Bitcoin’s 4-year cycle

Many people have heard that Bitcoin (BTC) has a 4-year cycle, but they are not clear about the specific mechanism and facts. This article uses the illustrations of ChartsBtc to interpret it and add some relevant knowledge to provide a simple popular science explanation.

When Satoshi Nakamoto, the inventor of Bitcoin, first conceived and wrote the code, he adopted a fixed-rate, halving-period issuance model. Although the final total amount is set at 21 million, it does not use a linear rate formula such as 21 million divided by 100 years to get an annual issuance of 210,000 pieces. Instead, it uses a fixed rate of 2.628 million pieces in the first year, and the same number in the second, third and fourth years; starting from the fifth year, the issuance is directly halved to 1.314 million pieces, and then the same in the sixth, seventh and eighth years; from the ninth year onwards, it is halved again to 657,000 pieces, and the same in the tenth, eleventh and twelfth years; and so on... According to the geometric sequence summation formula Sn = a1 x (1 - q ^ n)/(1 - q), it can be calculated that the final total issuance is roughly estimated to be about lim{n->∞}{4 x 262.8 x (1 - 0.5 ^ n)/(1 - 0.5)} = 4 x 262.8 x 2 = 21.024 million pieces.

Due to the precision limitation of actual program calculation, the minimum precision of BTC halving set by Satoshi Nakamoto cannot be less than 1 satoshi, which is one hundred millionth of a BTC. At the same time, the real BTC issuance is not carried out according to our world time, but according to the internal time of the BTC system itself, that is, the block height. In other words, starting from the first block, 50 BTC will be issued per block, one block every about 10 minutes, and the output will be halved every 210,000 blocks. According to such a detailed design and calculation, the final total issuance is 2099999997690000 satoshis, which is about 2100 trillion satoshis, equal to 21 million BTC.

The block time is not strictly equal to 10 minutes in the human world. Sometimes it is as short as a few minutes, and sometimes it is as long as dozens of minutes. Statistically speaking, it conforms to the Poisson distribution. For details, you can look at the Bitcoin white paper written by Satoshi Nakamoto. However, on average, it is about 10 minutes. In this way, 210,000 block times are roughly equivalent to 210,000 x 10 / 60 / 24 / 365 = 3.995 years in the human world, which is about 4 years.

This is the underlying mechanism of Bitcoin’s four-year halving cycle.

From the beginning of 2009 to the end of 2023, the Bitcoin system has been running uninterrupted for nearly 15 years. In these 15 years, there have been three halvings, the first on November 28, 2012, the second on July 9, 2016, and the third on May 11, 2020. The fourth halving will take place in the spring of 2024.

Theoretically, the underlying mechanism of the four-year halving is an internal code-level issue, which cannot directly determine or affect external market price performance. However, in reality, the past three halving events have divided the history of Bitcoin into four sections, each of which has formed a wave of bull-bear cycle transitions.

The four Epochs in the above figure are the history divided according to the halving time point. Obviously, the first wave (Epoch 1) had a bull market in mid-2011, the second wave (Epoch 2) had a bull market at the end of 2013 (there was also a small bull in early 2013, so 2013 was a double top), the third wave (Epoch 3) had a bull market at the end of 2017, and the fourth wave (Epoch 4) had a bull market in 2021 (double top pattern at the beginning and end of 2021). Obviously, the overall price level of each wave cycle, whether bullish or bearish, is an order of magnitude higher than the previous wave cycle (please note that the price axis on the left is a logarithmic axis).

Another perspective is to use the price at the time of the halving event as a benchmark and plot the relative proportion of subsequent trends. In this way, we can see the impact of the "supply shock" brought about by the halving on the market.

As can be seen from the figure, the impact of each halving on the price is weakening. This is easy to understand: as the stock of BTC increases, the impact of the change in the supply of new BTC is relatively less significant.

