I’ve been busy of late, working on my Sigma platform (which is now in user testing), writing the draft of a book I’ve been working on for a while (100,000 words and still not done, going to need some editing!) and building positions for my core portfolio for the next 6 months.
The last of those activities means I’ve still been monitoring the markets and maintaining my risk logs and it’s one of those, my primary left tail risk, I want to discuss today.
The articles I wrote in September 2022 (“Game of Fractals” and “The BTC 4 Year Cycle – The Greatest Myth there ever was?”) highlighted statistically the likelihood of a bottom in markets and a positive return potential Q4 through H1 2023 and we’ve now gone beyond that time horizon. I’m happy to say things played out as described. The data highlighted the trend and those who backed history to play out again made good returns in all markets.
As optimism has returned over the past few months, especially in the crypto market, I’ve been looking at another historical and statistical pattern that represents my primary left tail risk between now and November 2026. I wanted to take a break from book writing, so decided to put this down in another article.
As always, this is not a prediction. I cant tell the future any more than anyone else, this is simply a scenario that I’m monitoring and have a plan for, should I see my validation criteria start to fire. My primary scenario at the moment remains the beginnings of a new cycle, with the high in year 3, but we have precedent for this in other markets so have to remain vigilant as to the possibility.
So, what’s the risk?
At a very high level, Bitcoin is entering what would be its fourth potential 4 Year Cycle, which would complete a 16 Year Adoption Cycle. 16 Year Adoption Cycles, which first came to my attention via the excellent work of Bob Loukas who you should definitely investigate, tend to end with a cyclical bear market and a high that comes earlier than many anticipate. A “Left Translated” cycle top, in Bob’s words, which I wont lay claim to.
The general theory of an Adoption Cycle is that every new asset class goes through one from inception, where we see a period of expansion followed by a period of contraction as adoption normalises. This fits broadly with the technology adoption bell curve from innovators and early adopters on the left of the curve to late majority and laggards on the right. This normalised distribution, theoretically at least, applies from an investing context within the market movement of said adoption cycle.
The chart attached is the NASDAQ and shows the period from 1986 to 2002 and the Adoption Cycle of the Internet and Internet technology. What a time to be alive and an IT enthusiast this was! This is commonly referred to as the “Dotcom Bubble”.
As you can see, the NASDAQ (the primary tech index in the US) followed a pattern very, very similar to Bitcoin from its inception. A series of 4 year cycles made up roughly of 3 years growth and 1 year of drawdown. This presented as “Right Translated” cycles for the first 12 years, or simply put the high of the cycle came in the second half of said cycle.
This was evident right up until the final cycle, where the high (a true blowoff top in anyone’s eyes) occurred prior to the midpoint, making the final cycle Left Translated. I remember it well, as the majority called for higher prices, Euphoria was in the air, anyone who didn’t own tech stocks was buying all they could, then it rolled over into a prolonged bear market.
This time period humbled many investors, including a prominent Bitcoin enthusiast today, Michael Saylor, who claimed the unfortunate record of the largest single day loss in trading history. Now, that isn’t a criticism of Michael, I quite enjoy listening to his views, though I don’t always agree, he’s an interesting person with interesting opinions.
Is that what Bitcoin is setting up for?
Before I go any further, we’ve all seen those posters who confidently proclaim that anyone proposing “this time it will be different” is foolish, but that hubris fails to recognise a wider data set which would suggest that actually it is they themselves arguing for that which they deride. In ignoring the evidence of previous 16 Year Adoption Cycles in other markets, which contain 4 distinct 4 Year Cycles within just like Bitcoin, they are by extension the ones claiming “this time it will be different”.
I’ll let you think on the irony within that for a second. 🙂
This Bitcoin chart maps out the Bitcoin Adoption cycle thus far and shows, broadly, alignment with that NASDAQ cycle (in orange). 3 years of growth followed by a year of decline for 3 cycles completed thus far. So, are we entering the 4th cycle of the 16 year cycle and, if the adoption cycle plays out, should we expect an early blowoff top in Bitcoin, a Left Translated cycle and a prolonged bear market that takes out current lows afterwards?
This is my risk, in essence.
Do we have anything to support this?
So, now we look at what we may have technically that could support such a scenario and the pattern shown above is one I have discussed for around a year. One could make a case that we had a fully completed 5 wave cycle in the previous Bitcoin 4 Year Cycle. But, in that scenario Wave 5 clearly under performed and the retracement has been larger than one may expect.
I’ve outlined the measurements previously, but the fundamental point I want to raise here is that Elliot Wave IS NOT time bound. It doesn’t care about the Bitcoin notional 4 year cycle, it only cares about its levels and structure. And as such, this flat expanded scenario, where the current drawdown phase was a legitimate Wave 4, remains a valid count.
