A large number of data indicators suggest that the current crypto bull market has not yet reached its peak.
Written by: Zach Pandl, Michael Zhao
Compiled by: Luffy, Foresight News
Historically, the cryptocurrency market has followed a clear four-year cycle, with prices undergoing consecutive phases of rise and fall. 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 widened market entry channels, and the incoming Trump administration may bring greater regulatory transparency to the crypto industry. For these reasons, the valuations of cryptocurrencies may break historical highs.
Grayscale Research believes 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) are sound, the bull market could extend into 2025 or even longer.
Like many physical goods, Bitcoin's price does not strictly follow a 'random walk' model. Instead, Bitcoin's price movements exhibit characteristics of statistical momentum: uptrends often follow uptrends, and downtrends often follow downtrends. While Bitcoin may rise or fall in the short term, its price exhibits a significant upward cyclical trend in the long run (Figure 1).
Figure 1: Bitcoin's price fluctuates repeatedly but shows an overall upward trend
Each past price cycle had its unique driving factors, and future price trends will not necessarily follow past experiences. Furthermore, as Bitcoin matures and is adopted by a broader base of traditional investors, along with 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 insights into Bitcoin's typical statistical behavior, which can inform their risk management decisions.
Observations of Bitcoin's historical cycles
Figure 2 shows Bitcoin's price performance during the rising phases of each previous cycle. Prices are indexed at 100 at the cycle's low point (the start of the rising phase) and tracked to the peak (the end of the rising phase). Figure 3 presents the same information in table form.
The first price cycle in Bitcoin's history was relatively short and highly volatile: the first cycle lasted less than a year, while the second cycle lasted about two years. During both cycles, the price of Bitcoin increased more than 500 times from relatively low points. The subsequent two cycles lasted less than three years each. In the cycle from January 2015 to December 2017, the price of Bitcoin increased more than 100 times, while in the cycle from December 2018 to November 2021, the price of Bitcoin increased approximately 20 times.
Figure 2: Bitcoin's performance is similar in the past two market cycles
After peaking in November 2021, the price of Bitcoin fell to around $16,000 in November 2022, marking a cyclical low. The current price increase phase 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 peaks. From the perspective of the magnitude of the increase, Bitcoin's current rise in this cycle is approximately 6 times, and although the returns are quite considerable, they are noticeably lower than those achieved in the previous four cycles. In summary, while we cannot be certain whether future price returns will resemble those of past cycles, Bitcoin's history tells us that the latest bull market can still continue in both duration and magnitude.
Figure 3: Four different cycles in Bitcoin's price history
On-chain indicators
In addition to observing past cycles' price performances, investors can also apply various blockchain-based indicators to gauge the maturity of the Bitcoin bull market. Common indicators include: the profitability status of Bitcoin buyers, the level of new capital inflows into Bitcoin, and price levels related to Bitcoin miner income.
A particularly popular indicator calculates the ratio of Bitcoin's market capitalization (MV) (the circulating supply of Bitcoin * current market price) to its realized value (RV) (the sum of prices at which each Bitcoin was last transferred on-chain). This indicator is known as the MVRV ratio and can be viewed as the extent to which Bitcoin's market capitalization exceeds the market's total cost basis. In the past four cycles, the MVRV ratio has reached at least (Chart 4). Currently, the MVRV ratio is at 2.6, indicating that the latest cycle may continue for a longer period. However, the peak of the MVRV ratio in past cycles has been declining, so this round of the cycle may never reach a level of 4.
Figure 4: Historical trends 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 to the total free-floating supply of Bitcoin (Chart 5). In the past four cycles, this indicator has reached at least 60%. This means that during the rising phase, at least 60% of the free-floating supply was traded on-chain within a year. Currently, this figure is about 54%, indicating that we may see more Bitcoin change hands on-chain before the price reaches its peak.
