Sitting at my desk, I just returned from a walk through the canyon near my house.
The air was crisp and cold. It felt like Winter.
But today is September 25th.
Think about what that means, exactly.
I know, from cycles and calendars that September 25th is Fall.
Winter comes after fall.
And I can feel the change.
Instead of A/C, my house and truck now runs heat.
I'm no longer in shorts and a T-shirt, I'm in pants and a sweatshirt.
These seasonal changes are predictable, repeatable, and cyclical.
So, too, has the crypto currency markets.
In fact, that's why traders have coined season-inspired terms to refer to each part of the crypto cycle.
You may have heard the term "Crypto Winter" before, but never really understood what it means.
I'm going to explain it quickly, and what that implies for my portfolio, and yours.
Crypto Winter
A crypto winter is an extended bear market period that is characterized by sustain price declines, low trading volumes, and bearish investor sentiment.
Winters are followed by Summers which exhibit the exact opposite: rising prices, high volume, and bullish sentiment.
There are many causes of crypto winters and summers but it can be best understand as a product of momentum.
Momentum and Return to Mean
Trading momentum describes the overall trend of an asset's price.
Rising prices indicate rising momentum and vice versa.
Momentum is a function of psycology.
Consider this: over the course of multiple months you watch a particular stock continue to rise in price. It rises 10%, then 10% more. It rises 100% and then 200%.
Do you feel the urge to buy it?
Most people do.
But what if I told you that stock was already headed for bankrupcy?
See, momentum can get carried away and disconnected from fundamentals.
Let's look at a real example, of Vertiv Holdings $VRT:
This FASTGraphs displays the earnings of $VRT (EPS) and the orange line represents what the fair value of the shares should be based on those earnings. The blue line is the average value multiple of the shares over the entire chart and is closely aligned with the fair value, this makes sense.
But notice the points where price (black line) fell sharply, where I drew a red down arrow, and rose sharply, where I drew a red up arrow. These are extreme changes in price that are due to momentum.
Think about a long train or a large ship that is moving quickly. When the conductor or the captain wants the vessel to stop they cannot do so immediately. It takes time for the momentum of the vessel to slow down.
Similarly, when an asset begins to moving strongly in one direction or another it carries momentum with it and is difficult to stop and turn around.
This example of Vertiv shows how traders became bearish on the stock and traded it down to 18.5x earnings. Once the stock turned its momentum around, traders then carried that energy higher to 72x earnings!
And during this entire period the earnings of the company steadily grew. Today, the share price has returned to a 42x earnings multiple.
When momentum becomes extreme, it is likely that a return to mean event is probable. A return-to-mean event describes how an asset price will return to its average, which could be average valuation or average price.
Vertiv, in this case, returned to mean following the sharp drip but carried through the mean to a sharp spike. This is often associates with a return to mean, as momentum doesn't simply stop when it reaches the mean.
Bitcoin Halving
Ok, so now we understand how momentum can influence asset prices through perception and psycology. Now, let's apply this concept to crypto currency.
This is a chart of the Bitcoin price. There are many colors going on in this chart, take a careful look. Chart is from bitbo.io.
The rainbows colors on the bitcoin price dot plot (it appears as a line) indicate how many days are remaining until the next bitcoin halving.
The bitcoin halving is an event that occurs about every four years until 2036. The next halving will be April 17, 2028.
The halving is a pre-programmed event that cuts the reward of mining bitcoin in half. Essentially, it makes the mining process less profitable.
Traders have noticed that these seasons, winter and summer, correlate with the halving events.
Each of the last winter periods (bear markets) have ended around 600 days until the next halving.
Today, we are 570 days until the next halving.
While the crypto universe is filled with thousands of different crypto currencies, because Bitcoin is the largest by total value it tends to drive the entire market.
What it means
Past performance is no guaruntee of future performance. It's equally as likely that bitcoin enters its next summer season as it is to fall to $0.
There are many variables that impact markets, including crypto markets. I want to be very clear: no one can predict what crypto or bitcoin will do.
I am watching crypto markets closely and have fully allocated positions in my portfolio.
What I know is this:
Today is September 25th and winter is in the air.
Today is 570 days until halving and summer is in the markets.
Disclaimer: this is for education purposes only and is not personal financial advice.
