Grayscale report: We are currently in the middle of a crypto bull market, and the rise may continue until after 2025

Original title: The State of the Crypto Cycle

Original author: Zach Pandl, Michael Zhao, Grayscale

Original translation: Luffy, Foresight News

· Historically, the cryptocurrency market follows a clear four-year cycle, with prices experiencing consecutive rising and falling phases. Grayscale Research believes that investors can monitor a variety of blockchain-based and other indicators to track cryptocurrency cycles and provide reference for their own risk management decisions.

· Cryptocurrency is an increasingly mature asset class: new spot Bitcoin and Ethereum ETFs have broadened market access channels, and the incoming Trump administration may bring greater regulatory clarity to the crypto industry. For these reasons, cryptocurrency market valuations may break through historical highs.

· Grayscale Research believes that the current market is in the middle stage of a new round of crypto cycle. As long as fundamentals, such as application adoption and macro market conditions, are solid, the bull run has the potential to extend into 2025 and beyond.

Like many physical commodities, Bitcoin’s price does not strictly follow a “random walk” model. Instead, Bitcoin’s price action shows the hallmarks of statistical momentum: ups tend to follow ups, and downs tend to follow downs. While Bitcoin can rise or fall in the short term, over the long term, its price shows a significant upward cyclical trend (Figure 1).

Figure 1: Bitcoin’s price fluctuates, but generally shows an upward trend

Each past price cycle has had its own unique drivers, and future price action will not follow exactly from past experience. Furthermore, as Bitcoin matures and is adopted by a wider range of traditional investors, and as the impact of the four-year halving event on supply decreases, the cyclical nature of Bitcoin’s price action may reshape or disappear entirely. Nevertheless, studying past cycles can provide investors with some guidance on Bitcoin’s typical statistical behavior, which can inform their risk management decisions.

Bitcoin Historical Cycle Observations

Figure 2 shows Bitcoin’s price performance during the upswing phase of each previous cycle. The price is indexed to 100 at the cycle low (the beginning of the cycle’s upswing phase) and tracked to the peak (the end of the upswing phase). Figure 3 shows the same information as Figure 2 in tabular form.

The first price cycle in Bitcoin's history was relatively short and volatile: the first cycle lasted less than a year, and the second cycle lasted about two years. In both cycles, the price of Bitcoin rose more than 500 times from its lows. The two subsequent cycles lasted less than three years each. In the cycle from January 2015 to December 2017, the price of Bitcoin rose more than 100 times, while in the cycle from December 2018 to November 2021, the price of Bitcoin rose about 20 times.

Figure 2: Bitcoin has followed similar trends in the past two market cycles

After peaking in November 2021, the price of Bitcoin fell to a cyclical low of about $16,000 in November 2022. The current price rally phase began then and has lasted for more than two years. As shown in Figure 2, the latest price rally is relatively close to the past two Bitcoin cycles, both of which lasted about three years before the price peaked. From a magnitude perspective, Bitcoin is currently up about 6x in this cycle, which, while a respectable return, is significantly lower than the returns achieved in the past four cycles. In summary, while we cannot be sure that future price returns will be similar to past cycles, Bitcoin history tells us that the latest bull run has room to run in terms of both duration and magnitude.

Figure 3: Four different cycles in Bitcoin price history

On-chain metrics

In addition to observing the price performance of past cycles, investors can also apply a variety of blockchain-based metrics to measure the maturity of the Bitcoin bull run. For example, common metrics include: profitability of Bitcoin buyers, new capital inflows into Bitcoin, and price levels related to Bitcoin miners’ revenue.

One particularly popular metric is to calculate the ratio of Bitcoin’s market value (MV) (the amount of Bitcoin in circulation * the current market price) to its realized value (RV) (the sum of the prices of each Bitcoin at the time of its most recent on-chain transfer). This metric is called the MVRV ratio, and can be thought of as the degree to which Bitcoin’s market value exceeds the market’s total cost basis. In each of the past four cycles, the MVRV ratio has been at least 4 (Figure 4). The current MVRV ratio is 2.6, suggesting that the latest cycle may continue for much longer. However, the MVRV ratio has been declining from its peak in past cycles, so it may never reach 4 in this cycle.

Figure 4: Historically, Bitcoin’s MVRV ratio

Some on-chain metrics measure the extent to which new money is entering the Bitcoin ecosystem. Experienced cryptocurrency investors often refer to this framework as HODL Waves. There are a variety of such metrics to choose from, but Grayscale Research prefers to use the ratio of the number of tokens moved on-chain over the last year relative to Bitcoin’s total free float supply (Chart 5). This metric has reached at least 60% in each of the past four cycles. This means that during the rally phase, at least 60% of the free float supply was traded on-chain over the course of a year. Currently, this number is around 54%, suggesting that we may see more Bitcoin changing hands on-chain before prices peak.

