Schrödinger's Cycle Top: Where Are We Today In The Market Cycle?
With regards to sentiment, January 2025 has been one of the most (if not the most) wild and bizarre months in the ten years I've been doing this. Experienced and inexperienced market participants alike flip-flopped with every 1% move and every fresh hourly candle. Schrodinger's Cycle Top has played havoc, as the timeline has descended into depression and emerged into hope on a daily basis - truly, it's so over and yet we are so back...
I won't bore you with much of an introduction to this post but I just want to make it clear that this is simply my view on where are in the broader market cycle, underpinned by where I believe we are in the business and liquidity cycles.
If you want a detailed breakdown of how I view market cycles, I published a three-part series linked below. I've also linked my post on the phenomenon of financial deepening, as well as my 'cycle top' checklist, of sorts, primarily because it provides explanations of the various components and indicators I will cover here. This post will strictly be providing an updated view on all of these things, so if you want depth and reasoning for inclusion of these factors please read those posts:
'Global Liquidity' is contentious to some degree, but here this is expressed by central bank balance sheets. In no uncertain terms, this is at what we might consider cycle lows in a trend that has extended higher for two decades plus. I expect we see a period of balance sheet expansion globally, which will be supportive of risk - whether we reach the heights of Covid I have no idea, to be honest, but the show must go on...
Global M2 / Global GDP
This is my favoured metric for the liquidity cycle, as I believe it is more accurate for our purposes of determining where we are in the cycle: never have we seen risk assets more broadly (and particularly crypto) print a long-term top whilst Global M2 / Global GDP has been at cycle lows. And this makes sense because if Global M2 is trending higher vs. Global GDP, there are simply too many excess dollars circulating to not be shoved into assets. Higher.
Global M2 YoY %
Global M2 itself often gets used synonymously with liquidity, though they aren't precisely the same. Nonetheless, this is a view on YoY growth rates in Global M2. The most parabolic moves in Bitcoin have historically occurred when the YoY growth rate of Global M2 is in rapid ascent - this still feels very much mid-cycle, particularly if we consider our views on where Global M2 / Global GDP should be headed in the coming months.
M2SL / DXY
Another really nice proxy for financial conditions is the domestic US money supply divided by the Dollar Index, and as we can see history is rhyming hard with 2017. The most parabolic moves in Bitcoin that precede the 'cycle top' are the ones that occur after M2SL/DXY breaks the prior cycle highs. Again, given the extent of the Covid high, my view is that this is more likely to occur as we break the 2024 high.
Dollar Index (Inverted)
Now, if we're talking about rhyming with 2016/17, the Dollar Index inverted is showing us a pretty clear pathway: the first period of weakening of the Dollar during that cycle correlated with formation of the Bitcoin cycle lows and flattening out of volatility as price emerged from the bear market doldrums; we then see the trend steepen despite a period of the dollar strengthening; finally we see the parabolic ascent into the cycle top as the dollar weakens further before itself marking out its multi-year pivot point and continuing to strengthen in a cyclical manner. Thus, if DXY topped out (or DXY inverted bottomed out) this month, we should expect the final ascent higher to begin for BTC before the dollar continues to strengthen again.
USDCNH (Inverted)
Here, we can see USDCNH, which is the Dollar-Yuan, inverted (CNHUSD) for clarity. Not once has Bitcoin topped whilst CNHUSD has been bottoming out at cycle lows; in fact, the period after CNHUSD has bottomed out has historically been the period in which the steepest ascent has occurred for Bitcoin, which makes sense given that we can view CNHUSD rising as a proxy for the easing of financial conditions. Higher.
Reserve Balances (FRED:WRESBAL)
Finally, WRESBAL - or Reserve Balances - gives us a view of domestic liquidity conditions in the US. As Bitcoin is global, it does not depend on this in any way, however what is interesting to note is that periods of growth in domestic liquidity have a positive correlation with period of growth in BTC, even though the inverse does not appear to be true. Bitcoin benefits from rising US liquidity whilst not always suffering the downside. My view at present is that the next few months should be US liquidity positive (i.e. WRESBAL climbing higher). This should aid Bitcoin into its final ascent and again is supportive of the view that we have not topped in any meaningful way.
