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Adoption cycles of Bitcoin
Not many people know about the Bitcoin cycles. To me personally, it is very interesting how it is following almost the exact same 4-year cycle and it is continuing to grow naturally, but to some people the cycle is meaningless. Either way not learning about these types of cycles may cost many people potential gains.
Let’s reason down why this is an asset that follows the adoption wave so closely. It may be digital, however, it is comparable to God’s design of Gold while adding much more to it. Thus giving it one of the qualities to be considered as sound money and making it highly attractable to investors. Of course, Bitcoin can be much more than that as it has a lot of implementations.
We can see that after every 4-year cycle, cryptocurrencies get more recognition and adoption while the fundamentals are becoming stronger.
The 4-year Bitcoin cycle
One of the previous 4-year cycles was from the end of 2014 to the end of 2018. We can divide this 4-year cycle into two parts – 3 years of a bull market and 1 year of a bear market. Before explaining the cycle we need to factor in human psychology. As people in their nature are greedy and often get involved in this industry only because of the highly volatile price movement.
The first two years of the cycle
The first two years of the cycle are usually when the price consolidates around one level and stays there for a prolonged period of time. This period may be boring to endure and as a result of that, trend surfers and the media stop reporting on the crypto space. This is, arguably, when most of the “smart” money enters the market, while others are still in disbelief about whether this is a true rally or not.
The Bitcoin halving
Every 4 years, the network goes through a process called halving. The algorithm rewarding miners with BTC is based on the amount of work they’ve done to solve a complex problem. Since its inception, bitcoin has a preset block reward which after a certain number of mined blocks is being reduced.
The current inflation rate is 3.74% per annum and after the next halving, the inflation rate will become 1.80% thus becoming lower than the central-banks target of 2%. This acts as a shock to the supply of the digital asset.
The last year of the Bull cycle
If we look at the performance during the past 3rd years of the cycle, we can see that it is also the most volatile one. The reason for this is the halving showing its effect with a delay and here we can see the supply/demand law in its purest form. If Bitcoin repeats its past performances we should see a new cycle top forming up.
The last year is the one where everybody looks at the price and this is the only thing that they can think of. Nothing of true value is being built at that time and due to the influx of new people, you are bound to have scammers lurking around the industry, creating scam projects and ripping people off their money.
During the last half of the third year, volumes in the market will most likely see a big growth as new people enter the crypto industry. A lot of exchanges might close registrations at that time since they can’t scale the rate of customer growth.
The Bear market – The last year of the 4-year cycle
This is the year where usually prices are falling steeply from the top and a lot of crypto business struggle at some point because as the interest in the crypto industry is overall down. Therefore we see volumes getting lower and exchanges making less profit, leaving them with less available funds for advertising. Badly managed projects either file for bankruptcy or exit scam, leaving many investors hanging with their “bags” of worthless tokens.
During the bear market, we witness Bitcoin being pronounced dead multiple times and compared to every major bubble before it.
At this time period, most of the projects are really starting to feel the urgency to deliver a product and capture as much of the shrinking market as possible. More companies start to accept bitcoin and other cryptocurrencies as payment methods further driving the adoption ahead.
Of course, the cycle repeats on the 5th year and it all starts over again. This is mostly due to the human behavior and psychology involved in the process. The complicated part comes when we dive deeper into the activity of the market and its psychology. Markets are driven by humans and their behavior.
Why Bitcoin is so volatile?
The important aspect that makes this young market volatile is the fact that it is a limited asset with only 21 million to be ever created. With the halving event, you have fewer and fewer of it going into circulation.
On the other hand, there are the so-called “whales” who are sometimes trying to cause market manipulations resulting in big ups or downs. Factoring in all of this, plus the fact that we are still in the very beginning and you get the perfect recipe for very high volatility.
To gain a broader view of the situation you need to compare bitcoin’s market capitalization to some traditional assets.
Let’s compare its tiny market cap to that of Gold. The one asset that it is mostly compared to.
- Bitcoin Market Cap: 150 Billion
- Gold Market Cap: around 7-8 Trillion
Supply and Demand
As we mentioned earlier, Bitcoin has a limited total supply of 21 million with a circulating supply of around 18 million at this moment. Therefore this is making it one of the most scarce assets on the planet.
Demand is decided by the market, which is driven by the people. If you have a lot of people going to exchanges like Coinbase, CEX, Bitpanda to buy Bitcoin and the buyer’s demand is more than the seller’s quantities – the price will go up, especially on scarce assets like this. And the price will fall if there are more people willing to sell than buying.
This is the pillar for the volatility that we witness now, however, this is also a pillar for stability in the future. The simple ratio is – as the more people want to get hold of Bitcoin, less and less of it will be for sale.
A significant role in the price movement plays the sentiment. The way people feel towards an asset will most likely determine its price movement in a short period of time. Just like we see from the “Cheat Sheet” the market has its seasons.
In the beginning, you will always find people disbelieving, just like we saw with the multiple dismissals of Bitcoin in the past years. The sentiment gradually changes leading to a slowly building euphoria.
A proper example is the bull run in 2017 with the FOMO created, everyone tried to jump on the bandwagon and get a hold of this scarce digital asset. Of course, after such a hype cycle we always see big corrections. This is bound to happen when the prices get overboard and way ahead of the actual development or adoption.
After a correction occurs, the sentiment changes from positive to anger and depression. Sometime after, people forget about their bad “fear of missing out” experience and are ready to try that asset again.