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You may have noticed that crypto moves in massive cycles?
Or, if you’re new here, you may have heard us talk about past crypto cycles or refer to the current “cycle” we're in.
Understanding these cycles is probably the most important thing you can do as an investor or builder in crypto.
These cycles are not just about price, but also user and developer adoption, liquidity and investment in the space and so much more.
Timing these cycles properly is the key to capitalizing on the opportunity of crypto.
Today I’m going to teach you what causes these cycles and how you can stay ahead of them.
Here’s a great chart that showcases the crypto cycles of the past.
They are oddly similar, aren’t they?
Each cycle lasts about 4 years in total
The top (green line) to the bottom (red line) of the last 3 cycles have lasted 57 weeks, 57 weeks and 50 weeks
The bottom to the top of the last 2 cycles lasted 211 weeks and 201 weeks.
Even the specific chart patterns of each cycle look oddly similar.
Here’s the first cycle of Bitcoin which topped in 2014…
Here is the second cycle of Bitcoin which topped in 2017..
And the 3rd cycle which topped in 2021.
The latest cycle looks a bit different as it has a double top, however this can be explained by FTX, 3AC and other now bankrupt/fraudulent companies propping up the market with leverage from funds that didn’t actually exist.
Otherwise, it likely would have looked very much the same.
So what gives? How can this be possible?
The Bitcoin Halving? 🤔
Well, many people in this space consider these cycles as a result of the Bitcoin halving, which occurs every 4 years (I don’t by the way, so read on to understand what I do think is the reason).
The Bitcoin Halving is part of the Bitcoin protocol code whereby the rewards (aka inflation) of Bitcoin is cut in half every 4 years.
It would make sense that if you cut the amount of supply entering the market in half, while maintaining the same amount of demand, the price has no choice but to go up.
If we look at the chart below, the blue lines represent the halving and we can see that price tends to go up well before the halving event every cycle.
This could be explained by the fact that the halving is baked into the Bitcoin protocol code, so anyone “in-the-know” knows the exact date of the halving well in advance (...we already know this for the next 100 years) and can front-run the event.
But if the Bitcoin halving was causing these cycles… Why then would these cycles also exist in a stock like Amazon? (the green and red lines are copy/pasted from the Bitcoin chart)
Or Google?
Or the entire technology sector (NASDAQ)?
While the charts above are not exactly following the tops and bottoms of Bitcoin, they are very similar.
Also, with each cycle that passes they become more and more accurate. The last cycle’s tops and bottoms are identical across Bitcoin, Amazon, Google and the entire NASDAQ.
So, is Bitcoin’s halving controlling the entire technology sector? Of course not.
I believe the Bitcoin halving is simply a coincidence (though it likely does have some factor in the large upside Bitcoin has in these cycles vs. tech stocks) and these cycles in crypto and technology in general are occurring from a completely different factor.
That factor is Global Liquidity.
Global Liquidity Cycles ♻
Here is a chart of the rate of change in global liquidity since the financial crisis in 2008.
Notice anything?
If I put the top and bottom lines on this chart, they line up very close to the top and bottoms of the liquidity cycles which have occurred every 4 years since the 2008 financial crisis.
What is a liquidity cycle?
Every 4 years or so central banks around the world ease financial conditions via lowering interest rates and/or printing money.
By making money cheaper to access (via cheaper loans, mortgages, etc. + giving away free money to businesses or people) this stimulates economic growth – people buy things.
Liquidity cycles are not something new – this is something that has occurred for decades and beyond to help manage and grow economies.
You can see the year over year rate of change of global liquidity since the 1980s below. It’s extremely cyclical!
The difference now versus the 80s is that since the financial crisis in 2008, the amount of liquidity being produced is significantly more with each cycle.
Not to mention interest rates are generally much lower since 2008 too.
What this means is that these liquidity cycles have a much larger impact on assets than ever before. This is likely why with each passing liquidity cycle, all assets are converging to go up and down in correlation.
