Authors: Zach Pandl, Michael Zhao, Grayscale Research; Translated by 0xjs@Jinse Finance.
Key points:
From a historical perspective, cryptocurrencies exhibit a clear four-year cycle, going through continuous phases of price increases and decreases. Grayscale Research believes that investors can monitor various blockchain-based indicators and other metrics to track the cryptocurrency cycle, providing a basis for risk management decisions.
Cryptocurrencies are evolving into a mature asset class: new Bitcoin and Ethereum spot ETPs have expanded market access, and the incoming U.S. Congress may bring clearer regulations for the industry. Given these factors, cryptocurrencies might eventually break free from the significantly defined four-year cycle characteristic of early markets.
Nevertheless, Grayscale Research determines that the current combination of indicators aligns with the mid-cycle stage. As long as the fundamentals remain solid, such as widespread adoption and a favorable macro environment, the bull market is expected to continue until 2025 and beyond.
Like many physical commodities, Bitcoin prices do not strictly follow a 'random walk' model. In fact, there are statistical momentum signs in its price: once it rises, it tends to continue rising, and when it falls, it often continues to fall. Viewed over a more extended time span, Bitcoin's cyclical fluctuations oscillate around a historical upward trend line (Figure 1).
Figure 1: Bitcoin prices exhibit a cyclical fluctuation characteristic around an upward trend.
The drivers of past price cycles varied, and future price returns may not replicate past experiences. As Bitcoin matures, is accepted by more traditional investors, and the supply impact of the four-year halving events 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 risk management.
Measure momentum.
Figure 2 shows Bitcoin's price performance during the price appreciation phases of the previous cycles. Prices are benchmarked against the cycle low point set at 100 (signifying the start of the appreciation phase) and tracked to the peak (signifying the end of the appreciation phase). Figure 3 presents the same information in tabular form.
The early Bitcoin cycles were short and rapid: the first cycle was less than a year, and the second cycle lasted about two years. Both surged over 500 times from the previous cycle low points. The last two cycles each lasted nearly three years. During the cycle from January 2015 to December 2017, Bitcoin appreciated over 100 times; from December 2018 to November 2021, the increase was about 20 times.
Figure 2: The current Bitcoin trend resembles the trajectories of the previous two market cycles.
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 surpassed two years. As shown in Figure 2, this price rise is similar to the trajectories of the previous two Bitcoin cycles, both of which took another year to reach their price peaks. In terms of magnitude, this cycle has seen about a 6-fold increase, which is also impressive, but far less than the previous four cycles. In summary, while we cannot definitively claim that future price trends will align with past cycles, history indicates that this bull market has room for expansion in both duration and magnitude.
Figure 3: The four unique cycles in Bitcoin's price history.
Check key indicators.
In addition to analyzing past cycle price trends, investors can use various blockchain indicators to measure the progress of the Bitcoin bull market. Common indicators include the appreciation of Bitcoin buyers' costs, the scale of new capital inflow, and the relative level of prices to Bitcoin miner revenues.
Among the favored indicators is the ratio of Bitcoin market value (MV, the market price per coin) to realized value (RV, the value per coin based on the last on-chain transaction price), 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 reached at least 4 (Figure 4). The current MVRV ratio is 2.6, suggesting that this cycle may have further price movements. However, the peak of this ratio has gradually decreased in each cycle, and it may not reach 4 before the price peaks. Figure 4: MVRV ratio is at a mid-level.
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 be due to new capital purchasing coins from long-term holders. With numerous indicators, Grayscale Research prefers to select the ratio of the volume of coins transferred on-chain in the past year to the total circulating supply of Bitcoin (Figure 5). In the past four cycles, this indicator reached at least 60%, meaning that at least 60% of the circulating supply changed hands during the appreciation phase of a year. The current level is about 54%, indicating that we may see a further increase in on-chain turnover rate before the price peaks.
Figure 5: The activity level of Bitcoin's circulating volume in the past year was below 60%.
