Original title: The State of Crypto Cycle
Original authors: Zach Pandi, Michael Zhao
Original source: https://www.grayscale.com/research/reports/the-state-of-the-crypto-cycle
Translation by: Tom, Mars Finance
Historically, cryptocurrency valuations seem to follow a four-year cycle, with prices rising and then falling, repeating indefinitely. Grayscale Research believes that investors may be able to track the crypto cycle by observing various blockchain-based indicators and other measurement methods, providing references for risk management.
The crypto space is gradually maturing: new Bitcoin and Ethereum spot exchange-traded products (ETPs) have broadened market access, and the new Congress in the U.S. may bring a clearer regulatory environment for the industry. For these reasons, the valuations of crypto assets may ultimately surpass the frequently occurring four-year cycle patterns seen in the early market history.
That being said, Grayscale Research believes that the current combination of various indicators still aligns with the mid-phase of the cycle. As long as this asset class remains supported by fundamental factors (such as adoption rates and broader macro market conditions), the bull market may continue into 2025 and beyond.
Similar to many physical commodities, Bitcoin's price does not follow a strict 'random walk' [1]. Instead, the price exhibits statistically momentum characteristics: uptrends often follow uptrends, and downtrends often follow downtrends. From a longer time scale, the recurring nature of Bitcoin's cyclical rises and falls causes the price to exhibit cyclical fluctuations around historically upward trends (see Chart 1).
Chart 1: Bitcoin Price Characteristics Exhibit Cyclical Fluctuations Around an Upward Trend
Each past price cycle has had unique drivers, and there is no reason to believe that future price returns will completely replicate past experiences. Additionally, as Bitcoin continues to mature and gain broader acceptance among traditional investors, and as the impact of its halving event every four years on supply gradually diminishes, the cyclical fluctuations in Bitcoin prices may change or even fade. However, studying past cycles may provide investors with some reference for Bitcoin's typical statistical behavior, which could benefit risk management decisions.
Measuring Momentum
Chart 2 displays the price performance of Bitcoin during each previous cycle's upward phase. Prices are benchmarked at cyclical lows (marking the starting point of the upward phase) set to 100 and tracked to their peak (marking the end of the upward phase). Chart 3 presents the same information in tabular form.
The earliest price cycles of Bitcoin were short and steep: the first cycle lasted less than a year, and the second cycle lasted about two years. In both cycles, the price increased more than 500 times from the low point of the previous cycle. The subsequent two cycles each lasted nearly three years. During the cycle from January 2015 to December 2017, Bitcoin's price increased more than 100 times, while in the cycle from December 2018 to November 2021, Bitcoin's price increased about 20 times.
Chart 2: Current Bitcoin Price Trend Closely Resembles the Previous Two Market Cycles
After peaking in November 2021, Bitcoin's price fell to about $16,000 in November 2022, marking a cyclical low. Since then, the current price increase phase has started from that point and has lasted for over two years. As shown in Chart 2, the current price upward trend closely resembles the trajectories of the past two cycles, both of which continued for about another year before peaking. From the perspective of returns, the current cycle's approximate 6-fold return for Bitcoin is impressive, but it still pales in comparison to the increases seen in the past four cycles. Overall, while we cannot be certain that future price performance will align with past cycles, Bitcoin's history suggests that this bull market may extend further in both duration and returns.
Chart 3: Four Distinct Cycles in Bitcoin Price History
Examining Key Indicators
In addition to measuring past cycle price performance, investors can also use various blockchain-based indicators to assess the maturity of Bitcoin's bull market. Common indicators include measuring the extent of Bitcoin's increase relative to the cost basis of buyers, the scale of new capital inflows into Bitcoin, and the level of Bitcoin prices relative to miner income.
One popular indicator is the MVRV ratio, which is the ratio of Bitcoin's market value (MV, measured at the price per coin in the secondary market) to its realized value (RV, measured at the price when each coin last transacted on-chain). The MVRV ratio can be seen as the extent to which Bitcoin's market value exceeds the overall market cost basis. In each of the past four cycles, the MVRV ratio has reached at least 4 (see Chart 4). Currently, the MVRV ratio is 2.6, indicating that this cycle may still have upside potential. However, the peak of the MVRV ratio in each cycle has been lower than in the previous cycle, suggesting that this indicator may not necessarily reach 4 before the price peaks in this cycle.
Chart 4: MVRV Ratio at Mid-Level
Other on-chain indicators measure the extent of new capital entering the Bitcoin ecosystem — this framework is commonly referred to among seasoned crypto investors as 'HODL Waves.' Price increases may occur because new capital purchases Bitcoin at slightly above the cost of existing long-term holders. There are many specific indicators to choose from, but Grayscale Research prefers to use the ratio of the amount of coins transferred on-chain in the past year to the total circulating supply of Bitcoin (see Chart 5) [2]. In the past four cycles, this indicator has reached at least 60%, meaning that during a year of the upward phase, at least 60% of the circulating supply was traded on-chain. Currently, this value is about 54%, indicating that more coins may need to change hands on-chain before the price peaks.