In this scenario, the time required to complete one further 5 wave internal impulse, to complete the Macro wave 5, would be far less than a full macro 5 wave cycle from start to finish, traditionally at least.
Or, in short, if this were the final fifth wave that we’ve started, then that would fit with the possibility of a Left Translated cycle, a far lower end of cycle target (I project in the $80k to $120k range depending on strength of the blowoff) and a longer bear market to come with lows below $17k.
The timing of such a move would bring the same behaviour we saw pre 2000 in the dotcom bubble, with Euphoria about the strength of the move, more people piling in and everyone proclaiming it’s the time to buy, right before the rug is pulled from under everyone.
But surely we don’t have the wider economic conditions to support that? Why would that impact just Bitcoin when Bitcoin tracks fairly closely with traditional markets like the NAS and S&P?
Well, here’s something else I’ve been tracking (and talking about) for a while. The chart above shows the last 4 US recessions, alongside the Unemployment Rate, 10Y3M Yield Curve and FEDFUNDS base rate.
I have made my case in our Discord community that the FED is telling us Soft Landing while releasing figures that say the opposite. Their targets for base rate and unemployment in particular, along with the inverted curve on short end/long end bonds tells a different story.
For example, the change in Unemployment Numbers the FED is targeting/predicting for now through 2024 has NEVER HAPPENED outside of a recession. Ever. In History. Unemployment in March, when the below figures were updated, was 3.5%, the same as it is today. Their projection for 4.5% has shifted right to 2024. That gives us a 1% delta. The second image below shows the Unemployment rate right back to 1950. Unemployment has NEVER risen 1%, as you can see, outside of a recession.
Soft Landing?
Their published data tells a different story to their spoken word, in essence.
I’m also concerned that we’re starting to see a lot of commentary around recession being avoided. This hasn’t reached critical mass as yet, but the number of people suggesting such is certainly growing. This has also ALWAYS been a leading indicator for recession. The masses expect one, the media expect one, it doesn’t come so all those same people declare “recession avoided”, then when everyone is suitably comfortable, recession comes!
What else does the S&P chart show us there? Well, it shows us that there are 3 indicators that we can combine to give us early warning signs of a recession coming. In general terms, we see:
- The Unemployment Rate is falling and bottoms
- The FEDFUNDS rate is rising, stabilises and then falls
- The 10Y3M Yield curve inverts and bottoms
Once all 3 of these things become true, a recession has always followed. To date, it appears that Unemployment has bottomed out and the Yield Curve has also, leaving only what? Leaving the FED cutting cycle starting.
This isn’t projected to start until May 2024, so on that basis there should be a little time and we can monitor the other variables during that period. But this gives us a roadmap, potentially, as to a time window for recession through to November 2024, coincidentally that cycle midpoint!
Could we see a run up into late 2023/early 2024 to complete the fifth wave of the Elliot count, an ATH before or shortly after Bitcoin halving confirming a left translated cycle, then rate cuts start in Q2, a recession is confirmed Q3 and we see drawdown across all markets for a prolonged period?
As a Left Tail Risk, this is my primary concern at the moment regards the Bitcoin cycle and Risk markets in general. The more I look at the data, the more I see the possibility of this risk materialising. But, this is why we manage Risk, so we have a plan for such events. As I said above, I don’t see this as a primary scenario at the moment, but we don’t only manage our primary scenarios, we challenge those with what ifs and all the data, so as not to be trapped in our bias.
From my perspective, If I see a new ATH in BTC before November 2024 (the midpoint of the cycle), then this 4 year cycle is different. We’ve never seen ATH before midpoint bottom to bottom. In this scenario, I’m out.
And strangely, for all those people who may be calling “idiot” and proclaiming people always get it wrong thinking it’ll be different, per the argument made above, the reality is that this time would be the same, they just didn’t notice because they were stuck in their short term (4 year) bias and didn’t zoom out to the larger dataset.
There’s more I could present data wise, but I think that’s enough to make my point. Something to chew on if you will. 🙂
Key points of interest for me in this one are clear:
- What happens between now and end of 2023, is it setting up as an internal five wave structure to complete a fifth (yes at the moment, this is potentially a minor 1 into 2, not a new Macro 1)
- Do we surpass ATH before November 2024? If so, we’re in the danger zone for a left translated cycle
- Do we see the 3 indicators of recession trigger in Q1/Q2 2024 and if so, are traditional markets running new highs as well at the time.
Could certainly be an interesting few years!
As always, thanks for reading!