The Business Cycle
Copper / Gold
The past three cycles in particular have marked their cycle tops either shortly before or after the Copper/Gold ratio has topped; what's more, the most parabolic moves in the cycles have occurred as Copper/Gold has bottomed out and begun to trend higher. Pretty clear to see where we are at present...
HYG
Junk Bonds look like they're consolidating in a flag before a breakout higher, in my view - and as the cycles have progressed, Bitcoin has grown progressively more correlated with the credit cycle. No downtrend in junk; no downtrend in Bitcoin.
Financial Conditions Index (Inverted)
Financial conditions (inverted) continue to ease and the index is currently around levels similar to Feb 2021 and Oct 2017; this paints a slightly more aggressive picture on cycle timing, but certainly indicates room to run. In the 2017 cycle, Bitcoin topped just a couple of weeks before the index topped and turned lower, with its most aggressive returns occurring in that Oct-Dec window; if we are playing out that cycle again, we should see acceleration over the next 2-3 months. The more financial conditions ease, the more supportive the backdrop for continuation higher, but simultaneously the closer you should be dancing to the door.
Net % Of Domestic Banks Tightening Standards (Inverted)
Here, we can see the Net % of Domestic Banks Tightening Lending Standards (inverted), so as this measures rises here we're seeing loosening of lending standards. This has only just crossed the 0 threshold as of last quarter, which in the prior two cycles preceded the most aggressive moves higher in Bitcoin.
10Y Real Yields (Inverted)
10-year real yields (inverted) don't have a massively positive correlation with Bitcoin, but they are certainly at cycle lows (meaning real yields are as high as they have been in recent history). What we can eyeball from this is falling real yields do broadly correlate with positive returns for Bitcoin, which was particularly prevalent in the 2013 and 2021 cycles.
Credit Spreads (Inverted)
Credit spreads themselves are historically tight, which is a great environment for risk; now whilst we might be at cyclical tightness in spreads, this tightness can persist for very long periods of time before we start to see spreads widen. So far, we've only been in this range for around 90 days; in 2017, that lasted for 560 days and in 2021 for 329 days. My expectation here is that spreads remain range-bound but tight for the coming months. Bitcoin tends to peak well before spreads widen though, so this is something to be mindful of.
10Y Inflation Breakevens
Looking at 10-year inflation breakevens, again we have breakevens trending higher after bottoming out in September, and I expect them to continue to trend higher over the coming months, likely into 2026. There tends to be a positive correlation when breakevens are trending higher - and given inflation expectations under Trump last cycle, I see no reason why this time is different.
Manufacturing New Orders / Non-Manufacturing New Orders
Manufacturing New Orders / Non-Manufacturing New Orders has picked the cycle top almost perfectly the past three cycles and we are still in a manufacturing contraction, the outlook for which is now looking more optimistic. This is very much suggestive of mid-cycle dynamics, as opposed to late cycle. Higher.
US ISM
Looking at the US ISM, as mentioned above we are still not in expansion and very much in the mid-cycle recovery stage; certainly not late cycle. If we look at prior cycles in the ISM, the most aggressive returns occur post higher-high following a cycle bottom - if February or March prints above 50, I think we can then start looking for late cycle signs in the subsequent months.
Business Cycle Composite (excl. Yields)
Tying it all together, the business cycle composite is telling us the same thing - MID. CYCLE. We just broke fresh highs for the cycle and I expect this to now accelerate higher.
Inflation Breakevens + US ISM
If we look at inflation breakevens alongside the ISM, we can see that whilst ISM is expanding from mid to late cycle, inflation breakevens rise, barring one divergence in 2012. If our expectations are for expansion of the business cycle, we should also expect breakevens to rise and historically these do not top before the ISM. If that is the case - and Bitcoin generally sees positive returns during periods in which inflation breakevens are trending higher - what should we deduce about where we are cyclically?
