Written by: Zach Pandl, Michael Zhao
Translated by: Luffy, Foresight News
Historically, the cryptocurrency market has followed a clear four-year cycle, with prices going through 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 are broadening market access, and the incoming Trump administration may bring greater regulatory clarity to the crypto industry. For these reasons, the valuations of the cryptocurrency market may exceed historical highs.
Grayscale Research believes the current market is in the mid-phase of a new round of crypto cycles. As long as the fundamentals (such as application adoption and macro market conditions) are sound, the bull market could continue through 2025 or even longer.
Like many physical goods, the price of Bitcoin does not strictly follow the 'random walk' model. Instead, Bitcoin price movements exhibit characteristics of statistical momentum: uptrends often follow uptrends, and downtrends often follow downtrends. 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 had its unique driving factors, and future price movements will not strictly follow past experiences. Additionally, as Bitcoin matures and is adopted more widely by traditional investors, and as the impact of the four-year halving event on supply diminishes, the cyclical patterns of Bitcoin's price changes may be reshaped or completely disappear. Nevertheless, studying past cycles can provide investors with insights into Bitcoin's typical statistical behavior, offering references for their risk management decisions.
Observations on Bitcoin's historical cycles
Figure 2 shows Bitcoin's price performance during the uptrends of each previous cycle. Prices at the cycle lows (the start of the uptrend) are indexed to 100 and tracked to the peaks (the end of the uptrend). Figure 3 presents the same information in a tabular format.
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 lasted about two years. In both cycles, Bitcoin's price increased over 500 times from relative lows. The subsequent two cycles lasted less than three years each. During the cycle from January 2015 to December 2017, Bitcoin's price increased over 100 times, while in the cycle from December 2018 to November 2021, Bitcoin's price increased about 20 times.
Figure 2: Bitcoin's performance in the past two market cycles is similar
After peaking in November 2021, the price of Bitcoin fell to about $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 past two Bitcoin cycles, both of which lasted about three years before prices peaked. In terms of the magnitude of the increase, Bitcoin's price has risen about 6 times this cycle, which, while considerable, is significantly lower than the returns achieved in the past four cycles. In summary, while we cannot determine whether future price returns will resemble those of past cycles, Bitcoin's history tells us that the latest bull market could continue in both duration and magnitude.
Figure 3: Four distinct cycles in Bitcoin's price history
On-chain indicators
In addition to observing past cycles' price performance, investors can apply various blockchain-based indicators to assess the maturity of the Bitcoin bull market. Common indicators include the profitability of Bitcoin buyers, the inflow of new funds into Bitcoin, and price levels related to Bitcoin miners' income.
A particularly popular metric is the ratio of Bitcoin's market value (MV) (Bitcoin circulation * current market price) to its realized value (RV) (the sum of prices at which each Bitcoin was last transferred on-chain). This metric is known as the MVRV ratio and can be considered an indication of how much Bitcoin's market value exceeds the total cost basis of the market. In the past four cycles, the MVRV ratio has reached at least (Figure 4). Currently, the MVRV ratio is 2.6, indicating that the latest cycle may last even longer. However, the peak of the MVRV ratio in past cycles has been declining, so this cycle's indicator may never reach the level of 4.
Figure 4: The historical trend of Bitcoin's MVRV ratio
Some on-chain indicators measure the extent of new funds entering the Bitcoin ecosystem. Experienced cryptocurrency investors often refer to this framework as HODL Waves. There are various metrics available for this measure, 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). This indicator has reached at least 60% in the past four cycles. This means that during the uptrend, at least 60% of the free-floating supply was traded on-chain over the course of a year. Currently, this number is about 54%, suggesting that we may see more Bitcoin change hands on-chain before prices peak.
Figure 5: The ratio of active Bitcoin addresses to circulating supply over the past year is less than 60%
Some cyclical indicators focus on Bitcoin miners, who are the specialized service providers that secure the Bitcoin network. For example, a common metric is the ratio of miner capitalization (MC) (the dollar value of all Bitcoin held by miners) to what is known as 'thermocap' (TC) (the cumulative value of Bitcoin issued to miners through block rewards and transaction fees). Generally speaking, when the value of miner assets reaches a certain threshold, they may begin to take profits. Historically, when the MCTC ratio exceeds 10, prices have subsequently peaked within that cycle (Chart 6). Currently, the MCTC ratio is about 6, indicating that we are still in the middle phase of the current cycle. However, similar to the MVRV ratio, this indicator has been declining in peak values in recent cycles, so price peaks may arrive before the MCTC ratio reaches 10.
Figure 6: The cyclical peak of the Bitcoin miner indicator MCTC is also continuously declining
There are also many other on-chain indicators, which may differ slightly from metrics derived from other data sources. Furthermore, these tools can only provide a rough understanding of the current Bitcoin price uptrend compared to the past, and do not guarantee that the relationship between these indicators and future price returns will be similar to that of the past. That said, overall, the common indicators of Bitcoin cycles are still below the levels seen when prices reached peaks 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 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 may be especially 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 after the bull market began (Figure 7). Bitcoin's dominance has recently begun to decline and is currently at a point about two years into this market cycle. If this trend continues, investors should consider monitoring broader metrics to determine if crypto valuations are approaching cyclical highs.
Figure 7: Bitcoin's dominance has been declining 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 high demand for leverage, the funding rate tends to rise. Therefore, the overall funding rate level in the market can indicate the aggregate positions of speculative traders. Chart 8 shows the weighted average funding rates of the ten largest crypto assets (i.e., the largest 'altcoins') following Bitcoin. Currently, the funding rate is significantly positive, indicating that leveraged investors have demand for long positions, although the funding rate sharply declined during the past week's downturn. Furthermore, even at the current local high, the funding rate remains below levels from earlier this year and the highs of the previous cycle. Therefore, we believe the current funding rate level indicates that market speculation has not yet peaked.
Figure 8: Funding rates indicate that the speculative level of altcoins is moderate
In contrast, the open interest (OI) of altcoin perpetual futures has reached relatively high levels. 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 speculative positions in the market are relatively high. After the major liquidation, the open interest of altcoins dropped by about $10 billion, but remains at a high level. High long positions among speculative traders may align with the later stages of the market cycle, so continuing to monitor this indicator may be important.
Figure 9: Recent high levels of altcoin holdings before liquidation
The bull market may continue
Since Bitcoin's inception in 2009, the cryptocurrency market has made significant progress, with many characteristics of the current crypto bull market differing from those of the past. Most notably, the approval of spot Bitcoin and Ethereum ETFs in the US market has brought in $36.7 billion in net capital inflow and helped integrate crypto assets into broader traditional portfolios. Additionally, we believe that the upcoming US 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 represents a significant change compared to the past, where observers consistently questioned the long-term prospects of the crypto asset class. For these reasons, the 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, assessments of on-chain indicators and altcoin data may be helpful for 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-phase of a bull market: metrics like the MVRV ratio are significantly above the cycle lows, but have not yet reached the levels that marked 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 continue through 2025 and beyond.
