Attempting to predict the bitcoin cycle

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The first three halvings of bitcoin occurred in 2012, 2016 and 2020. Let's look at how $100 invested in bitcoin at the time of the halvings increased in the months following those halvings.

After 10-17 months, this $100 had increased to $9,600 (halving of 2012), $2,200 (halving of 2016) and $600 (halving of 2020). After reaching these high values, the price of bitcoin lost more than 70% in the months thereafter.

A simplified analogy helps to understand what happens after halving. Consider a city with a growing population in which, say, 1,000 new flats are built each month. If 1,000 new people arrive in the city each month, the price of flats remains stable: everything that comes onto the market finds a buyer.

If, in 2020, a law suddenly limited the construction of new flats to 500 from one month to the next and 1,000 people continued to arrive each month, the price of flats would undoubtedly rise, because 500 new arrivals would be without housing. Perhaps existing owners would start selling their flats, thereby pocketing healthy profits (and informing their neighbors about it). And the more prices rise, the more recent and old owners will be willing to sell their flats (and the more new people will be willing to buy and hope to profit from the rise). Until no one is willing to pay the by now unrealistic prices and the bubble bursts. It seems possible to me (but of course way from certain) that the bitcoin price will follow a similar trajectory following the next halving of 2024.

At present, any method used to buy bitcoins carries risks. For this reason, I split my purchases equally between three methods: a cold wallet, a centralized exchange and an ETP holding physical bitcoins. I know the saying "not your keys, not your coins" but I also know that probably millions of bitcoins have been lost and certainly some of these losses are due to people no longer having access to their cold wallets. By splitting my purchases into three separate pots, I don't need to predict which one is likely to fail. In the unlikely event that one of them goes to zero, the price of bitcoin “only” needs to gain 50% from the purchasing price for me to recover the initial capital.

I believe in the long-term potential of bitcoin: The Bitcoin Standard's argument that in the long run, the form of currency most difficult to produce will prevail seems plausible to me. But I also think that there will be price bubbles in the future. My (temporary) exit strategy: I plan to sell 70-80% of the money invested in bitcoin 10-15 months after the halving of 2024 when the bubble will likely reach its limit. After the next bubble bursts, I will gradually buy back bitcoin.

Let’s see in early 2025 if this post has aged like milk or wine.

Looking forward to hearing your thoughts on this.