Article by CryptoJelleNL
After 3 bull markets and three corresponding bear markets, most people these days operate under the assumption that the crypto market is of a cyclical nature. After a few good years, come a few bad years, and then good years again. The pattern repeats itself over and over again.
This observation is shared by analysts from JPMorgan Chase, which go as far as claiming that Bitcoin is a purely cyclical asset, instead of the hedge against economic hardship many maximalists make it out to be.
Most people also operate under the assumption that crypto bull markets are driven by Bitcoin halving events, which makes sense given that the last three bull runs all really kicked off shortly after the halving event took place – as you can see in the chart below.
And yet, despite the clear correlation, I'm here to argue that there is more to it. While the halvings may be a contributing factor (Bitcoin emissions are cut in half, after all!), I believe there is a much stronger driving force behind Bitcoin's cyclical nature. Let's dive in.
What are cyclical assets, anyway?
I'm sure most of you can answer this question by yourself but bear with me, as answering this question is instrumental in the point I will make later. Cyclical assets are assets that move in a certain cadence or rhythm. In most cases, cyclical assets follow the overall economic situation – thus moving up as business is booming, and going down when times are tough.
Stocks are a perfect example of a cyclical asset class because they are directly affected by the economic cycle.
Is the halving relevant?
I'll admit, the title of this article is a tad misleading. The halving event is not completely irrelevant as a bull market trigger. After all, Bitcoin halving events reduce the emission of new Bitcoin, which reduces the available supply as well. Thus, if demand stays the same or rises – the increased scarcity inevitably results in higher prices.
However, as the last sentence of the previous paragraph underlines, the effect of scarcity is only seen when demand stays the same, or of it rises. This brings us to what I believe to be the real driver behind Bitcoin's cyclical nature: liquidity and business cycles.
What are liquidity cycles?
Liquidity cycles refer to the changes to availability and cost of capital in an economy, over time. Periods of easy access to cheap capital (low-interest rates) are followed by periods of difficult access to cheap capital (high-interest rates).
Generally speaking, when capital is cheap and easily accessible, businesses are more prone to invest, which causes the economy to grow, and markets to go up. Conversely, expensive capital generally kills investment, causing a contraction in the economy, and markets to go down. In both cases, problems eventually arise (high inflation, or unemployment), causing the liquidity cycle to turn around.
Interest rates, asset prices, borrowing, saving, economic growth, investor sentiment and liquidity programs from the government (QE) all have an influence on the liquidity cycle.
The liquidity cycle is one of the main driving forces behind the stock market, and I believe it to be the main driving force behind crypto as well.
Sounds reasonable, but can you prove it?
When we think of times when the liquidity cycle drove markets, a clear example probably comes to mind: the large-scale capital injections that came after the outbreak of COVID-19. Unprecedented amounts of capital flooded the financial system, and all markets soared.
Twitter user TechDev_52 recently shared a chart that further underlines the close correlation between liquidity cycles and Bitcoin. He uses bond yields, the high-yield spread, and the aggregate balance sheets of major central banks (i.e. expansionary or contractionary policy) to create a visualization of liquidity cycles in the below chart.
Bitcoin/USD performance, compared to bond yields and central bank balance sheets, and the MACD indicator. Source: TechDev_52 on X (Twitter).
As you can tell, the liquidity cycle lines up with Bitcoin bull markets, just as well as the halving events. In some of his other tweets, this analyst even suggests that Satoshi intended the halvings to line up with liquidity cycles. I guess we will never know if this is true or not – but it looks like liquidity cycles play a role in driving bull markets.
Delphi Digital further fuels my case by demonstrating the correlation to the business cycle as well, by plotting the U.S. ISM Manufacturing Index (in white), and comparing it to Bitcoin returns. As you can tell, they too are strongly correlated.
Bitcoin/USD year-over-year (orange) vs. U.S. ISM Manufacturing Index year-over-year (white). Source: Delphi Digital
The way forward
We've seen markets closely follow the business and liquidity cycles, for a long time. Bitcoin halving events have historically preceded new bull markets as well.
As it stands, we know the next Bitcoin halving is scheduled to take place in April, while the tides of the liquidity cycle seem to be turning as well. Not only did the Federal Reserve announce a pause in interest rate increases, the Chinese government is actively deploying stimulus measures in an attempt to boost their currency and property market. As such, it looks like all the signs that preceded the previous bull markets – will be flashing green again soon.
While most people attribute bitcoin bull markets entirely to the halving events, I believe Bitcoin is not so different from other assets, and that it is at the mercy of liquidity and business cycles as well. Both liquidity and business cycles have lined up well with Bitcoin bull markets in the past, as have the Bitcoin halvings.
In the end, it looks like the halving, business cycles, and liquidity cycles all combine into a potion that sends Bitcoin flying. Will it pull off the same magic trick again?
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as trading or investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in both the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for WOO as well.
Check out his twitter: twitter.com/cryptojellenl
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