Historically, the cryptocurrency market has followed a clear four-year cycle, experiencing consecutive phases of growth and decline. Grayscale Research believes that investors can monitor various blockchain-based indicators and others to track cryptocurrency cycles and provide references for their own risk management decisions.
Cryptocurrencies are an increasingly mature asset class: new spot Bitcoin and Ethereum ETFs have broadened market access, and the incoming Trump administration may bring greater regulatory clarity to the crypto industry. Given these reasons, cryptocurrency market valuations may break historical highs.
Grayscale Research believes the market is currently in the mid-term phase of a new crypto cycle. As long as the fundamentals (such as application adoption and overall economic market conditions) are reliable, the bull market may continue until 2025 or even longer.
Like many physical commodities, Bitcoin's price does not strictly follow a 'random walk' model. Instead, Bitcoin's price trend exhibits characteristics of statistical momentum: upward trends often follow upward movements, and downward trends often follow downward movements. Although Bitcoin may rise or fall in the short term, its price shows a significant cyclical upward trend in the long term (Figure 1).
Source: Coin Metrics Figure 1: Bitcoin's price fluctuates repeatedly, but shows an overall upward trend
Each past price cycle has unique driving factors, and future price trends will not completely follow past experiences. Additionally, as Bitcoin matures and is adopted by a broader range of traditional investors, along with the diminishing impact of the four-year halving events on supply, the cyclical patterns of Bitcoin price changes may reshape or completely disappear. Nevertheless, studying past cycles can provide investors with some guidance on Bitcoin's typical statistical behaviors, 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 previous cycles. Prices are indexed at 100 at the cycle low (start of the rising phase) and tracked to the peak (end of the rising phase). Figure 3 presents the same information in tabular form.
The first price cycle in Bitcoin's history was relatively short and volatile: the first cycle lasted less than a year, while the second cycle lasted about two years. In both cycles, the price of Bitcoin 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.
Source: Coin Metrics Figure 2: Bitcoin's trends in the last two market cycles are similar
After peaking in November 2021, Bitcoin's price fell to about $16,000 in November 2022. The current price increase phase has continued for over two years since then. As shown in Figure 2, the latest price increase closely resembles the previous two Bitcoin cycles, both of which lasted about three years before prices peaked. From the perspective of the extent of the rise, Bitcoin's current rise this cycle is about 6 times, which, while considerable, is significantly lower than the returns achieved in the previous four cycles. In summary, while we cannot be certain that future price returns will be similar to past cycles, Bitcoin's history tells us that the latest bull market can still continue in terms of duration and magnitude.
Source: Coin Metrics Figure 3: Four different 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 profit status of Bitcoin buyers, the inflow of new funds into Bitcoin, and the price levels related to Bitcoin miner income.
A particularly popular indicator is the calculation of Bitcoin's market value (MV) (Bitcoin circulation * current market price) relative to its realized value (RV) (the total price at which each Bitcoin was last transferred on-chain). This indicator is called the MVRV ratio and can be considered a measure of how much Bitcoin's market value exceeds the total cost basis in the market. In the past four cycles, the MVRV ratio has reached at least (Figure 4). The current MVRV ratio is 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 declining, so this round's cycle may never reach a level of 4.
Source: Coin Metrics Figure 4: Historically, the trend of Bitcoin's MVRV ratio
Some on-chain indicators assess the extent of new funds entering the Bitcoin ecosystem. Experienced cryptocurrency investors often refer to this framework as HODL Waves. There are various assessment indicators available, but Grayscale Research prefers to use the ratio of the number of tokens moved on-chain last year relative to Bitcoin's total free-floating supply (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 over a year. Currently, this figure is about 54%, indicating that we may see more Bitcoin change hands on-chain before prices peak.
Source: Coin Metrics Figure 5: The ratio of active Bitcoin to circulation in the past year is less than 60%
Some cyclical indicators focus on Bitcoin miners, the professional service providers that secure the Bitcoin network. For example, a common metric is to calculate the miner's holdings (MC) (the dollar value of all Bitcoins held by miners) relative to the so-called 'thermocap' (TC) (the cumulative value of Bitcoins paid to miners through block rewards and transaction fees). Generally, when the value of miners' assets reaches a certain threshold, they may begin to take profits. Historically, when the MCTC ratio exceeds 10, prices subsequently peak 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's peak is continually declining in recent cycles, so the price peak may occur before the MCTC ratio reaches 10.
