Original Title: The State of Crypto Cycle
Original Authors: Zach Pandi, Michael Zhao
Original Source: https://www.grayscale.com/research/reports/the-state-of-the-crypto-cycle
Translation: Tom, Mars Finance
Historically, cryptocurrency valuations seem to follow a four-year cycle, with prices rising and then falling, repeating this pattern. Grayscale Research believes that investors may track the crypto cycle by observing various blockchain-based metrics and other measurement methods, thereby providing insights for risk management.
The crypto space is gradually maturing: new Bitcoin and Ether spot exchange-traded products (ETPs) are broadening market access, and the new Congress in the U.S. may bring a clearer regulatory environment to the industry. For these reasons, crypto asset valuations may ultimately transcend the four-year cycle pattern frequently observed in early market history.
That said, Grayscale Research believes that the current combination of various indicators still aligns with the mid-stage of the cycle. As long as this asset class remains supported by fundamental factors (such as the adoption of applications and broader macro market conditions), the bull market may extend into 2025 and beyond.
Like many physical commodities, Bitcoin's price does not follow a strict 'random walk' [1]. Instead, the price exhibits statistical momentum characteristics: uptrends tend to follow uptrends, and downtrends tend to follow downtrends. Viewed over a longer time frame, the cyclicality of Bitcoin's periodic rises and falls gives the price a pattern of cyclical fluctuations around historical uptrends (see Chart 1).
Chart 1: Bitcoin Price Characteristics Exhibit Cyclical Fluctuations Around Upward Trends
Each past price cycle has had unique drivers, and there is no reason to believe that future price returns will fully replicate past experiences. Additionally, as Bitcoin continues to mature and gain acceptance among a broader range of traditional investors, and as the impact of its halving events on supply diminishes, the cyclical fluctuations of Bitcoin prices may change or even fade. Nevertheless, studying past cycles may provide investors with some reference points regarding Bitcoin's typical statistical behaviors, which could benefit risk management decisions.
Measuring Momentum
Chart 2 shows Bitcoin's price performance during the ascent phase of each previous cycle. The price is indexed to 100 at cyclical lows (marking the starting point of the upward phase) and tracked to its peak (marking the end point of the upward phase). Chart 3 presents the same information in tabular form.
The earliest price cycles in Bitcoin history were short and steep: the first cycle lasted less than a year, and the second cycle lasted about two years. In both cycles, prices rose more than 500 times from the previous cycle's lows. The subsequent two cycles each lasted nearly three years. In the cycle from January 2015 to December 2017, Bitcoin's price increased more than 100 times, while in the cycle from December 2018 to November 2021, Bitcoin's price increased by about 20 times.
Chart 2: Current Bitcoin Price Trends Are Relatively Close to the Past 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, the current price rising phase has begun from that point and has lasted over two years. As shown in Chart 2, this price uptrend trajectory is relatively close to those of the past two cycles, both of which continued for about another year before peaking. From a return perspective, this cycle's approximately 6 times return for Bitcoin is significant, but still less impressive compared to the returns of the past four cycles. In summary, while we cannot determine whether future price performance will align with past cycles, Bitcoin's history suggests that this bull market may further extend in duration and return.
Chart 3: Four Distinct Cycles in Bitcoin Price History
Examining Key Indicators
In addition to measuring past cycle price performance, investors can use various blockchain-based indicators to assess the maturity of the Bitcoin bull market. Commonly used indicators include measuring the extent of Bitcoin's increase relative to the cost basis of buyers, the scale of new capital inflows into Bitcoin, and the level of Bitcoin prices relative to miner revenues.
One popular metric is the MVRV ratio, which is the market capitalization of Bitcoin (MV, measured at the price of each coin in the secondary market) relative to its realized value (RV, measured at the price of each coin at its last on-chain transaction). The MVRV ratio can be seen as the degree to which Bitcoin's market capitalization exceeds the overall cost basis of the market. In each of the past four cycles, the MVRV ratio has at least reached 4 (see Chart 4). Currently, the MVRV ratio is at 2.6, indicating that this cycle may still have upside potential. However, the peak of the MVRV ratio in each cycle has been lower than in the previous cycle, suggesting that this metric may not necessarily reach 4 before prices peak in this cycle.
Chart 4: MVRV Ratio is at Mid-Level
Other on-chain metrics measure the extent of new capital entering the Bitcoin ecosystem—this framework is often referred to as 'HODL Waves' among seasoned crypto investors. Price increases may occur because new capital purchases Bitcoin at slightly higher prices than the cost basis of existing long-term holders. There are many specific metrics available, but Grayscale Research prefers to use the ratio of the amount of coins transferred on-chain in the past year to the total circulating supply of Bitcoin (see Chart 5) [2]. In the past four cycles, this metric has reached at least 60%, meaning that in the year of the upward phase, at least 60% of the circulating supply had transacted on-chain. The current value is about 54%, indicating that more coins may need to change hands on-chain before prices peak.