Chart 5: Bitcoin Circulation Volume Activity Over the Past Year Below 60%
Additionally, cyclical indicators related to Bitcoin miners are also worth noting. Miners are professional service providers that offer security to the Bitcoin network. For example, a commonly used measurement is the ratio of the total market capitalization of miners (MC, the dollar value of all Bitcoin held by miners) to the 'thermal cap' (TC, the value of Bitcoin accumulated by miners through block rewards and transaction fees). The intuition is that when the value of the assets held by miners reaches a certain threshold, they may choose to take profits. Historically, when the MCTC ratio exceeds 10, prices tend to peak in that cycle (see Chart 6). Currently, the MCTC ratio is about 6, indicating that we are still in the middle phase of this cycle. However, similar to the MVRV ratio, the peaks of this indicator in each cycle are also declining, suggesting that prices may peak even before the MCTC ratio reaches 10.
Chart 6: Bitcoin Miner Indicators Have Yet to Reach Past Peak Levels
There are many other on-chain indicators, and different data sources may have slight variations in the calculations of these indicators. Furthermore, these tools can only provide a rough indication of the current price increase phase compared to the past and do not guarantee that the relationship between these indicators and future price returns will be the same as in the past. Nevertheless, overall, commonly used indicators for Bitcoin cycles remain below the levels seen at past price peaks, indicating that if the fundamentals remain supportive, this bull market may continue.
Looking Beyond Bitcoin
The crypto market is far more than just Bitcoin; signals from other areas of the industry may also provide guidance on the state of the market cycle. We believe these indicators will be particularly important over the next year, as the relative performance of Bitcoin compared to other crypto assets warrants attention. In the past two market cycles, Bitcoin's dominance (i.e., Bitcoin's share of total crypto market capitalization) peaked about two years after the start of the bull market (see Chart 7) [3]. Recently, Bitcoin's dominance has begun to decline, which is similar to the performance observed in the previous two cycles around the third year. If this trend continues, investors should consider broader indicators to assess whether crypto valuations are nearing cyclical highs.
Chart 7: Bitcoin Dominance Declined in the Third Year of the Past Two Cycles
For example, investors can pay attention to funding rates, which are the costs of holding long positions in perpetual contracts. When speculative traders' demand for leveraged longs increases, funding rates tend to rise. Therefore, the overall funding rate levels in the market can reflect the degree of overall speculative long positions. Chart 8 shows the weighted average funding rates of the top ten crypto assets by market capitalization outside of Bitcoin (i.e., major 'altcoins') [4]. Currently, funding rates are significantly positive, indicating that leveraged investors have a demand for long positions, although funding rates have pulled back somewhat during last week's market downturn. Additionally, even at local peaks, funding rates remain below earlier levels this year and the peaks of the last cycle. Therefore, we believe that the current levels are consistent with the scale of mid-term speculative positions and have not reached the extreme highs typically associated with mature market cycles.
Chart 8: Funding Rates Indicate Moderate Speculative Long Positions in Altcoins
In contrast, the open interest (OI) for altcoin perpetual contracts has reached relatively high levels. Before the massive liquidation on Monday, December 9, the altcoin OI approached $54 billion across the three largest perpetual contract exchanges (see Chart 9). This indicates a high level of speculative long positions in the overall market. After a wave of liquidations earlier this week, the altcoin OI dropped by about $10 billion but still remains at a high level. High speculative long positions are consistent with the late stages of the market cycle, so continuing to monitor this indicator may be quite important.
Chart 9: Recent High Open Interest in Altcoins Before Liquidation
Looking Forward
Since the birth of Bitcoin in 2009, the digital asset market has come a long way, and this crypto bull market has many differences from the past. Most importantly, the approval of Bitcoin and Ethereum spot ETPs in the U.S. has brought $36.7 billion in net capital inflow, incorporating these assets into more traditional portfolios [5]. Additionally, we believe that the upcoming U.S. elections may bring a clearer regulatory framework to the market, helping digital assets gain a long-term foothold in the world's largest economy — in stark contrast to the past when the long-term prospects of the crypto asset class were repeatedly questioned. For these reasons, the valuations of Bitcoin and other crypto assets may no longer follow the common four-year cycle seen in their early history.
Meanwhile, Bitcoin and many other crypto assets can be viewed as digital commodities, and thus may still exhibit a certain degree of price momentum. Evaluating on-chain indicators and altcoin market position data may provide references for investors' risk management decisions. Grayscale Research believes that the current combination of various indicators aligns with the mid-phase of the crypto market cycle: for instance, the MVRV ratio has risen far above the cyclical lows but has not yet reached the levels that marked past market tops. As long as the fundamentals remain supportive (such as increased adoption and a broader macro market environment), we see no reason why this crypto bull market cannot extend into 2025 and beyond.
[1] In a financial markets context, a random walk refers to the idea that asset prices evolve in an unpredictable way, in which information of past events holds no information about future results.
[2] Free Float Bitcoin supply defined by Coin Metrics as tokens active at least once in the last five years.
[3] Exhibit 7 only shows the two most recent cycles because the altcoin market was not sufficiently developed before that point.
[4] Defined as the largest tokens by market capitalization after Bitcoin with available data. No data was available for TON, so the next largest asset DOT was included instead.
[5] Source: Bloomberg, Grayscale Investments. Data as of December 11, 2024.
