Why Bitcoin's Price Moves in 4-Year Cycles

Understand why Bitcoin's Price move in 4-year cycles and how Mining Rewards affect supply and demand.

Every 4 years, Bitcoin price moves very fast. Then for another 1-2 years, the price is moving sideways and down. People think that Bitcoin has "crashed" and is now dead. No one pays attention until again Bitcoin takes over the news with a big move. Usually when Bitcoin breaks the all-time-high all the news channels talk about it.

Why does the price move like that? Why is it so volatile? To understand price movements you have to understand the Bitcoin supply schedule and “halvings” that happen every 4 years.

Until July 2010, Bitcoin did not even have a price. That's because no one knew about it and no one valued it. It had a long way to go to prove itself as a store of money.

If you look at the price graph from CoinMarketCap, a price tracker website, Bitcoin was at $0.06 by 14th July 2010. A few people started buying it, in the 100s and 1000s. Before that Bitcoin was in the hands of the community and developers.

Around July 2013, the price of Bitcoin was at $100. And by December of 2013, the price went up to $1000. A 10x jump.

By 2015, the price crashed back to $200. By 2017 December the price peaked at $16,300 and again by 2019, the price crashed back to $3500.

What's happening here?

Bitcoin transactions are stored in blocks. Each block is produced through a complex computation called mining. Mining is done by the Bitcoin miners. For each block they produce, they get a reward in Bitcoins. From 2009 to 2012, the block reward was 50 Bitcoins per block.

One new block containing Bitcoin transactions is produced every 10 minutes approximately. That means 6 blocks are produced in an hour. 144 blocks per day. From 2009 to 2012, 7200 Bitcoins were produced per day through mining.

In the design of Bitcoin, there is something called halving. After every 210,000 blocks the block reward is cut in half. That's approximately once in 4 years.

In 2012, the first halving happened and the block reward was cut down from 50 Bitcoins per block to 25 Bitcoins per block. That means that instead of 7200 Bitcoins mined per day, only 3600 Bitcoins will be mined per day.

Most Bitcoin miners sell the Bitcoins back into the market because they need to pay for electricity charges. That means that the supply hits the open market.

Bitcoin mining is a process that consumes a lot of electricity and there is a reason for that. We will discuss that in future lessons.

If 7200 Bitcoins were produced per day and if the price of Bitcoin is let's say $1000 then $7.2 million Bitcoin is being purchased every day to keep the price stable at $1000.

When that much supply is being absorbed by a consistent demand and suddenly you cut the supply in half, what happens? The price increases.

That's why Bitcoin price has always peaked after 1 to 1.5 years after the halving. The initial demand that meets with half the supply creates a sharp price increase and people see that. People hurry to buy more of it thinking that the price will keep going up like that without understanding the cycles. And then the price drops because the demand flatlines and people start selling.

Since Bitcoin trades in an open market 24 hours a day and 7 days a week, there is no cooling-off period to stop the frenzy. People get greedy and can't put some money into Bitcoin. If they put in a small amount and the price doubles in a few weeks, then they put in more, until the price reaches a top and starts crashing.

This kind of crazy price movement is actually better than having “protections” because it’s a free-market and no one steps in to “protect” the crash from happening. People who take on too much risk should also face the downside.

In traditional markets, most of the asset purchases are highly leveraged. Most home buyers only put 10% to 20% as down payment and the rest is taken as a loan. In 2008, a lot of people bought homes with a lot of leverage. They got access to cheap debt at very low interest rates. The prices went up a lot and then crashed.

When the prices crashed, people lost their houses, banks started failing and the government stepped in to bail out the banks who took too much risk by lending to people who couldn’t repay. The bailouts were done using tax payer’s money and this created further inflation.

When the price starts crashing, it looks scary and people start selling thinking that Bitcoin is going to zero. But it never goes to zero as you can see from the past cycles. True Bitcoiners get excited when there is a big crash because they can buy more cheaper.

The only people who lose money in Bitcoin are the ones who buy it at the cycle top and then sell in panic at a lower price. Anyone who has bought it at the top, if they can wait for 4 years, the price has always been higher than the previous tops.

In November 2021, the Bitcoin price peaked at $64,000 approx. Then it went down almost 75% to $16,000. Now it is back to $67,000 at the time of this writing. If people wait till November 2025, then it is expected (based on previous cycles) that the price will be more than $100,000.

(Please Note: This is only an expectation. Not financial advice. Don't ape into it right now. There are too many factors in play and this course is not financial advice or price predictions. The past is no guarantee of the future. I am only analyzing the past so far.)

In 2016, the number of blocks in the Bitcoin blockchain reached 420,000 blocks. The halving happened. The block reward was cut from 25 Bitcoins per block to 12.5 Bitcoins per block. That means that the daily supply of Bitcoin went down to 1800 Bitcoins from 3600 Bitcoins.

In 2020, the next halving happened, the block reward went to 6.25 Bitcoins per block. This cut the daily supply of Bitcoin to 900 per day.

Around April 2024, the next halving is expected to happen. The daily supply of Bitcoins will be cut to 450 Bitcoins per day. The block reward will be 3.125 Bitcoins per block. Right now, at the time of writing this, the price of Bitcoin is hovering around $43,000.

If 900 new Bitcoins per day are being mined and supplied into the market and if the price is stable at $43,000, we can assume that $38.7m Bitcoins are being bought every day throughout the world.

If the demand remains consistent around this volume and if the supply is cut in half, then the minimum expected price rise is 2x because cutting the supply in half is the same as doubling the demand. When the price goes up sharply in a short period, people fomo into it and we might see another big jump happen by the end of 2025.

It takes some time for the low supply to be realized in the market and that's why there is a gap of 18 months from the halving to the cycle peak. Check this chart where I have mentioned the halvings until 2060.

By 2056, only 1.76 Bitcoins will be mined per day. The block reward for miners will be 0.012. Imagine if the daily demand stays the same in 2056 and only 1.76 Bitcoins are produced per day. Theoretically, one Bitcoin should be around $21 million if that happens. But we have to wait for another 36 years to see that. It might or might not happen.

This will go on till 2140. After that there will be no block rewards and Bitcoin miners will only earn from transaction fees. We might not be around to see that at that time.

I hope you now understand why the price is so volatile. I hope you are mind-blown. Comment with your thoughts.

Cheers,
Deepak Kanakaraju