Source: Coin Metrics Figure 6: The cyclical peak of the Bitcoin miner indicator MCTC is also continuously declining
There are many other on-chain indicators, and these indicators may have slight differences compared to those from other data sources. Additionally, these tools can only provide a rough understanding of the current Bitcoin price increase phase compared to the past and cannot guarantee that the relationship between these indicators and future price returns will be similar to the past. Nevertheless, overall, common indicators of the Bitcoin cycle are still below the levels seen when prices peaked in the past. This indicates that if the fundamentals are reliable, the current bull market may continue.
Market indicators outside of Bitcoin
The cryptocurrency market is not just Bitcoin; signals from other industries in the sector may also provide guidance on the market cycle's state. 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 market share in the total cryptocurrency market capitalization) peaked about two years after the start of the bull market (Figure 7). Bitcoin's dominance has recently begun to decline, which is around two years into this market cycle. If this trend continues, investors should consider monitoring broader evaluation indicators to determine if cryptocurrency valuations are approaching cyclical peaks.
Source: Coin Metrics Figure 7: Bitcoin's dominance has shown a declining 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 higher demand for leverage, funding rates tend to rise. Therefore, the overall level of funding rates in the market can indicate the overall positioning of speculative traders. Chart 8 shows the weighted average funding rate of Bitcoin and the next ten largest crypto assets (i.e., the largest 'altcoins'). Currently, funding rates are significantly positive, indicating demand for long positions from leveraged investors, even though funding rates have dropped sharply in the recent decline over the past week. Furthermore, even though they are currently at a local high, funding rates are still below levels earlier this year and the peaks of the last cycle. Therefore, we believe that the current level of funding rates indicates that market speculation has not yet reached its peak.
Source: Coin Metrics Figure 8: Funding rates indicate that the speculative level of altcoins is at a moderate level
In contrast, the open interest (OI) of altcoin perpetual futures has reached relatively high levels. Before a significant liquidation event on December 9, the open interest of altcoins on the three major perpetual futures exchanges reached nearly $54 billion (Chart 9). This indicates that the overall speculative positions of traders in the market are relatively high. After a large-scale liquidation, the open interest of altcoins dropped by about $10 billion but remains elevated. The high long positions of speculative traders may align with the later stage of the market cycle, making it important to continue monitoring this indicator.
Source: Coin Metrics Figure 9: High open interest in altcoins before recent liquidations
The bull market will continue
Since the birth of Bitcoin in 2009, the cryptocurrency market has made significant progress, and many features of the current crypto bull market are different from the past. Most notably, approvals for spot Bitcoin and Ethereum ETFs in the U.S. market have brought in $36.7 billion in net capital inflows, helping to integrate crypto assets into broader traditional portfolios. Moreover, we believe that the recent U.S. elections may bring more regulatory clarity to the market and help secure the permanent status of crypto assets in the world's largest economy. Compared to the past, this is a significant change, as 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 early historical patterns.
Meanwhile, Bitcoin and many other crypto assets can be viewed as digital commodities, which may exhibit some degree of price momentum like other commodities. Therefore, evaluations of on-chain indicators and 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-phase of a bull market: indicators like the MVRV ratio are far above the cyclical lows but have not yet reached levels that symbolize previous market peaks. As long as the fundamentals (such as application adoption and overall economic market conditions) are reliable, we believe the crypto bull market will continue until 2025 and beyond.
[Disclaimer] The market has risks, and investments should be made cautiously. This article does not constitute investment advice, and users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific situation. Investing based on this is at one's own risk.
This article is republished with permission from: (Foresight News)
Original authors: Zach Pandl, Michael Zhao
'Where is the cryptocurrency bull market? Grayscale: We are in the mid-term, and the rise may continue until this point.' This article was first published in 'Crypto City'
