# Why does BTC continue to track the 4-Year Cycle? _How to understand crypto cycles from first principles_ June 24, 2026 • Michael Nadeau --- # Why does BTC continue to track the 4-Year Cycle? ## How to understand crypto cycles from first principles Michael Nadeau June 24, 2026 Hello readers, Back on 10/10/25, we sent an alert to Pro members that we had moved to a “risk-off” stance in our portfolio (increasing our cash to 60%). Of course, we did not have any insight into the liquidation event that would unfold later that day (which would kick off the bear market). Instead, we were simply following the framework we’ve developed through thousands of hours of research and analysis. Each week, we share that knowledge with Pro members, covering the specific data sets we track to monitor the cycle and manage risk. But we’ve never shared the framework through the lens of *leverage & credit* — the key driver of crypto cycles. That’s exactly what we’re doing this week. The goal is for you to come away with a deep understanding of how the crypto cycle works from first principles. Topics covered: - [The Drivers of Crypto Cycles](#the-drivers-of-crypto-cycles) - [Closing Thoughts & Portfolio Management](#closing-thoughts-portfolio-manageme)  *The DeFi Report is powered by **[Galaxy](https://www.galaxy.com/?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-does-btc-continue-to-track-the-4-year-cycle)**: helping the world invest, build, and transform — relentlessly. * [](https://www.galaxy.app/product/crypto/staking?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-does-btc-continue-to-track-the-4-year-cycle)With GalaxyOne Staking, you can earn up to an estimated 6.50% in variable staking rewards with 0% platform commission through 2026*. While other platforms can charge up to 35% in commission, GalaxyOne charges 0% through the rest of the year. Other fees may apply, see terms. Let’s go. # The Drivers of Crypto Cycles ##### The Capital Base vs The Valuation Premium During bull markets, we tend to see the Market Value of BTC (and other major assets) *separate* from the Realized Cap (capital invested into the network, which we refer to as the “capital base”). This separation is driven by *leverage and credit —* a* *topic we [covered at the peak of the market last year.](https://thedefireport.io/research/the-crypto-capital-base?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-does-btc-continue-to-track-the-4-year-cycle) Below, we can see that the premium was nearly 2.3x at the cycle peak for BTC. Data: The DeFi Report, Glassnode Nearly 9 months into the latest bear market, the leverage/credit premium has been nearly eliminated. Data: The DeFi Report, Glassnode However, we have yet to reach “par” with the capital base. For reference, at the lows of the ‘18 bear market, Bitcoin’s valuation fell 29% below the “capital base.” In ‘22, it fell to an 18.6% discount. Today we’re at a 19% *premium*. As noted, the separation between the capital base and the market value (on the upside) is driven by leverage and credit. The primary drivers of leverage and credit in the crypto markets are as follows (broadly, not just BTC): - Stablecoin Supply/Liquidity - Venture Capital - Active Loans in DeFi (and prime brokerage services on CEXs) - Derivatives Leverage (Perps) - Market Maker Financing & Basis Trades - Mining/Infrastructure Finance - Digital Asset Treasuries During bull markets, these “levers,” when combined with the desire to speculate, tend to compound on one another and reflexively feed the market. This drives users onchain. Media attention. Market psychology. And the asset allocation cycle. In bear markets? They all tend to stop “firing” at the same time. However, the “inertia” of the market is such that it typically takes roughly 1 year for the “reset” of leverage and credit to fully play out. Now. Let’s run through each driver of the leverage/credit cycle to cover how it all works and assess where we stand today. ##### Stablecoin Supply Data: The DeFi Report (includes Ethereum, Solana, Tron, Base, Arbitrum, and HyperEVM) Today, stablecoins do not have an inherent “money multiplier” as traditional bank deposits do. But when stablecoin supply increases, it becomes the base collateral and settlement asset for a much larger amount of trading, borrowing, derivatives exposure, and collateral reuse. That’s the crypto version of the money multiplier effect. Therefore, when stablecoins decline (or stop growing), it directly and reflexively impacts onchain liquidity and the amount of leverage in the system. We have yet to see any significant *decrease* in stablecoin supply so far in the ‘26 bear market. Why? We think there are three key drivers: - Utility of Stablecoins. An increasing supply of stablecoins is being held for settlement, collateral, treasury, transfer, and dollar-access purposes. This means that a larger portion of the supply is economically similar to cash collateral inside a financial system (rather than a “bridge” for onchain trading). - The GENIUS Act. This not only helps new issuance but also makes it easier for existing users, exchanges, fintechs, banks, and corporate treasuries to hold stablecoins in the bear market (again, rather than treating them as a “bridge” asset). - The loss of SEN and Signet. These systems served as the 24/7 stablecoin settlement layer serving crypto exchanges and other institutions in the last bull run. Both were shut down/seized by the FDIC in the aftermath of the bankruptcies of Silvergate and Signature Bank (their assets were disallowed for resale by the FDIC as part of [“Operation Choke Point 2.0”](https://www.piratewires.com/p/crypto-choke-point?