Overview

The "God Fish" once said, "There are generally two types of money in the cryptocurrency circle: cyclical money and emotional money. You need to distinguish which type of money you are making." "Buying the dip in a bear market and holding until selling in a bull market" should be the simplest method known to everyone in the crypto space for making money, yet many still chase highs and sell lows, becoming the "chives."
Why is it that a method known to everyone is rarely practiced? A significant reason is that most people want to make quick money, fantasizing about becoming rich overnight, engaging in high-risk trades with poor risk-reward ratios, and losing their chips before the bull market arrives. If we only focus on K-lines and intraday charts, we cannot gain an elevated perspective to understand cycles and find certainty amidst uncertainty.
The ability to understand market cycles and adapt to/predict economic cycles essentially determines how long an investor can survive in the market. To help readers reduce trial-and-error costs and deepen their understanding of cycles, we will launch a series on "How to Earn Cyclical Money." This series consists of four articles, where we will introduce cycles and how to profit from them from multiple perspectives, covering the following main topics: BTC halving narrative, multiple perspectives on judging cycles, how to allocate funds at different stages, potential sectors for the next bull market, and how to buy the dip and sell the top, among others.

Definition of Bull and Bear Cycles

A cycle is simply a repeated occurrence, and the bull and bear markets in the capital market also repeat, leading to bull and bear cycles. So how are bull and bear markets defined? We will focus on defining a bull market; once we know the definition of a bull market, the definition of a bear market becomes evident.

How to Define a Bull Market

Recently on Twitter, many influencers began debating which stage we are currently in within the bull-bear cycle. Some believe we are in the early stages of a bull market, but I am skeptical. To argue this, we first need to define a bull market.
What exactly constitutes a bull market? Is it simply not exceeding the historical peak? Clearly not. Take Japan as an example: after the economic bubble burst in the late 1980s, the Japanese stock market never returned to its peak. Does that mean there have been no bull markets in Japan for decades? Obviously, a bull market is not defined solely by exceeding historical highs.

Moreover, price increases are not exclusive to bull markets; can prices not rise in a bear market? The distinction between bull and bear markets is not only in price levels but also in trading volume, which is an important method for judging bull and bear markets. Many people only look at Bitcoin's price fluctuations to judge bull and bear markets, which is a misconception. During bear markets, Bitcoin often experiences a "vampire" market where it rises while altcoins do not follow, and when Bitcoin falls, altcoins also drop. This reflects insufficient market liquidity.
Thus, one standard for judging a bull market is: over a prolonged period, the overall market capitalization of cryptocurrencies is increasing, accompanied by the influx of incremental capital. Currently, interest rates remain high, and liquidity is continuously being drained, resulting in reduced momentum for both upward and downward movements. Any positive or negative news can cause significant price fluctuations. My understanding of a bull market is: an influx of incremental capital due to monetary easing leads to an overall increase in the cryptocurrency market, rather than price changes driven by sentiment and consensus from positive or negative news. Bull and bear markets are cyclical changes, while many people interpret them as price changes, which is a significant misunderstanding. Using price changes driven by sentiment to explain changes caused by cycles is fundamentally misguided.
In simple terms, a bear market is a game of existing capital, while a bull market is a win-win situation brought about by incremental capital. Price increases in a bear market rely on sentiment, while price increases in a bull market depend on the growth of on-site capital and sentiment.

BTC Halving Narrative

When Bitcoin's blockchain was born in 2009, the reward for creating a block was 50 BTC, and the reward would automatically halve every 210,000 blocks.
The system adjusts the mining difficulty every 2016 blocks (approximately every two weeks) based on the block creation time of the previous cycle, ensuring that the block creation time stabilizes around 10 minutes. It is not difficult to deduce that the halving cycle occurs approximately every four years.
In 2024, Bitcoin will experience its fourth halving, reducing the reward for creating a block to 3.125 BTC. Since the smallest unit of Bitcoin is a Satoshi (SAT), which is 0.00000001 (one hundred millionth) of a Bitcoin, by 2140, after the 33rd halving, the block reward will fall below 1 Satoshi for the first time, marking the end of Bitcoin block rewards.

Learning from History: A Review of Bitcoin Halving

Based on statistical information, we can draw the following conclusions:

1. Each bear market has seen a maximum drawdown of around 80%, while the percentage increase has been decreasing each time. Based on this pattern, we can predict that this bear market has likely bottomed out, and the bull market's increase may range from 4 to 6 times, i.e., between $62,388 and $93,582.
2. The time taken to reach historical highs after halving is increasing.
3. Based on the drawdown from the last peak, we can predict that this bear market has likely bottomed out.
4. The halving is expected to occur on April 27, 2024, with historical highs likely reached three to seven months after halving, which corresponds to Q3 and Q4 of next year.