Let’s look at a comparison of liquidity versus these assets a bit further and then I’ll explain why this happens and how we can capitalize on it.
Global Liquidity vs. Other Assets ⚖
Here is a chart comparing the global liquidity year over year (YoY) rate of change vs. Bitcoin’s price YoY rate of change.
Bitcoin tracks global liquidity to a tee, though it tends to overshoot to the upside in each cycle.
This is because Bitcoin also has exponential adoption as a tailwind to add to the global liquidity cycles. 🚀
Here is Bitcoin vs. global liquidity in actual $ terms rather than rate of change…
And here is the NASDAQ…
And here is Ethereum over the last few years…
The correlation of crypto and technology assets with global liquidity is uncanny.
So why is this happening?
The answer is simple:
Debasement of Currency 📉
When governments print money or put liquidity into the system, they are adding to the supply of their currency.
When you add supply to one asset, yet other assets have no change in their supply (i.e., they are scarce assets), their valuation in comparison to the inflated supply goes up, especially if that asset sees increased demand.
The easiest way to understand debasement of a currency is through an exaggerated example.
Here is a chart of the Argentinian stock market, the Merval, over the last few years.
It looks like investing in Argentine equities would have been an incredible trade, right? That’s a 30x increase since Jan 2020!
Well, no. This is the Merval priced in the Argentine Peso – which is currently undergoing hyperinflation, seeing inflation rates of 100-200% per year!
If we compare the Merval to the USD (while USD is also inflating, it is inflating significantly less than the Argentine Peso), we can see that the Merval only did less than a 2x since Jan 2020.
This is debasement of a currency in exaggerated form. But all fiat currencies are debasing and scarce assets with adoption and growth potential are the liferaft to save you from this.
What this means is that as central banks print money and debase their currency, scarce assets like equities, real estate, gold and crypto appreciate.
However, only those seeing exponential growth and adoption (i.e., demand), like crypto and technology stocks, outperform the debasement of the currency.
Real estate, value stocks, and gold appreciate vs. USD, but they do so minimally – they don’t actually outpace the debasement of the USD.
Meaning, if you were to account for the FED balance sheet (amount of money printed) in the performance of gold, real estate or the S&P 500, you would end up seeing 0 growth.
Understanding liquidity cycles is the key to understanding crypto cycles, which is also the key to understanding tech stock cycles and so on. They are all one in the same.
We live in a world where almost every asset is driven by the exact same force. Of course, some assets outperform others (crypto & tech vs. everything else), some assets lag others in timing (real estate has the same cycle but lags crypto for example), but ultimately they all move for the exact same reason… Liquidity!
Predicting Liquidity Cycles 🎯
Ok, so where is liquidity going next? Well, unfortunately that is not the easiest thing to understand. This is why macroeconomics is so important in crypto.
Factors like unemployment, inflation, interest rates, etc. all impact the direction of liquidity.
I wrote a 2 piece masterclass on this here that you can review (Part 1 & Part 2).
I recommend you try to understand macro as much as you can, however, one thing to be aware of is that most analysts struggle to predict these liquidity cycles because they focus too much on the complexities of macroeconomics.
They get lost in unemployment numbers or job loss claims or potential inflationary impacts and so on. What many people miss is the simple fact that central banks MUST keep interest rates low and print more money overtime.
Why?
Central Bank Debt 🏦
The central banks of the United States, Japan, China, Europe are all trillions of dollars in debt.
You can see the growth of their balance sheets below…
Don’t forget, central banks have to pay interest on those debts. With interest rates in the US for example currently at 5.25% those expenses are almost impossible for the US to cover (this is true of most of the large power countries like China, Japan, Europe, etc.).
So what central banks around the world have been doing since 2008 is simply refinancing their debt on an ongoing basis.
Meaning, they take out more debt (by printing money) to pay for their existing debt and extend the length of their due date another 4 years (this explains why liquidity cycles happen every 4 years).
You could think of this like maxing out a credit card and paying it off by getting another credit card with a higher credit limit.
