The 4 Year Cycle for Dummies

Bitcoin is a blockchain. A blockchain is a ledger, which means that is a store of records. Your bank account is a form of a ledger. When you give your money to a bank, you are entrusting the bank to account for it and follow regulatory compliance. You believe that the bank will act as a centralized authority that maintains and verifies the ledger of balances across all of their customers and not spend customer funds. When you check your balance on your bank account, it shows you your previous transactions and your current balance. Bank statements are simply excerpts from the bank's ledger.

Unlike a bank, Bitcoin operates on a decentralized network. This means that there's no single authority controlling the ledger. Instead, it's maintained by thousands of nodes (computers) across the globe. While bank ledgers are private, Bitcoin's blockchain is public. Anyone can view all transactions, though they're pseudonymous; you can identify the addresses, but not necessarily the owners. Users have direct control over their funds using private keys, eliminating the need to trust a third party like a bank. Additionally, it can also be accessed by anyone with an internet connection, regardless of their location or banking status.

The way that the ledger is maintained is via blocks. A block is a collection of transaction records, combined with other important information, that is the fundamental building block of the blockchain. Blocks are to the blockchain what cells are to the human body.

Blocks are created through a process called mining. New blocks are numbered and timestamped. Each block in the blockchain serves as a verified and permanent record of transactions, linked to the blocks before and after it, creating a secure and transparent ledger of all activity on the network.

Mining is a crucial process in blockchain networks like Bitcoin that use a Proof of Work (PoW) consensus mechanism. We already know that miners are nodes, or computers, that are distributed all over the world. In fact, you can mine for Bitcoin using your computer at home.

When a user wants to make a transaction such as sending 10 bitcoins to a friend, they first start by opening their wallet, specifying the recipient address and the amount to send. The wallet software also allows users to dictate a transaction fee, which is an amount that is paid out as an incentive to miners. Once this information is specified, the user will be prompted to sign off with their private key and the transaction will be broadcasted to the network.

The transaction is then received by various nodes in the memory pool. The mempool is a holding area for unconfirmed transactions. If your transaction is unconfirmed, nothing happens and no Bitcoin will be moved. The transaction only occurs when miners pick it up out of the mempool to add it to the next block.

Miners gather unconfirmed transactions from the mempool. They assemble these transactions into a potential new block, collecting all of the transaction fees from the senders (more on this later). Next, miners will take this potential new block and compete against other miners to be the first one to solve a cryptographic hash function.

Imagine trying to unlock an iPhone by guessing the passcode. You'd input different combinations rapidly, hoping to stumble upon the correct one. This is similar to how Bitcoin miners work. They repeatedly try different values (nonces) in their calculations, aiming to find a hash that meets specific criteria. Just as the iPhone only unlocks with the correct passcode, only a hash meeting the network's difficulty requirement will create a valid block. The faster you can input passcode guesses on the iPhone, the better your chances of unlocking it quickly. Similarly, miners with more computational power can try more hash combinations per second, increasing their odds of solving the puzzle first.

Initially, mining was done with CPUs, then GPUs. Miners wow predominantly use specialized hardware called ASICs (Application-Specific Integrated Circuits). This is why the process of mining is also called Proof of Work. The difficulty of this hash function puzzle ensures that significant computational power is expended, proving the miner's work.

Miners are mercenary capital. There are real life electricity costs that must be expended to fuel these energy intensive ASIC miners. When a block is mined, the miner is rewarded a base fee, along with all of the transaction fees that users “tip” the miner with in order to expedite their transaction. Using a higher transaction fee is a great way to make sure miners will pick up your transaction from the mempool.

The Bitcoin Halving refers to the halving of the base fee that is awarded to miners. This event occurs every 4 years. The price action around the halving is commonly referred to as the the 4 year cycle. Currently, miners are receiving 3.125 BTC per block successfully mined.

The Halving is an extremely important event and is the cornerstone of bitcoin price action. There is a total of 21 million bitcoins in existence. This includes all of the unmined bitcoin. Currently there is 19,767,628 bitcoins in circulation and the rest are unmined. The final bitcoin is expected to be mined in the year 2140. The reduction in halving fees to the miners results in a supply shock. The halving reduces the rate at which new bitcoins enter circulation, increasing scarcity.

With fewer new coins available but the same level of demand, each existing bitcoin becomes more valuable. This is simple supply/demand economics. The imbalance between constant demand and reduced supply typically exerts upward pressure on the price. This mechanism reinforces Bitcoin's deflationary nature, contrasting sharply with inflationary fiat currencies. As prices rise, existing Bitcoin holders might be less inclined to sell, further constraining available supply. This price action led FOMO also leads to behavior in buyers that may compete more intensely for the reduced supply of new coins, which drives prices up.

As we can see from the Rainbow Chart, historically, the strength of the BTC ecosystem tends to reveal itself not immediately post-halving, but rather about 6 months down the line. The last halving occurred on April 20, 2024. Notably, It will be 6 months since the last halving in about a week from today.

We’re in the blue zone right now, looking for an exit around orange/yellow. We see that these peaks typically occur about 18 months after the halving. Alongside the macro liquidity cycle loosening, as more capital flows to risk-on assets, there will be asymmetric returns in crypto as bitcoin soars past all time highs. I personally believe we can see 180-250k as this cycles peak high.

Mapping the cycle can indicate peak euphoria and give sell signals that should ring alarm bells. By the time your barber will be telling you about the latest dog token, the top should already be in, and there will be extremely profitable shorts to be made.

The stars are aligning once again and the Bitcoin rocket is preparing for liftoff. As we approach the all time highs, we could be on the cusp of a historic bull run. I expect this window of opportunity to close about 12 months from now.

Cryptocurrency remains a wild frontier of finance. If you decide to jump in, do so with eyes wide open. Do your research, understand the technology, and never invest more than you can afford to lose.

The 4-year cycle has been a reliable indicator in the past, but in the world of crypto, nothing is guaranteed. What is certain though, is that we're living through a financial revolution. The question is: will you be a part of it?

As always, not financial advice. Please do your own research.