Finally, I introduce a hypothesis for how the maturation of the Bitcoin network itself will eventually extinguish its four-year cycle, and explain why this would be a good thing for the network and its users.
Intended or not, the roughly four-year halving that has occurred three times in Bitcoin’s existence so far appears to have been a consistent trigger in pushing up the price every time.
Those price developments resulted in a temporary bubble each time that ended with a market crash and subsequent multi-month to multi-year bear market that was necessary for supply and demand to find a new equilibrium—each time at a higher level than during the previous cycle.
Although the post-halving price increases, the bitcoin price charts are already pretty distinct and the causal mechanism for such a cycle to exist is quite self-evident; it is nice to get more robust evidence for the notion that the bitcoin price indeed moves in a four-year cycle.
Now that we have insight into the mechanism that is driving bitcoin’s four-year cycles, we can take a more in-depth look at what this price cyclicality looks like.
The result is a metric that reflects to what extent any historic bitcoin price deviates from its four-year moving average while taking its volatility into account, and, thus, how “hot” or “cold” the price is—hence the name, Bitcoin Price Temperature.
While these levels have been determined based on a limited sample and thus need to be taken with a grain of salt, they are interesting price levels to monitor during bitcoin’s current and future four-year cycles—assuming those will continue to be similar to the past cycles, which will be discussed later in this article.
Another way to look at the cyclicality of the BPT and bitcoin price itself, is to “reset the clock” at every halving, creating a chart where the BPT and/or bitcoin price itself per cycle are overlaid, making them easier to compare.
In anticipation of each bitcoin halving, articles spreading fear, uncertainty and doubt them to stop mining.
While it is true that in the short-term some miners are turning off hardware that is less efficient or running on more expensive energy, that dip is barely visible on long-term charts and ensures that the remaining mining activity on the network is actually very efficient and healthy.
This means that on a multiyear horizon, we are actually seeing the complete opposite of what the mining death spiral FUD suggests will happen—all thanks to bitcoin’s four-year cycle.
During the second half of the cycle, when price is cooling down, hash rate growth stagnates a bit—until the next halving occurs and a new market cycle incentivizes more rapid growth of this network characteristic that is so important for its overall security, actually making the network itself more valuable.
To ensure that new blocks are created every ~10 minutes , the network has a built-in difficulty adjustment mechanism.
This means that during these periods of the cycle where the hash rate keeps going up, more new bitcoins are created than would be expected based on the original supply issuance schedule that assumes 10-minute block times.
When the bitcoin price growth stops and the market cycle finishes with a blow-off top that is followed by a cooldown period, mining profitability decreases, causing the daily coin issuance to go down again.
If we were to do so, we would indeed see an overall trend that, as time passes, more transactions are made on a daily basis, but as the Bitcoin network matures, that growth stagnates.
The mempool is currently in a state where it hasn’t cleared in approximately five months, which means that, when any miner created a new block during that time span, they had plenty of unconfirmed transactions to include in the block.
As a result, unconfirmed transactions with a high transaction fee are included in new blocks first, while transactions with a low fee remain stuck in the mempool longer.
An implication of this mechanism is that, during busy times on the network, anyone that is looking to make an on-chain transaction on the network needs to bid up their transaction fee to get their tiny share of block space on the Bitcoin blockchain that is needed to get their transaction confirmed.
Since the value of the transaction fees that are included in Bitcoin blocks essentially represents the magnitude of this developing block space market, it is a better proxy for network activity than simply looking at transaction counts.
After all, if the block subsidy declines every four years and at some point in the future disappears altogether, miners still need an incentive to keep mining and process transactions.
Figure 11 visualizes the percentage in which transaction fees , it becomes more apparent that over time, there is actually a clear upward trend in the degree to which transaction fees play a role in the block reward.
When this point is reached, there is one more incredibly important question that we’ll get an answer on: will the hash rate on the network stay relatively stable at a level that is sufficient to guarantee the network’s overall security? If the answer to that question is “yes,” Bitcoin will have passed the biggest test in its existence and have passed the final exam toward its full maturity.
In the absence of a block subsidy, 100% of the new demand for bitcoin will have to be satisfied by purchasing bitcoin from existing holders , creating a perfectly inelastic situation where price changes become a perfect reflection of changes in demand for bitcoin.
To understand those implications, it is important to grok that the relative impact of each halving on the block subsidy is the same , but the absolute impact of each halving on the block subsidy decreases over time.
The way I see it, this probably won’t be attributable to a single point in time, but it will be a gradual process that will happen when transaction fees overtake the block subsidy as the primary source of miner revenue .
Second, as the percentage of bitcoin’s finite supply that has already been issued increases, the bitcoin price becomes an increasingly pure reflection of the market demand for bitcoin.
Third, if the bitcoin price increasingly becomes a pure reflection of the market demand for bitcoin, the likelihood of a dramatic exponential price rise past what we have seen so far increases.
Fourth, another consequence of the absence of a four-year cycle as we know it could mean that the bitcoin price eventually becomes less volatile.
More likely, the block space fee pressure will incentivize more effective batching of transactions that have been built on top of Bitcoin’s base layer, which most of us will probably primarily use to interact with bitcoin, aside from occasional channel opens or closes or large transactions.