Key points:
● From a historical perspective, cryptocurrencies exhibit a clear four-year cycle, experiencing consecutive phases of price increases and decreases. Grayscale Research believes that investors can monitor various blockchain-based indicators and other metrics to track the crypto cycle, providing a foundation for risk management decisions.
● Cryptocurrencies are evolving into a mature asset class: new Bitcoin and Ethereum spot ETPs are broadening market access, and the incoming U.S. Congress may bring clearer regulation to the industry. Given these factors, cryptocurrencies may eventually break free from the significant four-year cycle patterns characteristic of the early market.
● Nevertheless, Grayscale Research assesses that the current combination of indicators aligns with the 'mid-stage' of a bull market cycle. As long as the fundamentals remain solid, such as widespread application and a favorable overall economic environment, the cryptocurrency bull market is expected to continue into 2025 or even longer.
Like many physical goods, Bitcoin's price does not follow a strict 'random walk' model. In fact, its price shows signs of statistical momentum: increases are often followed by further increases, while decreases tend to continue. From a longer time span perspective, Bitcoin's cyclical movements fluctuate around a historically rising trend line (Figure 1).
The driving factors for past price cycles have varied, and future price returns may not replicate past experiences. As Bitcoin matures and is accepted by more traditional investors, and as the supply impact of the four-year halving event diminishes, its price cycle may reshape or even disappear. However, studying past cycles can help investors gain insights into Bitcoin's typical statistical characteristics, aiding in risk management.
Measure momentum
Figure 2 shows the price performance of Bitcoin during the rising phases of previous cycles. Prices are set at 100 based on the cycle's low point (marking the start of the appreciation phase) and tracked to the peak (marking the end of the appreciation phase). Figure 3 presents the same information in tabular form.
Bitcoin's early cycles were short and rapid: the first cycle lasted less than a year, and the second cycle lasted about two years. Both soared more than 500 times from their previous cycle lows. The last two cycles lasted nearly three years each. From January 2015 to December 2017, Bitcoin appreciated over 100 times; from December 2018 to November 2021, the increase was about 20 times.
After peaking in November 2021, Bitcoin's price fell to about $16,000 in November 2022, marking the low point of the current cycle, which has now lasted over two years. As shown in Figure 2, this price increase is similar to the trajectories of the previous two Bitcoin cycles, which both took another year to reach peak prices. In terms of magnitude, this cycle has seen an increase of about 6 times, which is considerable, but still far less than the previous four cycles. In summary, while the future price trajectory cannot be definitively predicted to align with past cycles, history shows that this bull market has room for expansion in both duration and magnitude.
Check key indicators
In addition to analyzing past cycle price movements, investors can use various blockchain indicators to measure Bitcoin's bullish progress. Common indicators include the appreciation of the cost basis for Bitcoin buyers, the scale of new fund inflows, and the relative level of prices to Bitcoin miner earnings.
Among the favored indicators is the Bitcoin Market Value (MV, the price per coin on the secondary market) to Realized Value (RV, the price per coin based on the most recent on-chain transaction) ratio, known as the MVRV ratio, which can be seen as the degree to which Bitcoin's market value exceeds the total cost of the market. In the past four cycles, this ratio has reached at least 4 (Figure 4). Currently, the MVRV ratio is 2.6, indicating that this cycle may still have further momentum. However, the peak levels of this ratio across cycles have gradually decreased, and prices may not reach 4 before peaking.
Other on-chain indicators consider the extent of new capital inflow into the Bitcoin ecosystem, often referred to by seasoned cryptocurrency investors as 'HODL Waves.' Price increases may result from new capital purchasing coins from long-term holders. There are many indicators, but Grayscale Research tends to select the ratio of the amount of coins transferred on-chain over the past year to Bitcoin's total circulating supply (Figure 5). In past four cycles, this indicator has reached at least 60%, meaning that during the appreciation phase over the course of a year, at least 60% of the circulating supply changed hands. Currently, it is about 54%, suggesting that we may see further increases in on-chain turnover rates before prices peak.
