Authors: Zach Pandl, Michael Zhao, Grayscale Research
Compiled by: 0xjs, Golden Finance
Key points:
● From a historical perspective, cryptocurrencies exhibit a clear four-year cycle, going through consecutive phases of price rises and falls. Grayscale Research believes that investors can monitor a variety of blockchain-based indicators and other metrics to track the crypto 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 incoming U.S. Congress may bring clearer regulation to the industry. Considering these factors, cryptocurrencies may eventually break free from the significant four-year cyclical characteristics of early markets.
● Nevertheless, Grayscale Research determines that the current combination of indicators fits the mid-term stage of the cycle. As long as the fundamentals remain solid, such as widespread application and a favorable macroeconomic environment, the bull market is expected to continue until 2025 and beyond.
Like many physical commodities, Bitcoin prices do not follow a strict 'random walk' model. In reality, there are signs of statistical momentum in its prices: when prices rise, they tend to continue rising, and when they fall, they tend to keep falling. When viewed over a longer time span, Bitcoin's cyclical movements fluctuate around an historical upward trend line (Figure 1).
Figure 1: Bitcoin's price exhibits cyclical fluctuations around an upward trend.
The drivers of past price cycles have varied, and future price returns may not replicate past experiences. As Bitcoin matures and is accepted by more traditional investors, and as the supply impact of the four-year halving event diminishes, 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 support risk management.
Measuring momentum.
Figure 2 shows Bitcoin's price performance during the rising phases of previous cycles. Prices are set at 100 based on the cycle's low point (marking the start of the appreciation phase) and track to the peak (marking the end of the appreciation phase). Figure 3 presents the same information in tabular form.
The early cycles of Bitcoin were short and surged rapidly: the first cycle was less than a year, while the second cycle lasted about two years. Both surged over 500 times from the previous cycle's low point. 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 current Bitcoin cycle's trajectory is very similar to the previous two market cycles.
After peaking in November 2021, Bitcoin's price fell to about $16,000 in November 2022, marking the start of the current cycle, which has now exceeded two years. As shown in Figure 2, the price rise in this cycle is similar to the trajectories of the previous two Bitcoin cycles, both of which needed another year to reach their price peaks. In terms of magnitude, this cycle has seen a rise of about six times, which is substantial but far less than the previous four cycles. In summary, while it cannot be definitively stated that future price movements will align with past cycles, history indicates that this bull market has room for expansion in both duration and magnitude.
Figure 3: Four unique cycles in Bitcoin's historical prices.
Check key indicators.
In addition to analyzing past 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 earnings.
Among the favored indicators is the ratio of Bitcoin Market Value (MV, calculated at the secondary market price per coin) to Realized Value (RV, calculated at the most recent on-chain transaction price per coin), known as the MVRV ratio, which can be seen as the extent to which Bitcoin market value exceeds the total cost of the market. In the past four cycles, this ratio has reached at least 4 (Figure 4). The current MVRV ratio is 2.6, suggesting that there may be further price action in this cycle. However, the peak values of this ratio have gradually declined across cycles, and it may not reach 4 before the price peaks. Figure 4: MVRV ratio at a mid-level.
Other on-chain indicators consider the extent of new capital inflow into the Bitcoin ecosystem, often referred to by seasoned cryptocurrency investors as 'HODL Waves.' Price increases may occur as new capital is bought from long-term holders. There are numerous indicators, but Grayscale Research tends to select the ratio of on-chain transfer volume over the past year to the total circulating supply of Bitcoin (Figure 5). In the past four cycles, this indicator reached at least 60%, meaning that at least 60% of the circulating supply changed hands during the appreciation phase. The current ratio is about 54%, suggesting that we may see further increases in on-chain turnover before the price peaks.
Figure 5: The activity level of Bitcoin's circulating supply over the past year is below 60%.
Another cyclical indicator focuses on Bitcoin miners, who are the professional service providers maintaining the Bitcoin network. This includes the commonly used miner market cap (MC, the dollar value of coins held by miners) compared to the 'Total Cost' (TC, the accumulated value of Bitcoin earned by miners through block rewards and transaction fees). The principle is that when miner assets reach a certain threshold, they may take profits. Historical data shows that when the MCTC ratio exceeds 10, prices often peak during the cycle (Figure 6). The current ratio is around 6, indicating it is in the middle stage of the cycle. However, similar to the MVRV ratio, the peak values of this indicator have 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 many on-chain indicators, and different data sources may have discrepancies. Moreover, these tools can only roughly assess the similarities and differences between the current price appreciation phase and past phases, and cannot ensure that the relationship between indicators and future price returns remains constant. Overall, the common indicators of Bitcoin's cycle are still below the levels of past price peaks; if the fundamentals remain strong, the current bull market may continue.
Other cryptocurrencies besides Bitcoin.
The crypto market far exceeds Bitcoin's scope, and signals from other sectors of the industry can also guide market cycle trends. Given Bitcoin's relative performance to other crypto assets, such indicators will be particularly critical in the coming year. In the last two market cycles, Bitcoin's dominance (share of total market cap in the crypto market) peaked about two years into the bull market (Figure 7). Recently, its dominance has declined, coinciding with the two-year mark of the current market cycle. If this trend continues, investors should consider more indicators to assess whether crypto valuations are approaching cyclical highs.
Figure 7: Bitcoin's dominance began to decline in the third year of the first 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 leverage demand, the funding rate rises. Therefore, the market's funding rate level can measure the overall degree of speculative long positions. Figure 8 shows the weighted average funding rate for Bitcoin and the top ten cryptocurrencies (largest 'altcoins'). The current rate is significantly positive, indicating strong demand for long positions from leveraged investors, even though it dropped sharply during last week's market crash. Even at local peaks, it is still lower than the beginning of this year and the last cycle's peak. From this perspective, the current level aligns with a moderately speculative long position in the market, 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 high levels. Before the large-scale liquidation on December 9, open interest across the three major perpetual futures exchanges for altcoins was nearly $54 billion (Figure 9), highlighting a high level of speculative long positions in the market. After the large-scale liquidation at the beginning of this week, OI decreased by about $10 billion but remained at a high level. The high level of speculative long positions aligns with the characteristics of the later stages of the market cycle, so continuous monitoring is necessary.
Figure 9: Altcoin open interest was at a high level before the recent liquidation.
Next, let's play music.
Since the birth of Bitcoin in 2009, the digital asset market has developed rapidly, and this crypto bull market is quite different from the past in many ways. The key is that the approval of Bitcoin and Ethereum spot ETPs in the U.S. market has brought in a net inflow of $36.7 billion, integrating them into traditional investment portfolios. Additionally, the upcoming elections in the U.S. are expected to enhance market regulatory transparency, solidifying the status of digital assets in the world's largest economy. This transformative change is significant, as the long-term prospects of cryptocurrencies have often been questioned in the past. Therefore, Bitcoin and other crypto asset valuations may not necessarily follow the early four-year cycle pattern.
At the same time, cryptocurrencies like Bitcoin are akin to digital commodities, and their prices may exhibit momentum characteristics. Therefore, analyzing on-chain indicators and altcoin holding data can contribute to risk management decisions for investors.
Grayscale Research determines that the current combination of indicators fits the mid-term of the crypto market cycle: the MVRV ratio is above the cycle low and still far from the previous market peak. As long as the fundamentals remain solid, such as widespread application and a favorable macro environment, there is no reason the crypto bull market should not continue until 2025 and beyond.