Figure 5: The ratio of active Bitcoins to circulating supply over the past year is less than 60%
Some cyclical indicators focus on Bitcoin miners, the professional service providers that protect the Bitcoin network. For example, a common measure is to calculate the miner's holdings (MC) (the dollar value of all Bitcoins held by miners) in relation to the so-called 'thermocap' (TC) (the cumulative value of Bitcoins awarded to miners through block rewards and transaction fees). Generally speaking, when the value of miners' assets reaches a certain threshold, they may begin to take profits. Historically, when the MCTC ratio exceeds 10, the price subsequently reaches a peak within that cycle (Chart 6). Currently, the MCTC ratio is about 6, indicating that we are still in the middle stage of the current cycle. However, similar to the MVRV ratio, this indicator's peak is also continuously declining, so the price peak may come before the MCTC ratio reaches 10.
Figure 6: The cyclical peaks of the Bitcoin miner indicator MCTC are also continuously declining
There are many other on-chain indicators, and these indicators may have subtle differences from those derived from other data sources. Moreover, these tools can only provide a rough understanding of the current phase of Bitcoin's price increase compared to the past, and do not guarantee that the relationship between these indicators and future price returns will be similar to those of the past. That said, overall, common indicators of Bitcoin's cycles are still below the levels seen when prices peaked 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 the total cryptocurrency market capitalization) peaked approximately two years into the bull market (Chart 7). Bitcoin's dominance has recently begun to decline, just around the two-year mark since the start of this market cycle. If this trend continues, investors should consider monitoring broader metrics to determine whether cryptocurrency valuations are nearing cyclical highs.
Figure 7: Bitcoin's dominance has been on a downward trend in the third year of the last two cycles
For example, investors can monitor funding rates, which represent the cost of holding long positions in perpetual futures contracts. When speculative traders have a high demand for leverage, funding rates tend to rise. Therefore, the overall level of funding rates in the market can indicate the overall position size of speculative traders. Chart 8 displays the weighted average funding rates of the 10 largest cryptocurrencies (i.e., the largest 'altcoins') after Bitcoin. Currently, the funding rates are significantly positive, indicating that leveraged investors are demanding long positions, although funding rates fell sharply during the recent declines over the past week. Furthermore, even though we are currently at a local high, funding rates remain below levels seen earlier this year and the peaks of the previous cycle. Therefore, we believe that the current funding rate levels suggest that market speculation has not yet peaked.
Figure 8: Funding rates indicate moderate levels of speculation in altcoins
In contrast, the open interest (OI) in perpetual futures for altcoins has reached relatively high levels. Before a significant liquidation event on December 9, the open interest in altcoins across the three major perpetual futures exchanges had reached nearly $54 billion (Chart 9). This indicates a relatively high position size among speculative traders across the market. After the large-scale liquidation, the open interest in 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, so it may be important to continue monitoring this indicator.
Figure 9: High altcoin positions before recent liquidations
The bull market will continue
Since the birth of Bitcoin in 2009, the cryptocurrency market has made significant progress, and many characteristics of the current crypto bull market differ from those of the past. Most notably, the approval of spot Bitcoin and Ethereum ETFs in the U.S. market has brought in $36.7 billion in net capital inflows and helped integrate crypto assets into broader traditional portfolios. Additionally, we believe that the recent U.S. elections may bring more regulatory clarity to the market and help ensure the permanent status of crypto assets in the world's largest economy. This marks a significant change compared to the past, where observers repeatedly questioned the long-term prospects of the crypto asset class. For these reasons, the valuations of Bitcoin and other crypto assets may not follow the historical patterns of the early days.
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 as well as altcoin data may help investors make risk management decisions. Grayscale Research believes that the current set of indicators generally suggests that the crypto market is in the mid-stage of a bull market: indicators such as the MVRV ratio are significantly above the cycle's low points but have yet to reach levels that mark previous market tops. As long as the fundamentals (such as application adoption and macro market conditions) are sound, we believe the crypto bull market will extend to 2025 and beyond.
