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The Bitcoin (BTC-USD) halving cycle marks a steady history of bewildering price hikes followed by sharp corrections. As a rare recurring theme in the cryptocurrency scene, this could put BTC on a collision course with a crash in the first quarter of 2022 – although the long-term outlook remains largely bullish.
However, with greater institutional adoption and a cycle so far struggling to resemble its predecessors, BTC can count on much more than halving events when it goes through today’s price swings.
Bitcoin Halving Cycle
Bitcoin is a cryptocurrency that runs on a Proof of Work mechanism to generate new coins. To mint new bitcoins, miners devote huge amounts of computing power to solving arbitrary mathematical problems conjured up on the blockchain.
However, writing into the Bitcoin code is a recurring halving event that halves the amount of BTC that miners are rewarded with over time. When the cryptocurrency was first created, miners were paid 50 bitcoins per block. In 2012, when the first halving event occurred, the reward for miners dropped from 50 BTC to 25 BTC. Subsequent halvins occurred in 2016 and 2020 – with each volume halving of BTC. The next Bitcoin halving is scheduled to happen in 2024.
As we can see from the past three bitcoin halvings, each has followed a very similar pattern as it follows a short, sharp peak with a seismic correction before returning to a steady price buildup.
At the moment, we have yet to see BTC stick to the same pattern that has preceded it since its inception.
So, what could this mean? Well, if Bitcoin is to stick to the halving cycle, that means that an all-time crashing price hike is imminent followed by a period of severe pullbacks. Alternatively, it could mean that Bitcoin’s increasing institutional adoption and mainstream emergence have caused the currency to break from the direction it has been bound in for more than a decade.
Will 2022 start with a collapse?
Market crashes are no stranger to Bitcoin, and the second quarter of 2021 saw a sharp market downturn that wiped out more than 50% of BTC’s value in a matter of days. The crash, widely attributed to a combination of negative news revolving around sanctions from China and concerns about the environmental impact of POW cryptocurrencies, shook the asset at a time when many market commentators were anticipating an equivalent price move.
Bitcoin’s downturn has led to widespread uncertainty over whether the bull market is over or whether the market is entering a consolidation phase before rallying later in the year.
With Bitcoin recovering to break an all-time high in early November, the stock market sell-off in the wake of the omicron variant of Covid-19 pushed the asset’s price lower, wiping out about $300 billion from the crypto market as a whole.
Bitcoin’s hampered advance means that we haven’t yet seen the parabolic rally that occurred in the wake of the asset’s previous halving events. However, as history shows, the peak of a bull is always very short and is immediately followed by a severe crash.
Adam Morris and Tom de Spiegeler, founders of CryptoHead, told Yahoo Finance that:
It’s not a question of whether there will be a cipher breakdown, it’s a matter of time
The pair speculated that the market had gained a strong head and that Bitcoin’s recent rally towards an all-time high in November was the result of an influx of people “FOMO’d to crypto” in recent months. Morris and de Spiegeler also claimed that the market in its current form is “unsustainable” and is “close to the end of the bull run”.
The case remains optimistic
In a recent article published in Search for Alpha, financial market forecasters, The Value Trend, argue that times have changed from the nascent days of bitcoin, and that changing demand for the cryptocurrency could shield it from the amount of volatility that occurred after its previous halving events. .
If we think about how the use and demand for Bitcoin has evolved in the past few years, Bitcoin has many applications – and the protocol has been greatly improved by Taproot.
We have a much higher conviction by Bitcoiners, increasing demand from institutions and retail, the latter being driven by young investors who are starting to accumulate wealth, and we also have Bitcoin that is becoming more and more difficult to mine. This is the perfect recipe for presentation pressure.
Moreover, the cryptocurrency ecosystem is constantly evolving. Over the past year or so, we’ve seen financial giants like PayPal (PYPL) and Visa (V) offer crypto solutions, while Tesla – albeit briefly – has adapted its online store to accept payments in bitcoin.
Cryptocurrency exchanges are developing at a rapid rate as well. In April 2021, Coinbase (COIN) went public for the first time on the stock market, which at launch valued the company at $86 billion.
Elsewhere, KuCoin announced that it is offering social investment on its new KuCoin S platform.
