Crypto Market Cycle Analysis

Analyzing the Progress of the Current Crypto Bull Cycle

Key Takeaways

1. It has been roughly four months since the latest Bitcoin halving. The highest recorded price in each bull run has historically occurred during a 12-18 month window after the most recent halving date. Bitcoin is currently ~4 months post its latest halving (April 16th, 2024).
2. Global Liquidity, which historically has coincided with Bitcoin’s bull and bear markets, looks poised to increase over the coming 18 months. Generally, an increase in Global Liquidity bolsters a positive investing climat e for risk-on assets such as cryptocurrency.  This thesis is corroborated by the strong likelihood of rate cuts from central banks both domestic and abroad.
3. Various cyclic indicators, such as Pi Cycle, MVRV Z-Score, and Realized Cap HODL Waves are still forecasting more upside and longevity for this crypto cycle.

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Bitcoin’s Halving Cycle

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Bitcoin, the world's first and largest cryptocurrency by market capitalization, follows a reward halving schedule for validators of the network (miners). The reward granted to miners for confirming transactions within a block is reduced by 50% after every 210,000 mineable blocks are mined, which occurs approximately every four years. This halving mechanism will continue until the block reward reaches zero (year 2140). The latest Bitcoin halving reduced the block reward for miners from 6.25 BTC per block to 3.125 on April 16th, 2024. When investing in cryptocurrency it is important to explore and understand previous halving dates, their correlation with historical Bitcoin prices, and the underlying patterns that emerge.

Satoshi Nakamoto, the anonymous creator behind Bitcoin, mined the genesis block, also known as "Block 0," on January 3, 2009. With Bitcoin lacking monetary value during its nascent days, participation in mining was limited, with Satoshi leading the charge. Although Block 0 occurred in 2009, the first halving did not occur until November 28th, 2012. Subsequent halving dates were as follows: July 9th, 2016, May 11th, 2020, April 16th, 2024.

Table 1 (below) is aggregated data corresponding to all halving dates and ensuing price action. Regarding the relation between the three previous halving dates and peak Bitcoin price reached following each halving, it has taken Bitcoin between 12-18 months from each halving date to reach a new peak price. After the past two halvings occurred, July 9th, 2016 and May 11th, 2020, it took Bitcoin 525 and 546 days respectively to print what would become the peak price of that cycle. Bitcoin is now ~130 days post its latest halving. This would indicate we are still in the early innings of this cycle based on historical patterns and price action.

Historically, halvings have been followed by a subsequent surge in price. Returns, for the period: one year post-halving, have exceeded 250% at minimum after each occurrence. For example, the last halving transpired on May 11th, 2020 when Bitcoin’s price was $11,950 and by May 11th, 2021 the price was $49,631 resulting in a ~470% price increase.  The price of Bitcoin at the latest halving, April 19th, 2024, was $63,512. Only time will tell if similar levels of price appreciation will take place by Spring of 2025 (one year post 2024 halving).

Halving analysis is an important tool when monitoring the state of the current crypto cycle. Our team’s deduction is that this cycle is still less than half way concluded because of how recently the latest halving occurred (~130 days ago). History doesn’t repeat but it often rhymes. We forecast Bitcoin performing very well over the course of the next 6-12 months which coincides with historical patterns following Bitcoin Halvings.


Global Liquidity and Central Bank Policy

Global liquidity refers to the ease with which assets can be bought or sold in the global financial system without causing significant changes in their prices. It represents the availability of liquid assets in the international economy and the ability of financial markets to accommodate transactions.

Key components of global liquidity include:

1. Central Bank Policies: Central banks, particularly those of major economies like the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan, influence global liquidity through monetary policy actions such as interest rate adjustments and quantitative easing. When central banks inject money into the economy, it increases liquidity.
2. Capital Flows: Cross-border capital flows, such as investments in stocks, bonds, and other financial instruments, contribute to global liquidity. When investors move funds across borders in search of higher returns, it affects the liquidity in different markets.
3. Financial Markets: The depth and breadth of financial markets, including stock, bond, and foreign exchange markets, play a crucial role in determining global liquidity. Markets with higher trading volumes and more participants generally have higher liquidity.
4. Bank Lending: The willingness and ability of banks to lend money, both domestically and internationally, influence global liquidity. When banks increase lending, it enhances liquidity; when they tighten credit, liquidity can decrease.
5. Regulations: Financial regulations and their enforcement can impact global liquidity. For example, stricter capital requirements for banks can reduce their lending capacity, thereby affecting liquidity.

Global liquidity's significance is frequently underappreciated within the investment community, yet it serves as a crucial linchpin for risk-on assets. Much like the cyclical nature of cryptocurrency markets, traditional financial markets also experience cycles driven by liquidity fluctuations. These cycles are predominantly shaped by the monetary policies of central banks, including the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan.

In the image below, the Global Liquidity Index (GLI) highlights its cyclical nature. Notably, periods of heightened Global Liquidity have often aligned with US election years and the bull phases of previous crypto cycles.

Currently, the GLI is on an upward trajectory after reaching a 20-year low. Path's Investment team anticipates this trend will continue, driven by the expectation of monetary policy easing from the Federal Reserve in the near future. According to CME Group's Fed Watch team, there's a 65% probability of a 25 basis point cut and a 35% probability of a 50 basis point cut at the next FOMC meeting on September 18th, 2024. By the final FOMC meeting of 2024, the same team predicts a 76% chance that the Fed will have reduced rates by 1% or more from the current levels of 5.25-5.5%.

To corroborate the above data, On August 23rd, 2024, Fed Chair Jerome Powell signaled a shift in policy, stating, "The time has come for policy to adjust," indicating a move towards lowering interest rates.

