Insight
July 28, 2023
One of the unexplained mysteries within crypto investing is bitcoin’s cyclical price action, the 4-year repeating pattern of boom and bust that has been centered around reward halvings. On the surface, these repeating patterns violate even the weak form of the Efficient Market Hypothesis (EMH), that future price movements are not affected by historical price information, but for whatever reason they have played out time and time again.
We have two plausible explanations for these patterns. The first is that Bitcoin adoption continues to grow, driving the value of the overall network and price of bitcoin, but the human psychology of fear and greed associated with a paradigm-changing technology creates extreme deviations from this axis of growth. It is normal for new technological innovations to go through a hype period, whether that’s best described by the Gartner Hype Cycle or Carlota Perez’s technical revolutions framework; however, Bitcoin is the only technology we are aware of to repeatedly undergo these cycles. The other explanation is that bitcoin’s price is set by human actors, and, given few metrics with which to value the asset because bitcoin produces no cash flows to discount, these human actors look to price patterns for guidance about future movements, unconsciously retracing the price patterns of the past.
Regardless of the explanation of these repeating patterns for bitcoin, it’s not the only asset to have them. Litecoin, which was launched in 2011 with some similar economic variables as Bitcoin except they are either multiplied or divided by 4 (84M capped supply instead of 21M, block times averaging 2.5 minutes instead of 10 minutes, halvings every 840,000 blocks instead of every 210,000 blocks), has experienced its own unique repeating price patterns around its reward halving. Next week, Litecoin is scheduled to undergo the third halving in its history (Bitcoin is scheduled for its 4th at the end of next April), and while its price cycles are very different from bitcoin’s, we think a look at litecoin's cycles and how they are changing might be instructive as to how bitcoin’s cycles may change in the future.
Litecoin’s halving cycles are significantly shorter than bitcoin’s. While bitcoin’s can be described as having these long 4-year arcs, litecoin has reacted to halvings in a much shorter time frame. Its halving cycles have been marked by a trough in price 7-8 months ahead of the halving, around when bitcoin troughs for its 4-year cycles, but then rallies significantly, usually outperforming bitcoin, until peaking 1 – 1.5 months ahead of the actual halving. Litecoin then falls into the halving, finding a floor sometime after it. Therefore, Litecoin’s halving cycle has been one of anticipation, where it troughs and peaks ahead of its halving event. This is opposed to bitcoin, which has peaked well after its halving in its cycles.
In the first part of its halving cycle, litecoin typically outperformed bitcoin, as shown in the following graph. Litecoin has typically bottomed when bitcoin bottomed, but then outperformed bitcoin a few months ahead of its halving.
Looking at the data behind litecoin’s halving cycles, there are two important takeaways – the duration of the cycles remains consistent, but the amplitude of the peaks has declined with each successive cycle. First on the duration of the cycles, as the following table shows, there has been remarkable consistency around the timing of the trough, which has come 223 – 234 days before the halving date. The same can be said for the timing of the peak, which occurred 32 – 47 days ahead of the halving.
If we look at the returns for the halving cycle, the trough price to the peak price, we notice a consistent trend, one of declining returns. The first two halving cycles were relatively close in terms of trough-to-peak returns, 550% and 505%. However, the current cycle exhibited a steep drop off in price returns from trough to peak, just under 75%.
This is more evident when compared against the price of bitcoin, using the LTC-BTC price (the price of litecoin quote in bitcoin terms). Going into the prior 2 halvings, litecoin substantially outperformed bitcoin as the trough-to-peak return of LTC-BTC indicates. However, even though litecoin was up nearly 75% ahead of third halving, it underperformed bitcoin at its peak price. Litecoin did have a brief moment in November of last year when it materially outperformed bitcoin off the low. It appeared as if another halving cycle trade was on, but that outperformance was shortly lived and peaked by the third week of November. Since that time, bitcoin has outperformed litecoin, and by the time litecoin peaked in absolute price, LTC-BTC was down on a trough-to-peak basis.
You may be wondering why we have devoted most of this week’s research to the discussion about a little-known phenomenon about a coin that gets little discussion these days (yet is still a top 10 coin excluding stablecoins). The reason is that bitcoin’s halving is coming up in less than a year, and investors are looking for clues as to how bitcoin might perform around it. Looking at price performance in the successive halving cycles of litecoin may inform us as to how bitcoin cycles might change. Indeed, we have already noted numerous times that trough-to-peak and peak-to-trough returns for bitcoin’s halving cycles have experienced a muting over time, with lower highs and more shallow drawdowns. This trend appears to be happening with litecoin, especially around the current cycle. It is therefore reasonable to believe that this trend will continue as bitcoin heads through the current cycle into next year’s halving. Of course, past performance is no guarantee of future returns, so while our expectation is for these cycles to continue to repeat (performance this year is on par with what we would see in the year following a drawdown year), we continue to watch for how new information and investors attitudes to the asset class may change that.
Bitcoin fell 2.0% on the week as the asset remains largely rangebound following the spot ETF enthusiasm-driven rally in mid-June. The next catalyst to drive price one way or the other may come in the form of information from the ETF applications, the next of which is due technically on August 13th, but given the day of the week, Sunday, will likely come by the Friday before. Equities were subdued on the week despite an initial bump following the FOMC’s rate decision on Wednesday, which was anticipated by investors. The S&P 400 was up 0.1% while the Nasdaq Composite fell 0.1%. Gold fell 1.4% as real interest rates ticked up this week, but oil rallied 5.9% as fears of an imminent recession continue to diminish. Bonds fell on news of the rate hike with, investment grade corporate bonds down 0.9%, high yield bonds down 0.4%, and long-term US Treasuries down 2.4%.
Grayscale Urges Equal Treatment for Spot Bitcoin ETFs in SEC Letter - CoinDesk
Sequoia Slashes Crypto Fund as It Downsizes Amid Startup Crunch - WSJ
Some Binance.US Crypto Trading Was a Mirage, the SEC Alleges - WSJ
SEC Charges Quantstamp In $28.35 Million Initial Coin Offering - SEC
Crypto Bill Endorsed by US House Committee - Bloomberg
Crypto Rapper 'Razzlekhan,' Husband Reach Plea Deal - Reuters
The Potential Pitfalls of Purported Crypto “Assurance” Work - SEC
Wall Street Grapples with Crypto’s Trillion-Dollar Custody Question - Bloomberg
Anchorage Sees Institutional Pie Expanding, Despite Bear Market - The Block
Fidelity-Backed EDXM Expands Institutional Access with Talos - The Block
Aug 10 - July CPI reading
Aug 11 - SEC response date for Ark 21Shares ETF (Aug 13 is a Sunday)
Aug 25 - CME expiry
Sept 1 - Expected SEC response date for BlackRock iShares ETF
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