Chart 5: Bitcoin Circulation Volume in the Past Year Below 60%
Additionally, the cyclical indicators surrounding Bitcoin miners are also worth monitoring. Miners are professional service providers that secure the Bitcoin network. For example, a common measurement is the ratio of miner total market capitalization (MC, the dollar value of all Bitcoin held by miners) to 'thermal cap' (TC, the value of Bitcoin accumulated by miners through block rewards and transaction fees). The intuition is that when the value of assets held by miners reaches a certain threshold, they may choose to take profits. Historically, when the MCTC ratio exceeds 10, prices often peak within that cycle (see Chart 6). Currently, the MCTC ratio is about 6, indicating that we are still in the middle stage of this cycle. However, like the MVRV ratio, this indicator's peak in each cycle is also decreasing, suggesting that prices may peak before the MCTC ratio reaches 10.
Chart 6: Bitcoin Miner Metrics Have Not Yet Reached Past Peak Levels
There are many other on-chain metrics, and different data sources may have slight variations in their calculations. Moreover, these tools can only provide a rough indication of the current price rise phase relative to past comparisons, and do not guarantee that the relationship between these indicators and future price returns will be the same as in the past. Nonetheless, overall, commonly used indicators for Bitcoin cycles remain lower than the levels seen at past price peaks, suggesting that if the fundamentals remain supportive, this bull market may persist.
Looking Beyond Bitcoin
The crypto market extends far beyond Bitcoin, and signals from other areas of the industry may also provide guidance on the state of market cycles. We believe that these indicators are particularly important in the coming year, as the relative performance of Bitcoin against other crypto assets is worth noting. In the past two market cycles, Bitcoin's dominance (i.e., the proportion of Bitcoin in the total crypto market capitalization) peaked about two years after the bull market began (see Chart 7) [3]. Recently, Bitcoin's dominance has started to decline, which is similar to the performance of the previous two cycles around the third year. If this trend continues, investors should consider a broader range of indicators to assess whether crypto valuations are approaching cyclical peaks.
Chart 7: Bitcoin's Dominance Decreased in the Third Year of the Past Two Cycles
For example, investors can pay attention to funding rates, which are the ongoing costs of holding long positions in perpetual contracts. When speculative traders' demand for leveraged longs rises, funding rates tend to increase. Therefore, the overall level of market funding rates can reflect the degree of overall speculative long positions. Chart 8 shows the weighted average funding rates of the top ten crypto assets by market capitalization outside of Bitcoin (i.e., major 'altcoins') [4]. Currently, the funding rate is significantly positive, indicating that leveraged investors demand long positions, although funding rates have slightly decreased in last week's market downturn. Additionally, even at local peaks, funding rates remain below earlier levels this year and the peaks of the previous cycle. Therefore, we believe that the current levels align with mid-term speculative positions and have not reached the extreme highs typically corresponding to mature market cycles.
Chart 8: Funding Rates Indicate Moderate Levels of Speculative Long Positions in Altcoins
In contrast, the open interest (OI) of altcoin perpetual contracts has reached relatively high levels. Before a massive liquidation on Monday, December 9, altcoin OI approached $54 billion across the three largest perpetual contract exchanges (see Chart 9). This indicates a high level of speculative long positions across the market. Following a wave of liquidations earlier this week, altcoin OI dropped by about $10 billion but remains at a high level. The high speculative long positions are consistent with the late stage of the market cycle, so it may be quite important to continue monitoring this metric.
Chart 9: Recent Altcoin Open Interest Remains Elevated Before Liquidation
Looking Ahead
Since the birth of Bitcoin in 2009, the digital asset market has come a long way, with this crypto bull market differing significantly from the past. Most importantly, the approval of Bitcoin and Ether spot ETPs in the U.S. has brought a net capital inflow of $36.7 billion into the market, incorporating these assets into more traditional investment portfolios [5]. Additionally, we believe that the upcoming U.S. elections may bring a clearer regulatory framework to the market, helping digital assets gain a long-term foothold in the world's largest economy—this is in stark contrast to the past, when the long-term prospects of the crypto asset class were repeatedly questioned. Given these reasons, the valuations of Bitcoin and other crypto assets may no longer follow the common four-year cycle observed in their early history.
Meanwhile, Bitcoin and many other crypto assets can be viewed as digital commodities, and may still exhibit some degree of price momentum. Assessing on-chain metrics and altcoin market position data may provide a reference for investors' risk management decisions. Grayscale Research believes that the current combination of various indicators aligns with the mid-stage of the crypto market cycle: the MVRV ratio is well above cyclical lows but has not yet reached levels that marked past market tops. As long as the fundamentals remain supportive (such as the promotion of applications and a broader macro market environment), we see no reason why this crypto bull market cannot continue into 2025 and beyond.
[1] In a financial markets context, a random walk refers to the idea that asset prices evolve in an unpredictable way, in which information of past events holds no information about future results.
[2] Free Float Bitcoin supply defined by Coin Metrics as tokens active at least once in the last five years.
[3] Exhibit 7 only shows the two most recent cycles because the altcoin market was not sufficiently developed before that point.
[4] Defined as the largest tokens by market capitalization after Bitcoin with available data. No data was available for TON, so the next largest asset DOT was included instead.
[5] Source: Bloomberg, Grayscale Investments. Data as of December 11, 2024.