In fact, when you dive into the numbers, the amount of liquidity that central banks are putting into the system is identical to the amount they owe in their debt interest payments.
Below is a picture of the US Fed Balance sheet (debt) vs. US debt expenditures (past and projected interest payments based on current/projected rates and debt)…
This means that the FED will have no choice but to print money in the next 2 years to cover their interest payments.
There is no other way around it other than to default on their trillions of dollars of debt (which they won’t do).
Most big countries look identical to this. So regardless of inflation, unemployment, and all the complexities of macro, you just need to understand one thing...
Nations will continue to print money and do everything they can to maintain low interest rates, regardless of what is happening in the world.
If they don’t, they will become insolvent and their currency will collapse.
Of course, no nation is going to allow that to happen. So they instead continue to kick the can down the road and inject liquidity.
They will come up with various names or reasons to do it, whether it be stimulus for COVID or the Bank Term Funding Program which bailed out banks in the US last year or whatever else, but ultimately, it’s all the same.
They are printing money because they have to. They will lower rates because they have to.
And yes, this is a pure scam, but that is the unfortunate FIAT world that we live in. It is also the reason why we MUST hold crypto and tech stocks if we want to save ourselves from the ongoing currency debasement.
Of course, central banks can’t just maintain 0% interest rates while pumping out money at all times. They need to react to what’s happening in the real world, like the inflation burst we saw over the last 2 years.
But ultimately, they have their own internal pressures to bring rates back down and start printing once again.
Where Are We In The Current Liquidity Cycle? 🤷
The top of the last liquidity cycle was mid 2021, since then, the rate of change of global liquidity has decreased until Q3 2022.
Since Q3 2022 the rate of change of liquidity has begun increasing.
This is the exact reason why we were calling “risk on” and telling the Web3 Academy community to buy back in January of 2023.
To be clear, and the reason why many people are too late to the party when looking at liquidity, the chart above shows the year over year change of liquidity.
It is not an absolute number.
Meaning, the 2021 peak in the chart above was not the peak of new liquidity, there was still more liquidity being put into the system after that, even as the white line went downwards.
The white line going down is simply showing that the rate of new liquidity entering the market is decreasing.
As long as that white line is higher than 0 then technically overall liquidity is still increasing. The opposite is true below the 0 line.
The reason markets did so well in 2023, even though technically global liquidity was still decreasing, is because the rate of which it was decreasing was shrinking, so much so that now liquidity is back into the positive.
If you waited until liquidity was positive to start buying risk assets, you would have missed the massive moves we saw in crypto and tech stocks in 2023.
Markets react to liquidity but they are forward thinking.
They don’t care about what liquidity is doing right now, they care about what will happen with liquidity in 6 - 9 months from now.
The chart below uses leading indicators to project where global liquidity will be 15 months ahead…
These leading indicators have worked almost perfectly for the last 10 years and they suggest a significant increase in liquidity over the next 2 years.
This is extremely bullish for crypto and tech stocks! 🐂
The key to timing the crypto cycle we are in is timing the liquidity cycle we are currently in.
Although the chart looks perfect above, there are still months of deviation from the leading indicators and reality.
Even the tops and bottoms of markets have a deviation from the tops and bottoms of this chart. So this is by no means perfect science.
Also, looking back, this seems very easy, but at the moment, things look and feel very different!
What we need to do is use global liquidity numbers as well as other macro indicators to decide when the up-trend is actually over.
At that point, it may make sense to take profits based on the “When To Sell Plan” I wrote about previously.
FYI – accurate global liquidity numbers are tough to find publicly. Every research platform uses different formulas to calculate these numbers.
Unfortunately, it’s not onchain and transparent!
I use numbers from different research and platforms that I pay to be subscribed to, and I will do my best to continue to share these numbers with PRO subscribers throughout this cycle, so you don’t have to spend big bucks to subscribe to various sources.
As promised, together, we are going to capitalize on this cycle! 💪
Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤
How'd you feel about our read today?
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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