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-does-btc-continue-to-track-the-4-year-cycle)). We think this was the key driver of fiat redemptions late in 2022 and into 2023. As such, we may not see a material drop in stablecoin supply in this bear market. But for the next bull run to commence, we’ll be looking for a material *increase* in supply. We expect to see this play out *after* BTC has bottomed and begun its recovery. ##### Venture Capital [Data: Galaxy](https://www.galaxy.com/insights/research/crypto-blockchain-vc-venture-capital-startups-fundraising-q1-2026?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-does-btc-continue-to-track-the-4-year-cycle) As the chart shows, the majority of VC capital is raised and deployed during *bull markets.*  But bear markets are for building. As such, this capital quietly provides the fertilizer for the next market expansion. How it historically has played out: - Most projects receive funding in the bull market. - Teams quietly build in the bear market. - When they are ready to launch their products (often early in the next expansion), they offer incentives and air drops (funded by Venture Capital). - These incentives often create a “wealth effect” onchain for the most successful projects. For example, the Jito airdrop was a key driver at the beginning of the Solana bull market in late ‘23, kicking off “memecoin season.” The HYPE airdrop had a similar effect one year later. This onchain “wealth effect” is something we’ll be looking for because it is one of the key drivers of *onchain reflexivity*. In particular, we think [PUMP](https://thedefireport.io/research/the-watch-list-pump-fun-pump?utm_source=thedefireport.beehiiv.com&utm_medium=referral&utm_campaign=why-does-btc-continue-to-track-the-4-year-cycle)is a prime candidate to ignite the Solana ecosystem and meaningfully shift market perception of the project. ##### Active Loans in DeFi The wealth effect from incentives/airdrops and rising prices (and media attention) drives users/”animal spirits” back onchain. As users return onchain, we tend to see a reflexive increase in demand for onchain* credit. *As this plays out, DeFi protocols will often run incentives (boosted yields) to attract new customers. *This is similar to banks lowering lending standards when demand for loans rises. * The demand (and availability) for onchain credit leads to more onchain activity (e.g., DEX volumes). Onchain fundamentals improve. Which, in turn, drives asset prices and the asset allocation cycle (with capital flowing away from BTC and the majors). These mechanics are similar to TradFi credit and asset allocation cycles. For more on that, we recommend “Mastering The Market Cycle” by Howard Marks. Data: Token Terminal, The DeFi Report What do we see today? Active loans on Ethereum are currently down 57% from the cycle peak. In ‘22, active loans dropped 85%. Could we see a similar drop in ‘26? We tend to think it will be a shallower decline. Primarily driven by alternative credit vehicles offered by protocols such as Morpho, which is used less for “looping” and other speculative activity than lending protocols such as Aave. We’ll be looking for an increase in active loans *after* BTC has bottomed for the cycle. We expect to see this sometime next year. ##### Derivatives Leverage Data: Glassnode, The DeFi Report As shown above, the last bear market for BTC ended when Perps Open Interest *bottomed* for the cycle. When the credit cycle ended, and when the last of the leverage had been squeezed out of the system. What do we see today? Similar conditions. Perps Open Interest is currently down 52% from the cycle high. When we bottomed in ‘22, open interest had declined 55%. As we’ve noted in recent reports, *most of the air* is already out of the majors. ##### Market Maker Financing & Basis Trades Market makers and arbitrage desks are an important but largely *invisible* driver of crypto liquidity conditions. Their balance sheets finance token inventory, exchange collateral, cross-venue arbitrage, derivatives hedging, and OTC activity. When financing is abundant, market makers can warehouse more risk, quote tighter spreads, provide deeper order books, and absorb selling without immediately pushing prices lower. When it contracts, liquidity deteriorates quickly. Spreads widen. Depth falls. And relatively small sell orders can have an outsized impact on price, especially on longer tail assets. Key indicators to monitor: - Aggregate order-book depth and bid/ask spreads. - Futures open interest relative to spot-market depth. - Stablecoin balances on exchanges relative to open interest in derivatives. - CME futures basis relative to Treasury yields. - Leveraged-fund positioning in CME futures. - And the breadth of liquidity across BTC, ETH, SOL, and smaller assets. The most concerning setup is rising derivatives exposure alongside declining spot depth, narrowing basis, and weakening stablecoin collateral buffers. That combination suggests the market is carrying more leverage than underlying liquidity can comfortably support. We last saw this at extreme levels in October of last year. ##### Digital Asset Treasuries One of the primary drivers of leverage in the last bull market came from Digital Asset Treasury Companies (DATs), pioneered by Strategy with BTC. How it works (using Strategy/BTC in our example): BTC rises —> convertible debt/equity and preferred securities become more valuable/easier to issue —> Strategy raises capital —> market participants front run Strategy (often using leverage in the derivatives markets to do so) —> Strategy buys BTC —> BTC rises further. To be clear, Strategy is not creating leverage inside Bitcoin itself. It's simply bringing leverage and equity-market risk appetite from public capital markets into spot BTC demand. In the past cycle, we saw a “DAT season” that included many new BTC treasury companies as well as a host of treasury companies focused on altcoins. This created “peak speculation” in the derivatives markets in Q3 of last year. Why? Traders had cover to “go long,” knowing that treasury firms were behind them, buying rapidly in the spot markets. Therefore, when these firms had finished deploying their capital, the market was left in an extremely vulnerable position (high leverage combined with declining spot demand). This is what we were seeing when we went “risk-off” just before the 10/10 liquidation event last year. ##### Looking Forward Back in ‘22, the bear market did not end until the final domino of the credit cycle had fallen (the FTX fraud was discovered *after *leverage had been pulled from the market, and there was no way to “paper over” the hole in their balance sheet any longer). Is Strategy the final domino in 2026? This is difficult to forecast as we have no edge in predicting such events. With that said, we received some positive news on Monday when Strategy announced it had bolstered its cash position to $1.4b (by issuing MSTR shares). via X If they can continue to do this and shore up 2+ years of dividend payments without losing their MSTR shareholder base, it’s possible the worst of this ordeal is over. ##### Miner Financing Bitcoin miners are effectively leveraged producers of future BTC. They raise outside capital to buy ASICs, secure power capacity, build data centers, and hold BTC (rather than sell it). In bull markets, rising BTC prices and improving miner economics make financing easier to obtain. This allows miners to expand more aggressively and reduce near-term BTC sell pressure (impacting the supply side of the equation, rather than demand). But when the BTC price stops rising, margins compress due to *fixed *infrastructure costs*. *When this happens, the capital markets pull back on financing. If margins compress enough, many miners are forced to shut down machines (to reduce overhead costs) and sometimes sell BTC to pay off existing debts. That’s why we tend to see a “miner capitulation” late in bear markets, when it’s the worst time to sell. Data: Glassnode, The DeFi Report It’s also why the mining industry tends to consolidate late in bear markets, with the largest players acquiring smaller players' assets and growing market share. While the Bitcoin hash rate is currently down 18%, we’ve yet to see material forced selling from the miners so far in ‘26. Of course, it’s possible that the largest miners have learned and done a better job managing their balance sheets this cycle (while also diversifying with AI customers). As we can see in the chart, there was quite a bit of selling (presumably to shore up cash positions) early in the bull market (first half of ‘24). # Closing Thoughts & Portfolio Management The “4-year cycle” is not a random coincidence. It’s just how leverage, credit, media attention, human behavior, and incentives collide to create a “market cycle.” When you understand this, it’s an “aha” moment because, rather than assuming “history will repeat,” we can identify the underlying drivers. And map them to data so that we can track the probabilities of future outcomes as investors. Why has the cycle consistently lasted 4 years? We’re not quite sure. There is no law at play here, and the markets surely do not obey a clock. As such, we view the narrative as creating a “recurring coordination mechanism” that sits atop the leverage/credit cycle. Remember, narratives are formed *after the fact.*  They primarily serve a psychological function. Said another way, *narratives exist to ease our minds.* Ascribing meaning to things we do not understand reduces anxiety by making the world feel less chaotic. Therefore, the “4-year cycle” narrative is really just a simplified story the market tells about a deeper process of balance sheet repair, credit creation, and reflexive risk-taking. If you’re here to “trade the big cycle” like we are, your success depends on understanding this while managing risk to the probabilities in the marketplace as conditions evolve. It’s our job to make it easier for you to do so. ##### Portfolio Management Update The rest of today’s report is reserved for TDR Pro members, who get access to our active portfolio, weekly “cycle awareness” reports, and email alerts when we make a change. As noted in the intro, it was the framework we shared today that informed our move to “risk-off” just ahead of the 10/10 liquidation event that ended the last bull run. Pro members were alerted just ahead of the sell-off. We then called for $65k BTC as our “fair value” target. ## TDR Pro Upgrade to finish reading the report. [Upgrade to TDR Pro](https://thedefireport.beehiiv.com/upgrade) Already a paying subscriber? [Sign In](https://thedefireport.beehiiv.com/login). #### TDR Pro Members Receive: - • Macro + onchain data "cycle awareness" updates - • Full access to our portfolio positions - • Email notifications when we make changes - • Average entry price for each position - • % of the portfolio in each position (including cash) - • Weekly update on what we are buying/selling - • Clear thesis & supporting analysis for any portfolio changes