The halving event is not the starting point of the bull market, but halfway between the bottom of the bear market and the peak of the bull market. This is also easy to understand: the BTC halving event is completely executed by the algorithm, which is open, transparent and predictable. The veterans in the market will foresee the occurrence of this event, so they will make arrangements in advance, which will lead to the early bottoming and recovery. So why doesn't the so-called good news turn into bad news when the halving event occurs? This is probably because the halving event will never be fully digested and priced by the market. The reason is that this market is still developing at a high speed, and a large number of newcomers have not learned this knowledge. At the same time, there are also many skeptical speculators who are not sure whether the halving event will really work.

All of this has led to what we see in the above chart. Starting from the bottom of the cycle, the recovery process before the halving is not actually fast, and it is only after the halving that it really begins to accelerate into the bull market. This means that there are very few people who are truly far-sighted. Most people are slow to realize it. Therefore, they can only wait until the second half of the year to take over at high prices.

We can also change our perspective and start from the top of the cycle, which gives us the following picture:

It can also be seen from the figure that the depth of this cycle is shallower than the previous two cycles. In other words, the coldness and despair of the bear market are much better and not so difficult to endure.

If you zoom in a little, you can see a strong rebound after each cycle hits bottom.

Comparing the current cycle with the previous one, the price level has increased 5x times.

Although the trends and forms of each cycle are different, their MVRV graphs are very similar.

MVRV is the abbreviation of Market Value to Realized Value, which means the ratio of market value to realized value (market value calculated at the purchase price). This indicator reflects the overall profit and loss of an asset.

Another interesting finding is that the price at each halving event is similar to the midpoint price of this cycle.

For example, in the 2012-2016 wave, the midpoint price was $589, and the price at halving was $652. In the 2016-2020 wave, the midpoint price was $7454, and the price at halving was $8592. In the current 2020-2024 wave, the midpoint price is $39642, and the price at halving is still unknown, and will be verified when halving next year.

Finally, put together the price increases of each wave cycle, from the previous low, to the peak, and then to the bottom.

It can be seen that in each cycle, under the impact of halving, the bottoming point has a steady growth relative to the previous low, which reflects the endogenous growth of BTC value.

The 4-year period is very close to the Kitchin cycle in economics, also known as the inventory cycle. The Kitchin cycle was proposed by British economist Joseph Kitchin in 1923 and is a short-wave cycle lasting 3-4 years, or about 40 months.

After analyzing 30 years of data from the United States and the United Kingdom, Kitchen found that in addition to the big cycles, economic indicators that have a significant impact on national income, such as inventory, prices, and employment, also fluctuate regularly every 40 months or so.

Kitchen looked at the changes in corporate production and inventory from a micro perspective. When manufacturers produce too much, inventory will be formed, thus reducing production and causing economic fluctuations. When inventory decreases, manufacturers will increase production and the economy will fluctuate upward. Based on this phenomenon, Kitchen focused on inventory, believing that changes in inventory can reflect changes in market supply, demand and expectations, which in turn lead to economic fluctuations. Therefore, the Kitchen cycle is also called the "inventory cycle" or "short wave theory."

The inherent basis of the Kitchin cycle theory is that the impact of commodity demand is passive and external, while the adjustment of supply inventory is active and internal. Therefore, the different changes in demand and supply also form four cyclical stages of inventory. That is, we often hear about active destocking, passive destocking, active inventory replenishment, and passive inventory replenishment, which correspond to the four different stages of the economic cycle, namely: recession, recovery, overheating, and stagflation.

We don’t know whether Satoshi Nakamoto considered the Kitchin cycle when he conceived the design of Bitcoin 15 years ago. From the few words he left us, we never found any mention of such issues. In fact, he never explained why he adopted the design of halving the output.

But the peaches and plums do not speak, but people come to them of their own accord. Truly powerful things do not need explanation. After all, what Satoshi Nakamoto believed in was not to persuade people with eloquence, but to educate people with facts. After all, people are hard to persuade, but they can be convinced by money (but please note: things that persuade you or convince you may be scams). That is why people often think of what Satoshi Nakamoto once said: If you don’t understand or believe me, then I don’t have time to persuade you, sorry.