Grayscale Report: Decoding the Encrypted Bull Market Cycle, How Much Longer Can the Market Rise?

Original Title: "The State Of the Crypto Cycle"

Authors: Zach Pandl & Michael Zhao

Compiled by: Shenchao TechFlow

• Historically, the valuation of cryptocurrencies has typically exhibited a distinct four-year cycle, with prices undergoing phases of sustained increases and decreases. Grayscale Research believes that investors can track the cyclical changes in the cryptocurrency market by monitoring a range of blockchain-based indicators and other data, thereby optimizing their risk management strategies.

• As cryptocurrencies gradually mature into an asset class, significant changes are occurring in the market. For example, the launch of spot exchange-traded products (ETPs) for Bitcoin and Ethereum has further lowered the barriers for investors entering the market. At the same time, the new U.S. Congress may bring a clearer regulatory framework for the industry. Based on these factors, the valuation of cryptocurrencies may gradually break free from the recurring four-year cycle pattern seen in early history.

• Nevertheless, Grayscale Research believes that current market indicators show the cryptocurrency market is in the middle phase of the cycle. As long as this asset class remains supported by fundamental factors, such as the expansion of use cases and a stable macroeconomic environment, the bull market may continue into 2025 and beyond.

Like many physical commodities, Bitcoin's price does not entirely follow a "random walk" pattern. Instead, data shows that its price exhibits a statistical momentum effect: upward trends tend to persist for a while, while downward trends also continue. Over a longer time frame, the cyclical fluctuations in Bitcoin's price reflect 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. Additionally, as Bitcoin matures and is accepted by more traditional investors, along with the diminishing impact of the four-year halving events on supply, the cyclical fluctuations in Bitcoin's price 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, thereby improving their risk management.

Measuring Momentum

Figure 2 illustrates Bitcoin's price performance during each cycle's upward phase. For ease of comparison, prices are normalized 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, while the second cycle lasted about two years. During these two cycles, the price increased by more than 500 times from the low point of the previous cycle. The subsequent two cycles lasted less than three years each. In the cycle from January 2015 to December 2017, Bitcoin's price increased by over 100 times, while in the cycle from December 2018 to November 2021, Bitcoin's price rose by about 20 times.

Figure 2: Current Bitcoin price trend is relatively close to the last two market cycles

After peaking in November 2021, Bitcoin's price fell to around $16,000 in November 2022, marking a cyclical low. Since then, Bitcoin has entered a new phase of price increases, which has lasted for over two years. As shown in Figure 2, the recent upward price trend resembles the trajectories of the previous two Bitcoin cycles, both of which lasted about a year before reaching their peaks. In terms of returns, Bitcoin's price return in this cycle is approximately 6 times, which, while significant, is notably lower than the returns of the past four cycles. Overall, while we cannot determine whether future price performance will replicate past patterns, Bitcoin's history suggests that this bull market may still have room for further development in terms of duration and magnitude.

Figure 3: Four distinct cycles in Bitcoin's price history

Analysis of Key Indicators

In addition to assessing past cycles' price performance, investors can gauge the maturity of the current Bitcoin bull market through various blockchain-based indicators. These indicators typically include: the increase in Bitcoin's price relative to the buyer cost basis, the scale of new funds flowing into the Bitcoin market, and the ratio of Bitcoin's 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 at the current market price per Bitcoin) to its realized value (RV) (calculated at the last on-chain transaction price per Bitcoin). The MVRV ratio can be understood as the degree of premium of Bitcoin's market value relative to the total cost basis of the market. In the past four cycles, the MVRV ratio reached at least 4 (see Figure 4). Currently, the ratio stands at 2.6, indicating that there may still be room for further increases in the current cycle. However, the MVRV ratio has gradually decreased at each cycle's peak, suggesting that prices may peak before this indicator reaches 4.

Figure 4: The MVRV ratio is currently at a mid-level

Other on-chain indicators focus on the influx of new funds into the Bitcoin ecosystem, often referred to by seasoned cryptocurrency investors as HODL Waves. This framework posits that price increases may be due to new funds purchasing Bitcoin from long-term holders at slightly higher prices. Grayscale Research prefers to measure this by 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 during the upward phase of a year, at least 60% of the circulating supply underwent on-chain transactions. Currently, this ratio is about 54%, suggesting that more Bitcoins may change hands on-chain before prices 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 threshold, they may choose to take profits. Historical data shows that when the MCTC ratio exceeds 10, Bitcoin's price often peaks in that cycle (see Figure 6). Currently, the MCTC ratio is about 6, indicating that the current cycle may still be in the middle phase. However, similar to the MVRV ratio, the MCTC ratio has gradually decreased at each cycle's peak, suggesting that prices may peak before this indicator reaches 10.

Figure 6: The miner-based indicator is 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 of the current price increase phase with the past and do not guarantee that the relationship between these indicators and future price trends will fully conform to historical patterns. Nevertheless, overall, the commonly used indicators for Bitcoin cycles remain below the levels seen when prices peaked in the past, suggesting that if fundamental factors can support it, the current bull market may continue.

Looking Beyond Bitcoin

The scope of the crypto market extends far beyond Bitcoin, and signals from other areas of the industry can also provide clues about the state of market cycles. We believe that due to Bitcoin's relative performance against other crypto assets, these signals may be particularly crucial in the coming year. In the past two market cycles, Bitcoin's dominance (i.e., Bitcoin's share of 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 has reappeared around the two-year mark of the market cycle. If this trend continues, investors should reference other indicators more broadly to assess whether the valuation of cryptocurrencies is approaching cyclical highs.

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

For example, investors can pay attention to funding rates (i.e., the cost of holding long positions in perpetual futures contracts). When speculative traders increase their demand for leverage, funding rates tend to rise. 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 rates of the ten largest crypto assets (i.e., altcoins) excluding Bitcoin. Currently, the funding rate is positive, indicating that leveraged investors have a high demand for long positions, although the funding rate has decreased somewhat during last week's market pullback. Moreover, even at its local peak, the current level of funding rates remains below the peaks earlier this year and in the previous cycle. Therefore, we believe that the current level of funding rates 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 open interest in altcoin perpetual futures has reached relatively high levels. Before the large-scale liquidation event on December 9, the open interest in altcoins reached nearly $54 billion across the three major perpetual futures exchanges (see Figure 9). This indicates a significant scale of speculative long positions in the market. Following the large-scale liquidation earlier this week, the open interest in altcoins decreased by about $10 billion but remains at a high level. Generally, high levels of speculative long positions indicate the later stages of a market cycle, making this indicator worth continued attention.

Figure 9: Altcoin open interest reached a high level before the recent liquidation

The Market is Still Evolving

Since Bitcoin's inception in 2009, the digital asset market has made significant progress, and the current crypto bull market differs in many ways from those in the past. The most notable change is that the U.S. has approved Bitcoin and Ethereum spot exchange-traded products (ETPs), which have brought in $36.7 billion in net capital inflows and incorporated these assets into more traditional portfolios. Additionally, 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 past doubts about the long-term prospects of crypto assets. For these reasons, the valuations of Bitcoin and other crypto assets may no longer follow the recurring four-year cycle pattern seen 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 certain momentum effects. Therefore, the analysis of on-chain indicators and altcoin position data is crucial for investors' risk management decisions. Grayscale Research believes that the current combination of indicators aligns with the middle phase of the crypto market cycle: for instance, the MVRV ratio is significantly above its cyclical low but has not yet reached the levels seen at past market tops. As long as fundamental factors, such as the proliferation of applications and broader macroeconomic conditions, can support it, the bull market may continue.