How to make money on cycles? Recognize and judge cycles first

Overview

Shenyu once said that “there are generally two kinds of money in the currency circle, periodic money and emotional money, and you must distinguish what kind of money you earn.” “Buying the bottom in the bear market, holding it to sell in the bull market”, this should be the easiest way for everyone in the currency circle to know that they can make money, but many people still chase the rise and fall and become leeks.

The big reason is that most people want to make quick money, fantasize about being able to get rich overnight, do some high-risk trades with poor profit and loss ratios, and lose their chips before the bull market comes. If we only stare at the candlestick and aim at the tick chart, we will not be able to perceive the cycle from a detached perspective and find certainty in the uncertainty.

The ability to understand market cycles, and the ability to adapt/anticipate economic cycles, essentially determines how long an investor can survive in the market. In order to enable readers to reduce the cost of trial and error and deepen their understanding of the cycle, we will start a series on “How to make money from the cycle”. There are four articles in this series, we will introduce the cycle from multiple perspectives and how to use the cycle to make profits, the main content includes the following parts: BTC halving narrative, judging the cycle from multiple perspectives, how to allocate funds at different stages, the track where the next round of bull market may break out, how to buy the bottom and escape the top, etc.

Definition of a bull-bear cycle

Cycles are simply recurring things, and the bull and bear markets in the capital market are also repeated, so there is a bull and bear cycle. What is the definition of a bull market and a bear market? We will focus on the definition of a bull market, and knowing the definition of a bull market, then the definition of a bear market is obvious.

How a bull market should be defined

Not long ago, on Twitter, a group of big Vs began to debate which stage of the bull and bear cycle it was. Some people think it’s the beginning of the bulls, and I’m skeptical. To demonstrate this, we must first define a bull market.

Obviously this is not the case; Take Japan as an example, after the bursting of the economic bubble in the 80s and 90s of the last century, the Japanese stock market has never returned to its highest point. Obviously, it is not a bull market that exceeds the historical high?

! [How to make money on cycles? (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-3c74b1f4d1-dd1a6f-cd5cc0.webp)

Moreover, rising prices are not exclusive to the bull market, so can’t the price rise in a bear market? Bulls and bears are not only different in price, but also an important way to judge bulls and bears in terms of trading volume. And many people judge bulls and bears just by looking at the rise and fall of bitcoin prices, which is also a misunderstanding, bitcoin often goes to the bloodsucking market during the bear market, at this time, bitcoin rises and copycats do not follow the rise, bitcoin falls and copycats also fall, which is the manifestation of insufficient market liquidity.

Therefore, one criterion for judging the bull market is that the overall market capitalization of the crypto market is growing over a long period of time, and there is an entry of incremental funds. At present, interest rates remain high, liquidity is constantly being withdrawn, causing both upward and downward momentum will be reduced, and any positive and negative will cause large price fluctuations. My understanding of the bull market: the entry of incremental funds due to the release of water causes the overall rise of the crypto market, rather than the price changes caused by the sentiment and consensus brought by the bullish or bearish. The bull and bear itself is a cyclical change, and many people interpret it as a change in price, which is a big misunderstanding. Using price changes caused by emotions to explain changes caused by cycles is itself a wrong direction.

To put it simply, the bear market is a game of stock funds, and the bull market is a win-win situation brought by incremental funds. The price increase in the bear market depends on sentiment, and the price rise in the bull market depends on the growth and sentiment of the market funds.

BTC 减半叙事

When the Bitcoin blockchain was born in 2009, the reward for creating a block was 50 BTC, and the reward was automatically halved every 210,000 blocks.

Every 2016 blocks (about two weeks), the system will adjust the mining difficulty according to the block generation time of the previous cycle, so that the block generation time is stable at about 10 minutes, and it is not difficult to launch the cycle of reward halving is about once every 4 years.

Bitcoin will usher in its fourth halving in 2024, and the reward for creating a block will drop to 3.125 BTC. Since the smallest unit of Bitcoin is a satoshis (SAT), which is 0.00000001 (1/100 millionth) of Bitcoin, the block reward will be below 1 satoshi for the first time after the 33rd halving in 2140, and the Bitcoin block reward will end.

Taking History as a Mirror to Know the Rise and Fall: A Historical Review of the Bitcoin Halving

! [How to make money on cycles? (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-40a1a9bb0b-dd1a6f-cd5cc0)

Based on the statistics, we can draw the following conclusions:

1. The maximum drawdown of each bear market is around 80%, while the gains are decreasing every time. According to this law, we can predict that the bear market has most likely bottomed out, and the bull market may rise between 4 ~ 6 times, that is, between 62388 ~ 93582 US dollars.
2. The time to reach all-time highs after the halving is extensive.
3. Based on the retracement from the last high, we can predict that the price has bottomed out in this bear market.
4. The halving is expected to occur on April 27, 2024, reaching an all-time high three to seven months after the halving, which is between Q3 and Q4 next year.

