Original title: The State of the Crypto Cycle
Original authors: Zach Pandl, Michael Zhao, Grayscale.
Original translation: Luffy, Foresight News.
· Historically, the cryptocurrency market follows a distinct four-year cycle, with prices experiencing consecutive phases of rise and fall. Grayscale Research believes that investors can monitor various blockchain-based metrics and other indicators to track cryptocurrency cycles and inform their own risk management decisions.
· Cryptocurrency is an increasingly mature asset class: New spot Bitcoin and Ethereum ETFs have broadened market access, and the upcoming Trump administration may bring greater regulatory transparency to the crypto industry. Given these reasons, the valuation of the cryptocurrency market 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 solid, the bull market could extend into 2025 or even longer.
Like many physical commodities, Bitcoin's price does not strictly adhere to a 'random walk' model. Instead, Bitcoin's price movements exhibit characteristics of statistical momentum: price increases often follow increases, and price decreases often follow decreases. Although Bitcoin may rise or fall in the short term, its price shows a significant cyclical upward trend in the long term (Figure 1).
Figure 1: Bitcoin's price fluctuates repeatedly but shows an overall upward trend.
Each past price cycle has unique driving factors, and future price movements will not necessarily follow past experiences. Additionally, as Bitcoin matures and is adopted by a broader array of traditional investors, alongside the diminishing impact of the four-year halving events on supply, the cyclical nature of Bitcoin's price fluctuations 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 cycle low (the beginning 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 of Bitcoin was relatively short and volatile: the first cycle lasted less than a year, while the second cycle lasted about two years. In both cycles, Bitcoin's price increased more than 500 times from relatively low points. The subsequent two cycles each lasted less than three years. During the cycle from January 2015 to December 2017, Bitcoin's price increased more than 100 times, while in the cycle from December 2018 to November 2021, Bitcoin's price increased by about 20 times.
Figure 2: Bitcoin's performance in the past two market cycles is similar.
After peaking in November 2021, Bitcoin's price fell to around $16,000 in November 2022, marking a cyclical low. The current price uptrend has continued for over two years since then. As shown in Figure 2, the latest price increase is relatively close to the previous two Bitcoin cycles, both of which lasted about three years before reaching their price peaks. In terms of the magnitude of the increase, Bitcoin's current rise in this cycle is approximately 6 times, and while the returns are quite substantial, they are significantly lower than those achieved in the past four cycles. Overall, while we cannot ascertain whether future price returns will be similar to past cycles, Bitcoin's history tells us that the latest bull market could continue in terms of both duration and magnitude.
Figure 3: Four different cycles in Bitcoin 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 metrics include: the profitability of Bitcoin buyers, the inflow of new capital into Bitcoin, and price levels associated with Bitcoin miner revenue.
A particularly popular metric is to calculate the market value (MV) of Bitcoin (Bitcoin circulation * current market price) and its realized value (RV) (the sum of the prices at which each Bitcoin was last transferred on-chain). This metric is referred to as the MVRV ratio, which can be considered the extent to which Bitcoin's market value exceeds its total cost basis. In the past four cycles, the MVRV ratio has reached at least (Chart 4). Currently, the MVRV ratio stands at 2.6, indicating that the latest cycle may continue for a longer time. However, the peaks of the MVRV ratio in past cycles have been consistently declining, suggesting that this round may never reach a level of 4.
Figure 4: The historical trend of Bitcoin's MVRV ratio.
Some on-chain indicators measure the extent of new capital 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 relative to Bitcoin's total freely floating supply (Chart 5). In the past four cycles, this metric has reached at least 60%. This means that during the upward phase, at least 60% of the freely floating supply was traded on-chain within a year. Currently, this figure 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 Bitcoin to circulating supply over the past year is less than 60%.
