According to Morgan Stanley (NYSE: MS), cryptocurrencies have shifted from being media darlings for their meteoric rise in value to becoming subjects of scrutiny due to instances of financial loss, exchange failures, and fraudulent schemes. As investors tread through this volatile terrain, insights from previous cryptocurrency trading cycles could serve as crucial navigation tools.
In a report (titled “Will Crypto Spring Ever Come?”) published by Morgan Stanley Wealth Management on October 17, MS points out that Bitcoin is the cornerstone of the crypto market, making up about 50% of the total digital asset market capitalization. One of its defining attributes is the “halving” mechanism, designed to create a limited supply to preserve Bitcoin’s value. Every four years, the production rate of new bitcoins is reduced by half, and this will continue until the maximum supply of 21 million bitcoins is reached.
MS discusses how this intentionally restricted supply of Bitcoin can affect its price by catalyzing bullish market trends. Since its introduction in 2011, Bitcoin has experienced three such bullish cycles, each initiating between 12 to 18 months after a halving event.
Based on MS’s analysis, the cryptocurrency market follows a four-year cycle, analogous to the four seasons:
- Summer: According to MS, the most significant growth in Bitcoin’s price generally occurs immediately after a halving event, ceasing when it reaches its previous highest point.
- Autumn: When Bitcoin breaks past its previous peak, it garners media attention and attracts new investors, says MS. This heightened interest can push the price to new highs, ending the current bull market.
- Winter: MS notes that this phase sets in when investors decide to liquidate their holdings, triggering a market downturn and deterring new investments. Such periods have historically lasted about 13 months.
- Spring: This season is characterized by price recovery from the market’s lowest point, although MS mentions that investor enthusiasm usually remains muted during this period.
MS advises investors to consider several factors to identify if “Crypto Spring” is indeed here or if the market is still undergoing a “Crypto Winter”:
- Time from the Last Peak: Historically, the lowest point in Bitcoin’s value has occurred 12 to 14 months post-peak.
- Bitcoin Drawdown Magnitude: MS observes that previous low points were about 83% off their respective highs.
- Mining Activities: The cessation of mining activities by unprofitable operations could be a sign that the market is near its lowest point.
- Market Indicators: MS also points to metrics like the “bitcoin price-to-thermocap multiple” and exchange viability as signs to watch for.
According to MS, the next Bitcoin halving is predicted to happen around April 2024, and current data indicates that we may be moving out of the “Crypto Winter” and into a new “Crypto Spring.” However, they caution that there is still much unknown, as only three such “Springs” have been observed.
MS emphasizes that past performance should not be viewed as an indicator of future results. The crypto market faces various risks, including encryption failures, software glitches, economic downturns, or coordinated governmental actions, which could interrupt expected trends.
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