Bitcoin’s four-year cycle: the halving, its patterns and their limits

Bitcoin’s four-year cycle: the halving, its patterns and their limits

Few stories in the crypto market are as persistent as that of the four-year cycle. Roughly every four years, so the story goes, Bitcoin follows the same script: a build-up, an exuberant rise, a peak, a deep decline and then a long quiet spell. The story is not conjured out of thin air; it is anchored in a real mechanism inside the protocol. Even so, it deserves more scepticism than it usually receives. Below, we set out the mechanism, the pattern and the limits of that pattern.

What the halving is

Bitcoin has a fixed issuance schedule. Whoever adds a new block of transactions to the chain receives a reward in newly created coins: the block subsidy. After every 210,000 blocks that subsidy is automatically cut in half, an event known as the halving. In practice this works out to roughly once every four years. New issuance therefore declines in steps towards the maximum of 21 million coins written into the protocol. Halvings took place in November 2012, July 2016, May 2020 and April 2024, at blocks 210,000, 420,000, 630,000 and 840,000.

The link to the market seems intuitive at first glance: after each halving, the pace at which new supply becomes available drops. Whether that effect is large or small, and whether the market has absorbed it before it even happens, is precisely the question the debate revolves around.

The classic cycle story

Around each halving a recurring picture has historically emerged, and investors began to give it names: a run-up in the months before the halving, an exuberant rise afterwards, a peak, a deep decline and a quiet period in which interest fades away, until the rhythm supposedly starts anew. This script has grown into a widely used narrative in the market, the framework through which many investors, analysts and commentators view Bitcoin. The distinction that matters here is between description and law. A narrative summarises what people recognise in the chart after the fact; it does not prove that the market will keep following the script.

Rules of thumb that circulate

Out of that narrative, rules of thumb have emerged. One that circulates among investors says ‘buy a few months before the halving’; another holds that exiting roughly a year after the cycle peak would be the obvious move. We record these rules here purely as market folklore: a description of what goes around, emphatically not advice or a recommendation. The foundation is simply too thin for that; four cycles yield four observations, and four observations cannot support a law.

What is striking, moreover, is how elastic the rules are. After every cycle they are adjusted to fit what actually happened: this time the run-up started earlier, the peak came later, the decline played out differently. That way they are always right in hindsight, while rarely testable in advance. It is the hallmark of folklore rather than of a strategy.

Why the evidence is thin

The small sample is the first problem. Four observations will accommodate almost any pattern; look long enough and a line that fits will always turn up. In our article on backtesting we described this phenomenon as overfitting: the smaller the dataset, the greater the chance that a rule is tracing coincidence rather than a genuine relationship.

The second problem is that a known pattern can be priced in beforehand: investors position themselves ahead of the expected move. A pattern everyone knows can change precisely because everyone knows it. Investors who expect the post-halving rise position themselves earlier, and in doing so they shift the move or erase it altogether. Add to this that the market after 2024 differs fundamentally from that of 2012: exchange-traded Bitcoin funds now take part, with flows that simply did not exist in the early years. Market conditions have changed as a result, and what held in a small, closed market cannot simply be extended to this environment.

Then there is hindsight. Looking back, every cycle appears clear and logical, but that clarity did not exist at the time: the chart shows the patterns that fitted, not the doubt of the moment. Anyone who only sees the end result overestimates how visible the pattern was along the way.

How a systematic approach relates to this

A rules-based strategy does not have to pick a side in this debate. It does not need to believe the four-year cycle exists, nor does it need to deny it. It follows the trend that actually presents itself, on fixed, predefined signals, rather than betting on the calendar. If a four-year rhythm genuinely exists, it will show up of its own accord in the trends the rules register. If it fails to appear, nothing has to be adjusted; the approach never took a position on the basis of a date, only on what the market actually did. That distinction, between retelling a story and capturing market behaviour in predefined rules, is what we regard as the core of systematic investing.

Rules over the calendar

At Callisto Capital, entry and exit points follow from rules fixed in advance, not from a date in the cycle. If a halving happens to coincide with a signal, the model acts on the signal.

Callisto Capital is a Dutch fund for joint account; its manager is registered with the AFM under the AIFMD-light regime and is not subject to ongoing supervision. Participation is open from an investment of 100,000 euro. This article is for information only and does not constitute investment advice.