Authors: Zach Pandl, Michael Zhao, Grayscale Research
Translation: 0xjs, Golden Finance
Key Points:
● From a historical perspective, cryptocurrencies exhibit a distinct four-year cycle, undergoing continuous phases of price rises and falls. Grayscale Research believes that investors can monitor various blockchain-based indicators and other metrics to track crypto cycles and provide a basis for risk management decisions.
● Cryptocurrencies are developing into a mature asset class: new Bitcoin and Ether spot ETPs have expanded market access, and the incoming U.S. Congress may bring clearer regulations for the industry. Considering these factors, cryptocurrencies may eventually break through the significantly four-year cycle characteristic of early markets.
● Nevertheless, Grayscale Research determines that the current combination of indicators fits the mid-cycle stage. 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.
Similar to many physical goods, Bitcoin prices do not strictly follow a 'random walk' model. In fact, there are signs of statistical momentum in its price: when it rises, it tends to continue rising; when it falls, it often continues to fall. Viewed over a longer time span, Bitcoin's cyclical fluctuations revolve around historical upward trend lines (Figure 1).
Figure 1: Bitcoin's price exhibits a cyclical fluctuation pattern around an upward trend
The driving factors of past price cycles have varied, and future price returns may not replicate past experiences. As Bitcoin matures, gains acceptance by more traditional investors, and the supply impact of the four-year halving event diminishes, its price cycle may reshape or even disappear. However, studying past cycles can help investors gain insights into Bitcoin's typical statistical characteristics, aiding in risk management.
Measure momentum
Figure 2 shows Bitcoin's price performance during the rising phases of the first few cycles. Prices are benchmarked at the cycle low set at 100 (marking the start of the appreciation phase) and tracked to the peak (marking the end of the appreciation phase). Figure 3 presents the same information in tabular form.
Bitcoin's early cycles were short and rapid: the first cycle lasted less than a year, and the second cycle lasted about two years. Both skyrocketed over 500 times from the lows of the previous cycles. The last two cycles each lasted nearly three years. During the cycle 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 trajectory of Bitcoin in this cycle is very similar to the previous two market cycles
After peaking in November 2021, Bitcoin's price fell to about $16,000 by November 2022, marking the beginning of the current cycle, which has already lasted over two years. As shown in Figure 2, the price increase in this cycle is similar to the trajectories of the previous two Bitcoin cycles, both of which also required a year to reach peak prices. In terms of magnitude, this cycle has seen an increase of about 6 times, which is considerable but far less than the previous four cycles. In summary, while it is impossible to definitively state that future price movements will align with past cycles, history indicates that this current bull market has room for expansion both in duration and magnitude.
Figure 3: The four distinct cycles of 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 buyers' costs, the scale of new capital inflows, and the relative level of price to Bitcoin miners' earnings.
Among the favored indicators is the ratio of Bitcoin Market Value (MV, the price per coin in the secondary market) to Realized Value (RV, the price per coin based on the most recent on-chain transaction), known as the MVRV ratio, which can be viewed as the extent to which Bitcoin's market value exceeds the total cost in the market. In the past four cycles, this ratio has reached at least 4 (Figure 4). The current MVRV ratio is 2.6, indicating that this cycle may have further developments. However, the peak value of this ratio in each cycle has gradually declined, and it may not touch 4 before the price peaks. Figure 4: MVRV Ratio at Intermediate Level
Other on-chain indicators assess the degree of new capital inflow into the Bitcoin ecosystem, which seasoned cryptocurrency investors often refer to as 'HODL Waves.' Price increases may occur as new capital purchases coins 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 has reached at least 60%, meaning that during the appreciation phase, at least 60% of the circulating supply changes hands within a year. Currently, it 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 circulation over the past year has been below 60%
Another cycle indicator focuses on Bitcoin miners, the professional service providers maintaining the Bitcoin network. For example, the commonly used Miner Market Cap (MC, the dollar value of coins held by miners) to 'Thermal Cap' (TC, the cumulative value of Bitcoin obtained 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). Currently, it is about 6, indicating that we are in the middle stage of the cycle. However, similar to the MVRV ratio, the peak values of this indicator in each cycle are declining, and prices may peak before reaching 10.
Figure 6: Indicators based on Bitcoin miners are also below past thresholds
There are numerous on-chain indicators, and different data sources may have discrepancies. Moreover, these tools only provide a rough judgment of the current price appreciation phase compared to the past and cannot ensure that the relationship between indicators and future price returns is constant. Overall, common indicators of Bitcoin cycles remain below previous price peak levels, and if the fundamentals are solid, the current bull market may continue.
Other cryptocurrencies beyond Bitcoin
The cryptocurrency market far exceeds the Bitcoin realm, 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 capitalization in the crypto market) peaked around two years into the bull market (Figure 7). Recently, its dominance has receded, 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 cycle highs.
Figure 7: Bitcoin's dominance began to decline in the third year of the first two cycles
For example, investors can monitor funding rates, which represent the holding costs of long positions in perpetual futures contracts. When speculative traders have high leverage demands, funding rates rise. Thus, the level of market funding rates can measure the overall speculative long positions. Figure 8 shows the weighted average funding rates of Bitcoin and the top ten crypto assets (largest 'altcoins'). The current rate is significantly positive, indicating strong demand from leveraged investors, even though it dropped sharply during last week's market crash. Even at local peaks, it remains below this year's early levels and the previous peak. Therefore, the current level aligns with moderately speculative long positions, 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 a high level. Prior to the massive liquidation on Monday, December 9, the OI of altcoin on the three major perpetual futures exchanges was nearly $54 billion (Figure 9), highlighting the high speculative long positions in the market. After large-scale liquidation at the beginning of this week, the OI decreased by about $10 billion but remained at a high level. The high speculative long positions are consistent with characteristics of the later stages of the market cycle, thus continuous monitoring is necessary.
Figure 9: The open interest of altcoin perpetual contracts was at a high level recently before liquidation
Next, please play music
Since the birth of Bitcoin in 2009, the digital asset market has made significant strides. This current crypto bull market is markedly different from the past in many ways. The key lies in the approval of Bitcoin and Ether spot ETPs in the U.S. market, which has introduced a net inflow of $36.7 billion, pushing them into traditional investment portfolios. Moreover, the upcoming U.S. elections are likely to enhance market regulatory transparency, solidifying the status of digital assets in the world's largest economy. This transformation is profound, as the long-term prospects of crypto assets have been repeatedly questioned in the past. Therefore, the valuations of Bitcoin and other crypto assets may not necessarily follow the same path as the early four-year cycle.
At the same time, assets like Bitcoin are similar to digital commodities, and their prices may exhibit momentum characteristics. Therefore, analyzing on-chain indicators and altcoin holding data can contribute to investors' risk management decisions.
Grayscale Research determines that the current combination of indicators fits the mid-cycle of the crypto market: the MVRV ratio is above the cycle low and far from the previous market top. As long as the fundamentals remain solid, such as widespread application and favorable macro conditions, there is no reason for the crypto bull market not to continue until 2025 and beyond.
