Some Investors Are Saying That Bitcoin Won't Crash Again. Are They Right?

In every market cycle, there's a moment when investors start to believe that this time is different, that the guardrails are taller, that the road is smoother. But after the Oct. 10 flash crash, a different kind of takeaway is emerging: Bitcoin (CRYPTO: BTC) bent, but it did not break when many cryptocurrencies did.

That observation ties into a bigger debate about what crashes might look like from here. In fact, one high-profile crypto investor said that Bitcoin probably won't experience any more severe declines stemming from its four-year halving cycle, and others are nodding along. But is that right?

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Why this argument is credible

Arthur Hayes, the former chief executive officer and co-founder of the BitMEX crypto exchange, said in an Oct. 8 blog post that the old script about Bitcoin's volatility and proneness to crashing and entering into a bear market every four years or so is fading.

In his view, the brutal declines and the four-year price cycle tied to Bitcoin's halving -- when the reward for creating new coins is cut in half, slowing supply growth -- are less relevant as global liquidity increasingly shapes supply and demand directly. To be clear, Hayes isn't saying that Bitcoin will never crash again, or that it will never enter into a bear market again. He's saying that the actions of central bankers controlling the global money supply will likely support the coin's value increasing over time, rather than taking the wind out of its sails as they've done during past episodes of monetary tightening and interest rate hikes.

There are a few reasons to believe Hayes is correct, starting with the Federal Reserve's seemingly increasing tolerance of inflation running higher than its long-standing target of 2% per year. That would mean increases to the money supply at a consistently faster rate than during past halving events for Bitcoin. It would also mean that investors would be more incentivized to seek refuge from inflation by buying the coin, which can't be printed like a fiat currency can.

Other factors, like institutionalization, could also contribute to making Hayes correct. The largest U.S. spot Bitcoin exchange-traded fund (ETF) now sits near $93 billion of net assets, making Bitcoin exposure a mainstream, rules-based allocation for pensions, advisors, institutional investors, and ordinary brokerage accounts. If durable demand for the asset is flowing through new avenues, it's a lot harder to produce the kind of price vacuum that typified earlier busts.

But what about the very recent real-world test of the coin's stability during the flash crash on Oct. 10?

In the sharp sell-off that shook digital assets, altcoins cratered by 70% or more, while Bitcoin held up comparatively better, losing just 7%. This is a pattern consistent with large, steady buyers anchoring the market even when sentiment curdles. The flash crash was not in any way prompted by Bitcoin's halving or its scarcity, but this pattern does support the idea that the asset is becoming less volatile, and less prone to repeating its prior patterns.

Of course, none of this makes Bitcoin crash-proof. Black swans still fly, and some might be even more destructive to the coin's value than Oct. 10.

Is the four-year cycle really over?

The four-year halving cycle is a core part of Bitcoin's investing folklore among crypto natives.

In this story, a halving arrives once every four years. Supply growth produced by mining slows even further. About a year and half after the halving, euphoria follows, and then there's a long and brutal winter of about 12 months or so where prices drop at least 60%. While the halving itself will continue happening, Hayes' contention is that expanding fiat currency liquidity and deepening institutional adoption have started to blur the tidy pattern of boom and bust. As of now, the evidence suggests he's at least partially right.

On the other hand, history warns against declaring victory over gravity.

Since 2014, Bitcoin has endured multiple drawdowns greater than 50%, with the largest declines averaging around 80%. It is unlikely that the halving's effect on human psychology has been permanently neutralized, even if its downstream effects are somewhat mitigated. Even in a maturing market, the broader crypto complex can still experience violent air pockets, and supply phenomena can indeed contribute to those in ways which are difficult to predict with precision before they occur.

So are the optimists right? Partly, yes. It's likely that new sources of structural demand from ETFs and corporate holders can put a floor under many sell-offs and shorten the recovery time.

The prudent way to play this information is to size your positions so that a 50% decline does not force you to sell, and to use dollar-cost averaging (DCAing) to take advantage of the coin's supply scarcity over the course of years. Expect fewer 80% collapses in the future, not zero.

Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.