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(Kitco News) – 2023 has been a volatile year for the cryptocurrency market. Bitcoin (BTC) got off to a hot start, surging from $16,200 to nearly $32,000 over the first few months on the back of several major developments including the largest banking crisis since 2008, but has since struggled to regain that momentum.
The market has been trapped in what’s been called a “crypto winter” since prices peaked in November 2021, as multiple high-profile bankruptcies and a regulatory clampdown on the industry by the Securities and Exchange Commission (SEC) have pushed many investors out of the market and seen token prices fall 50-95%.
The outlook began to improve in June after BlackRock filed a spot BTC exchange-traded fund (ETF) application, which sparked a flurry of similar filings from other asset managers, and analysts across the ecosystem are growing increasingly bullish that the approval of the first spot BTC ETF is only a matter of time.
According to a recent report by Morgan Stanley, signs have now emerged indicating “that ‘crypto winter’ – Bitcoin’s cyclical bear-market decline – may be in the past,” citing recent developments and the upcoming Bitcoin halving.
“Bitcoin is the leading cryptocurrency, accounting for about 50% of total digital assets by market capitalization, and, in many ways, acts as a proxy for the overall crypto market,” Morgan Stanley analyst Denny Galindo said. “One unique aspect of Bitcoin is that it is designed to go through a process called ‘halving’ that creates scarcity, so that Bitcoins can maintain their value.”
Roughly every four years, the Bitcoin code is designed to cut the new supply of BTC released with every new block in half – known as the halving – which serves as a deflationary force for the token. It is estimated that by 2140, all 21 million BTC will have been created, and no more Bitcoins will be mined.
“By intentionally limiting the supply of new Bitcoin, the shortage caused by the halving can affect the price of Bitcoin to potentially spur a bull run,” Galindo said. “There have been three such runs on Bitcoin since its inception in 2011, each lasting 12 to 18 months after the halving.”
Due to this four-year cycle, the cryptocurrency market goes through various phases that correspond to the four seasons of the year.
During a crypto summer, “Historically, most of Bitcoin’s gains come directly after the halving,” Galindo said. “This bull-run period starts with the halving event and ends once the price of Bitcoin hits its prior peak.”
Once BTC price surpasses the old high, crypto fall sets in. “It tends to attract interest from the media, new investors, and businesses, which can then drive prices even higher,” he said. “This period represents the time between when Bitcoin passes the old high and reaches a new one, which signals that the bull market has run its course.”
Then comes the crypto winter. “In previous cycles, the bear-market decline has come when investors decided to lock in their gains and sell Bitcoin, causing prices to drop while scaring off new investment,” Galindo said. “This period takes place between the new peak and the next trough. There have been three winters since 2011, lasting about 13 months each.”
After investor pain has been maximized, crypto spring starts to emerge. “During this period preceding each halving, the price of Bitcoin generally recovers from the cycle’s low point, but investor interest tends to be weak,” he said.
This leads to the current question for crypto investors: Is crypto spring here?
“Just as a farmer avoids planting seedlings in the winter or too late in the spring, crypto investors want to know when crypto spring has arrived to maximize their investment ‘growing season,’” he said.
Galindo outlined several points to consider “when trying to determine whether crypto spring is truly here, or if the market is still in the midst of crypto winter.”
The first thing to consider is the amount of time since the last peak. “The trough of Bitcoin in previous crypto winters has historically occurred 12 to 14 months after the peak,” he said.
The magnitude of the Bitcoin drawdown is also important, as previous troughs were roughly 83% off their respective highs.
“When Bitcoin has neared the trough of past cycles, many Bitcoin miners shut down their operations because they were losing money,” he said. This is what is known as miner capitulation. “When a miner shuts down, it makes it a little easier for the remaining miners. A statistic called ‘Bitcoin difficulty’ measures how easy or hard it is to mine Bitcoin. When difficulty decreases, it is a sign the trough may be near.”
