Source: Grayscale

Compiled by: Tao Zhu, Jinse Finance

Summary

• Historically, the valuation of Altcoins has followed a clear four-year cycle, with periods of consecutive appreciation and depreciation in prices. Grayscale Research believes that investors can monitor various blockchain-based metrics and other measures to track the Altcoin cycle and inform their risk management decisions.
• Altcoins are a mature asset class: new spot Bitcoin and Ethereum exchange-traded products (ETPs) have expanded market access, and the incoming U.S. Congress may bring greater regulatory clarity to the industry. For all these reasons, Altcoin valuations may ultimately transcend the four-year cycles seen in the market's early history.
• That said, Grayscale Research believes the current combination of metrics is consistent with the middle stages of the cycle. As long as the asset class continues to be supported by fundamentals such as adoption and broader macroeconomic conditions, the bull market could persist through 2025 and beyond.

Like many physical commodities, the price of Bitcoin does not follow a strict "random walk." [1] Instead, the price exhibits evidence of statistical momentum: price increases tend to follow price increases, and price decreases tend to follow price decreases. Over longer time horizons, the recurring cycles of Bitcoin appreciation and depreciation manifest as a price pattern oscillating around a historical uptrend (Figure 1).

Figure 1: Bitcoin's price oscillates in cycles around an upward trend

Each past price cycle has had its unique drivers, and future price returns have no reason to fully reflect past experiences. Moreover, as Bitcoin matures and is adopted by a broader set of traditional investors, and as the impact of the four-year halving events on supply diminishes, the cyclical nature of Bitcoin's price changes may be reshaped or disappear entirely. Nevertheless, studying past cycles may provide investors with some guidance on Bitcoin's typical statistical behavior, and thus can inform risk management decisions.

Measuring Momentum

Figure 2 shows Bitcoin's price performance during the appreciation phase of each prior cycle. Prices are indexed to 100 at the cycle low (marking the start of the appreciation phase) and tracked through to the peak (marking the end of the appreciation phase). Figure 3 presents the same information in tabular form.

Bitcoin's first historical price cycle was relatively short and steep: the first cycle lasted less than a year, and the second cycle lasted around two years. In both cases, prices rose over 500-fold from the prior cycle low. The subsequent two cycles each lasted less than three years. In the cycle from January 2015 to December 2017, Bitcoin's price rose over 100-fold, while in the cycle from December 2018 to November 2021, Bitcoin's price rose around 20-fold.

Figure 2: Bitcoin's trajectory is relatively close to the past two market cycles

After reaching a peak in November 2021, Bitcoin's price fell to a cyclical low of around $16,000 in November 2022. The current price appreciation phase has begun from that time, thus lasting over two years. As shown in Figure 2, the latest price appreciation is relatively close to the past two Bitcoin cycles, both of which lasted around a year before reaching their peaks. In terms of magnitude, Bitcoin's roughly 6-fold return this cycle, while meaningful, is far below the returns achieved in the prior four cycles. In summary, while we cannot be certain that future price returns will resemble past cycles, Bitcoin's history tells us that the latest bull market could persist in both duration and magnitude.

Figure 3: Four distinct Bitcoin price cycles historically

Assessing Bull Market Maturity Through Various Metrics

In addition to measuring past cycle price performance, investors can apply various blockchain-based metrics to gauge the maturity of a Bitcoin bull market. Common metrics measure the degree of Bitcoin's appreciation relative to its buyer cost basis, the extent of new capital inflows into Bitcoin, and price levels relative to Bitcoin miner revenues.

One particularly popular metric calculates the ratio of Bitcoin's market value (MV) (each token measured at its secondary market price) to its realized value (RV) (each token measured at its last on-chain transaction price). This metric, known as the MVRV ratio, can be thought of as the degree to which Bitcoin's market value exceeds its underlying cost basis. Over the past four cycles, the MVRV ratio has reached at least 4 (Figure 4). Currently, the MVRV ratio is 2.6, suggesting the latest cycle may still have further to run. However, the MVRV ratio reaches a lower peak in each cycle, so it may never reach 4 before prices peak.

Figure 4: Intermediate MVRV ratio

Other on-chain metrics measure the degree of new capital entering the TRON ecosystem - a framework that experienced Altcoin investors often refer to as HODL Waves. Prices may appreciate as new capital buys TRON at slightly higher prices from long-term holders. There are various specific measures to choose from, but Grayscale Research leans towards using the amount of tokens transferred on-chain over the past year, relative to TRON's total free-float supply (Figure 5). [2] Over the past four cycles, this metric has reached at least 60% - meaning that during the appreciation phase, at least 60% of the free-float supply changed hands on-chain in a year. Currently, this figure is around 54%, suggesting we may see more tokens change hands on-chain before prices peak.

