Authors: Zach Pandl & Michael Zhao
Compiled by: Shenchao TechFlow
Historically, cryptocurrency valuations have typically shown a clear four-year cycle, with prices undergoing sustained phases of increase and decrease. Grayscale Research believes that investors can track the cyclical changes in the cryptocurrency market by monitoring a series of blockchain-based indicators and other data, thereby optimizing their risk management strategies.
As cryptocurrencies gradually become a mature asset class, significant changes are occurring in the market. For instance, the launch of spot exchange-traded products (ETPs) for Bitcoin and Ethereum has further lowered the barrier for investors to enter the market. At the same time, the new U.S. Congress may bring a clearer regulatory framework for the industry. Based on these factors, cryptocurrency valuations may gradually detach from the recurring four-year cycle pattern seen in early history.
Nevertheless, Grayscale Research believes that the current market indicators suggest that the cryptocurrency market is in the intermediate stage of its cycle. As long as this asset class remains supported by fundamental factors, such as the expansion of application scenarios and a stable macroeconomic environment, the bull market may persist until 2025 and beyond.
Like many physical commodities, Bitcoin's price does not entirely follow a 'random walk' pattern. Instead, the data shows that its price exhibits statistically significant momentum effects: upward trends tend to persist for a while, and downward trends also continue. Over a longer time frame, the cyclical fluctuations of Bitcoin price show repeated rises and falls around a long-term upward trend (see Figure 1).
Figure 1: Cyclical fluctuations of Bitcoin price around a long-term upward trend
Each past price cycle has its unique driving factors, so future price performance will not completely replicate past experiences. Furthermore, as Bitcoin matures and gains acceptance among more traditional investors, and as the impact of the halving event occurring every four years on supply gradually diminishes, the cyclical fluctuations of Bitcoin prices may change or even disappear. Nevertheless, studying past price cycles can still provide investors with references to help them understand Bitcoin's typical statistical characteristics for better risk management.
Measuring momentum
Figure 2 shows the price performance of Bitcoin during the upward phases of each cycle. For ease of comparison, prices have been standardized to 100 starting from the cycle's low point (i.e., the beginning of the upward phase) and tracked to its peak (i.e., 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, and the second cycle lasted about two years. During these two cycles, prices increased more than 500 times from the low of the previous cycle. The following two cycles lasted less than three years each. In 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 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 about $16,000 in November 2022, marking a cyclical low. Since then, Bitcoin has entered a new price increase phase that has lasted for more than two years. As shown in Figure 2, the recent price increase trend is similar to the trends of the previous two Bitcoin cycles, both of which lasted about a year before reaching their price peaks. In terms of return, Bitcoin's price return in this cycle is about 6 times; although this increase is not to be underestimated, it is significantly lower than the returns seen in the past four cycles. Overall, while we cannot ascertain whether future price performance will replicate past patterns, Bitcoin's history indicates that this bull market may still have further development potential in terms of duration and magnitude of increase.
Figure 3: Four unique cycles in Bitcoin's price history
Analysis of key indicators
In addition to assessing past cycles' price performance, investors can also gauge the maturity of the current Bitcoin bull market through various blockchain-based indicators. These indicators typically include: the increase in Bitcoin price relative to the cost basis of buyers, the scale of new capital inflows into the Bitcoin market, and the ratio of Bitcoin price to miner revenue, among others.
One commonly used indicator is the MVRV ratio, which is the ratio of Bitcoin's market value (MV) (calculated based on the current market price per Bitcoin) to realized value (RV) (calculated based on the last on-chain transaction price per Bitcoin). The MVRV ratio can be understood as the premium level of Bitcoin's market capitalization relative to the overall cost basis in the market. In the past four cycles, the MVRV ratio reached at least 4 (see Figure 4). Currently, this ratio is 2.6, indicating that there may still be room for further price increases in the current cycle. However, the peaks of the MVRV ratio in each cycle have gradually declined, so 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 influx of new capital into the Bitcoin ecosystem, often referred to by seasoned cryptocurrency investors as HODL Waves. This framework suggests that price increases may be due to new capital purchasing Bitcoin from long-term holders at somewhat higher prices. Grayscale Research prefers to measure this by comparing the ratio of the number of Bitcoins moved on-chain in the past year to the total circulating supply (see Figure 5). In the past four cycles, this ratio reached at least 60%, indicating that at least 60% of the circulating supply was transacted on-chain during the upward phase of a year. Currently, this ratio is around 54%, suggesting that more Bitcoins may change hands on-chain before a price peak.