Does Halving Always Lead to a Bull Market?

Many believe that Bitcoin halving is a definitive event that leads to price increases, but correlation does not imply causation. So, is there a causal relationship between Bitcoin halving and price increases?
Before discussing Bitcoin halving, let's take a look at the recent halving of LTC. On August 2, LTC reached a block height of 2,520,000, and the block reward halved from 12.5 LTC to 6.25 LTC. After that, LTC's price continued to decline. While this can be explained as "good news turning into bad," LTC's price had not risen significantly beforehand, mostly following the market's fluctuations. The halving narrative did not drive LTC's price up, so will Bitcoin's halving next year still have potential?

Price is determined by both supply and demand. After Bitcoin's three halvings, the impact of halving on supply has become increasingly minimal. After the 2024 halving, Bitcoin's block reward will decrease from 6.25 to 3.125. Therefore, what truly determines Bitcoin's price will be demand, specifically whether new external capital will flow in.
Looking back at the Bitcoin bull market that started after the 2020 halving, the reasons many might associate with it are not the halving itself but rather the "pandemic" and "the Federal Reserve's massive monetary easing." In an environment of extreme liquidity, U.S. stocks soared, and a large amount of capital flowed into Grayscale Bitcoin Trust, which continued to buy Bitcoin. Subsequently, Tesla also bought Bitcoin, driving the entire market into a frenzy. Thus, the source of capital is the key factor that truly determines whether a crypto bull market occurs.
Does this mean that Bitcoin halving is unimportant? Not at all. Bitcoin halving still possesses strong narrative and expectation value. In a crypto market where fundamentals are nearly non-existent, price fluctuations are often driven by narratives and expectations, and it has been proven that narrative value is often effective. When everyone is willing to believe that Bitcoin halving will lead to a bull market, they will rush to buy, thus genuinely bringing about a bull market. Therefore, only when the majority believe that Bitcoin halving can lead to a bull market will the bull market likely truly arrive. This is also what Soros referred to as "reflexivity."
From the historical review of Bitcoin halving, we learn that the time span from the halving to reaching new historical price highs is increasing. In contrast, between 2017 and 2020, the time span between Bitcoin and the Dow Jones Industrial Average's peaks and troughs became shorter, with both showing similar trends. The reason for skepticism about the four-year bull market cycle following Bitcoin halving is that price trends are actually more closely tied to the Dow Jones Industrial Average, meaning Bitcoin has a higher correlation with U.S. stocks over certain periods, and Bitcoin's block reward halving may just be a fortunate coincidence.

Another supporting argument is that Bitcoin was born after the 2008 economic crisis, coinciding with the end of a Kitchin cycle. Whether it was Satoshi Nakamoto's clever design or an incredible coincidence, the timing of Bitcoin's halving cycle, which occurs every four years, corresponds to the 3-4 year Kitchin cycle.
Bitcoin mining companies also played a certain role in boosting previous bull markets. In earlier bull markets, Bitcoin's market capitalization was relatively small, and prices were easier to manipulate. Therefore, Bitcoin mining companies would push Bitcoin prices to compensate for the profit loss caused by halving. However, as Bitcoin's market capitalization continues to rise, the difficulty and cost of manipulating prices are increasing.

The Trader's Tool: The Merrill Lynch Clock

Concept

The Merrill Lynch Clock is an investment theory invented by Merrill Lynch in 2004, based on historical financial data and a mature financial analysis framework, summarizing a classic cyclical investment methodology. The Merrill Lynch Clock guides us on what assets to invest in at different stages.
It divides the financial cycle into four stages:

• Recovery (High GDP + Low CPI) - Optimal for stocks
• Overheating (High GDP + High CPI) - Optimal for commodities
• Stagflation (Low GDP + High CPI) - Optimal for holding cash
• Recession (Low GDP + Low CPI) - Optimal for bonds
  

How to Use the Merrill Lynch Clock

The current cycle point we are in: Stagflation ==> Recession
According to the latest U.S. economic data, we are in a period of slowly transitioning from low GDP + high CPI to low GDP + low CPI. During this stage, the primary investment opportunity is cash. This is also why the dollar is scarce, making it difficult for startups to secure financing.
To determine what stage we can invest in crypto assets, we first need to classify it as an asset type. Bitcoin has both risk and safe-haven characteristics; due to its high volatility, it can be classified as a risk asset, while its decentralized and censorship-resistant features give it safe-haven attributes. Since Bitcoin's movements are strongly correlated with U.S. stocks, we will discuss Bitcoin here as a risk asset.

