Megatrends: Why the four seasons of cryptocurrency matter to investors

While cryptocurrency used to make headlines for its dizzying highs and instant millionaires, these days it's in the news for lost fortunes, exchange bankruptcies, and business fraud. As investors monitor the crypto bear market, now is a good time to search for insights from past cryptocurrency trading cycles to understand what may lie ahead.

Bitcoin is the leading cryptocurrency and in many ways acts as a proxy for the overall crypto market. One unique thing about bitcoin is that it is designed to go through a process called ‘halving.’ This means that every four years, the number of bitcoins created every ten minutes is cut in half. Eventually when there is a total of 21 million bitcoins in existence, no more bitcoins will be mined. This process was designed to create scarcity so bitcoin can maintain their value.

By intentionally limiting the supply of new bitcoin, the shortage caused by the halving can affect the price of bitcoin to potentially spur a bull run. There have been three bull runs on bitcoin since its inception in 2011, each lasting twelve to eighteen months after the preceding halving.

Morgan Stanley Wealth Management likens the four-year cryptocurrency cycle to the four ‘seasons’ of the year:

• Spring: The period from the low to the next halving. While Spring isn’t always great, the crypto market tends to recover from its lows even though the move is largely ignored by the broader investor universe. Investor interest is low.
• Summer: Historically, most of bitcoin’s gains come directly after the halving. This bull run period starts with the halving event and ends once the price of bitcoin hits its prior peak.
• Fall: Once the price surpasses the old high, it tends to attract interest from the media, new investors, and businesses, which can then drive prices even higher. The fall period represents the time between when the old high is passed and a new high is reached, which signals that the bull market has run its course.
• Winter: The inevitable bear market of decline comes when investors decide to lock in their gains, causing prices to drop while scaring off new investment. The winter period takes place between when the new peak is reached and the price of bitcoin hits its next bottom. There have been three winters since 2011, lasting about 13 months each.

Note: 2020 cycle includes the current spring. This cycle is not complete yet. Morgan Stanley Wealth Management measures bitcoin cycles starting at the halving. Summer is the first season, starting the month following the halving and including the month bitcoin reaches the prior peak. Fall starts the month following bitcoin reaching the prior peak and includes the month bitcoin makes a new peak. Winter starts the month following a new bitcoin peak and includes the trough in price. Spring begins the month following the trough in bitcoin price and includes the next halving.

Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of June 30, 2023

Past performance is not indicative of future results.

Just as a farmer avoids planting seedlings in the winter–or too late in the spring–crypto investors want to know when crypto spring has arrived to maximize their investment growing season. Here’s what to consider when trying to determine whether crypto spring is truly here, or if the market is still in the midst of crypto winter:

• The calendar: The bottoming out of bitcoin in the previous crypto winters have historically occurred twelve to fourteen months after the peak.
• Bitcoin drawdown: Previous bottoms were about 83% off their respective highs.¹
• Miner capitulation: Near bottoms, many bitcoin miners shut down their operations because they are losing money. When a miner shuts down it makes it a little easier for the remaining miners. A statistic called bitcoin difficulty measures how easy or hard it is to mine bitcoin. When difficulty decreases it is a sign the bottom may be near.
• Bitcoin price-to-thermocap multiple: Thermocap measures how much money has been invested in bitcoin since its inception. Investors use thermocap like the book value of a bank to see how expensive bitcoin is. A lower price-to-thermocap multiple indicates a bottom, while a higher multiple indicates a peak.
• Exchange problems: When the price of crypto drops, it tends to impact the viability of some crypto exchanges. Bankruptcies, bad news, or new regulations may all indicate a bottom.
• Price action: A 50% increase in price from bitcoin’s low is typically a good sign that the bottom has been achieved, although there have been examples of such a gain being followed by a retesting of the low.

Estimates of when exactly the next halving will occur vary, but history indicates it has the potential to occur sometime around April 2024.² Based on current data,³ signs indicate that crypto winter may be in the past and that crypto spring is likely on the horizon. However, keep in mind that there have only been three crypto springs to date. In other words, there is still a lot to learn.

While no one can tell you if now is the right time to buy or sell cryptocurrency, today is the right time to learn more about the crypto market’s cyclical tendencies so that you can ask questions, monitor trends, and determine for yourself if the cycle will repeat a fourth time and whether to invest.

One key thing to keep in mind: as with any investment, past performance doesn’t indicate future results. Potential risks such as encryption breaking, software bugs, recession, or coordinated government action could emerge before the expected halving and disrupt the cycle.

1. Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office as of May 31, 2023

2. Alphacurrents, ‘The Four Seasons of Cryptocurrency’, Morgan Stanley Wealth Management, Global Investment Office, July 20, 2023.

3. Alphacurrents, ‘The Four Seasons of Cryptocurrency’, Morgan Stanley Wealth Management, Global Investment Office, July 20, 2023.