Article source: Golden Finance.
Authors: Zach Pandl, Michael Zhao, Grayscale Research; Compilation: 0xjs@Golden Finance.
Key points:
● From a historical perspective, cryptocurrencies exhibit a clear four-year cycle, experiencing 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 upcoming U.S. Congress may bring clearer regulation to the industry. Given these factors, cryptocurrencies may ultimately break free from the distinctly four-year cycle that characterized the early market.
● Nevertheless, Grayscale Research determines that the current combination of indicators aligns with the mid-cycle phase. As long as the fundamentals remain strong, such as widespread application and a favorable macro market environment, the bull market is expected to continue until 2025 and beyond.
Like many physical commodities, Bitcoin's price does not strictly follow a 'random walk' pattern. In fact, its price shows statistical momentum signs: it tends to continue rising after an increase and to continue falling after a decline. Looking at a longer time span, Bitcoin's cyclical fluctuations oscillate around a historical upward trend line (Figure 1).
Figure 1: Bitcoin prices exhibit cyclical fluctuations around an upward trend.
The driving factors of past price cycles have varied, and future price returns may not replicate past experiences. With Bitcoin maturing and being accepted by more traditional investors, and the diminishing influence of the four-year halving event on supply, its price cycle may be reshaped or even disappear. However, studying past cycles can help investors gain insights into Bitcoin's typical statistical characteristics and assist in risk management.
Measure momentum.
Figure 2 shows Bitcoin's price performance during the rising phases of previous cycles. Prices are set to 100 at the cycle low point as a benchmark (marking the beginning of the appreciation stage) and tracked to the peak (marking the end of the appreciation stage). Figure 3 presents the same information in tabular form.
Bitcoin's early cycles were short and surged rapidly: the first cycle lasted less than a year, and the second cycle lasted about two years. Both soared over 500 times from their previous cycle lows. The last two cycles each lasted nearly three years. 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 price trajectory of Bitcoin in this cycle closely resembles that 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 lasted over two years. As shown in Figure 2, this price increase closely resembles 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 considerable but far less than the past four cycles. In summary, while it cannot be definitively stated that future price movements will align with past cycles, history shows that this bull market has room for expansion in both duration and magnitude.
Figure 3: Four distinct historical cycles of Bitcoin prices.
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 buyer costs, the scale of new capital inflows, and the relative level of prices to Bitcoin miner revenues.
One favored indicator is the ratio of Bitcoin's market value (MV, calculated at secondary market prices per coin) to its realized value (RV, calculated at the most recent transaction price on-chain per coin), known as the MVRV ratio, which can be seen as the extent 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 follow-up movements. However, the peak values of this ratio have gradually declined across cycles, and it may not reach 4 before the price peaks. Figure 4: The MVRV ratio is at a mid-level.
Other on-chain indicators consider the degree of new capital injected into the Bitcoin ecosystem, which seasoned cryptocurrency investors often refer to as 'HODL Waves.' Price increases may arise from new capital buying coins from long-term holders. There are many indicators, and Grayscale Research tends to select the ratio of the amount of coins transferred on-chain over the total circulating supply of Bitcoin over the past year (Figure 5). In the past four cycles, this indicator reached at least 60%, meaning that during the appreciation stage, at least 60% of the circulating supply changed hands within a year. Currently, it's about 54%, suggesting that we may see further increases in on-chain turnover rates before price peaks.
Figure 5: The activity level of Bitcoin's circulating supply over the past year is below 60%.
There are also cyclical indicators focusing on Bitcoin miners, who are the professional service providers that maintain the Bitcoin network. For instance, the ratio of miner market capitalization (MC, the dollar value of miners' holdings) to 'thermal cap' (TC, the cumulative value of Bitcoin earned by miners through block rewards and transaction fees). The principle is that when miners' 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 of the cycle. However, like the MVRV ratio, this indicator's peak values have also declined across cycles, and prices may peak before it reaches 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 stage in comparison to the past, and cannot ensure that the indicators maintain a consistent relationship with future price returns. Overall, common indicators for the Bitcoin cycle are still below past price peak levels; if the fundamentals remain strong, the current bull market may continue.
Other cryptocurrencies besides Bitcoin.
The cryptocurrency market extends far beyond Bitcoin; signals from other industry sectors can also guide market cycle trends. Given Bitcoin's relative performance to other crypto assets, such indicators will be especially 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 a broader range of indicators to assess whether cryptocurrency valuations approach cyclical highs.
Figure 7: Bitcoin's dominance began to decline in the third year of the previous two cycles.
For example, investors can monitor funding rates, which represent the holding costs of long positions in perpetual futures contracts. When speculative traders have high leverage demands, funding rates rise. Thus, the level of market funding rates can measure the overall speculative long positions. Figure 8 shows the weighted average funding rates for Bitcoin and the top ten cryptocurrencies (largest 'altcoins'). The current rate is significantly positive, indicating strong demand from leveraged investors for long positions, even though it plummeted last week during the market crash. Even at localized peaks, it is still below the highs of earlier this year and the previous cycle. In this regard, the current level corresponds to a moderately speculative long position, still far from the market cycle peak.
Figure 8: Altcoin funding rates show moderately speculative long positions.
In contrast, the open interest (OI) of altcoin perpetual futures has risen to a high level. 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 level of speculative long positions in the market. After large-scale liquidations at the beginning of this week, OI dropped by about $10 billion but remains at a high level. The high speculative long positions correspond to characteristics of the later stages of the market cycle and thus require continuous monitoring.
Figure 9: The volume of open contracts for altcoins before recent liquidations is at a high level.
Then the music plays.
Since Bitcoin's inception in 2009, the digital asset market has made significant strides, and this bull market in cryptocurrency differs in many ways from the past. The key point is that the U.S. market's approval of Bitcoin and Ethereum spot ETPs has introduced a net inflow of $36.7 billion, promoting their integration into traditional investment portfolios. Additionally, recent U.S. elections are expected to enhance market regulatory transparency, solidifying the status of digital assets in the world's largest economy. This transformative change is profound, as the long-term prospects of cryptocurrency assets have often been questioned in the past. Therefore, Bitcoin and other crypto asset valuations may not necessarily retrace the early four-year cycle.
At the same time, cryptocurrencies like Bitcoin are similar to digital commodities, and their prices may exhibit momentum characteristics. 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 phase of the cryptocurrency market: the MVRV ratio is above the cycle's low point and still far from the previous market peak. As long as the fundamentals are solid, such as the widespread adoption of applications and a favorable macro environment, there is no reason for the crypto bull market not to continue into 2025 and beyond.