Easing monetary policy, which now seems increasingly likely both domestically and internationally, would significantly bolster the risk-on environment essential for speculative assets like cryptocurrencies to thrive. The Global Liquidity Index (GLI) bottomed in 2019 and 2020, leading to the bull run that first propelled Bitcoin into the $60k range. Bitcoin, thus far, this cycle has sustained the $60k price level for over five months, in contrast to the brief peak above $60k in 2021.

In summary, global liquidity is a crucial driver of the global economy, affecting everything from asset prices to economic stability.

Crypto-Native Cyclic Indicators 

Path’s Investment team monitors a number of long-term indicators that have shown a historical propensity to predict the ebbs and flows of crypto market cycles. A few of our team’s favorite ‘cyclic’ indicators are the Pi Cycle, MVRV Z-Score, and Realized Cap HODL Waves. We will take a look at how each of these are composed and what inferences they are currently providing about the market cycle stage in which we are currently residing.

The Pi Cycle Top Indicator has historically been remarkably effective in identifying market cycle highs, often within a mere three-day window. This indicator relies on the 111-day moving average (111DMA) and a custom multiple of the 350-day moving average, specifically the 350DMA multiplied by two. Importantly, the multiple applies to the price values of the 350DMA, not the number of days. Over the past three market cycles, when the 111DMA rises and crosses above the 350DMA x 2, it has consistently coincided with Bitcoin's price peaks. Interestingly, the ratio of 350 to 111 equals approximately 3.153, which is strikingly close to Pi (3.142). This is, in fact, the closest approximation to Pi achievable by dividing 350 by another whole number. This relationship not only underscores the cyclical nature of Bitcoin's price movements over extended periods but also highlights the high degree of accuracy this indicator has demonstrated during Bitcoin's adoption phase.

The current state of the Pi Cycle Top Indicator (see image below) shows that the two key moving averages are gradually converging, signaling the potential for a future 'top signal.' However, given the slow-moving nature of these averages, it could still be several months before they intersect again. For now, the Pi Cycle Top Indicator suggests that the bull phase of this market cycle remains firmly intact.

The MVRV Z-Score is a Bitcoin chart that leverages blockchain analysis to identify periods when Bitcoin is significantly overvalued or undervalued relative to its 'fair value.'

This metric is composed of three key components: (see chart below)

1. Market Value (black line): This represents the current price of Bitcoin multiplied by the total number of coins in circulation, analogous to market capitalization in traditional markets (i.e., share price multiplied by the number of shares).
2. Realized Value (blue line): Instead of using the current Bitcoin price, the Realized Value calculates the average price at which each Bitcoin was last moved (i.e., the last time it was transferred between wallets). By averaging these prices and multiplying by the total number of coins in circulation, this metric filters out short-term market sentiment, offering a more 'true' long-term measure of Bitcoin's value. The Market Value fluctuates above and below the Realized Value depending on prevailing market sentiment.
3. Z-Score (orange line): This is a standard deviation test that highlights the extremes in the difference between Market Value and Realized Value, making it easier to spot when Bitcoin is significantly over or undervalued.
   
   

The MVRV Z-score has proven highly effective in pinpointing periods when the market value of Bitcoin significantly exceeds its realized value. These moments are marked by the Z-score (orange line) entering the pink zone, which signals the peak of market cycles. Remarkably, the indicator has consistently identified market highs within a two-week window.

Conversely, the Z-score also highlights periods when the market value is well below the realized value, indicated by the score entering the green zone. Historically, buying Bitcoin during these times has yielded substantial returns.

Currently, the Z-score remains below 2, indicating that the market value does not yet significantly exceed the realized value compared to previous bull cycle peaks. As the Z-score approaches the 4-5 range, we will begin to question the longevity of the current bull phase. However, for now, this indicator suggests that there is still more upside potential before the onset of another prolonged bear market.

Realized Cap HODL Waves is an adaptation of HODL Waves, which track the total amount of Bitcoin in circulation at any given time, categorized into different age bands.

Realized Cap HODL Waves, or RHODL Waves, expand on this concept by weighting the HODL Waves according to the Realized Price of coins within each age band.

To summarize, the Realized Price represents the cost basis of Bitcoins (or more precisely, UTXOs) held in wallets at a given time—essentially, the price at which they were last purchased.

RHODL Waves (see image below), therefore, provide insight into the cost basis of Bitcoins held in wallets over varying time periods, with each period represented by a wave on the chart.

In a sense, this metric is similar to MVRV Z-score as it leans on blockchain analytics to collect data on average historical purchase price of Bitcoins in circulation.

Peaks in the younger age bands indicate periods when these bands have a proportionally higher Realized Value weighting compared to the older age bands.

This is significant because it suggests that the market is willing to pay higher prices for Bitcoin today and in the recent past, compared to historical norms. Such behavior can be a strong signal that the market is becoming overheated.

Conversely, when older age bands dominate, it often signals that investors are cautious, unwilling to pay what they perceive as high prices relative to past levels. This typically occurs at major cycle lows, when Bitcoin is no longer capturing the interest or excitement of the average investor.

Currently, RHODL Waves also indicates the market is not particularly overheated compared to historical levels seen at bull market peaks.

Summary

It has been four months since the latest Bitcoin halving, the highest prices in previous bull runs have historically occurred within 12-18 months post-halving. Global liquidity, which aligns with Bitcoin's market cycles, is expected to increase over the next 18 months, likely driven by anticipated central bank rate cuts. This rise in liquidity typically supports a favorable investing environment for cryptocurrencies. Cyclic indicators, including the Pi Cycle, MVRV Z-Score, and Realized Cap HODL Waves, continue to suggest further upside and an extended duration for the current crypto bull cycle.

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