Riding the Financial Roller Coaster: Understanding Market Cycles Did you ever wonder why Bitcoin makes all time high (ATH) and all time low (ATL)? Why it does not go straight to upside? Imagine standing in line for a roller coaster. As you watch, the cars climb steep hills, crest at dizzying heights, and then plummet into deep valleys. Your anticipation builds with each scream of excitement and terror from the riders. Now, consider the financial markets as that roller coaster, constantly cycling through thrilling peaks and terrifying drops. Understanding these market cycles can make the ride less daunting and more profitable, helping you make informed investment decisions. The Fundamentals of Financial Market Cycles Financial markets, including stocks, bonds, and cryptocurrencies, operate in cycles. These cycles consist of periods of expansion and growth (bull markets) followed by periods of contraction and decline (bear markets). The movement of these cycles is influenced by various factors, such as economic conditions, global events, wars, and changes in interest rates. For instance, let’s look at the period between 2022 and 2023, when the interest rate in the United States climbed to 5.5%. This increase had a substantial negative impact on all financial markets. The reason is simple: higher interest rates make saving money in the bank more attractive because of the increased returns, leading investors to pull money out of riskier investments like stocks and cryptocurrencies. Moreover, higher borrowing costs due to increased interest rates can stifle companies’ growth and investment plans, adversely affecting their balance sheets and stock prices. The Impact of Interest Rates on Financial Markets To understand the impact of interest rates, imagine you’re running a business. When interest rates are low, you can borrow money at a lower cost to expand your operations, hire more staff, and invest in new technology. These activities typically lead to higher profits and, consequently, a rising stock price. However, when interest rates rise, borrowing becomes more expensive. You might have to cut back on expansion plans and investments, which can result in lower profits and a declining stock price. This relationship is why investors closely monitor interest rate changes. A hike in interest rates generally signals a more challenging environment for businesses, leading to a decline in stock prices and the onset of a bear market. Conversely, when interest rates fall, it can stimulate economic activity and lead to a bull market. The Cyclical Nature of Bitcoin and Cryptocurrencies Bitcoin, the pioneering cryptocurrency, also follows cyclical patterns, albeit over a shorter history compared to traditional financial markets. Bitcoin’s cycle typically spans four years and includes a year of rapid growth (bull run), a year of decline (bear market), and two years of recovery and stabilization. A crucial event in Bitcoin’s cycle is “halving,” which occurs approximately every four years. During a halving event, the reward for mining new Bitcoin blocks is halved, effectively reducing the supply of new Bitcoins. This scarcity often triggers a bull run, but significant price increases usually start a few months after the halving. However, other factors can also influence Bitcoin’s price. For example, in 2022, when Russia invaded Ukraine, Bitcoin, like other risky assets, experienced a sharp decline. This drop coincided with a bear market year for Bitcoin, highlighting how various factors can simultaneously impact market cycles. Real-World Examples: The Cyclical Nature of Bitcoin and Cryptocurrencies The 2013 Cycle and first all time high (ATH) In 2013, Bitcoin went through one of its first significant bull runs. At the beginning of the year, Bitcoin was trading at around $13. By April, it had surged to over $260, marking a substantial increase. This growth was driven by increasing media coverage and growing interest in cryptocurrencies. However, this rapid rise was followed by a sharp decline, with Bitcoin prices falling back to around $50 by mid-year. The market then entered a second bull phase, and by the end of 2013, Bitcoin reached a new all-time high of around $1,150 before entering a bear market. The 2017 Cycle The 2017 Bitcoin cycle is one of the most well-known in the cryptoverse. Bitcoin started the year at approximately $1,000 and experienced an explosive bull run, reaching an all-time high of nearly $20,000 in December. This surge was fueled by increased adoption, the launch of Bitcoin futures markets, and a frenzy of retail investor interest. However, this peak was short-lived, and Bitcoin entered a prolonged bear market in 2018, with prices dropping to around $3,200 by December 2018. The subsequent recovery phase saw Bitcoin stabilizing and slowly regaining value over the next two years. The 2020-2021 Cycle Bitcoin’s most recent cycle began in 2020. The COVID-19 pandemic initially caused a sharp decline in Bitcoin’s price, with a drop to around $4,000 in March 2020. However, as governments around the world implemented stimulus measures and interest rates were slashed, investors sought out alternative assets, leading to a significant bull run. By December 2020, Bitcoin had surpassed its previous all-time high, and by April 2021, it reached a new peak of around $64,000. This bull run was driven by several factors: increased institutional adoption (with companies like Tesla and MicroStrategy investing heavily in Bitcoin), growing acceptance as a store of value, and widespread media coverage. However, by mid-2021, Bitcoin experienced a sharp correction, dropping to around $30,000. Factors contributing to this decline included regulatory concerns in China, which cracked down on cryptocurrency mining and trading, and environmental concerns about Bitcoin’s energy usage. After this correction the second bull began and price surged to $69,000 before bear market started. The Influence of External Events As mentioned earlier, Bitcoin’s price is not only influenced by internal factors like halving but also by external events. The 2022 Russian invasion of Ukraine is a prime example. When the conflict began, global financial markets, including cryptocurrencies, experienced significant volatility. Investors typically react to such geopolitical tensions by moving away from riskier assets, and Bitcoin was no exception. This led to a sharp decline in Bitcoin’s price, further exacerbating the bear market