Crypto market in early stages of new cycle, Delphi Digital co-founder says

“Risk assets, like stocks and crypto, have been sniffing this out all year,” Kelly said. “This isn't just another bear market rally.”

To the uninitiated, crypto markets can seem chaotic. However, Kelly pointed to the consistency in the timing between peak-to-trough bottoms, the recovery duration to previous cycle highs and the timing of price rallies to new cycle tops.

Using bitcoin as a yardstick, Kelly argued that a standard crypto cycle unfolds with BTC achieving a new all-time high, followed by an approximate 80% drawdown, bottoming out a year later. It then recovers to its previous high in about two years and rallies for another year to touch a new all-time high, with each cycle lasting around four years.

Rather than the length and consistency of these cycles being random, so far, Kelly said they lined up with the broader business cycle.

ISM and bitcoin: An unlikely pair

Bitcoin's price peaks often coincide with the ISM (Institute for Supply Management) Manufacturing Index, also known as the Purchasing Managers' Index (PMI), showing signs of topping. Metrics like active addresses and transaction volumes have also peaked alongside the ISM.

Then, “as the business cycle shows signs of recovery, so too do network activity levels,” Kelly said.

Though many crypto market participants remain cautious due to higher rates, inflationary pressures and recession worries, Kelly argues that markets are forward-looking, and this was already priced in heading into 2023.

It’s ‘like 2015-2017’

With the ISM again looking like it’s nearing the final stages of a downtrend, Kelly believes the market is in an environment akin to 2015-2017, pointing to the confluence in the S&P500 also trading similarly to that period. Market sentiment, earnings data and the price action of gold — influenced by global liquidity cycles — were also cited as comparable.

Given the correlation in timing between macro cycles and Bitcoin halvings — when the block reward gets cut in half approximately every four years — the last two halvings occurred around 18 months after bitcoin bottomed and seven months before it broke new all-time highs.

With the next halving event expected in April 2024 (around 18 months from the November 2022 low), bitcoin could witness a new all-time high by Q4 2024 and a new cycle peak by Q4 2025 if it follows the same playbook in line with a renewed liquidity cycle uptrend, Kelly said.

Is this time different?

Despite his bullish outlook, Kelly warned there was no guarantee the cycle would play out the same way this time around, and it doesn’t mean the market can’t see more corrections.

“This is actually around the time when we could see another modest selloff or period of price consolidation, especially after the strong rally we’ve seen over the last 9 months (similar to 2H 2019),” Kelly said.

“Another notable risk is if the business cycle exhibits a false bottom (like we saw back in March 2020) or doesn't bottom as quickly as anticipated,” he added. “But if we look beyond the short-term trade, the outlook for the next 12-18 months is significantly brighter from where I'm sitting.”