Speaking to Yahoo News, the CEO of KuCoin said:
We believe that integrating ‘social’ and ‘trading’ features will make cryptocurrency trading easier and more understandable for newcomers.
We intend to provide a one-stop solution where users can discuss the latest trends and topics, learn about others’ investment strategies and portfolios, and then set up a trading bot to automatically implement their trading ideas.
By catering to the social demands of people within the framework of cryptocurrency exchange, KuCoin has sought to offer higher levels of participation among traders in an already highly sentiment-driven market.
As the barriers to adoption continue to decline, we may see Bitcoin more resilient when dealing with its cyclical framework.
Has Bitcoin’s Cyclical Crash Really Happened?
Bitcoin’s end-of-cycle price crash was severe. The famous 2011 Mt Gox breakout event saw a 99% drop in value heralding the end of its initial bull run, while subsequent cycle peaks in April 2013 and December 2017 led to falls of 83% and 84%, respectively.
Every event at the end of the cycle was motivated by external factors. In 2013, Mt. Gox with the hectic trading volume of BTC, crashing the platform and leaving the platform open for hackers to attack. While in 2017, investors sought to cash in on Bitcoin as the asset swelled towards $20,000 – the ongoing sell-off was exacerbated by the threat of cryptocurrency being banned in East Asian countries such as Japan and South Korea.
Similar external factors were what saw Bitcoin drop about 53% in May 2021. With Bitcoin already slowing from breaking its previous all-time high at $63,576.68, the news that Elon Musk removed Bitcoin as a payment option on Tesla (TSLA) website ) on the web citing shocking the environmental impact of the cryptocurrency market. The downturn was driven by fresh concerns about Chinese regulation – causing a recession that Bitcoin has struggled to shake off.
As a result, BTC ended 2021 at a price lower than its Q1 2021 peak of $57669.30.
Bitcoin’s rally in late 2020 and early 2021 closely mimics the combined path set for it by market analytics firm, Ecoinometrics. However, while the initial crash of Bitcoin came at a time when analyzes indicated that it was possible as part of the halving cycle, the peak associated with it was much lower than the model plotted.
This suggests that with a greater level of institutional control over the asset, the Bitcoin halving cycles do not dictate the rise and fall of the asset with quite the same effect as they did in its formative years.
Bitcoin Dependence on Sentiment May Lead to a Downtrend in 2022 and Beyond
As we have seen time and time again in the cryptocurrency world, sentiment can have a severe impact on the performance of an asset. So far in 2022, bitcoin has sank more than 10% as investors fear that the crypto’s underperformance will not recover in the short term.
With more retail investors embracing Bitcoin, increased buying and selling volumes could make dips more visible when negative news stories occur – which could create broader selling sentiment towards BTC leading to further price crashes.
As the Bitcoin halving event of 2020 lies more in the past, the loss of optimism for one big pump could give way to a more bearish outlook for BTC – no matter how far the asset may come from its previous cycles.
The power is in the hands of whales
Bitcoin has always been dominated by whales. According to a recent study by the National Bureau of Economic Research, only 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 were a boom period for institutional investing as well. Companies like Ark Investment Management LLC currently have about 20 million shares in the Grayscale Bitcoin Trust (OTC: GBTC) under management, with the Kinetics Portfolios Trust holding around 14 million shares.
Similarly, large companies such as Tesla (TSLA), MicroStrategy (MSTR), Block (SQ), Galaxy Digital Holdings (OTCPK: BRPHF), and Voyager Digital (OTCQX: VYGVF) have emerged as major investors in the cryptocurrency in recent years.
Remarkably, at the time of the last Bitcoin halving on May 11, 2020, the total cryptocurrency market cap was $242,814,408,358 – while in 2021 its market capitalization peaked at $2.97 trillion.
This huge influx of investment over the past two years has made the cryptocurrency market 10 times more resilient, and therefore, it is better connected to the traditional cycles that have affected the market.
This suggests that we may not be heading for the same price spike and crash as previous BTC halving cycles, but it does mean that – if trends continue – we are at the beginning of a mass drive towards institutional acceptance of Bitcoin, which will lead to further adoption.