Original Title: The State Of the Crypto Cycle
Author: Zach Pandl & Michael Zhao
Compiled by: TechFlow
Historically, the valuation of Altcoins has typically exhibited a clear four-year cycle, with prices experiencing sustained periods of appreciation and depreciation. Grayscale Research believes that investors can track the cyclical changes in the Altcoin market by monitoring a series of blockchain-based metrics and other data, and optimize their risk management strategies accordingly.
As Altcoins gradually become a mature asset class, the market is undergoing significant changes. For example, the launch of Bit and Amp ETPs has further lowered the barrier for investors to enter the market. Meanwhile, the new U.S. Congress may provide a clearer regulatory framework for the industry. Based on these factors, the valuation of Altcoins may gradually depart from the recurring four-year cycle pattern seen in its early history.
Nevertheless, Grayscale Research believes that current market indicators suggest the Altcoin market is in the middle stage of the cycle. As long as this asset class continues to be supported by fundamental factors, such as the expansion of use cases and a stable macroeconomic environment, the bull market may persist until 2025 or beyond.
Similar to many physical commodities, the price of Bit does not completely follow a "random walk" pattern. Instead, the data shows that it has a statistically significant momentum effect: upward trends tend to persist for a period, and downward trends also tend to persist. From a longer-term perspective, the cyclical fluctuations in the price of Bit exhibit a repeated pattern of rises and falls around a long-term upward trend (see Figure 1).
Figure 1: Cyclical fluctuations in the price of Bit around a long-term upward trend
Each past price cycle has had its unique driving factors, so future price performance may not completely replicate past experiences. Furthermore, as Bit gradually matures and is accepted by more traditional investors, and the impact of the four-year halving event on supply weakens, the cyclical fluctuations in the price of Bit may change or even disappear. Nevertheless, studying past price cycles can still provide a reference for investors, helping them understand the typical statistical characteristics of Bit and better manage their risks.
Measuring Momentum
Figure 2 shows the price performance of Bit during the upward phases of each cycle. To facilitate comparison, the prices are standardized to 100 starting from the cycle low (i.e., the starting point of the upward phase) and tracked to their peak (i.e., the endpoint of the upward phase). Figure 3 presents the same data in tabular form.
Bit's early price cycles were relatively short and steep: the first cycle lasted less than a year, and the second cycle lasted about two years. In these two cycles, the price rose more than 500-fold from the low of the previous cycle. The subsequent two cycles lasted less than three years each. In the cycle from January 2015 to December 2017, the price of Bit rose more than 100-fold, while in the cycle from December 2018 to November 2021, the price of Bit rose about 20-fold.
Figure 2: The current Bit price trend is relatively close to the most recent two market cycles
After reaching a peak in November 2021, the price of Bit fell to around $16,000, a cyclical low, in November 2022. Since then, Bit has entered a new phase of price appreciation, which has continued for over two years. As shown in Figure 2, the recent price uptrend is similar to the trajectories of the previous two Bit cycles, both of which lasted about a year before reaching their peaks. In terms of the magnitude of the gains, the current cycle has seen a return of around 6-fold, which, while significant, is notably lower than the returns of the past four cycles. Overall, while we cannot be certain that future performance will replicate past patterns, Bit's history suggests that this bull market may still have room to develop further in terms of duration and magnitude of gains.
Figure 3: Four distinct cycles in the history of Bit prices
Analysis of Key Indicators
In addition to assessing the price performance of past cycles, investors can also use a variety of blockchain-based metrics to gauge the maturity of the current Bit bull market. These metrics typically include the appreciation of Bit's price relative to a buyer's cost basis, the scale of new capital inflows into the Bit market, and the ratio of Bit's price to miner revenues.
One commonly used indicator is the MVRV ratio, which is the ratio of Bit's market value (MV) (calculated at the current market price per Bit) to its realized value (RV) (calculated at the last on-chain transaction price per Bit). The MVRV ratio can be understood as the premium of Bit's market capitalization over the total cost basis of the market. In the past four cycles, the MVRV ratio has reached at least 4 (see Figure 4). Currently, the ratio is 2.6, suggesting that the current cycle may still have room for further appreciation. However, the peak MVRV ratio has been declining in each cycle, so the price may top out before the indicator reaches 4.
Figure 4: The MVRV ratio is currently at an intermediate level
Other on-chain indicators focus on the inflow of new capital into the Bit ecosystem, often referred to by seasoned Altcoin investors as HODL Waves. This framework suggests that price appreciation may be driven by new capital purchasing Bit at slightly higher prices from long-term holders. Grayscale Research prefers to use the ratio of the amount of Bit moved on-chain in the past year to the total circulating supply as a measure of this (see Figure 5). In the past four cycles, this ratio has reached at least 60%, meaning that during the upward phase of a year, at least 60% of the circulating supply has changed hands on-chain. Currently, this ratio is around 54%, suggesting that more Bit may change hands on-chain before the price peaks.
