With Bitcoin hovering just several percent above the low set in June 2022, let’s have a look at the bull and bear markets that it underwent since 2010. There were 4 bull markets and 4 bear markets, as presented in the chart below.

Cycle 1 lasted between 2010 and 2012, cycle 2 between 2012 and 2015, while cycle 3 from 2015 until 2018. Cycle 4 started in Dec 2018 and one important question is whether it has ended already or not yet. In other words, will the June ‘22 low of 19,018 BTC/USD (on a closing basis) hold or will we experience new lows. We know the peak of cycle 4 is behind us, but we do not know, if we’ve seen the bottom. In order to have a better understanding of each cycle, let’s look at the data:

Maturation of bitcoin as an asset class seems to have brought, with each cycle, the following:

– lower annual returns

– lower volatility

– lower Sharpe ratio

Cycle 2 had a longer duration than cycle 1 and, in turn, cycle 3 has been longer than cycle 2. While the bull phase of cycle 4 was about as long as bull market of cycle 3 (1059 days vs. 1066 days), the bear market has been much shorter – just 222 days vs. 364 days. Also, the drawdown of cycle 4 so far has been 72%, while in the past 2 cycles the maximum drawdowns have been 82% and 83%. Now, if the volatility of an asset class decreases, one could plausibly expect lower drawdowns. Unfortunately, bitcoin’s volatility in cycle 4 has been more or less the same as in cycle 3: 74% vs. 73% on the annual basis. Coupled with lower annual returns (66% vs. 104%) this resulted in lower Sharpe ratio. The unfortunate consequence here is that there is a potential for even higher drawdown in cycle 4 when compared to cycle 3. If we assume that a bear market results in a 2 standard deviation move to the downside, the expected drawdown for cycle 4 (annual return of 66% and volatility of 73%) is, unfortunately, 86%. That translates to a bottom of about 9460, or -53% from current prices of ~20k USD/BTC. Ouch! Of course, this does not need to happen, as there’s no rule that a bear market “needs” to reach 2 standard deviations below the trend. If drawdown of cycle 4 matches those of cycle 2 and 3, we could see the trough of 10800-11200, still a ~45% drop form ~20k BTC/USD. Another way to get to this number is to look at the ratio of peaks and ratio of bottoms. The peak of cycle 4 (67 570 BTC/USD) was 3.47 times higher than peak of cycle 3 (19 500 BTC/USD). The expected bottom could then be 3.47*3237 or about 11200 BTC/USD.

Comparing current situation to previous market cycles is obviously an just one exercise to establish a baseline scenario. Perhaps the drawdown will be lower than expected due to more mature market and higher institutional ownership of cryptos. Perhaps it will be deeper, because we have substantial tightening from the FED and rising real long term interest rates. I’m just thinking that the short duration of current bear market, just 7 months, compared to 12-13 months in the previous two cycles, and still a relatively low drawdown of 72% vs. expected 80-85% (I know how this sounds!), makes it plausible that more pain is to be expected in the crypto world in the coming months.

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