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Bitcoin’s (BTC-USD) halving cycle points to a consistent history of bewildering price rallies followed by steep corrections. As a rare recurring theme in the cryptocurrency landscape, this may put BTC on a collision course with a crash in Q1 of 2022 – despite long-term outlooks remaining largely bullish.
However, with greater institutional adoption and a cycle that’s so far struggled to resemble its predecessors, BTC could be dependent on far more than its halving events when undergoing price fluctuations today.
Bitcoin’s Halving Cycle
Bitcoin is a cryptocurrency that operates on a proof-of-work mechanism for generating new coins. To mint new Bitcoins, miners dedicate huge volumes of computing power to solving arbitrary mathematical problems conjured on the blockchain.
However, written into Bitcoin’s code is a recurring halving event that halves the amount of BTC rewarded to miners over time. When the cryptocurrency was first established, miners were paid 50 BTC per block. In 2012, when the first halving event took place, the reward received by miners fell from 50 BTC to 25 BTC. Subsequent halvings took place in 2016 and 2020 – with each halving the volume of BTC miners earned further. The next Bitcoin halving is due to occur in 2024.
As we can see from bitcoin’s past three halving cycles, each has been involved in has followed an extremely similar pattern whereby a brief, steep peak is followed by a seismic correction before returning to consistent price accumulation.
At present, we’re yet to see BTC commit to the same pattern that’s preceded it since its creation.
So, what could this mean? Well, if Bitcoin were to commit to its halving cycle, it would mean that a significant all-time-high-smashing price rally will be imminently due followed by a period of extreme pullbacks. Alternatively, it may mean that Bitcoin’s growing institutional adoption and mainstream emergence has caused the coin to break from a trend that it’s been bound to for over a decade.
Will 2022 Start with a Crash?
Bitcoin is no stranger to market crashes, and Q2 of 2021 saw a severe market pullback wipe more than 50% off the value of BTC in a matter of days. The crash, which was widely attributed to a cocktail of negative news revolving around sanctions emanating from China and concerns over the environmental impact of proof-of-work cryptocurrencies, rocked the asset at a time where parabolic price movements were expected by many market commentators.
The setback for BTC led to widespread uncertainty as to whether the bull market was over or if the market was merely entering a phase of consolidation before a rally later in the year.
As Bitcoin recovered to break its all-time high momentarily in early November, stock market sell-offs in the wake of the emergence of the omicron variant of Covid-19 pushed the price of the asset down in a dip that wiped some $300 billion from the crypto market as a whole.
Bitcoin’s hampered progress means that we’re yet to see the parabolic price rally experienced in the wake of the asset’s previous halving events. However, as history shows, the peak of the bull is always extremely brief and immediately followed by a heavy crash.
Adam Morris and Tom De Spiegelaere, co-founders of CryptoHead, told Yahoo Finance that:
It’s not a matter of if there will be a crypto crash, it’s a matter of when
The pair speculated that the market had built up a head of steam and that the recent BTC rally towards its new all-time high in November was the result of a procession of people who had “FOMO’d into crypto” in recent months. Morris and De Spiegelaere also claimed that the market in its current form is “unsustainable” and coming “towards the end of a bull run”.
The Case to Remain Bullish
In a recent article published in Seeking Alpha, financial market forecasters, The Value Trend, argues that times have changed from the fledgeling days of Bitcoin, and that changing demand for the cryptocurrency can protect it from the scale of volatility experienced following its previous halving events.
If we think about how Bitcoin usage and demand have evolved in the last few years, Bitcoin has many more applications – and the protocol has been significantly improved through Taproot.
We have much higher conviction by Bitcoiners, demand growing from institutions and retail, the latter being driven by younger investors who are beginning to accumulate wealth, and we also have Bitcoin becoming increasingly harder to mine. This is the perfect recipe for a supply squeeze.
Furthermore, the cryptocurrency ecosystem is ever-evolving. Over the past year or so, we’ve seen financial giants like PayPal (PYPL) and Visa (V) introduce crypto solutions, while Tesla – albeit briefly – adapted its online store to accept payments in BTC.
Cryptocurrency exchanges are evolving at a rapid rate, too. In April 2021, Coinbase (COIN) went public in a stock market debut that valued the company at $86 billion at launch.
Elsewhere, KuCoin has announced that it’s introducing social investing in its new platform, KuCoin S.
