Author: Michael Nadeau
Translation: Felix, LianGuaiNews
The crypto market has been in a deep bearish trend for a long time. What is the relationship between the economic cycle and the crypto market? When will the bull market arrive? This article takes you through the data analysis of the future direction of the crypto market.
LianGuaiNews Note: The views expressed in this article are solely those of the author and should not be considered as investment or legal advice. Do your own research (DYOR).
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- A quick overview of the Sui Liquidity Staking Hackathon shortlisted projects
- An Overview of TON Blockchain Ecosystem Applications, with 551 DApps covering 16 Tracks.
- Reviewing past cycles based on data
- Outlook: preparing for the next cycle
- Current on-chain market signals
- Risks
Bitcoin rainbow price chart, source: Look Into Bitcoin
Reviewing past cycles
To outsiders, the price of cryptocurrencies may seem to have no discernible patterns. However, the crypto market actually exhibits strong cyclicality. Taking Bitcoin as a benchmark, significant consistencies have been discovered in the past three cycles:
- Percentage of retracement from each cycle peak: approximately 80%
- Time to reach the cycle bottom: 1 year from the peak
- Time to reclaim historical highs from the cycle bottom: 2 years
Source: Glassnode
In addition, comparing it with the US ISM Manufacturing PMI (Note: The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) shows the business environment of US manufacturing for a specified month. The index is calculated based on surveys of hundreds of representative companies in 18 industries in the US), it can be found that almost every cycle in the crypto market aligns perfectly with the cyclical changes in the economic cycle.
Source: Delphi Digital
The crypto cycle also aligns with the global liquidity cycle:
Next cycle
There are 7 months left until the next Bitcoin halving, and Bitcoin has already dropped by about 80% from the peak of the previous cycle. At the same time, it took about a year for the market to reach the bottom. It has now been recovering for 10 months.
If history repeats itself, it should break the historical high within about 14 months (from the fourth quarter of 2023 to 2024) and reach its peak in the fourth quarter of 2025.
Of course, this is a big assumption.
To understand the future price trends, the following are potential influencing factors:
- Transition in the economic cycle (driven by monetary policy and global liquidity)
- Strong market narratives
- Continuation of the innovation cycle
- New market participants and new speculation (leverage)
So far, everything has been going smoothly for various factors. Let’s explore the reasons below.
Economic Cycle and Liquidity
The author believes that global liquidity hit bottom in October 2022. Since then, it can be seen that the Federal Reserve has implemented a round of stealth quantitative easing (related to the banking crisis in March). Now China is struggling with deflation.
China’s PPI and CPI turned negative year-on-year:
Data: Delphi Digital, Bloomberg
This has led to the recent interest rate cuts by the People’s Bank of China. This is a good sign for global assets such as Bitcoin, as shown in the following chart.
China: Bitcoin vs. People’s Bank of China total assets
Source: Delphi Digital, Bloomberg
At the same time, the People’s Bank of China has been buying gold, leading to the spot price of gold in China being more than $120 per ounce higher than the global price. Is the People’s Bank of China taking action before the depreciation of the renminbi?
Looking at the United States, over $7 trillion of debt is due next year. The Federal Reserve may have to buy a large amount of such debt as they need refinancing. In addition, debt interest payments currently account for more than 31% of tax revenue (red line) – tax revenue is declining, indicating an impending economic recession (gray line). How to increase tax revenue? Lower interest rates (green line).
Data: Federal Reserve FRED database
43 million Americans will resume student loan repayments in October with an average monthly interest of $503.
The commercial real estate industry has over $1.5 trillion of debt that needs to be refinanced in the coming years. 5
Commercial bank loans in the United States are currently at recession levels (gray line = recession):
Data: Federal Reserve FRED database
Ongoing claims for unemployment benefits are starting to increase:
Data: Federal Reserve FRED database
Economic Cycle/LiquiditySummary
The author has looked at multiple data points in the FRED database, most of which indicate an economic recession. Given that liquidity appears to have hit bottom in October 2022, in the coming months, it is more likely to see monetary policy easing until 2024 – but the premise is that the economy really starts to slow down.