Figure 5: The active circulating supply of Bitcoin in 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 'thermal capital' (TC). Intuitively, when the Bitcoin assets held by miners reach a certain critical value, they may choose to take profits. Historical data shows that when the MCTC ratio exceeds 10, Bitcoin prices tend to peak during that cycle (see Figure 6). Currently, the MCTC ratio is about 6, indicating that the current cycle may still be in the middle stage. However, similar to the MVRV ratio, the MCTC ratio's peaks have gradually declined in each cycle, suggesting that prices may peak before this indicator reaches 10.
Figure 6: Bitcoin miner-based indicators are currently also below historical thresholds
There is 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 increase phase and the past and do not guarantee that the relationships between these indicators and future price movements will fully align with historical patterns. Nevertheless, overall, commonly used indicators for Bitcoin's cycle remain below the levels seen when past prices peaked, suggesting that if fundamental factors can support it, the current bull market may continue.
Looking beyond Bitcoin
The scope of the crypto market far exceeds that of Bitcoin, and signals from other areas of the industry can also provide clues about the state of the market cycle. We believe that due to Bitcoin's relative performance compared to other crypto assets, these signals may be particularly critical in the next year. In the past two market cycles, Bitcoin's dominance (i.e., the share of Bitcoin in the total market capitalization of cryptocurrencies) typically peaked two years after the bull market began (see Figure 7). Recently, Bitcoin's dominance has begun to decline, a trend that reappears around the two-year point of the market cycle. If this trend continues, investors should refer to a broader range of indicators to assess whether cryptocurrency valuations are nearing cyclical highs.
Figure 7: Bitcoin's dominance has declined in the third year of the past two cycles
For example, investors can focus on the funding rate (i.e., the cost of holding long positions in perpetual futures contracts). When speculative traders increase their demand for leverage, the funding rate tends to rise. Therefore, the level of the funding rate can reflect the overall level of speculative long positions in the market. Figure 8 shows the weighted average funding rate of the top 10 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 the funding rate has decreased during last week's market correction. Furthermore, even at its local peak, the current funding rate level is still below the peaks seen earlier this year and in the previous cycle. Therefore, we believe that the current funding rate level reflects a moderate level of speculative long positions in the market and does not necessarily indicate that the market cycle has reached its end.
Figure 8: Altcoin funding rates indicate a moderate level of speculative long positions
In contrast, the perpetual futures open interest of altcoins has reached relatively high levels. Before the massive liquidation event on December 9, the open interest in altcoins reached nearly $54 billion across three major perpetual futures exchanges (see Figure 9). This indicates a significant scale of speculative long positions in the market. After the massive liquidation earlier this week, the open interest in altcoins decreased by about $10 billion but remains at a high level. Typically, high levels of speculative long positions signal the later stages of a market cycle, so this indicator is worth monitoring.
Figure 9: Altcoin open interest reached high levels before the recent liquidation
The market is still developing
Since Bitcoin's inception in 2009, the digital asset market has made significant progress, with the current crypto bull market having many differences compared to the past. The most notable change is that the U.S. has approved Bitcoin and Ethereum spot exchange-traded products (ETPs), which brought $36.7 billion in net capital inflows to the market and incorporated these assets into more traditional portfolios. Furthermore, the recent U.S. elections may provide a clearer regulatory framework for the market and solidify the position of digital assets in the world's largest economy—contrasting sharply with the past when there were repeated doubts about the long-term prospects of crypto assets. For these reasons, the valuation of Bitcoin and other crypto assets may no longer follow the recurring four-year cycle pattern that appeared in their early history.
Meanwhile, Bitcoin and many other cryptocurrencies can be viewed as digital commodities, similar to traditional goods, whose prices may exhibit certain momentum effects. Therefore, the analysis of on-chain indicators and altcoin position data is crucial for investors making risk management decisions. Grayscale Research believes that the current combination of indicators aligns with the intermediate stage of the crypto market cycle: for instance, the MVRV ratio is significantly above its cyclical low but has not yet reached levels seen at previous market tops. As long as fundamental factors, such as the proliferation of applications and a stable macroeconomic environment, can support it, the bull market may continue until 2025 and beyond.