Figure 5: The active Bit circulating supply over the past year is below 60%
Additionally, there are some cyclical indicators that focus on the behavior of Bit miners, who are the core participants responsible for maintaining the security of the Bit network. For example, a common indicator is the ratio of the Miner's Capital (MC) to the "Thermal Capital" (TC). Intuitively, when the Bit assets held by miners reach a certain critical value, they may choose to realize their gains. Historical data shows that Bit prices tend to peak in a cycle when the MC/TC ratio exceeds 10 (see Figure 6). Currently, the MC/TC ratio is around 6, suggesting the current cycle may still be in the middle stage. However, similar to the MVRV ratio, the peak MC/TC ratio has been declining in each cycle, so the price may top out before the indicator reaches 10.
Figure 6: Indicators based on Bit miners are also below historical thresholds
There are many types of on-chain indicators, and the measurement results may differ slightly between different data sources. Furthermore, these tools can only provide a rough comparison of the current price appreciation phase with the past, and cannot guarantee that the relationship between these indicators and future price movements will fully conform to historical patterns. Nevertheless, when viewed holistically, the common indicators of the Bit cycle suggest that they are still below the levels seen when prices reached their peaks in the past, indicating that the current bull market may continue if the fundamental factors can be sustained.
Looking Beyond Bitcoin
The scope of the crypto market extends far beyond Bitcoin, and signals from other industry sectors can also provide clues about the state of the market cycle. We believe that due to the relative performance of Bitcoin and other crypto assets, these signals may be particularly crucial in the coming year. Over the past two market cycles, Bitcoin's dominance (i.e., Bitcoin's share of the total crypto market capitalization) typically peaked around two years into the bull market (see Figure 7). Recently, Bitcoin's dominance has started to decline, and this trend has again emerged around the two-year mark of the market cycle. If this trend continues, investors should look more broadly at other indicators to assess whether crypto valuations are approaching a cyclical peak.
Figure 7: Bitcoin's dominance has declined in the third year of the past two cycles
For example, investors can monitor the funding rate (the cost of holding a long position in perpetual futures contracts). Funding rates tend to rise when speculative traders increase their demand for leverage. Therefore, the level of funding rates can reflect the overall level of speculative long positions in the market. Figure 8 shows the weighted average funding rate of the top 10 largest crypto assets (i.e., Altcoins) excluding Bitcoin. Currently, the funding rate is positive, indicating a relatively high demand for leveraged long positions, although the funding rate has declined somewhat in last week's market pullback. Moreover, even at its local highs, the current funding rate level is still lower than the peaks earlier this year and in the previous cycle. Therefore, we believe the current funding rate level reflects a moderate degree of speculative long positions in the market and does not necessarily imply that the market cycle is nearing its end.
Figure 8: Altcoin funding rates indicate a moderate degree of speculative long positions
In contrast, the perpetual futures open interest in Altcoins has reached relatively high levels. Prior to the large-scale liquidation event on December 9th, Altcoin open interest reached nearly $54 billion across the three major perpetual futures exchanges (see Figure 9). This suggests a significant scale of speculative long positions in the market. After the large-scale liquidation earlier this week, Altcoin open interest has decreased by around $10 billion, but it still remains at a high level. Typically, high levels of speculative long positions signal a late stage of the market cycle, so this indicator is worth continued monitoring.
Figure 9: Altcoin open interest reached high levels prior to the recent liquidation
The Market Continues to Evolve
Since the birth of Bitcoin in 2009, the digital asset market has made significant progress, and the current crypto bull market differs from the past in many ways. The most notable change is that the US has approved Bitcoin and Ethereum spot exchange-traded products (ETPs), which have brought $36.7 billion in net capital inflows and integrated these assets into more traditional investment portfolios. Furthermore, the recent US election may provide a clearer regulatory framework for the market and solidify the position of digital assets in the world's largest economy - a stark contrast to the past, when the long-term prospects of crypto assets were repeatedly questioned. For these reasons, the valuations of Bitcoin and other crypto assets may no longer follow the four-year cyclical pattern that has been observed in their early history.
At the same time, Bitcoin and many other crypto assets can be viewed as digital commodities, similar to traditional commodities, and their prices may exhibit some momentum effects. Therefore, the analysis of on-chain indicators and Altcoin positioning data is crucial for investors' risk management decisions. Grayscale Research believes that the current indicator mix is consistent with the mid-stage of the crypto market cycle: for example, the MVRV ratio has significantly exceeded its cyclical lows but has not yet reached the levels seen at past market peaks. Provided that fundamental factors, such as the adoption of applications and broader macroeconomic conditions, can continue to support the market, the bull market may persist.
