Original authors: Zach Pandl, Michael Zhao
Original translation: Luffy, Foresight News
Historically, the cryptocurrency market follows a clear four-year cycle, with prices experiencing consecutive stages of rises and falls. Grayscale Research believes that investors can monitor various blockchain-based indicators and other metrics to track cryptocurrency cycles and inform their risk management decisions.
Cryptocurrency is an increasingly mature asset class: new spot Bitcoin and Ethereum ETFs have broadened market access, and the incoming Trump administration may bring greater regulatory transparency to the crypto industry. For these reasons, cryptocurrency market valuations may break historical highs.
Grayscale Research believes that the current market is in the mid-stage of a new crypto cycle. As long as the fundamentals (such as application adoption and macro market conditions) remain sound, the bull market could extend into 2025 or even longer.
Like many physical commodities, Bitcoin's price does not strictly follow a 'random walk' model. Instead, Bitcoin's price movements exhibit characteristics of statistical momentum: upward trends often follow previous upward trends, and downward trends often follow previous downward trends. Although Bitcoin may rise or fall in the short term, it shows a significant upward cyclical trend in the long term (see Chart 1).
Figure 1: Bitcoin's price fluctuates repeatedly but shows an overall upward trend.
Each past price cycle has its unique driving factors, and future price trends will not completely follow past experiences. Additionally, as Bitcoin matures and is adopted by a broader range of traditional investors, and as the impact of the four-year halving events on supply diminishes, the cyclical patterns of Bitcoin's price changes may reshape or completely disappear. Nevertheless, studying past cycles can still provide investors with some guidance on Bitcoin's typical statistical behavior, which can inform their risk management decisions.
Observations of Bitcoin's historical cycles
Figure 2 shows the price performance of Bitcoin during the upward phases of each previous cycle. Prices are indexed at 100 at the cyclical low (the start of the upward phase) and tracked to the peak (the end of the upward phase). Figure 3 presents the same information in tabular form.
The first price cycle in Bitcoin's history was relatively short and volatile: the first cycle lasted less than a year, while the second lasted about two years. In both cycles, Bitcoin's price increased over 500 times from relatively low points. The subsequent two cycles lasted less than three years each. During the cycle from January 2015 to December 2017, Bitcoin's price rose over 100 times, while from December 2018 to November 2021, it increased by about 20 times.
Figure 2: Bitcoin's trends are similar in the past two market cycles.
After peaking in November 2021, Bitcoin's price fell to about $16,000 in November 2022, marking a cyclical low. The current price increase phase has lasted for more than two years since then. As shown in Figure 2, the latest price increase is relatively close to the last two Bitcoin cycles, which both lasted about three years before reaching peaks. In terms of the magnitude of the increase, Bitcoin's current rise in this cycle is approximately 6 times, which, although considerable, is significantly lower than the returns achieved in the last four cycles. In summary, while we cannot be certain that future price returns will resemble those of past cycles, Bitcoin's history tells us that the latest bull market can continue in duration and magnitude.
Figure 3: Four different cycles in Bitcoin's price history.
On-chain indicators
In addition to observing past cycles' price performance, investors can also apply various blockchain-based indicators to measure the maturity of the Bitcoin bull market. Common indicators include: the profitability of Bitcoin buyers, the inflow of new funds into Bitcoin, and price levels related to Bitcoin miners' income.
A particularly popular metric is to calculate the ratio of Bitcoin's market value (MV) (Bitcoin supply * current market price) to its realized value (RV) (the sum of prices at which each Bitcoin was last transferred on-chain). This metric, known as the MVRV ratio, can be considered a measure of how much Bitcoin's market value exceeds the total cost basis of the market. In the past four cycles, the MVRV ratio has reached at least (see Chart 4). Currently, the MVRV ratio is 2.6, suggesting that the latest cycle may last even longer. However, the peaks of the MVRV ratio in previous cycles have been declining, so this indicator may never reach the level of 4 in the current cycle.
Figure 4: Historically, the trend of Bitcoin's MVRV ratio.
Some on-chain indicators measure the extent of new funds entering the Bitcoin ecosystem. Experienced cryptocurrency investors often refer to this framework as HODL Waves. There are various metrics available, but Grayscale Research prefers to use the ratio of the number of tokens moved on-chain last year to the total floating supply of Bitcoin (see Chart 5). In the past four cycles, this metric has reached at least 60%. This means that during the rising phase, at least 60% of the floating supply was traded on-chain over a year. Currently, this number is about 54%, indicating that we may see more Bitcoin changing hands on-chain before prices reach their peak.