Business Optimism Index + ISM + Manufacturing New Orders / Non-Manufacturing New Orders
Here, we can see the Small Business Optimism Index, alongside the US ISM and Manufacturing New Orders / Non-Manufacturing New Orders. Business optimism is exploding higher, much like post-Trump election in 2017. This, in turn, led the recovery in the business cycle back then - I expect no different now.
Business Optimism + Business Cycle Composite
Looking at the Business Cycle Composite alongside optimism, we are pretty much exactly where we were in Dec 16 - Jan 17. That huge spike in business optimism then dragged the Business Cycle Composite higher over the subsequent months. HIGHER.
Small Caps
If we turn our attention to small caps, we can see there's a pretty clear pattern in which the parabolic phase of the Bitcoin cycle occurs after small caps make fresh cycle highs. We aren't there yet - pay close attention to IWM breaking its 2021 highs.
10Y 2Y % Change
This is the 2-year annualized percentage change in 10-year treasury yields, with a 12-month lead time vs US ISM - the correlation has been pretty robust for the best part of the past 12 years, growing more tightly correlated since 2016, though I would argue the lead time is not persistently 12 months. Regardless, this cycle it appears to be tracking very tightly indeed and suggests the ISM should begin expanding until late 2025.
The Crypto Cycle
On-Chain Indicators
This indicator aggregates on-chain metrics to give a snapshot of relative froth - and we are plainly mid-cycle. I expect these metrics to heat up significantly over the coming months, but it is at present more akin to April 2017 or December 2020 than the prior cycle tops.
CBBI
Similarly, CBBI is another way to view some of the same on-chain metrics, and again it looks like we still have the late-cycle mania phase ahead of us.
PI CYCLE
Now moving onto a couple of markers of how overextended we might be, we are still trading below the 350dMA x2 as per the Pi Cycle Top, which is currently around $145k. Whilst I am uncertain whether the Pi Cycle cross marking the top occurs again this cycle given we'd be looking at close to $300k, I am very confident we at least test the 350dMA x2 before we can consider anything remotely overextended.
4-YEAR MOVING AVERAGE MULTIPLE
And looking at the 4-year MA multiple, we are less overextended now than January 2021 or April 2017, let alone the cycle tops. Higher.
TERMINAL PRICE
The Terminal Price has been tested every cycle so far - and though this is a small sample size it is pretty clear to see we are nowhere near it yet. It currently sits around $190k, for reference.
POWER LAW FRACTAL CLOUD
The next few charts are all variations on presentations of the Power Law, the first of which is the Power Law Fractal Cloud, where we appear to be very much following the fractal mean at present which points to the cycle top being in Q4. I will primarily be monitoring the degree of overextension of the trend in the coming months, alongside the business cycle, to determine whether I think we have juice for a Q4 cycle high - but what is clear is we are somewhere close to where historically we have seen acceleration higher.
VOLATILITY-ADJUSTED POWER LAW INDEX
The Volatility-Adjust Power Law Index also suggests we have the real mania yet to come, where relative to prior cycles we are more akin to December 2020 or August 2017.
POWER LAW DECAY CHANNEL OSCILLATOR
Same goes for the Decay Channel Oscillator - we're warm but not hot just yet...
POWER LAW EXPONENTIAL DECAY
The Exponential Decay Fit also suggests room to the upside, currently sat at $150k but moving higher with each day it remains untested.
POWER LAW EXPONENTIAL DECAY OSCILLATOR
Finally, the Exponential Decay Oscillator is at similar levels to December 2020, October 2017 and November 2013.
The Master Chart
I have combined my most favoured measures, tools and indicators in the chart above - the Master Chart - to give myself a clear snapshot of where we are in the business cycle, liquidity cycle and the crypto cycle - and it is very much suggestive of the end of mid-cycle and the beginning of late-cycle. The largest nominal gains occur during the late cycle stage - I do not expect this time to be different.