Will the halving necessarily lead to a bull market

In everyone’s opinion, the Bitcoin halving is a definitive event that causes the price to rise, but correlation does not equal causation. So is there a causal relationship between the Bitcoin halving and the price increase?

Before we talk about the Bitcoin halving, let’s take a look at what the LTC of the recent halving looks like. On August 2nd, the LTC block height reached 2,520,000, the block reward was halved, and the mining reward was reduced from 12.5 LTC to 6.25 LTC. After that, the price of LTC fell all the way, although it can be interpreted as “good is bad”, but the price of LTC did not rise much before, and it was more of a fluctuation with the broader market. The halving narrative has also failed to drive LTC prices up, so will there be any play to the Bitcoin halving next year?

! [How to make money on cycles? (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-7e9e4ff44b-dd1a6f-cd5cc0.webp)

The price depends on both supply and demand, and the impact of the Bitcoin halving on supply is becoming smaller and smaller after the Bitcoin halving in 2024, and the Bitcoin block reward will change from 6.25 to 3.125 after the Bitcoin halving in 2024. Then, what will really determine the price of bitcoin will be demand, that is, whether there will be new inflows of external funds.

Looking back at the round of bitcoin bull market that opened after the halving in 2020, the reason why everyone may be associated with it is not the bitcoin halving, but the “epidemic” and the “Federal Reserve’s big release”, under the extremely loose flow, the US stock market soared, and a large amount of money entered the grayscale bitcoin trust, and grayscale continued to buy bitcoin, and then Tesla also bought bitcoin, driving the entire market into madness. Therefore, where the money comes from is the key to what really determines whether a crypto bull market will be successful or not.

That doesn’t mean that the Bitcoin halving event isn’t important, or that the Bitcoin halving still has a strong narrative and expected value. In a crypto market where there is little to no fundamentals, price rises and falls are often driven by narratives and expectations, and narrative values have often proven to work. When everyone is willing to believe that the Bitcoin halving will bring about a bull market, then everyone will rush to buy, which will really bring a bull market. So maybe a bull market will only come when most people believe that the Bitcoin halving will bring about a bull market. This is also what Soros calls “reflexivity”.

From the historical review of the Bitcoin halving, we know that the time span between the Bitcoin block reward and the time from the time of the halving to the time when it hits a new all-time price high is getting larger and larger. In contrast, between 2017 and 2020, the time span between the highs and lows of Bitcoin and the Dow Jones Industrial Average has become smaller and smaller, and the two have moved in similar directions. The reason for being skeptical about the 4-year bull cycle of bitcoin halving is that the price trend is actually more closely aligned with the Dow Jones Industrial Index, which means that bitcoin is more correlated with US stocks for a certain period of time, and the Bitcoin block reward halving may just be a lucky moment.

! [How to make money on cycles? (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-6dd2c520ee-dd1a6f-cd5cc0.webp)

Another supporting argument is that Bitcoin was born in the wake of the 2008 economic crisis, which happened to be at the end of a Kitchin cycle. I don’t know if it’s Satoshi Nakamoto’s ingenious design or an amazing coincidence, the timing of the Bitcoin halving cycle happens to be a four-year halving, which corresponds to a 3-4 year Kitchin cycle.

Bitcoin miners have also played a role in the previous rounds of bull market. In the previous bull markets, the market value of Bitcoin was still relatively small, and the price was relatively easy to manipulate, so Bitcoin mining companies will push the price of Bitcoin in order to make up for the reduction in profits caused by the Bitcoin halving. And now, as Bitcoin’s market capitalization continues to climb, it is becoming more difficult and expensive to manipulate the price.

The artifact of the cycle trader: Merrill Lynch Clock

Concept

Merrill Lynch Clock is an investment theory invented by Merrill Lynch in 2004, which is a classic cyclical investment methodology based on historical financial data and mature financial analysis frameworks. Merrill Lynch Clock will guide us on what assets we should invest in at different stages.

It divides the financial cycle into 4 phases:

• Recovery period (high GDP + low CPI) stocks are the best
• Commodities are best during overheating periods (high GDP+high CPI).
• Stagflation period (low GDP + high CPI) is best for holding cash
• Recessionary (low GDP + low CPI) bonds are optimal

! [How to make money on cycles? (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-42d88dbef4-dd1a6f-cd5cc0.webp)

How to take advantage of Merrill Lynch clocks

We are now at the point of the cycle: stagflation == > recession

According to the latest U.S. economic data, we are in a period of slow transition from low GDP+high CPI to low GDP+low CPI, and the broad category of investment opportunities at this stage is cash. This is also the reason why dollars are scarce now, and it is difficult for startups to raise funds.