Figure 5: The ratio of active Bitcoins to circulating supply over the past year is below 60%.
Some cyclical indicators focus on Bitcoin miners, the professional service providers that secure the Bitcoin network. A common metric is to calculate the ratio of miner's holdings (MC) (the dollar value of all Bitcoin held by miners) to the so-called 'thermocap' (TC) (the cumulative value of Bitcoin issued to miners through block rewards and transaction fees). Generally, when the value of miners' assets reaches a certain threshold, they may start to take profits. Historically, when the MCTC ratio exceeds 10, prices subsequently peak within that cycle (see Chart 6). Currently, the MCTC ratio is about 6, indicating that we are still in the middle stages of the current cycle. However, similar to the MVRV ratio, this indicator's peaks have been declining in recent cycles, suggesting that price peaks may arrive before the MCTC ratio reaches 10.
Figure 6: The peak cycle value of Bitcoin miner indicators MCTC is also continuously declining.
There are many other on-chain indicators, which may have slight differences from metrics from other data sources. Additionally, these tools can only provide a rough understanding of how the current Bitcoin price increase phase compares to past ones, and they do not guarantee that the relationship between these indicators and future price returns will be similar to the past. That said, overall, common indicators of the Bitcoin cycle are still below levels seen when prices reached peaks in the past. This suggests that, if the fundamentals are sound, the current bull market may continue.
Market indicators outside of Bitcoin.
The cryptocurrency market is not just Bitcoin; signals from other areas of the industry may also provide guidance on the state of the market cycle. We believe that due to the relative performance of Bitcoin and other crypto assets, these indicators may be particularly important in the coming year. In the past two market cycles, Bitcoin's dominance (its share of total cryptocurrency market capitalization) peaked about two years after the bull market began (see Chart 7). Bitcoin's dominance has recently begun to decline, occurring around the two-year mark of this market cycle. If this trend continues, investors should consider focusing on broader metrics to determine whether cryptocurrency valuations are approaching cyclical peaks.
Figure 7: Bitcoin's dominance has been declining in the third year of the past two cycles.
For example, investors can monitor the funding rate, which is the cost of holding long positions in perpetual futures contracts. When speculative traders have a high demand for leverage, the funding rate tends to rise. Therefore, the overall funding rate level in the market can indicate the aggregate position of speculative traders. Chart 8 shows the weighted average funding rates of the ten largest crypto assets (i.e., the largest 'altcoins') after Bitcoin. Currently, the funding rate is significantly positive, indicating a demand for long positions from leveraged investors, although it has sharply declined in the past week. Furthermore, even though it is currently at a local high, the funding rate is still lower than earlier this year and the peaks of the previous cycle. Thus, we believe the current funding rate level indicates that market speculation has not yet reached its peak.
Figure 8: The funding rate indicates that the speculative degree of altcoins is at a moderate level.
In contrast, the open interest (OI) of perpetual futures for altcoins has reached relatively high levels. Before the significant liquidation event on December 9, the open interest of altcoins on the three major perpetual futures exchanges reached nearly $54 billion (see Chart 9). This indicates that the overall speculative trading volume is relatively high. After the massive liquidation, the open interest in altcoins fell by about $10 billion but remains elevated. The high long positions of speculative traders may align with the later stages of the market cycle, so it could be important to continue monitoring this indicator.
Figure 9: The high open interest in altcoins before the recent liquidation.
The bull market will continue.
Since Bitcoin's inception in 2009, the cryptocurrency market has made significant progress, with many characteristics of the current crypto bull market differing from those in the past. Most importantly, the approval of spot Bitcoin and Ethereum ETFs in the US has brought in $36.7 billion in net capital inflows and helped incorporate crypto assets into broader traditional portfolios. Furthermore, we believe that the upcoming US elections may bring more regulatory clarity to the market and help solidify the permanent status of crypto assets in the world's largest economy. This represents a significant shift compared to the past, when observers repeatedly questioned the long-term prospects of the crypto asset class. For these reasons, valuations of Bitcoin and other crypto assets may not follow early historical patterns.
Meanwhile, Bitcoin and many other crypto assets can be viewed as digital commodities, which, like other commodities, may exhibit a certain level of price momentum. Therefore, assessing on-chain indicators and altcoin data may help investors make risk management decisions. Grayscale Research believes that the current set of indicators shows that the crypto market is in the mid-stage of a bull market: indicators like the MVRV ratio are far above cycle lows but have yet to reach levels that marked previous market tops. As long as the fundamentals (such as application adoption and macro market conditions) remain sound, we believe the crypto bull market will last until 2025 and beyond.
