An Observation on Crypto Cycles: Are You Ready for the Periodic Inflection Point?

Jan 04, 2022

By Nathan Chen,2019.8.15


In Tony Tao’s previous article, “An Observation on Crypto Cycles | Is there still a Future for the Token Economy after Entering the New Cycle”, we see that the global economy has entered a stage of hedging in the cycle. Rising risk aversion has changed the overall investment landscape, which has also affected the digital currency sector.


Before explaining how the world is entering the risk aversion cycle, we need to think about these questions:


1.What caused this cycle? What are the characteristics of the cycle?


2.Which stage of the cycle are we currently at? How do we deal with it?


3.What role does Bitcoin play in this cycle?


Cycle: Pendulum and Positive/Negative Feedback


To further understand the cycle, let’s first talk about the financial market. The financial market is like a mirror image of the world, in which we continuously experience cycles of different sizes.


The financial market is always in the process of two types of feedbacks — positive and negative. Positive feedback drives market expansion, while negative feedback inhibits its development. These two forces are in an eternal play, which makes the state of the market oscillate periodically, and us in a cycle of greed and fear.


Greed and Fear, Cagle


Many people in history have focused more on the description of cycles, whether it is the Keynesian Economic Cycle Theory on prosperity and recession, or the more technical Eliot Wave Theory and Dow Theory. Certainly, descriptions can present to us the history, but finding the cause and effect of the cycle will bring us the essence of it. This will allow us to make predictions confidently and take appropriate actions based on the cycles.


Hence, Howard Mark’s Pendulum theory and Soros’ Reflexivity theory are precious here.


Howard Marks’ Pendulum


Pendulum is a very vivid way to describe cycles.


For the first time in his book “Mastering the Market Cycle”, Howard Marks, the founder of Oak Tree Capital Management, systematically describes the interaction process of positive and negative feedback forces in cycles.


Mastering the Market Cycle, Money and Markets


Compared to directly using the term “cycle”, such description emphasized two important features:


1.Excessive rising and excessive falling have reciprocal causal effects: excessive rising causes excessive falling, and vice versa;


By linking the pendulum effect and negative feedback process, we will discover that at the highest point of the swing, the object remains relatively still, and has the highest potential energy. In Howard’s view, this is when the cycle reaches an extreme and starts to move in the opposite direction.


2. The price will not stay still in the middle axis. Price recovers to the middle axis after excessive rising, and immediately enters into the process of excessive falling, and vice versa.


From the perspective of positive feedback, when it reaches a state of “just right” (the middle point of the pendulum), momentum is the largest because people realize the benefits of this state. Hence, such state will continue to be pushed into the other extreme. “Just right” means that the risks are not exposed.



Such a positive feedback process is best explained by reflexivity.


Soro’s Reflexivity: Positive Feedback Process


According to Soros, changes in participant’s perceived situation (“cognitive function”) will lead to a change in the participant’s action (“participating function”). At the same time, changes in the participant’s action (“participating function”) will lead to a change in the participant’s perceived situation (“cognitive function”).



The illustration above shows that our cognition will further reinforce itself due to the positive changes in the results. Further, our behavior will further reinforce itself through the positive reinforcement of the cognition.


Now let’s analyze pendulum cycles. When we do not see any drawbacks (that is, when we are in the value center), our cognition does not receive any signal that “excessive behavior will be problematic”. Hence, we will tend to reinforce our current thoughts. The behavior that this will lead to is, of course, to keep moving forward.


Reinforcement, Simply Psychology


Extending such behavior to the group level will result in a participation bias, inevitably leading the group to the other extreme.


It is only when our intrinsic cognition is terminated by a more objective law (i.e. the impact on our cognition by external factors), can our new understanding break away from the process of positive feedback and enter into the period of negative feedback.


In this way, will people not give up until all hope is gone?


In fact, there is another way, such as to draw lessons from history. History allows us to feel how insignificant we are, and to temporarily get out of the dilemma of dealing with reality so that we can truly look at our own situation.


