on their portfolio and place early bets
- Other large market cap projects like Ethereum begin to follow Bitcoin’s lead as investors search for “the next Bitcoin”
- New narratives emerge attempting to describe “the reason” for the crypto market’s new found optimism
- dApps and projects who’ve survived previous cycles shift their marketing to focus on the new narratives
- New projects with new tokens launch to serve the new narratives
- Not to be left behind, large crypto projects with big treasuries start “incentivizing” investors to use their chains/dApps
- Big (non-crypto) brands announce crypto initiatives
- Another wave of media frenzy ensues driving prices higher
- Higher prices leads to high “yields” since the tokens being issued as rewards are growing in price
- People start borrowing against their ballooning portfolios flooding the system with leverage
- All sorts of “staking schemes” emerge attracting huge TVL (Total Value Locked) for protocols no one has ever heard of
- Huge centralized companies seem to appear out of nowhere run by shady characters
- Massive hacks for hundreds of millions of dollars occur and no one even cares
- Crazy positive shit happens that never could have predicted
- People start believing “this time is different” and the price will never crash (aka Super Cycle)
- About a year after BTC first hit a new all time high, a final media push drives prices high FAST causing new investors to FOMO in and buy crypto for the first time - at the top
- Price crashes, simply because it went too high too fast
- The “crash” causes forced liquidations from investors who borrowed too aggressively, driving prices down even further
- Crazy negative shit happens that never could have predicted
- Price continues downwards for a full year as leverage and bad actors are flushed from the system
- Price bottoms out somewhere around the previous cycle’s all time high
- Price consolidates sideways for a year as media proclaims crypto is dead
- The legit builders take everything they learned from the previous cycle and they build the stuff that will drive the next cycle
- Four years later, or exactly 210,000 blocks since the last Bitcoin halving, comes the next halving, and the cycle repeats
Trading The Cycle
First let’s be clear, there are NO GUARANTEES crypto will boom again. Maybe the media is right this time, and crypto is truly dead. But if you’re like me and you think we’re going to boom and bust up and to the right forever, here’s how you might want to trade it:
- You want to be buying when “crypto is dead” and everyone has moved on. Typically starting a year after the previous All Time High.
- You want to start selling when the inevitable narrative emerges that “this time is different” and there won’t be a crash.
- Timing these things perfectly is impossible, so always buy and sell in chunks (DCA).
- You want to pay attention to early narratives that emerge leading into The Halving, typically during the sideways boring phase of the cycle when no one is paying attention.
- In The US, you want to hold your position for at least a year to take advantage of long term capital gains, which means buying sometime around The Halving and hodling on tight.
- Have a goal and make a crypto financial plan!
- Buying the bottom and selling the top can be risky business ~ if you’re not going to pay close attention to the markets, especially when things turn dark, it might make more sense to just hodl through multiple cycles.
Written by: @gerbz Gerbz is the founder of BitLift and has been journeying down the crypto rabbit hole since 2013.