Figure 5: Ratio of active Bitcoin to circulating supply was less than 60% over the past year

Some cyclical indicators focus on Bitcoin miners, the professional service providers who secure the Bitcoin network. For example, a common measure is to calculate the ratio of miner holdings (MC) (the dollar value of all Bitcoin held by miners) to the so-called "thermocap" (TC) (the cumulative value of Bitcoin issued to miners through block rewards and transaction fees). Generally speaking, when the value of miners' assets reaches a certain threshold, they may start to make a profit. Historically, when the MCTC ratio exceeds 10, the price will subsequently peak in the cycle (Chart 6). Currently, the MCTC ratio is about 6, indicating that we are still in the middle of the current cycle. However, similar to the MVRV ratio, the peak of this indicator in the recent cycle is decreasing, so the price peak may come before the MCTC ratio reaches 10.

Figure 6: The cycle peak of Bitcoin miner indicator MCTC is also decreasing

There are many other on-chain indicators, which may differ slightly from those of other data sources. In addition, these tools can only give a rough idea of how the current Bitcoin price increase phase compares to the past, and there is no guarantee that the relationship between these indicators and future price returns will be similar to the past. That being said, taken together, common indicators of Bitcoin cycles are still below the levels when prices peaked in the past. This suggests that if the fundamentals are solid, the current bull run may continue.

Market Indicators Beyond Bitcoin

The cryptocurrency market is more than just Bitcoin, and signals from other parts of the industry may also provide guidance on the state of the market cycle. We believe these indicators may be particularly important in the coming year due to the relative performance of Bitcoin and other crypto assets. In the past two market cycles, Bitcoin's dominance (Bitcoin's share of the total cryptocurrency market value) peaked about two years into the bull market (Figure 7). Bitcoin's dominance has recently begun to decline, and is now about two years into the current market cycle. If this trend continues, investors should consider looking at a wider range of metrics to determine whether cryptocurrency valuations are approaching cyclical highs.  

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

For example, investors can monitor the funding rate, which is the cost of holding a long position in a perpetual futures contract. Funding rates tend to rise when demand for leverage among speculative traders is high. Therefore, the level of funding rates across the market can indicate the overall open interest of speculative traders. Figure 8 shows the weighted average funding rate of the 10 largest crypto assets after Bitcoin (i.e. the largest "altcoins"). Currently, funding rates are clearly positive, indicating demand for long positions by leveraged investors, despite a sharp drop in funding rates during the past week's decline. Moreover, even at the current local high, funding rates are still lower than levels earlier this year and the highs of the previous cycle. Therefore, we believe that the current funding rate level indicates that the market's speculation has not yet reached its peak.

Figure 8: Funding rates indicate that altcoins are moderately speculative

In contrast, altcoin perpetual futures open interest (OI) has reached relatively high levels. Prior to the major liquidation event on December 9, altcoin open interest on the three major perpetual futures exchanges had reached nearly $54 billion (Chart 9). This indicates relatively high open interest among speculative traders across the broader market. Following the large liquidation, altcoin open interest fell by about $10 billion, but remains elevated. High levels of speculative trader long positioning can be consistent with the late stages of a market cycle, so it may be important to continue monitoring this indicator.

Chart 9: High altcoin open interest prior to recent liquidations

The Bull Run Will Continue

Cryptocurrency markets have come a long way since Bitcoin’s inception in 2009, and many of the characteristics of the current crypto bull run are different from those of the past. Most importantly, the approval of spot Bitcoin and Ethereum ETFs in the U.S. market has brought $36.7 billion in net capital inflows and helped integrate crypto assets into broader traditional portfolios. In addition, we believe that the recent U.S. election may bring more regulatory clarity to the market and help ensure a permanent place for crypto assets in the world’s largest economy. This is a significant change from the past, when observers repeatedly questioned the long-term prospects of the crypto asset class. For these reasons, the valuation of Bitcoin and other crypto assets may not follow the historical patterns of the early days.

At the same time, Bitcoin and many other crypto assets can be considered digital commodities and, like other commodities, may exhibit a certain degree of price momentum. Therefore, an assessment of on-chain indicators as well as altcoin data may be helpful for investors in making risk management decisions. Grayscale Research believes that the current set of indicators generally shows that the crypto market is in the mid-term stage of a bull market: indicators such as the MVRV ratio are well above the cycle lows, but have not yet reached the levels that marked the previous market tops. As long as the fundamentals (such as application adoption and macro market conditions) are reliable, we believe that the crypto bull market will continue until 2025 and beyond.

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