Great Historical Cycle: Globalisation and Deglobalisation


Extending the positive and negative feedback law of the financial market pendulum to a global perspective will unfold a large cycle based on the global economy before us.


The Heyday of Globalisation Has Ended


The rapid development of the blockchain industry is inseparable from global cooperation. Globalization brought about many benefits, such as the rise of multinational enterprises, ample opportunities, diversification, openness and exchanges, etc.


However, what comes with globalization is not just benefits. While people enjoy the convenience it caused, drawbacks such as protectionism and economic inequality are constantly exposed as well.


Benefits & Drawbacks of Globalisation, The Daily Star


Even prior to the US-China trade war, countries had quietly sparked the trade war. From November 2008 to October 2016, members of the G20 implemented 5,560 trade protectionist measures. From 2011 to 2016, the growth rate of global trade in goods and services measured by trade volume was continuously lower than that of the world economy’s growth.


In light of globalization, the problem of unfair distribution of resources in society and unbalanced development among countries has become more and more prominent. The problems of globalization are accumulating gradually. This year’s US-China trade war has further intensified trade protectionism and people’s reflection on the trend of globalization.


Trade Protectionism, China Daily


Thomas Piketty responded to the issue of globalization in his book “ Capital in the 21st Century”, emphasizing that the rate of return on capital, which represents the rich, has been significantly higher than the global economic growth rate for a long time. With the rapid development of the Internet and the prosperity brought by globalization, the wealth gap has not been shrinking as expected by the Kuznets curve. Instead, it has begun to move away from the Kuznets curve (or the inverted U curve). Economic inequality is facing the risk of widening further and faster.


Capital in the Twenty-First Century, JSTOR Daily


This imbalance in wealth distribution does not occur only in specific countries. According to the World Inequality Report 2018, most countries show an increasing trend of income disparity, especially in the United States and India. More detailed data shows that the income of the top 1% of the world’s wealth grew rapidly between 1980 and 2016, much faster than that of the middle-income group.


The World is Turning into a Deglobalization State, and It Seems Inevitable.



Deglobalization Has Begun


People may feel that globalization, as a product of years of development and a world trend by itself is an irreversible process. However, scholars who study globalization generally acknowledge the fact that globalization is reversible.


Globalization and deglobalization is a long historical big cycle.


The last cycle began in 1850. The first industrial revolution has been completed, and the second has quietly taken place. The gold standard established in the 1970s guaranteed the stability of the international payment system. This resulted in the growth of global trade to be faster than the growth of the world’s income after the 19th century. Kuznets estimates that by the eve of the First World War, the value of world exports accounted for 16–17% of global income, which is already quite high even by today’s standards.



With the outbreak of World War I, the world trade system has been strongly impacted, and globalization has stopped and retrogressed. More so, the Great Depression of 1929 made protectionism the mainstream of the world.


From 1929 to 1937, the annual growth rate of world trade fell by 0.4%, equivalent to half of the world’s economic growth rate of 0.8%. Such a deglobalization cycle lasted until the end of the Second World War, and only then did the restructuring of the global trading system recover gradually.


Through these 200 years of history, we can see that globalization and deglobalization are like pendulums, swinging from one end to the other, and then back again.


From 1850–1914, it went from deglobalization to globalization, and back again from 1914 to 1950. Subsequently, the world economy entered the period of globalization again.



Each cycle lasts for a century. If the Subprime Mortgage crisis of 2008 symbolizes the beginning of deglobalization, then this cycle has just begun, and the pendulum is still accelerating.


Irreversible Factors in Global Cycles


“Reversibility” is the fundamental characteristic of cyclical phenomena. However, the development of the world is also steadily driven by another kind of irreversible force.


Among these irreversible drivers, the most obvious one is technological innovation. The emergence of new technology has truly changed our lives, which historians term it the “industrial revolution”. But don’t forget that humans need time to adapt to new technologies.