Galindo said that one technical analysis tool that is helpful in determining the crypto season is the Bitcoin price-to-thermocap multiple. “‘Thermocap’ measures how much money has been invested in Bitcoin since its inception,” he said. “A lower Bitcoin price-to-thermocap multiple indicates a trough, while a higher multiple indicates a peak.”
Other signs of an impending crypto spring include exchange problems and notable tells in Bitcoin’s price action.
“When the price of crypto drops, it tends to impact the viability of some crypto exchanges. Bankruptcies, bad news, or new regulations may all indicate a trough,” he said. “A 50% increase in price from Bitcoin’s low is typically a good sign that the trough has been achieved, although there have been examples of such a gain being followed by significant declines.”
Current estimates indicate that the next halving will occur sometime between April 12 and April 24, 2024.
“Based on current data, signs indicate that crypto winter may be in the past and that crypto spring is likely on the horizon,” Galindo said. “However, keep in mind that there have only been three crypto springs to date. In other words, there is still a lot to learn.”
It’s also important to note that, as with all investments, past performance doesn’t indicate future results, he said. “Potential risks such as encryption breaking, software bugs, recession, or coordinated government action could emerge before the expected halving and disrupt the cycle.”
“While no one can tell you if now is the right time to buy or sell cryptocurrency, today is the right time to learn more about the crypto market’s cyclical tendencies so that you can ask questions, monitor trends, and determine for yourself if the cycle will repeat a fourth time and whether to invest,” Galindo concluded.
According to a report from Forbes Digital Assets, recent moves by BlackRock and JPMorgan are laying the groundwork for the next Bitcoin, Ether, XRP, and crypto price bull run.
They cited Monday’s price swing in Bitcoin – which was caused by an erroneous report that BlackRock’s spot BTC ETF application had been approved – as proof that the market is primed to move higher.
“Meanwhile, BlackRock has become the first Wall Street giant to use JPMorgan’s blockchain-based collateral settlement system, part of a plan that BlackRock’s chief executive has said will usher in ‘the next generation for markets,’” Forbes said. “Last week, JPMorgan’s Ethereum-based Onyx blockchain and the bank’s tokenized collateral network were used by BlackRock to tokenize shares in one of its money market funds, sending them to the London-based Barclays in an over-the-counter derivatives trade.”
Forbes senior contributor Billy Bambrough noted that blockchain technology “allows traditional assets to be ‘tokenized’ on a public ledger, potentially making the transfer of anything from stocks, bonds, real estate and alternative investments like art, cheaper and easier.”
They also cited multiple statements made by Larry Fink, CEO of BlackRock, who has become increasingly bullish on the crypto sector in recent years.
In his 2022 annual letter to shareholders, Fink called blockchain technology “very important,” and said, “very interesting developments are happening in the digital asset space.” He also predicted the struggles witnesses in 2023, saying many of the big Bitcoin and crypto companies that existed at the time were not “going to be around” for long in the aftermath of FTX’s dramatic collapse, and suggested that Wall Street giants could take over the management of the Bitcoin and crypto space.
While speaking with CNBC in July, Fink noted that, due to his firm’s spot BTC ETF application, he is not permitted to mention Bitcoin, so he used the word ‘crypto’ instead.
“If you look at the value of our dollar, how it depreciated in the last two months and how much it appreciated over the last five years … an international crypto product can really transcend that,” he said. “That’s why we believe there’s great opportunities and that’s why we’re seeing more and more interest. And the interest is broad-based [and] worldwide.”
He also highlighted that crypto can add a new dimension of diversification to investor portfolios, which may come in handy in the event of a major global recession, and said he expects Bitcoin and crypto to “transcend” traditional currencies, including the U.S. dollar, thanks in large part to Wall Street adoption. “It has a differentiating value versus other asset classes, but more importantly, because it’s so international it’s going to transcend any one currency,” Fink said.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
