Why The 4 Year Cycle Is Wrong
The Blockchain Sector @ 2023-08-09
The collective opinion in crypto markets is that the 4 year cycle has proven itself and is set to play out again. Bitcoin will make us rich after the next halving in 2024 and again in 2028. However following a consensus opinion in markets is perilous because the outcome the crowd predicts, is already priced in.
In this article I’m going to make a counter argument to the 4 year cycle and explain why you shouldn’t believe it will last forever.
The Danger of Consensus
A collective agreement on the value of an asset can stabilize its price and reduce volatility but when the trade becomes crowded, it can distort the market, skewing the balance of risk and reward.
A crowded trade occurs when the majority of market participants position their portfolio according to a shared belief. In the case of Bitcoin, the 4 year cycle has become such a widely accepted narrative that it has drawn in the entire industry, all hoping to buy at the bottom and sell at the top.
What we see in the slide above is the effect of a consensus opinion and market maturity reducing asset price volatility. We have already started to see this influence on the 4 year cycle. In 2021 we never got the blow off top that everyone was waiting for. In 2023 there are still people waiting to buy in at the $12-14k level that was widely predicted.
When a majority viewpoint dominates the market, the popular outcome becomes priced into the asset creating a skewed risk to reward ratio. This means that the potential rewards of following the crowd are often diminished, as the price already reflects the expected outcome. At the same time, the risks are amplified. In extreme circumstances when the popular belief proves to be wrong, the price can plummet as investors sell off their hopes into a market crash.
The Allure of Predictability
Consensus can create an illusion of safety, luring us into a psychological trap. The emotionally triggering thought of everyone being wrong and not getting Lamborghinis isn’t pleasant and might blindside our consideration of alternative potential outcomes.
Human beings are pattern seeking creatures and our brains are hardwired to find order in chaos, seeking out patterns in the world around us to make sense of randomness. This innate tendency is a survival mechanism that has evolved over thousands of years to anticipate potential dangers.
The markets are unpredictable, filled with a dizzying array of variables and influenced by a multitude of factors. Amidst this uncertainty, patterns offer a semblance of predictability, a glimmer of order in the chaos.
The allure of Bitcoin's 4 year cycle lies in its apparent predictability. Like clockwork, the cycle seems to repeat itself, offering a comforting sense of certainty in the notoriously volatile world of crypto. The cycle is a beacon of light that promises riches to those who follow its path.
The danger lies not in the pattern itself, but in our unwavering faith in its inevitability
Uncharted Path
On a fundamental basis digital assets are the future and hard currencies will appreciate over the long term relative to an inflating US dollar.
However a continuation of the four year is not guaranteed. The remnants of the crypto industry are likely near fully invested already and plan to sell when Bitcoin breaks $100k. Is anyone planning on allocating significant capital when Bitcoin is priced between it’s all time high and $100k?
So who will be buying then? Will retail return to pump our bags? Perhaps. If Bitcoin can make a new all time high then it will be newsworthy and attract attention but the significant price movements recently have been driven by institutional investment.
When Tesla first allocated a portion of their treasury to Bitcoin I thought it would be only a matter of time before Apple, Facebook and all the other tech giants followed suit. That hasn’t been the case. For board members the opportunity to allocate treasury funds to high interest rate treasuries and bonds offers a lower career risk to “gambling on Bitcoin”.
The seemingly imminent Bitcoin spot ETF’s are the exception to this argument and could well initiate a wave of institutional investment.
Navigating Uncertainty
To date, the four year cycle has had a self-fulfilling prophecy but it only has 4 data points and markets are very different now to what they were in 2011.
As markets mature I expect steady growth and reduced volatility, aka a supercycle. Each of Bitcoin's 4 year cycles has been less dramatic than the previous. Investors believe more than ever in the longevity of the technology and are ready to buy dips and sell tops.
Hopefully next year we will see a massive run up following the halving but we shouldn’t believe this is guaranteed. If retail doesn’t come back and institutions aren’t interested it’s hard to see where the capital inflows will come from.
That doesn’t mean that Bitcoin wont one day break $100k, it might just not happen in the way the entire community currently predicts.
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