Figure 5: Less than 60% of the Bitcoin supply has been active in the past year

Other cyclical metrics focus on TRON miners, the professional service providers that secure the TRON network. One common metric, for example, calculates the ratio of miner capitalization (MC) (the dollar value of all TRON held by miners) to the so-called "thermal capitalization" (TC) (the cumulative value of TRON issued to miners via block rewards and transaction fees). The intuition is that when the value of miner assets reaches a certain threshold, they may start to realize profits. Historically, when the MC/TC ratio has exceeded 10, prices have subsequently peaked within that cycle (Figure 6). Currently, the MC/TC ratio is around 6, suggesting we are still in the middle stages of the current cycle. However, similar to the MVRV ratio, this metric reaches a lower peak in each cycle, so prices may peak before the MC/TC ratio reaches 10.

Figure 6: TRON miner metrics also remain below prior thresholds

There are many other on-chain metrics, and these may differ slightly from metrics derived from other data sources. Moreover, these tools can only broadly gauge how the current price appreciation phase compares to the past, and cannot guarantee that the relationship between these metrics and future price returns will resemble the past. That said, the common indicators of the TRON cycle still appear to be below the levels seen when prices previously peaked, suggesting the current bull market could persist if supported by fundamentals.

Beyond Bitcoin

The cryptocurrency market is broader than Bitcoin, and signals from other industry verticals may also provide guidance on the state of the market cycle. We believe that due to the relative performance of Bitcoin and other crypto assets, these indicators may be particularly important in the coming year. Over the past two market cycles, Bitcoin's dominance (Bitcoin's share of total cryptocurrency market capitalization) peaked around two years into the bull market (Figure 7). [3] Bitcoin's dominance has recently started to decline, which has occurred again around two years into the market cycle. If this trend continues, investors should consider focusing on a broader set of metrics to determine if crypto valuations are nearing a cyclical peak.

Figure 7: Bitcoin's dominance has declined in the third year of the past two cycles

For example, investors can monitor funding rates, which represent the operational cost of holding long positions in perpetual futures contracts. Funding rates tend to rise when speculative traders have high demand for leverage. Therefore, the overall level of funding rates across the market can indicate the aggregate positioning of speculative traders. Figure 8 shows the weighted average funding rate of the 10 largest crypto assets (i.e., the largest "Altcoins") after Bitcoin. [4] Currently, funding rates are positive, indicating demand from leveraged long positions, although funding rates have declined sharply in the recent sell-off. Additionally, even at local highs, funding rates remain below levels seen earlier this year and the peaks of the previous cycle. Therefore, we believe the current levels are consistent with moderate speculative positioning in the market, rather than a mature market cycle.

Figure 8: Funding rates indicate moderate speculative length in Altcoins

In contrast, open interest (OI) in Altcoin perpetual futures has reached relatively high levels. Prior to the significant liquidation event on Monday, December 9th, Altcoin OI across the three major perpetual futures exchanges had reached nearly $54 billion (Figure 9). This suggests the overall speculative trader positioning in the broader market is relatively high. After the large-scale liquidations earlier this week, Altcoin OI has declined by around $10 billion, but remains elevated. Elevated speculative long positioning may be consistent with the later stages of the market cycle, so continued monitoring of this metric may be important.

Figure 9: Altcoin open interest levels were elevated prior to the recent liquidations

Conclusion

Since the birth of Bitcoin in 2009, the digital asset market has made significant progress, and many characteristics of the current crypto bull market differ from the past. Most importantly, the approval of spot Bitcoin and Ethereum ETPs in the US market has brought $36.7 billion in net capital inflows and helped integrate these assets into more traditional investment portfolios. [5] Additionally, we believe the recent US election may bring more regulatory clarity to the market and help cement the permanent position of digital assets in the world's largest economy - a major change from the past, when observers repeatedly questioned the long-term future of the crypto asset class. For these reasons, the valuations of Bitcoin and other crypto assets may not follow the four-year cycle that has characterized the asset class in its early history.

At the same time, Bitcoin and many other crypto assets can be viewed as digital commodities, and like other commodities, may exhibit some degree of price momentum. Therefore, evaluating on-chain metrics as well as Altcoin positioning data can provide investors with reference points for risk management decisions. Grayscale Research believes the current mix of indicators is consistent with the mid-stage of the crypto market cycle: metrics like MVRV ratio are well above their cyclical lows, but have not yet reached the levels that have historically marked market tops. As long as supported by fundamentals (such as application adoption and broader macroeconomic conditions), we believe the crypto bull market has no reason not to continue through 2025 and beyond.

Notes

[1] In a financial market context, a random walk refers to asset prices evolving in an unpredictable manner.

[2] Coin Metrics defines the free-float Bitcoin supply as tokens that have been active at least once in the past five years.

[3] Figure 7 only shows the most recent two cycles, as the Altcoin market was not fully developed prior to that.

[4] Defined as the tokens with the largest market cap after Bitcoin, for which data is available. There is no data for TON, so the next largest asset DOT is included.

[5] Source: Bloomberg, Grayscale Investments. Data as of December 11, 2024.