Author: Zach·Pandl, Michael·Zhao, Grayscale Research; Translated by 0xjs@Jinse Finance
Key Points:
●From a historical perspective, cryptocurrencies have exhibited a clear four-year cycle, going through consecutive stages of price increases and decreases. Grayscale Research believes that investors can monitor various blockchain-based indicators and other metrics to track the crypto cycle and inform risk management decisions.
●Cryptocurrencies are developing into a mature asset class: new Bitcoin and Ethereum spot ETPs are expanding market access, and the incoming U.S. Congress may provide clearer regulation for the industry. Given these factors, cryptocurrencies may eventually break out of the distinctive four-year cycle that has characterized the early market.
●Nevertheless, Grayscale Research assesses that the current indicator combination fits the mid-stage of the cycle. As long as the fundamentals remain solid, such as widespread adoption and a favorable macroeconomic environment, the bull market could continue until 2025 and beyond.
Similar to many physical commodities, Bitcoin's price does not strictly follow a "random walk" pattern. In fact, its price exhibits statistical momentum: it tends to continue rising after an increase, and to keep falling after a decline. Viewed over a longer time horizon, Bitcoin's cyclical ups and downs oscillate around a 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, gains more acceptance from traditional investors, and the supply impact of the four-year halving event diminishes, its price cycle may be reshaped or even disappear. However, analyzing past cycles can help investors understand Bitcoin's typical statistical characteristics and aid in risk management.
Measuring Momentum
Figure 2 shows Bitcoin's price performance during the upswing phases of the previous few cycles. Prices are indexed to 100 at the cycle low point (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 saw rapid appreciation: the first cycle was less than a year, and the second was around two years. Both saw prices surge over 500x from the prior cycle low. The latter two cycles were each close to three years. The cycle from January 2015 to December 2017 saw Bitcoin appreciate over 100x; the cycle from December 2018 to November 2021 saw an appreciation of around 20x.
Figure 2: The trajectory of Bitcoin in this cycle is similar to the previous two market cycles
After peaking in November 2021, Bitcoin's price fell to around $16,000, the cycle low point, in November 2022, marking the start of the current cycle, which has now exceeded two years. As shown in Figure 2, the price upswing in this cycle is similar to the trajectories of the previous two Bitcoin cycles, both of which took around one more year to reach their price peaks. In terms of magnitude, this cycle has seen an appreciation of around 6x, which is substantial but far less than the previous four cycles. Overall, while the future price trajectory may not precisely match past cycles, history suggests this bull market has room to expand in both duration and magnitude.
Figure 3: Four Distinct Bitcoin Price Cycles in History
Checking Key Indicators
In addition to analyzing past cycle price trajectories, investors can use various blockchain indicators to gauge the progress of the Bitcoin bull market. Common indicators cover the appreciation magnitude of Bitcoin buyers' cost basis, the scale of new capital inflows, and the relative levels of price and Bitcoin miner revenues.
One widely followed indicator is the ratio of Bitcoin's market value (MV, calculated using secondary market prices per coin) to its realized value (RV, calculated using the most recent on-chain transaction prices per coin), known as the MVRV ratio, which can be seen as the degree to which Bitcoin's market value exceeds the market's total cost basis. In the past four cycles, this ratio has reached at least 4 (Figure 4). The current MVRV ratio is 2.6, suggesting this cycle may have further to go. However, the peak MVRV ratio has been declining across cycles, and it may not necessarily reach 4 before the price tops out.
Figure 4: The MVRV ratio is at a mid-range level
Other on-chain indicators consider the degree of new capital inflows into the Bitcoin ecosystem, which crypto-savvy investors often refer to as "HODL Waves". Price appreciation may be driven by new capital bidding up coins from long-term holders. Among the many indicators, Grayscale Research favors the ratio of the one-year on-chain transfer volume to the total circulating supply (Figure 5). In the past four cycles, this indicator has reached at least 60%, meaning that at least 60% of the circulating supply changed hands in the year leading up to the price peak. Currently, it is around 54%, suggesting we may see further increases in on-chain turnover before the price tops out.
