Original title: (The State Of the Crypto Cycle)
Authors: Zach Pandl & Michael Zhao
Compiled by: Deep Tide TechFlow
Historically, cryptocurrency valuations have exhibited a pronounced four-year cycle, with prices undergoing sustained phases of rise and fall. Grayscale Research believes that investors can track the cyclical changes in the cryptocurrency market by monitoring a range of blockchain-based indicators and other data, thereby optimizing risk management strategies.
As cryptocurrencies gradually mature as an asset class, the market is undergoing significant changes. For example, the launch of Bitcoin and Ethereum spot exchange-traded products (ETPs) has further lowered the barrier for investors to enter the market. At the same time, the new U.S. Congress may bring clearer regulatory frameworks to the industry. Based on these factors, cryptocurrency valuations may gradually detach from the recurring four-year cycle patterns of early history.
Nevertheless, Grayscale Research believes that the current market indicators suggest that the cryptocurrency market is in the intermediate phase of the cycle. As long as this asset class remains supported by fundamental factors, such as the expansion of use cases and stable macroeconomic conditions, the bull market could continue until 2025 and beyond.
Similar to many physical commodities, Bitcoin's price does not entirely follow a 'random walk' pattern. Instead, data shows that its price exhibits statistical momentum effects: upward trends tend to persist for a period, while downward trends also continue. Over a longer horizon, Bitcoin's cyclical price fluctuations show repeated rises and falls around a long-term upward trend (see Figure 1).
Figure 1: Bitcoin price's cyclical fluctuations around a long-term upward trend
Each past price cycle has its unique driving factors; thus, future price performance will not completely replicate past experiences. Additionally, as Bitcoin matures and is accepted by more traditional investors, combined with the diminishing impact of the four-year halving events on supply, the cyclical volatility of Bitcoin prices may change or even disappear. Nevertheless, studying past price cycles can still provide investors with insights to help them understand Bitcoin's typical statistical characteristics, thereby enhancing their risk management.
Measuring momentum
Figure 2 shows Bitcoin's price performance during each cycle's upward phase. For comparison, prices are normalized to 100 starting from the cycle's low point (the beginning of the upward phase) and tracked to its peak (the end of the upward phase). Figure 3 presents the same data in tabular form.
The early price cycles in Bitcoin's history were relatively short and steep: the first cycle lasted less than a year, while the second cycle lasted about two years. In these two cycles, prices increased by more than 500 times from the previous cycle's low. The subsequent two cycles lasted less than three years each. During the cycle from January 2015 to December 2017, Bitcoin's price increased by more than 100 times, while in the cycle from December 2018 to November 2021, Bitcoin's price increased by approximately 20 times.
Figure 2: The current Bitcoin price trend is relatively close to the last two market cycles
After peaking in November 2021, Bitcoin's price fell to around $16,000 in November 2022, marking a cyclical low. Since then, Bitcoin has entered a new price uptrend that has lasted over two years. As shown in Figure 2, the recent price uptrend is similar to the trajectories of the previous two Bitcoin cycles, both of which lasted about a year before prices peaked. In terms of gains, Bitcoin's price return in this cycle is approximately 6 times, although this increase is notable, it is significantly lower than the returns of the past four cycles. Overall, while we cannot determine whether future price performance will replicate past patterns, Bitcoin's history suggests that this bull market may still have further room for development in terms of duration and gains.
Figure 3: Four unique cycles in Bitcoin price history
Analysis of key indicators
In addition to evaluating past cycle price performance, investors can assess the maturity of the current Bitcoin bull market through various blockchain-based indicators. These indicators typically include: the increase in Bitcoin price relative to buyer cost benchmarks, the scale of new funds flowing into the Bitcoin market, and the ratio of Bitcoin price to miner income, among others.
One commonly used indicator is the MVRV ratio, which is the ratio of Bitcoin's market value (MV) (calculated at the current market price per Bitcoin) to its realized value (RV) (calculated at the last on-chain transaction price per Bitcoin). The MVRV ratio can be understood as the degree of premium of Bitcoin's market capitalization relative to the market's total cost benchmark. In the past four cycles, the MVRV ratio reached at least 4 (see Figure 4). Currently, the ratio is 2.6, indicating that there may still be room for further price increases in the current cycle. However, the peak of the MVRV ratio has gradually decreased in each cycle, suggesting that prices may peak before this indicator reaches 4.
Figure 4: The MVRV ratio is currently at an intermediate level
Other on-chain indicators focus on the inflow of new funds into the Bitcoin ecosystem, which seasoned cryptocurrency investors usually refer to as HODL Waves. This framework suggests that price increases may result from new funds purchasing Bitcoin from long-term holders at slightly higher prices. Grayscale Research prefers to measure this by the ratio of the amount of Bitcoin moved on-chain over the past year to the total circulating supply (see Figure 5). In the past four cycles, this ratio reached at least 60%, meaning that at least 60% of the circulating supply underwent on-chain transactions within a year during the upward phase. Currently, this ratio is approximately 54%, suggesting that more Bitcoin may change hands on-chain before prices peak.
