The coin’s resilience during the recent flash crash makes this new argument even more convincing.
There is a moment in every market cycle when investors begin to believe that things are different this time, the guardrails are higher, and the road is smoother. But after the October 10 flash crash, a different kind of lesson is emerging. The idea is that Bitcoin tilted, but did not collapse when many cryptocurrencies collapsed.
This observation ties into a larger discussion about what future crashes will look like. In fact, one prominent crypto investor says, and others agree, that Bitcoin probably won’t see any more severe declines due to the four-year halving cycle. But is it?
Why is this argument reliable?
Arthur Hayes, former CEO and co-founder of cryptocurrency exchange BitMEX, said in an Oct. 8 blog post that the old narrative about Bitcoin’s volatility and its tendency to crash and enter a bear market every four years or so is fading.
In his view, global liquidity increasingly directly shapes supply and demand, and the sharp decline and four-year price cycle associated with Bitcoin’s halving (when the reward for creating new coins is cut in half and supply growth slows) is less important. To be clear, Mr. Hayes is not saying that Bitcoin will never crash again or that it will never enter another bear market. He said the actions of central bankers, who control the world’s money supply, are likely to cause the coin’s value to rise over time, rather than knocking the wind out of the wind as they did in past monetary tightening and interest rate hikes.
There are several reasons to believe that Hayes is right. It starts with the Federal Reserve’s apparent tolerance for inflation exceeding its long-standing goal of 2% a year. This means that the money supply will increase at a consistently faster pace than past Bitcoin halvings. It also means investors have even more incentive to try to escape inflation by buying coins that cannot be printed like fiat currency.
Other factors, such as institutionalization, may also contribute to vindicating hazing. The largest U.S. spot Bitcoin exchange-traded fund (ETF) currently holds nearly $93 billion in net assets, with Bitcoin exposure predominant in rules-based allocations to pensions, advisors, institutional investors, and general brokerage accounts. When sustained demand for an asset flows through new channels, it becomes much more difficult to create the kind of price vacuum typical of early crashes.
But what about the most recent real-world test of the coin’s stability during the October 10th flash crash?
While altcoins plummeted more than 70% in the sell-off that rocked digital assets, Bitcoin held up relatively well, dropping just 7%. This is consistent with a pattern of large, steady buyers anchoring the market even when sentiment cools. While the flash crash was in no way caused by Bitcoin’s halving or its scarcity, this pattern supports the idea that Bitcoin is becoming less volatile and less prone to repeating previous patterns.
Of course, this does not make Bitcoin crash-proof. Black swans are still flying around, and some may destroy the value of the coin even more than they did on October 10th.
Is the 4 year cycle really over?
The four-year halving cycle is a core part of Bitcoin investment folklore among crypto natives.
In this story, half-life occurs once every four years. Supply growth from mining will slow further. About a year and a half after the halving, a euphoria follows, followed by a long, harsh winter of about 12 months, during which prices fall by at least 60%. While halvings themselves will continue to occur, Hayes’ argument is that the expansion of fiat liquidity and deepening institutional adoption are beginning to blur the neat patterns of boom and bust. For now, the evidence suggests he’s at least partially right.
On the other hand, history warns against declaring victory over gravity.
Since 2014, Bitcoin has experienced multiple drawdowns of more than 50%, with the largest decline averaging around 80%. Even if the downstream effects are somewhat mitigated, it is unlikely that half-life’s influence on human psychology will be permanently neutralized. Despite the market’s maturity, the broader crypto complex can still experience violent air pockets, and supply phenomena may indeed contribute to air pockets in ways that are difficult to accurately predict before they occur.
So are the optimists right? Partly yes. New sources of structural demand from ETFs and corporate holders are likely to bottom out many declines and shorten recovery times.
A smart way to take advantage of this information is to size your position so that a 50% drop doesn’t force you to sell, and use dollar-cost averaging (DCAing) to take advantage of the coin’s lack of supply over the years. In the future, collapse is not expected to be zero, but to be reduced by 80%.
Alex Karkidi has a position in Bitcoin. The Motley Fool has a position in and recommends Bitcoin. The Motley Fool has a disclosure policy.
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