Bitcoin Could Potentially Have 70% Downside Even From These Levels

Bitcoin continues to slide from its all-time high of nearly US$69,000 in early November. A number of macro factors have contributed to this move, including a breakdown of many high-valuation, high-risk tech stocks, the U.S. Fed’s actively discussing a tapering of its bond buying program, and a rapid and almost unabated increase in inflation in the United States.

(On this last measure, Bitcoin’s performance is a bit of a head scratcher, as one key aspect of the digital currency was supposed to be its ability to act as a hedge against inflation.)

As Bitcoin fell below US$50,000 to around US$46,825 on December 14, many Bitcoin investors are wondering what the downside could be if a snap reversal to the upside were not to occur — of course such reversals have happened with regularity over the past 14 or so months — and if the macro factors noted above were to persist (or in a negative scenario worsen). One way to look at this is to analyze Bitcoin’s behavior throughout the full approximate four-year cycles of previous Bitcoin “halving” events.

Bitcoin miners compete to solve extremely complex problems, the answer to which are a long string of numbers called hashes. A valid hash is generated by the Bitcoin network about every ten minutes. When the winning miner solves the problem, a block is added to the blockchain, and the miner receives a block award of 6.25 Bitcoin (as well as transaction fees).

After the creation of 210,000 blocks, which, at a block creation pace of one block every ten minutes, takes about four years, the block reward is halved. Such a halving last occurred on May 11, 2020, when the block reward was cut to 6.25 Bitcoin (plus transaction costs) from 12.5 Bitcoin. The previous halving events occurred on July 9, 2016 and November 28, 2012 when the rewards were cut to 12.5 Bitcoin from 25 and to 25 Bitcoin from 50, respectively.

In the 2012 and 2016 halving cycles, Bitcoin rallied strongly in the time leading up to and following a Bitcoin halving. After a time, however, in both the 2012 and 2016 cycles, Bitcoin crashed and then suffered through “crypto winters” where investor and public sentiment waned. The peaks of the 2012 and 2016 cycles occurred 372 and 526 days, respectively, after the halving events. Equally important, the low points during the crypto winters of both the 2016 and 2012 cycles represented around 80% declines from the cycle peaks.

Bitcoin Halving Cycles. Index begins at 1.0 on halving dates. Line graphs are expressed on a logarithmic scale.

The 2020 halving cycle has so far followed a similar early cycle pattern as the 2012 and 2016 periods; it rallied very strongly after the May 2020 halving, albeit with somewhat of a lag. Furthermore, if the November 11, 2021 Bitcoin price proves to be the peak price during the 2020 halving cycle, the peak would have occurred around 550 days after the May 11, 2020 halving, roughly the same as in the 2016 cycle.  

Importantly, if one takes this logic to the next step, that would imply if the 2020 halving cycle were similarly to mirror the back ends of the 2016 and 2012 cycles, Bitcoin could suffer a further significant decline between now and, say, late 2023 or early 2024. At that time, investors would presumably begin buying Bitcoin in anticipation of the next halving event in May 2024.

If the peak to trough declines in the 2020 halving cycles were to match the 80% declines in the previous two periods, it is then conceivable that Bitcoin could possibly fall to around US$14,000 sometime over the next 24 months.  

Bitcoin last traded at US$46,825.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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