Figure 5: The active circulating supply of Bitcoin over the past year is below 60%
Additionally, there are some cyclical indicators that focus on the behavior of Bitcoin miners, who are the core participants responsible for maintaining the security of the Bitcoin network. For example, a common indicator is the ratio of miner asset value (MC) to 'hot capital' (TC). Intuitively, when the Bitcoin assets held by miners reach a certain critical value, they may choose to take profits. From historical data, when the MCTC ratio exceeds 10, Bitcoin prices tend to peak in that cycle (see Figure 6). Currently, the MCTC ratio is around 6, indicating that the current cycle may still be in its intermediate stage. However, similar to the MVRV ratio, the peak of the MCTC ratio has gradually decreased in each cycle, suggesting that prices may peak before this indicator reaches 10.
Figure 6: Blockchain-based indicators based on Bitcoin miners are currently also below historical thresholds
There are a wide variety of on-chain indicators, and there may be slight differences in measurements between different data sources. Furthermore, these tools can only provide a rough comparison between the current price upward phase and the past and cannot guarantee that the relationship between these indicators and future price movements will fully align with historical patterns. Nevertheless, overall, common indicators of Bitcoin's cycle remain below the levels of previous price peaks, indicating that if fundamental factors can support it, the current bull market may still continue.
Looking beyond Bitcoin
The scope of the crypto market far exceeds Bitcoin, and signals from other sectors of the industry can also provide clues about the state of the market cycle. We believe that due to Bitcoin's relative performance to other crypto assets, these signals could be particularly crucial in the coming year. In the past two market cycles, Bitcoin's dominance (the share of Bitcoin in the total market capitalization of crypto) typically peaked two years after the bull market began (see Figure 7). Recently, Bitcoin's dominance has started to decline, a trend that reappeared around the two-year mark of the market cycle. If this trend continues, investors should reference other indicators more broadly to assess whether cryptocurrency valuations are approaching cyclical peaks.
Figure 7: Bitcoin's dominance has declined in the third year of the past two cycles
For example, investors can pay attention to funding rates (the cost of holding long positions in perpetual futures contracts). When speculative traders increase their demand for leverage, funding rates tend to rise. Therefore, the level of funding rates can reflect the overall level of speculative long positions in the market. Figure 8 shows the weighted average funding rates of the 10 largest cryptocurrencies (i.e., altcoins) outside of Bitcoin. Currently, the funding rate is positive, indicating that leveraged investors have a high demand for long positions, although funding rates have decreased somewhat during last week's market correction. Moreover, even at their local peaks, the current funding rate levels remain below the peaks of earlier this year and the previous cycle. Thus, we believe that the current funding rate levels reflect a moderate level of speculative long positions in the market and do not necessarily indicate that the market cycle has entered its final phase.
Figure 8: Altcoin funding rates show a moderate level of speculative long positions
In contrast, the perpetual futures positions of altcoins have reached relatively high levels. Before the large-scale liquidation event on December 9, altcoins' positions on the three major perpetual futures exchanges reached nearly $54 billion (see Figure 9). This indicates that there is a large scale of speculative long positions in the market. After a large-scale liquidation earlier this week, altcoin positions decreased by about $10 billion but remain at a high level. Generally, high levels of speculative long positions indicate the later stages of the market cycle, so this indicator is worth continuing to monitor.
Figure 9: Recent liquidation before altcoin positions reached a high level
The market is still developing
Since Bitcoin's inception in 2009, the digital asset market has made significant progress, and the current crypto bull market differs in many ways from the past. The most notable change is that the U.S. has approved Bitcoin and Ethereum spot exchange-traded products (ETPs), bringing a net capital inflow of $36.7 billion to the market and incorporating these assets into more traditional portfolios. Additionally, recent U.S. elections may bring clearer regulatory frameworks to the market and consolidate the position of digital assets in the world's largest economy—this contrasts sharply with past skepticism surrounding the long-term prospects of crypto assets. For these reasons, the valuations of Bitcoin and other crypto assets may no longer follow the recurring four-year cycle patterns of their early history.
Meanwhile, Bitcoin and many other crypto assets can be viewed as digital commodities, similar to traditional commodities, and their prices may exhibit certain momentum effects. Therefore, the analysis of on-chain indicators and altcoin position data is significant for investors' risk management decisions. Grayscale Research believes that the current combination of indicators aligns with the intermediate phase of the crypto market cycle: for example, the MVRV ratio is significantly above its cyclical low but has not yet reached historical market peak levels. As long as fundamental factors, such as the popularity of applications and broader macroeconomic conditions, can support it, the bull market may continue.