Industrial Revolution, National Public Radio


Adaptation Process During the First and Second Industrial Revolutions


Before the beginning of the globalization wave in 1850, the first industrial revolution had just ended with large-scale factory production replacing manual production. This was the first time that science and technology had a large-scale impact on people’s production and lifestyle. Important technologies in the textile industry, steam engine, iron and steel production methods have been applied on a large scale.


Thereafter came changes in the relations of production. The concentration of production had replaced the original mode of apprenticeship workshop by big factories. Standardized production brought about cheap products, depriving more and more handicraftsmen of their income.


What impact will the concentration of production have?


The impact was that resources were concentrated in a few people, and the gap between rich and poor has widened considerably. People were also divided into the capitalist and working class, which was also the core conflict from 1850 to 1914.


Rich getting richer, The New Yorker


Such conflict did not exist before the Industrial Revolution. People were unable to find an appropriate way to deal with the huge changes in the mode of production brought about by the industrial era.


Thus, the extreme inadaptability accumulated and amplified.


Later, after the two World Wars and the Global Financial Depression, people gradually adapted to the results of the First and Second Industrial Revolution. The greatest characteristic of this adaptation is the rise of the middle class.


In an article commemorating Roosevelt, Clinton wrote that “Roosevelt’s New Deal really allowed the establishment of the middle class”. For a long time, America’s prosperity was based on the growth of this middle class.


The New Deal, Johnston (1933)


The characteristics of the middle class are different from those of the working class. They usually have a higher educational background and professional skills, with occupations such as managers or technicians. At the same time, the rise of trade unions also guaranteed workers’ rights and interests, which allows more workers to enter the middle class. It is also the rise of the middle class that enabled the Kuznets curve to emerge.


First to Fourth Industrial Revolution, SpaceNews


Objectively speaking, the expansion of the middle class represents human’s complete adaptation to the First and Second Industrial Revolutions.


How Do We Cope with the Third And Fourth Industrial Revolutions?


The development of science and technology is self-reinforcing. With the rapid development of new technology based on existing technologies, the third industrial revolution (digital revolution) has quietly taken place and ended. From machinery to digital circuits, the level of mechanic automation has been improving continuously. The Fourth Industrial Revolution, or Industrial 4.0, is also advancing rapidly with the core being the realization of industrial intelligence.


When we see unmanned factories, unmanned kitchen, and unmanned supermarket appearing, it is inevitable to centralize production again. At the same time, Big Data resources have landed into the hands of a few technology giants, resulting in resources being further concentrated.


Fourth Industrial Revolution, Information Age


The unmanned factory brought by Artificial Intelligence makes people feel useless for the first time. In the First and Second Industrial Revolution, although machines could replace people for the majority of the work, they still need professional personnel to deal with complex situations. Machines are just heavy tools, the world was still dominated by smart people.


However, the ability of humans that we have been proud of has also begun to face unprecedented challenges in the context of automation and Artificial Intelligence. In “ A Brief History of Tomorrow”, Israeli historian Harari points out that it is inevitable that a great deal of work will be replaced by intelligent machines, and that billions of people will become the “useless class”.


A Brief History of Tomorrow, Amazon


The predictions are alarming, but not unrealistic. What does all this mean?


Machines have begun to replace human beings, becoming the main body of production (labor). Its direct result is that people with resources can achieve further wealth accumulation through these “smart machines” instead of through other people. Old relations of production will be replaced, but where is the new production relationship? Nobody can give a definite answer right now.


The adaptation process will be long, and everything has just begun.


Risk Aversion Cycle Has Just Begun


The deglobalization cycle is already on its way and human beings’ adaptation to the Third and Fourth Industrial Revolution has just begun. Production is once again concentrated, and production relations will change again.


What does all these means?


In our last article by Tony Tao“An Observation on Crypto Cycles | Is there still a Future for the Token Economy after Entering the New Cycle”, we mentioned that “ prosperity and hope are mainstream factors that drive the world’s development, but they are also cyclical. The trend now is that the pendulum is moving towards conservative hedging and has not yet come to an end.