Some cyclical indicators focus on Bitcoin miners, who are the professional service providers that secure the Bitcoin network. For example, a common metric is to calculate the ratio of miner's holding (MC) (the dollar value of all Bitcoin held by miners) to the so-called 'thermocap' (TC) (the cumulative value of Bitcoin distributed 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 tend to peak within that cycle (Chart 6). Currently, the MCTC ratio is around 6, indicating that we are still in the middle phase of the current cycle. However, similar to the MVRV ratio, this metric has been consistently declining in recent cycles, suggesting that the price peak may arrive before the MCTC ratio reaches 10.
Figure 6: The cyclical peak of Bitcoin miner metric MCTC is also continuously declining.
There are many other on-chain indicators, and these indicators may have subtle differences from metrics derived from other data sources. Furthermore, these tools can only provide a rough understanding of how the current Bitcoin price uptrend compares historically and cannot guarantee that the relationship between these metrics and future price returns will be similar to the past. That said, overall, common indicators of Bitcoin cycles remain below the levels seen when prices peaked in the past. This suggests that, if the fundamentals are solid, the current bull market may continue.
Market indicators outside Bitcoin
The cryptocurrency market is not just Bitcoin; signals from other sectors of the industry may also provide guidance on the state of market cycles. We believe that, due to the relative performance of Bitcoin and other crypto assets, these indicators could be particularly important in the coming year. In the past two market cycles, Bitcoin's dominance (its share of the total cryptocurrency market capitalization) peaked about two years into the bull market (Figure 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 shown a downward trend 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 level of the funding rate in the market can indicate the overall positioning of speculative traders. Chart 8 shows the weighted average funding rates of the 10 largest crypto assets (i.e., the largest altcoins) following Bitcoin. Currently, the funding rate is significantly positive, indicating demand from leveraged investors for long positions, although the funding rate has sharply declined in the past week amid the downturn. Moreover, even though it is currently at a local high, the funding rate remains below the levels seen earlier this year and the peaks of the previous cycle. Therefore, we believe the current funding rate level indicates that the market's speculation has not yet peaked.
Figure 8: The funding rate indicates that the speculative level of altcoins is moderate.
In contrast, the open interest (OI) of altcoin perpetual futures has reached a relatively high level. Before the major liquidation event on December 9, the open interest of altcoins on the three major perpetual futures exchanges had reached nearly $54 billion (Chart 9). This indicates that the overall positioning of speculative traders in the broader market is relatively high. After the large-scale liquidation, the open interest of altcoins dropped by about $10 billion but remains at a high level. The high long positions of speculative traders may align with the later stages of the market cycle, making it important to continue monitoring this metric.
Figure 9: Recent high open interest in altcoins before liquidation.
The bull market will continue.
Since Bitcoin's inception in 2009, the cryptocurrency market has made significant progress, and many characteristics of the current crypto bull market differ from those in the past. Most notably, the approval of spot Bitcoin and Ethereum ETFs in the U.S. market has brought in a net capital inflow of $36.7 billion, helping to integrate crypto assets into broader traditional portfolios. Furthermore, we believe that the recent U.S. elections may provide the market with more regulatory clarity and help ensure the permanent status of crypto assets in the world's largest economy. Compared to the past, this is a significant change, as observers have repeatedly questioned the long-term prospects of the crypto asset class. For these reasons, valuations of Bitcoin and other crypto assets may not follow earlier historical patterns.
Meanwhile, Bitcoin and many other crypto assets can be viewed as digital commodities, which, like other commodities, may exhibit some degree of price momentum. Therefore, assessing on-chain indicators alongside altcoin data may assist investors in making risk management decisions. Grayscale Research believes that the current set of indicators overall suggests that the crypto market is in the mid-stage of a bull market: metrics like the MVRV ratio are well above the cycle lows but have not yet reached levels that signify previous market tops. As long as the fundamentals (such as application adoption and macro market conditions) remain solid, we believe the crypto bull market will continue into 2025 and beyond.
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