If we want to determine when we can invest in crypto assets, we first need to divide it into asset types. Bitcoin has a dual nature of risk and risk aversion, Bitcoin can be divided into risk assets due to its large volatility, and has hedging attributes due to its decentralization and anti-censorship characteristics. Since the trend of bitcoin has a strong correlation with the trend of US stocks, we will discuss bitcoin as a risk asset here.

! [How to make money on cycles? (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-207103b69d-dd1a6f-cd5cc0.webp)

According to Merrill Lynch Clock, the Bitcoin bull market will reach the recovery period or overheating period of Merrill Lynch Clock.

Of course, this does not mean that there are no phased investment opportunities, we just analyzed the coming bull market in the crypto market from the perspective of Merrill Lynch’s clock cycle.

Encrypt Merrill Lynch Clock

Based on Merrill Lynch Clock, we have made Merrill Lynch Clock for the crypto market, which is designed to help investors in the selection of crypto assets at different stages.

In addition to inflation and growth, we find a third factor influencing the crypto market, which we believe is a unique dimension measured in the cryptocurrency space: culture. Memes are undoubtedly the most culturally attributed, while at the other end of the axis, tooling middleware is the least culturally deficient. Whether it is the public chain itself or the protocol on the public chain, we can more or less feel the differences in development and user experience brought about by different cultural attributes. Therefore, we venture to speculate that the invisible hand of culture is also subtly influencing the cryptocurrency cycle.

! [How to make money on cycles? (https://img-cdn.gateio.im/resized-social/moments-69a80767fe-a7e3726758-dd1a6f-cd5cc0)

Here’s an introduction to each period:

1. Recovery period: low inflation→ medium inflation, medium growth, → high growth. The accumulation of underlying technologies and the iteration of middleware in the long bear market have prepared for the outbreak of the application layer. In addition, inflation has bottomed out and the expected improvement in the economy will attract more money and users, making it logical that apps are the most prominent asset class at this stage.
2. Overheating period: medium inflation→ high inflation, high growth, → medium growth. With the intensification of inflation, the market heat has gradually reached its peak, and the market has overdrawn the technology accumulation + application explosion brought about by high growth expectations, and there is a lack of sufficient innovation reserves to drive the market forward in the short term. Capital has reached a bottleneck under the narrative of fundamental analysis, and the reason why meme-like assets can shine is because their unique cultural narrative attributes carry the continuous entry of capital and ignite the enthusiasm of investors.
3. Stagflation: high inflation→ medium inflation, medium growth, → low growth. The carnival of the bull market often ends after inflation peaks, and the bubble brought by excessive growth is also fully released at this stage, the capital market will slowly return to rationality, and the bubble asset prices will retreat sharply, while the market is also looking forward to finding new growth points and brewing the next narrative cycle. This moment should be sorted out after the tide has receded, leaving behind the core technology and standing on the shoulders of the infrastructure needed to nurture the next cycle eruption.
4. Recession: Medium-term inflation→ low inflation, low growth, → moderate growth. This will be the most difficult phase of a bear market, when the infrastructure that is the growth engine of the next bull market is maturing, but due to the inactivity of the capital market, it is still not possible to directly reflect economic growth on the market. Therefore, at this stage, we should pay more attention to the middleware that connects applications and protocols, and take the signs of middleware maturity and large-scale adoption as one of the signals of the opening of the bull market.

To sum up, the crypto market will continue to go through the above four cycles, and the core link in the cycle will repeat the rotation of “application-meme-protocol-middleware”. The dominant application of the previous cycle will gradually expand the ecosystem and become the infrastructure of the next cycle, and the infrastructure of the next cycle will give birth to new dominant applications, and so on.

At present, the market is still in the transition stage from stagflation to recession, and it is also the stage of continuous accumulation of blockchain infrastructure and protocols. We not only pay attention to the price, but also keep an eye on the development of the industry, and Alpha is always born in the development of the industry.

Summary

We can’t predict when a bull market will come, but we can always find some precursors of a bull market from historical clues. Through the discussion of our previous article, it can be seen that whether the Bitcoin halving can bring a bull market is an uncertain event, although the halving reduces the supply from the supply and demand relationship, but he is consistent with the reason that the price does not rise but falls after the LTC halving, and it is the confidence brought by the halving narrative rather than the halving itself that really brings the bull market.

There is always some news in the market that releases smoke bombs that affect our judgment, and Merrill Lynch clock is an important tool for us to objectively analyze the market environment. Merrill Lynch Clock is not only a simple tool for judging the cycle, it also contains the law of market ups and downs, conform to the law, and calmly analyze the objective environment, in order to accurately control the market.

Looking at the cycle objectively, understanding and adapting to the cycle, and adapting to the cycle are the keys to surviving in the dark forest of the crypto market.

References:

1. Halving narrative and reflexivity: LTC does not rise but falls, can BTC halving still bring a bull market?

2. Graphic analysis of Bitcoin’s four bull and bear crossings, so that your bear market will no longer panic

3. Use 20 charts to shatter the “Bitcoin halving cycle theory.”