In the sentiment pendulum, hype and hedging are at extreme ends. Hope and dream drive the hype cycle to the extreme, while the hedging cycle is driven by the sense of security and the pursuit of certainty.


Risk Aversion, Pi Online


In the trend of deglobalization, more people need a global deflationary asset to act as hard currency. Compared with hopes and dreams, human beings’ need for security are more instinctive and urgent.


There is always ebb and flow, and the tides are ebbing. We need to be prepared.




To discuss hedging, we need to understand the assets and liabilities first.


In an economy, one person’s liability is another person’s asset. With the economic development and the widening gap between the rich and the poor, some people are overburdened with debts and are unable to repay them. This results in bad debts, which translates to a higher overall risk for the economy.


As a result, external forces are needed to reduce this debt and average it out to make the economy more stable. However, the cost of averaging out is that some debt needs to be discharged, which will damage the rights and interests of creditors.


Bad Debts, Los Angeles Daily News


Direct debt reduction can damage the credit system itself. Hence, an appropriate way may be to use the method mentioned by Ray Dalio: “ debt monetization” — diluting some of the debt. To hedge is to avoid such passive “subtraction”. Frankly speaking, hedging is an effort made by the rich to avoid their assets being passively deducted.


Due to the fact that all countries are facing the problem of resource centralization, the monetary policies of all countries are pretty much the same. In that case, having a global deflationary asset to act as hard currency is the best way for the rich.


Bitcoin: the Alpha of Hedging Assets


1920–2010 Gold Price Fluctuations


Gold is the preferred safe-haven asset at present.


Many people have a misconception, thinking that gold should be “stable” and that bulls last long and bears are short. In fact, gold is the opposite of these two attributes. Not only does gold have high volatility, but the cyclical trend of gold fluctuation is also pretty obvious. The bull market lasts shortly and the bear is long. This is also in line with the fact that people’s mentality of risk aversion is always radical and relatively unsustainable.


We believe that hedging assets should have intrinsic certainty and high external liquidity (high acceptance).


High Intrinsic Certainty


The driving force for hedging comes from uncertainties in the market and the political environment. When this uncertainty is understood as the source of possible threats and destructions, the pursuit of certainty comes into focus.


In times of prosperity, uncertainty is understood as an opportunity; but in hedging, certainty (the resources at hand) is more needed. Therefore, an asset with certainty will be the ideal target for the rich.


So how can we have this intrinsic certainty?


Clear measurement, a perfect confirmation rights process and predictable supply are indispensable. The calculation of gold is based on the physical properties of the metal itself, while Bitcoin uses distributed ledgers to make the measurement completely transparent, open and accurate. When counting gold, no one knows how much gold there is, which increases uncertainty, while Bitcoin has perfectly solved such an uncertainty.


An important event in 2019 is the new Bitcoin Network Hash Rate high (i.e. computing power). This greatly increases the stability of the Bitcoin network and makes the advantage of Bitcoin as a hedging asset more prominent.


New Bitcoin Network Hash Rate High, Cointelegraph


External Acceptance and Liquidity


The biggest change in Bitcoin in 2019 was its widespread recognition and acceptance. Although each country has different opinions and legal definitions on various kinds of tokens and digital currencies, there is a consensus that Bitcoin is an asset.


All the legal work in the United States is to promote access to Bitcoin and other digital currencies on the operational level. Since it is an asset, it should be taken seriously and properly allocated. At the liquidity level, the growth of Bitcoin derivatives and the introduction of legal exchanges, especially Bakkt, are in the testing process and will be launched soon.


The Bitcoin market as a whole is well developed with sufficient liquidity. All these signals point to a more deterministic future of the asset.




This is our recent observation and reflection on the whole market. Being in such a market, we are bound to experience cycles after cycles, which bring both risks and opportunities.


The more immediate question for everyone is “how should I deal with it?” Only those who keep fighting bravely can survive. Once the cycle starts, it won’t stop easily.


Are you ready?


Originally published at on October 7, 2019.