There are also cycle indicators focused on Bitcoin miners, who are the specialized service providers maintaining the Bitcoin network. For instance, the commonly used miner market capitalization (MC, the dollar value of the Bitcoin held by miners) versus 'thermal cap' (TC, the accumulated value of Bitcoin obtained by miners through block rewards and transaction fees). The principle is that when miner assets reach a certain threshold, they may take profits. Historical data shows that when the MCTC ratio exceeds 10, prices often peak within the cycle (Figure 6). Currently, it is about 6, indicating that we are in the middle stage of the cycle. But similar to the MVRV ratio, this indicator's peak levels have declined across cycles, and prices may peak before reaching 10.
There are numerous on-chain indicators, and different data sources may have discrepancies. Furthermore, these tools can only roughly judge the current price appreciation phase compared to the past, and cannot ensure a constant relationship between the indicators and future price returns. In summary, common indicators of Bitcoin cycles are still below past price peak levels. If the fundamentals remain solid, the current bull market may continue.
Other cryptocurrencies
The crypto market extends far beyond Bitcoin, and signals from other areas of the industry can also guide the market cycle's status. Given Bitcoin's relative performance against other crypto assets, such indicators are especially crucial in the coming year. In the last two market cycles, Bitcoin's dominance (its share of the total market capitalization of crypto) peaked approximately two years into a bull market (Figure 7). Its recent decline in dominance coincides with the two-year mark of the current market cycle. If this trend continues, investors should consider multiple indicators to assess whether crypto valuations are nearing cycle highs.
For instance, investors can monitor funding rates, which are the holding costs for long positions in perpetual futures contracts. When speculative traders have high leverage demands, the funding rate rises. Thus, the level of the market funding rate can gauge the overall speculative long position. Figure 8 shows the average funding rate weighted by the top ten cryptocurrencies (the largest 'altcoins'). The current rate is significantly positive, indicating strong demand from leveraged investors, despite a sharp drop during last week's market crash. Even at local peaks, it remains below the levels at the beginning of this year and the previous cycle's peak. Therefore, the current level aligns with a moderately speculative long position in the market, still far from the market cycle peak.
In contrast, the open interest of perpetual futures for altcoins has risen to a peak. Before a massive liquidation on Monday, December 9, the open interest for altcoins on the three major perpetual futures exchanges was nearly $54 billion (Figure 9), highlighting a high speculative long position in the market. After the large-scale liquidation at the beginning of the week, open interest dropped by about $10 billion but remains high. The high speculative long positions align with characteristics of the later stages of the market cycle, thus continuous monitoring is required.
Next, play the music
Since the birth of Bitcoin in 2009, the digital asset market has made significant strides, and this round of the crypto bull market has many differences from the past. The key is that the approval of Bitcoin and Ethereum spot ETPs in the U.S. market has brought in a net inflow of $36.7 billion, integrating them into traditional investment portfolios. Moreover, the upcoming U.S. elections are expected to enhance market regulatory transparency, solidifying the position of digital assets in the world's largest economy. This transformation is profound, as the long-term prospects of crypto assets have often been questioned in the past. Therefore, the valuations of Bitcoin and other crypto assets may not necessarily repeat the patterns of the earlier four-year cycles.
At the same time, Bitcoin and other crypto assets are akin to digital goods, and their prices may exhibit momentum characteristics. Therefore, analyzing on-chain indicators and altcoin holding data can provide valuable support for investors' risk management decisions.
Grayscale Research determines that the current combination of indicators aligns with the mid-cycle of the crypto market: the MVRV ratio is above the cycle's low point and is still far from the previous market peak. As long as the fundamentals remain solid, such as widespread application and a favorable overall economic environment, there is no reason for the cryptocurrency bull market not to continue into 2025 or even longer.