Assuming that an economic recession is expected in the next six months or so, the Federal Reserve’s more dovish policies may align perfectly with the Bitcoin halving schedule.
Innovation Cycle
Despite the ongoing crypto winter, significant progress can still be seen in the infrastructure development of public chains. The highlights include:
- Bitcoin is expanding on the Lightning Network, and the Ordinals protocol is driving new demand for block space.
Data: Blockworks Research
- With the application of Moore’s Law, Ethereum is also scaling through Layer2. Note: Moore’s Law is the empirical observation by Gordon Moore, one of the founders of Intel, that the number of transistors that can be placed on an integrated circuit doubles approximately every 18 to 24 months. In other words, the performance of processors roughly doubles every two years, while the price halves.)
EIP 4844 (Expansion Upgrade) is expected to be implemented in the fourth quarter. Significant progress has been made in important improvements, such as account abstraction (related to bridging assets with user experience), smart contract wallets, tokenization of real-world assets, stablecoins, liquidity staking protocols, Eigen Layer (heavy staking), data availability (Celestia), and DeFi blue chips.
To highlight the growth of operational and network KPIs in each cycle, here is a quick view of Ethereum data:
The author believes that the “broadband moment” of cryptocurrencies is coming, which may usher in the next wave of consumer applications and new users.
Lastly, competing L1 public chains (such as Solana) are showing strong resilience.
Narrative
Here are the remarks of renowned investor Jeff Gundlach at the recent Future Proof conference:
“Overall, I believe the U.S. dollar will depreciate significantly in the next economic recession. This is because the response to the next economic recession relative to our fiscal situation will be a complete disaster. It will sound the alarm that the United States has gone bankrupt. We cannot fulfill our debt. The U.S. has nearly $200 trillion in unfunded liabilities — nearly 8 times the GDP. In terms of today’s purchasing power, we would have to pay 10% of GDP over the next 80 years. We won’t do that. We will completely abandon the dollar. We will see a restructuring of the U.S. financial system.”
If this really happens, the following can be expected:
Statement: The author does not hope for a future great recession. But it is important to consider that if certain circumstances occur, such a narrative may prevail.
Narratives are difficult to predict. Did anyone foresee LianGuaiul Tudor Jones publicly sharing his views on Bitcoin in the previous cycle? What about Michael Saylor and Microstrategy? Did anyone predict that Tesla, Square, and Mass Mutual would purchase Bitcoin and include it in their balance sheets? Did anyone predict that BlackRock would apply for a Bitcoin ETF before this cycle?
Please remember that the “shame” associated with crypto is finally starting to disappear. BlackRock is a catalyst. This means that cryptocurrency is now entering a “turning point” stage in the traditional market—where the integration of new technology and the traditional financial system is increasing, and new regulations are “blessing” new technology. Recent victories in court (Ripple, Grayscale, Uniswap) indicate the emerging significant changes.
Not to mention, the media loves cryptocurrency. There is a reason why major platforms such as CNBC and Bloomberg continue to increase their coverage of cryptocurrency. Cryptocurrency is very eye-catching. These media outlets are eager to promote the next narrative.
But ultimately, the future narrative is determined by the market. However, it seems to be consistent with the economic cycle in the United States, the global liquidity cycle, the innovation cycle of public chains, and the halving cycle of Bitcoin.
On-chain Signal: Market Value to Realized Value
Let’s take a quick look at one of the on-chain signals: MVRV. The ratio of market value to realized value is currently 0.41.
Historically, long-term investors have been able to make significant gains as long as they enter the market when the MVRV signal is below 1.
Risks
Although the above explanations may sound good, nothing is guaranteed. So where are the problems? The author believes the following points need to be noted:
- Inflation. If inflation does not continue to decline (or accelerates), the Federal Reserve will have difficulty changing its monetary policy. This may delay or negate judgments about the economic cycle and the shift in monetary policy.
- No recession. Despite being reluctant to say so, the economy needs to truly be in trouble for the Federal Reserve to adjust its monetary policy. If this situation does not occur, the author’s viewpoint is unlikely to be confirmed.
- Regulation. The SEC may continue to take a tough stance and prevent the approval of BlackRock’s ETF. The author believes this is unlikely, but it is still something to consider.
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