According to the Merrill Lynch Clock, a Bitcoin bull market will occur during the recovery or overheating phases.
Of course, this does not mean there are no short-term investment opportunities; we are simply analyzing the arrival of a crypto market bull market from the perspective of the Merrill Lynch Clock cycle.

Crypto Merrill Lynch Clock

Based on the Merrill Lynch Clock, we have created a Crypto Market Merrill Lynch Clock to help investors choose crypto assets at different stages.
In addition to inflation and growth, we have identified a third factor that influences the crypto market, which we believe is a unique dimension measured in the cryptocurrency field: culture. Undoubtedly, memes have the most cultural attributes, while on the other end, middleware tools lack cultural attributes. Whether it is the public chain itself or the protocols on the public chain, one can feel the differences in development and user experience brought about by various cultural attributes. Therefore, we boldly speculate that the invisible hand of culture subtly influences the cryptocurrency cycle.

Here is an introduction to each period:

1. Recovery: Low inflation → Medium inflation, Medium growth → High growth. The accumulation of underlying technology and iteration of middleware during a long bear market prepares for an explosion at the application layer. Additionally, inflation has bottomed out, and improved economic expectations will attract more capital and users, making more accessible and understandable application types the most prominent asset class during this stage.
2. Overheating: Medium inflation → High inflation, High growth → Medium growth. As inflation intensifies, market enthusiasm peaks, and the market has already overdrawn the technological accumulation + application explosion brought about by high growth expectations, lacking sufficient innovation reserves to drive the market forward in the short term. Capital has reached a bottleneck under the narrative of fundamental analysis, and the reason Meme assets can shine is that their unique cultural narrative attributes carry the continuously entering capital, igniting investor enthusiasm.
3. Stagflation: High inflation → Medium inflation, Medium growth → Low growth. The frenzy of a bull market often ends after inflation peaks, and the bubbles brought about by excessive growth are fully released during this stage. The capital market will gradually return to rationality, and bubble asset prices will experience significant retracement, while the market is also looking for new growth points, brewing the next narrative cycle. This moment should be a time for sorting out after the tide recedes, leaving behind core technologies and standing on the shoulders of the infrastructure needed to nurture the next cycle's explosion.
4. Recession: Medium inflation → Low inflation, Low growth → Medium growth. This will be the most challenging phase of the bear market; at this time, the infrastructure that will serve as the growth engine for the next bull market is maturing, but due to the inactivity of the capital market, it still cannot be directly reflected in economic growth on the surface. Therefore, at this stage, we should pay more attention to middleware that connects applications and protocols, using the maturity of middleware and its large-scale application as one of the signals for the onset of a bull market.

In summary, the crypto market will continue to experience the above four cycles, with the core links in the cycle repeating the rotation of "application - Meme - protocol - middleware." The dominant applications of the previous cycle will gradually expand the ecosystem, becoming the infrastructure for the next cycle, and the infrastructure of the next cycle will nurture new dominant applications, and so on.
Currently, the market is still in the transitional phase from stagflation to recession, which is also a phase of continuous accumulation of blockchain infrastructure and protocols. Our investments should not only focus on prices but also keep a close eye on industry development trends, as Alpha always emerges from industry development.

Conclusion

We cannot predict when the bull market will arrive, but we can always find some signs of an impending bull market from historical clues. From the discussions in our previous articles, it is clear that whether Bitcoin halving can lead to a bull market is an uncertain event. Although halving reduces supply from a supply-demand perspective, it aligns with the reasoning behind LTC's price decline post-halving. What truly brings about a bull market is the confidence generated by the halving narrative, not the halving itself.
There are always some news releases in the market that act as smoke screens, affecting our judgment, and the Merrill Lynch Clock is an important tool for objectively analyzing the market environment. The Merrill Lynch Clock is not just a simple tool for judging cycles; it also encompasses the laws of market fluctuations. By following these laws and calmly analyzing the objective environment, we can gain precise control over the market.
Objectively viewing cycles, understanding and adapting to cycles, and leveraging cycles are key to surviving in the dark forest of the crypto market.

References:
1. Halving Narrative and Reflexivity: LTC's Price Decline Post-Halving, Can BTC Halving Still Bring a Bull Market?
2. Illustrated Analysis of Bitcoin's Four Bull and Bear Crossings, So You Won't Panic in a Bear Market
3. Using 20 Images to Shatter the "Bitcoin Halving Cycle Theory"