Another cycle indicator focuses on Bitcoin miners, who are the professional service providers maintaining the Bitcoin network. For example, the ratio of miner market capitalization (MC, the dollar value of miners' holdings) to 'Thermal Cap' (TC, the cumulative value of Bitcoin obtained by miners through block rewards and transaction fees). The principle is that when miner assets reach a specific threshold, they may take profits. Historical data shows that when the MCTC ratio exceeds 10, prices often peak during the cycle (Figure 6). The current level is about 6, indicating that we are in the mid-cycle stage. However, similar to the MVRV ratio, the peak of this indicator has declined in each cycle, and prices may peak before reaching 10.
Figure 6: Indicators based on Bitcoin miners are also below past thresholds.
There are numerous on-chain indicators, and different data sources may have discrepancies. Moreover, these tools can only roughly assess the current price appreciation phase compared to the past, and cannot ensure that the relationship between indicators and future price returns remains constant. Overall, common indicators in the Bitcoin cycle are still below past price peak levels. If the fundamentals remain solid, the current bull market may continue.
Other cryptocurrencies apart from Bitcoin.
The crypto market extends far beyond Bitcoin, and signals from other areas of the industry can also guide the market cycle dynamics. Given Bitcoin's relative performance against other crypto assets, such indicators will be particularly crucial in the coming year. In the last two market cycles, Bitcoin's dominance (its share of the total market capitalization of cryptocurrencies) peaked about two years into the 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 more indicators to assess whether crypto valuations are approaching cycle highs.
Figure 7: Bitcoin's dominance began to decline in the third year of the previous two cycles.
For example, investors can monitor the funding rate, which is the holding cost of long positions in perpetual futures contracts. When speculative traders have high leverage demand, the funding rate rises. Therefore, the market funding rate level can measure the overall speculative long position level. Figure 8 shows the weighted average funding rate of the top ten cryptocurrencies (the largest 'altcoins') outside Bitcoin. The current rate is significantly positive, indicating strong demand from leveraged investors for long positions, despite a sharp drop during last week's market crash. Even at local peaks, it remains below earlier this year and the previous peak. Thus, the current level aligns with a moderately speculative long position in the market, still far from the market cycle peak.
Figure 8: Altcoin funding rates indicate a moderately speculative long position.
In contrast, the open interest (OI) in perpetual futures of altcoins has risen to high levels. Before large-scale liquidations on Monday, December 9, the OI of altcoins on the three major perpetual futures exchanges approached $54 billion (Figure 9), highlighting a high speculative long position in the market. After the large-scale liquidation at the beginning of this week, the OI decreased by about $10 billion but still remains high. The high speculative long position aligns with the characteristics of the later stage of the market cycle, hence continuous monitoring is necessary.
Figure 9: The open interest in altcoins was high before recent liquidations.
Then play the music.
Since Bitcoin's inception in 2009, the digital asset market has made significant strides, and this bull market in cryptocurrencies differs in many ways from the past. The key lies in the approval of Bitcoin and Ethereum spot ETPs in the U.S. market, bringing in a net inflow of $36.7 billion, promoting their integration into traditional investment portfolios. Additionally, 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 change is profound, as the long-term outlook for cryptocurrency assets has often been questioned. Therefore, the valuations of Bitcoin and other cryptocurrencies may not necessarily follow the same trajectory as the early four-year cycles.
At the same time, cryptocurrencies like Bitcoin share characteristics with digital commodities, and their prices may exhibit momentum traits. Therefore, analyzing on-chain indicators and altcoin holding data can contribute to investors' risk management decisions.
Grayscale Research determines that the current combination of indicators aligns with the mid-cycle stage in the cryptocurrency market: the MVRV ratio is above the cycle low point and still far from the previous market peak. As long as the fundamentals remain solid, such as widespread adoption and a favorable macro environment, there is no reason for the crypto bull market not to continue until 2025 and beyond.
