The 4 Year Bitcoin Cycle: The greatest myth there ever was?

OK, that’s a rather (intentionally) controversial title. I apologise. 🙂

I think it’s fairly well accepted that Bitcoin has, since its inception, followed a 4 year cycle. The general view is that this cycle revolves around the halvings, when the block reward paid to miners on the network halves in line with the number of blocks resolved for historically.

A cursory glance at a macro BTC chart like the BLX Weekly (shown below) would support this notion and is what many involved in Crypto as a speculative asset class base their macro decisions around.

But…….what if it has nothing to do with Bitcoin halvings? What if this is a classic Economics example of assumed causation from coincidental correlation?

Before I dive into the meat of this article, let me first cover Causality and Correlation as these are central to the suggestion that I plan to make, based on the data.

Correlation: There exists an association between two variables, either inverse or direct. i.e. when one thing goes up the other goes down (inverse) or when one thing goes up both things go up (direct). Causation: There exists a direct link between two correlated variables where a change in one directly causes a change in the other.

One of the more well know examples to distinguish the two comes in the form of Ice Cream sales versus Shark Attacks in the United States. Theres a clear correlation between these variables, but does that mean that consuming Ice Cream causes Shark Attacks?

Of course not. The more likely explanation is that when its warmer outside more people consume Ice Cream AND go into the ocean. There’s a correlation between the variables, but no causality.

Now that we have that out of the way, let’s delve into some data. Firstly a look at the most commonly perceived 4 Year Cycle for Bitcoin, where (in general terms) there is a bottom of the previous cycle, a runup towards the halving, a pullback, some sideways then the halving is the catalyst for the Bull Cycle phase of the 4 year period. A look at this BLX Weekly Chart (Click to enlarge) shows the halving dates and does support this theory, on its own.

So, there is what appears to be a correlation between the Halving and the Bitcoin (and by extension Crypto market) cycle. But can we infer causality in this correlation, like many in Crypto do, or can we look to other data to suggest that, perhaps, the Halving is a coincidentally correlated variable in a wider causal model?

Firstly, credit to Mike Zaccardi for prompting me to look more deeply into this relationship from a Crypto perspective following his excellent work on 4 Year Presidential Cycles and the traditional markets, specifically the SPX and Dow.

Let’s take a look at this really interesting data, going back 100 years, relating to the S&P 500 and how it moves during the 4 year US Presidential Cycle. As you can see from this data set, the general pattern is up in Year 1, down into the mid terms in Year 2, up from Q4 Year 2 into H1 Year 3, some consolidation/pullback then finally a runup into Year 4 and the race for the Oval.

Interesting.

Let’s have a look at that in terms of a Market Profile, using a 4 Year Cycle based around the US Presidential Cycle. In general terms, of course, based on the aggregated view of the data since 1930.

I’ve been studying Market Profiles of Bitcoin from the Macro right down to the Intraday level and this is a pattern that jumped out at me when I read Mike’s article and drew it out on a chart. Why? Because its almost exactly how Bitcoin moves over it’s own, notional, 4 Year Cycle.

Now, we know that Bitcoin is still acting like a Risk On asset. The “Digital Gold” narrative is strong, as a narrative, but anyone paying attention to the data since its inception can plainly see that it moves in a correlated way to equities, particularly the S&P. Bitcoin, certainly in this Traders opinion, is a Risk On Asset tracking with Equities and against USD.

So, how does the Bitcoin chart over its full history compare to the S&P in terms of this correlation, and where do the 4 Year Presidential cycles fit in around that timeframe?

Let’s dive in and have a look.

The chart to the right (click to enlarge) shows the full history of BTC at a weekly level (top) and the same movement of the SPX during that time (bottom). As you can see, the correlation between the two is strong, for the most part, particularly from the start of the first full 4 Year BTC cycle in 2013.

There are anomalies, obviously, but in general terms the movement has been fairly correlated.

The table beneath the chart shows the overall expectation for Mid Term year from all of that data and the lower table is the raw data for every Presidential Mid Term year since 1928.

Now, what you will note is that in the second (Purple) Bitcoin cycle marked, the overall Presidential Market profile didn’t play out with October to December in Mid Term year bringing large drawdown. This was the Presidency of Donald Trump and (drawing no conclusions about Trump as a President only presenting the data) of the 100 years around it this was the outlier. You can see this in the lower table. It should be noted however that the overall profile of Q4 Y2 to H1 Y3 and positive return DID follow during the Trump Presidency.

Its not ideal from a Bitcoin perspective, given we’ve only had 2 full cycles, that one of those came in an outlier of the larger data set and perhaps is what contributes to the lack of correlation (certainly that I have seen) in these cycles being discussed.

No matter though, as highlighted in the data set, 91% of the time, 21 of 23 Presidential 4 Year Cycles measured, there was positive return Q4 Y2 into H1 Y3 around Mid Terms. And in these years, even the Q1-Q3 Y2 with the largest drawdown posted positive Q4 Y2 to H1 Y3 results.

But what has this got to do with Bitcoin Cycles that operate around the Bitcoin Halving, I hear you say?

Well, what if the Bitcoin Halvings happened to, completely coincidentally, line up perfectly with the market profile of the larger (and 100+ year old) Equities market cycle around the US Presidential race?

Wouldn’t that be interesting? Let’s have a look and see where the Halvings happen to fall shall we.

The bottom chart shows it all together, BTC and SPX movement, the 4 Year Presidential Cycles and the BTC Halvings. And darn wouldn’t you happen to know it: the BTC Halvings have all fallen in Year 4 of the Presidential Cycle, in a place where the movement Crypto Investors have come to expect around the Halvings would (or at least should, given the SPX movement) have been happening anyway.

Yes, I said that out loud. The movement of BTC around the Halvings appears, based on this data and the correlation to the traditional Risk On Markets, that it would have been happening anyway regardless of the Halvings themselves.

So, why does this matter to us, if it were true? Well, this all depends on your perspective, in reality. But, as the Halvings get earlier and earlier in the 4 year Cycle (Nov, July, May, April) one of these correlations needs to break. Either BTC is correlated to its Halving cycle, the halving itself providing the causality, or it is correlated to the much longer standing Equities Presidential Cycle which, in 3 cycles so far just happens to have overlapped with the BTC Halvings perfectly and it is that wider cycle that is the causal force on Bitcoin price movement, in line with the overall Risk On class..