Figure 5: The one-year Bitcoin transfer volume activity is below 60%
Another set of cycle indicators focuses on Bitcoin miners, the professional service providers that maintain the Bitcoin network. A commonly used one is the ratio of Miner Capitalization (MC, the dollar value of miners' Bitcoin holdings) to Thermocap (TC, the cumulative value of Bitcoin rewards and fees earned by miners). The rationale is that when miners' assets reach a certain threshold, they may start to realize profits. Historical data shows that when the MC/TC ratio exceeds 10, prices have typically peaked within the cycle (Figure 6). The current ratio is around 6, indicating the market is in the mid-stage of the cycle. However, similar to the MVRV ratio, this indicator's peak value has been declining across cycles, and prices may top out before it reaches 10.
Figure 6: Miner-based indicators are also below historical thresholds
There are many on-chain indicators, and data sources may differ. Moreover, these tools can only roughly assess the current price appreciation stage relative to past cycles, and cannot guarantee a constant relationship between the indicators and future price returns. Overall, the typical Bitcoin cycle indicators remain below their historical peak levels, suggesting that the current bull market may continue if the fundamentals remain solid.
Beyond Bitcoin: Other Cryptocurrencies
The crypto market extends far beyond just Bitcoin, and signals from other areas of the industry can also inform the market cycle dynamics. Given the relative performance of Bitcoin and other crypto assets, such indicators may be particularly crucial in the coming year. In the past two market cycles, Bitcoin's dominance (its share of the total crypto market capitalization) peaked around the two-year mark of the bull markets (Figure 7). Bitcoin's dominance has recently declined, coinciding with the two-year mark of the current cycle. If this trend continues, investors should consider a broader set of indicators to assess whether crypto valuations are nearing a cycle peak.
Figure 7: Bitcoin's dominance started declining in the third year of the previous two cycles
For example, investors can monitor the funding rates, which represent the holding cost for long positions in perpetual futures contracts. High funding rates indicate strong demand for leveraged long positions by speculative traders. The weighted average funding rate for Bitcoin and the top 10 Altcoins (Figure 8) shows that the current rates are significantly positive, indicating robust speculative long demand, although they dropped sharply during the recent market selloff. Even at these local highs, the rates are lower than the peaks earlier this year and in the previous cycle. This suggests the current level is consistent with a moderate speculative long positioning, still far from a cycle top.
Figure 8: Altcoin funding rates indicate moderate speculative long positioning
In comparison, the open interest (OI) of Altcoin perpetual futures contracts has risen to a high level. On Monday, December 9, before the large-scale liquidation, the OI of Altcoins on the three major perpetual futures exchanges was close to $54 billion (Figure 9), highlighting the high speculative long positions in the market. After the large-scale liquidation at the beginning of this week, the OI has dropped by about $10 billion but is still at a high level. The high speculative long positions are in line with the characteristics of the late stage of the market cycle, so continuous monitoring is needed.
Figure 9: The open interest of Altcoins was at a high level before the recent liquidation
Keep the Music Playing
Since the birth of Bitcoin in 2009, the digital asset market has developed by leaps and bounds, and this round of the cryptocurrency bull market is different from the past in many ways. The key is that the approval of Bitcoin and Ethereum spot ETPs in the US market has led to a net inflow of $36.7 billion, driving their integration into traditional investment portfolios. Moreover, the recent US election is expected to improve the transparency of market regulation and consolidate the position of digital assets in the world's largest economy, a profound transformation that has long been questioned about the long-term prospects of cryptocurrency assets. Therefore, the valuation of Bitcoin and other cryptocurrencies may not necessarily repeat the early four-year cycle.
At the same time, cryptocurrencies such as Bitcoin are digital commodities, and their prices may have momentum characteristics. Therefore, analyzing on-chain indicators and Altcoin position data can provide investors with risk management decision-making.
Grayscale Research determines that the current indicator combination is in line with the mid-term stage of the cryptocurrency market cycle: the MVRV ratio is higher than the cycle low point, and still far from the previous market top. As long as the fundamentals are stable, such as widespread adoption and a favorable macroeconomic environment, the cryptocurrency bull market has no reason not to continue until 2025 and beyond.