Speaking to Yahoo News, KuCoin’s CEO told:
We believe that the integration of “social” and “trading” features will make crypto trading easier and more understandable for newcomers.
We intend to provide a one-stop-shop solution where users can discuss latest trends and topics, get to know others’ investment strategies and portfolios, and then set up a trading bot to implement their trading ideas automatically.
By meeting people’s social demands within a cryptocurrency exchange, KuCoin has sought to deliver greater levels of engagement between traders in what’s already a heavily sentiment-driven market.
As the barriers to adoption continue to fall, we may yet see Bitcoin become more resilient when coming to terms with its cyclical framework.
Has Bitcoin’s Cyclical Crash Already Occurred?
Bitcoin’s end-of-cycle price crashes have been severe. The infamous Mt. Gox hacking event in 2011 saw the value plummet by 99% marking the end of its initial bull run, whilst subsequent cycle tops in April 2013 and December 2017 led to drops of 83% and 84% respectively.
Each end-of-cycle event was driven by external factors. In 2013, Mt. Gox struggled with the frenzied trading volume of BTC, crashing the platform and leaving the platform open for hackers to attack. Whilst in 2017, investors sought to cash in on Bitcoin as the asset ballooned towards $20k – the proceeding sell-off was exacerbated by the threat of the cryptocurrency becoming banned across eastern Asian countries like Japan and South Korea.
It was similar external factors that saw BTC tumble some 53% in May 2021. With Bitcoin already cooling off from breaking its previous all-time high of $63,576.68, the news that Elon Musk removed Bitcoin as a payment option on Tesla’s (TSLA) website citing the cryptocurrency’s environmental impact shocked the market. The downturn was fuelled further by fresh fears regarding Chinese regulation – causing a slump that Bitcoin has struggled to shake off.
As a result, BTC ended 2021 at a price that’s below its peak Q1 2021 value of $57,669.30.
Bitcoin’s late 2020 and early 2021 rally closely mimicked the aggregated path mapped out for it by market analytics firm, Ecoinometrics. However, whilst Bitcoin’s initial crash came at a time when the analytics suggested that it was possible as part of the halving cycle, the associated peak was far lower than the model had mapped out.
This indicates that, with the greater level of institutional control over the asset, that Bitcoin’s halving cycles don’t dictate the rise and fall of the asset with quite the same influence as they had done in its formative years.
Bitcoin’s Reliance on Sentiment Could Lead to a Bearish 2022 and Beyond
As we’ve seen time and again in the world of cryptocurrencies, sentiment can carry a severe effect on the performance of an asset. So far in 2022, BTC has sunk more than 10% with investors becoming fearful that the cryptocurrency’s underperformance won’t recover over the short term.
With a growing number of retail investors adopting Bitcoin, the increased volume of buying and selling can make dips more pronounced when negative news stories occur – which can create wider selling sentiment towards BTC leading to more price crashes.
As Bitcoin’s halving event of 2020 falls further into the past, this loss of optimism for one significant pump may give way to a more bearish outlook for BTC – regardless of how far the asset has come from its previous cycles.
Power in the Hands of the Whales
Bitcoin has always been dominated by whales. According to a recent study by the National Bureau of Economic Research, just 0.01% of account holders account for 27% of all holdings. Furthermore, the top 10,000 Bitcoin accounts hold 5 million Bitcoins – worth around $232 billion at the time of writing.
2020 and 2021 has been a boom time for institutional investment also. Firms like Ark Investment Management LLC currently have around 20 million shares of Grayscale Bitcoin Trust (OTC:GBTC) under management, with Kinetics Portfolios Trust holds around 14 million shares.
Likewise, large firms like Tesla (TSLA), MicroStrategy (MSTR), Block (SQ), Galaxy Digital Holdings (OTCPK:BRPHF), and Voyager Digital (OTCQX:VYGVF) have all emerged as major investors in the cryptocurrency in recent years.
Significantly, at the time of Bitcoin’s most recent halving on the 11th May 2020, the total cryptocurrency market cap stood at $242,814,408,358 – whereas in 2021 its market cap peaked at $2.97 trillion.
This heavy inflow of investment over the past two years has caused the cryptocurrency market to be 10-times more resilient, and thus, far better anchored against the traditional cycles that influenced the market.
This indicates that we may not be headed for the same mind-bending price rally and crash that’s punctuated the previous BTC halving cycles, but it does mean that – should trends continue – we’re at the beginning of a mass drive towards institutional acceptance of Bitcoin, which will drive further adoption.
