The phenomenon of financial bubbles is hotly debated among industry operators, and there are many academic papers on the subject, starting in 2014 by Professor Didier Sornette Studying financial bubbles. In fact, the paper defines a “bubble” as a period of unstable growth with prices rising faster and faster, i.e. growing more than exponentially. Obviously, bubbles by definition are destined to burst and return prices to their initial value or worse.
In the recent past, Bitcoin (BTC) has experienced periods of more than exponential growth, followed by sharp declines, called “crypto winter,” a period when no one talks about Bitcoin and other assets, which means there is a freeze around the sector, and prices collapse. Previous declines following the Bitcoin price bubble were -91%, -82%, -81%, and -75% in the last crypto winter, respectively.
To date, the Bitcoin price trend has followed a unique cycle marked by a stop every 210,000 blocks, which is equivalent to about 4 years, with rhythmically determined periods of collapse, recovery, and then increasing growth.
In 2011, together with Professor Ruggero Bertelli, DiRan Partners published a paper on a deterministic statistical indicator called the DiRan ratio. This indicator creates a linear regression between prices on a logarithmic scale (as shown above for the price of bitcoin) and time.
Without going into detail about this indicator, which is really useful for those who use quantitative tools to make investment decisions, the purpose of the first part of the analysis is to verify how much and how Bitcoin entered a bubble in the past. To do this, if dr < 0, it means that the price is falling; If dr <1, nangangahulugan ito na ang paglago ay napapanatiling; Kung DR = 1, nangangahulugan ito na ang paglago ay exponential; Kung dr> 1, this means that growth is more than expansion, which corresponds to the definition of Prof. Sornette of bubbles.
DiRan Partners took Bitcoin’s daily historical series, calculated the one-year DR, and checked whether it was greater than 1.
The graph clearly shows that in the previous cycles there were periods of more growth, while in the recent cycle, apart from an attempt when ETFs were approved in the United States and the price of bitcoin exceeded the 2021 high before the 2024 halving, a phenomenon that had never happened before, the DiRan ratio was never higher than 0.
Does this mean that bitcoin cycles will no longer follow the four-year rule, with crypto winter starting until the end of the second year of the cycle? It’s too early to say, but Bitcoin’s growth structure has probably changed. To test this hypothesis, we took the Bitcoin price volatility with a 4-year observation window, which is equivalent to a rolling cycle, and slipped the volatility calculation window over time to see if it remains constant or decreases over time.
The graph shows a sharp decline in volatility, which in the first years of development was more than 140% on an annual basis, then gradually declined to a current value of about 50% or less. While lower volatility also means lower expected returns, it also means more price stability for the future and fewer surprises.
Related: Estimating Bitcoin support levels for the next cycle bottom
In fact, if we take a Rolling Annual Return Chart, that is, take the performance of a year in 2011 and then calculate the return for a year on a daily basis, it is clear that in the past there have been returns that have decreased over time and in the last three years have in fact remained flat, proving that the theory of the Bitcoin cycle, with amazing years followed by a catastrophic year, is somewhat broken.
The chart above shows that the average annual return has declined gradually, with no peaks in the last cycle, confirming the hypothesis that Bitcoin’s risk return structure has changed. However, the price of Bitcoin increased from $ 15,000 in December 2022 to $ 126,000 at recent highs, so an attractive return was still achieved in this cycle, but with less risk than in previous cycles.
The graph of the average annual return over a four-year observation period shows a clear trend towards the decline of Bitcoin’s return over time, which is understandable when considering the total market cap of Bitcoin, because it is one thing to double an asset worth $ 20 billion, but quite another to double an asset worth $ 2 trillion.
On the other hand, assuming that we can consider the increase of the fourth round of the cycle to be completed, which no one can deny or confirm with certainty, the total wealth generated so far is greater than the other cycles, which proves, if confirmation is necessary, that Bitcoin, understood both as a network and as an asset in itself, has generated more wealth than any other type of investment in just 15 years of history
Drawing conclusions from this analysis, from a statistical point of view:
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On four occasions, Bitcoin can be considered to be in a ‘bubble’ phase, that is, with a more than exponential return, but unlike traditional bubbles that then burst within a few months, Bitcoin has shown resilience in its growth, which on average has a DiRan ratio of less than 1 with high but not expanding growth. In fact, a power law can describe Bitcoin’s price growth quite well.
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It is also clear to see that these “bubble” phenomena have decreased in intensity and duration over time, so that in the last cycle that began in 2024, there was (at least for now) no more than an expansion of the price.
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Both returns and volatility are decreasing, suggesting that reaching values above one million (if ever) will probably take 15 years, and therefore, many predictions of Bitcoin reaching $13 million in 2040 are statistically unlikely.
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The approval of ETFs in the United States, with BlackRock’s ibit spot Bitcoin ETF reaching $100 billion in assets under management in less than three years, becoming the fastest growing financial product in history, has broken the bitcoin cycle predicted periods of growth, hypergrowth, and crypto winter, with new highs reached after the next split.
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More stability in returns and lower volatility suggest that the winter of crypto will not be “too cold” with losses of more than 50-60% as in previous cycles, but may be an alternate period of decline to new highs without the exponential jumps seen in the past.
This article is for general informational purposes and is not intended to be and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
