GrayScale: We are in the stage of a crypto bull market

Author: Michael Zhao

Compiled by: Block unicorn

• Bitcoin has historically exhibited cyclical behavior, with distinct "bull market" and "bear market" phases.
• The current Bitcoin bull market cycle appears to be driven by various technical factors, such as the inflow of funds into spot Bitcoin ETFs, increased inflows of stablecoins, and strong fundamental factors like the growth of total value locked (TVL) in DeFi applications.
• Bitcoin's cyclical indicators suggest that we are currently in the mid-point of a bull market (to use a baseball analogy, possibly around the fifth inning), and based on current trends, there is still room for continued growth.
• Given a series of positive fundamental developments, the bull market may continue. However, investors may want to stay vigilant by monitoring the inflows into Bitcoin spot ETFs and macroeconomic indicators for signs of market shifts.

Are We in a Bull Market?

In the past month, Bitcoin's price has surged rapidly in the U.S., breaking through multiple historical highs and rebounding quickly from its 2023 lows. Among over 30 currency pairs, Bitcoin even reached its historical high earlier. This recovery has attracted media attention, with daily reports on Bitcoin's price movements. But it seems to go beyond that: traditional investment managers have even begun analyzing meme coins in their research notes—historically a clear sign of growing mainstream interest in cryptocurrencies. As the overall cryptocurrency market cap approaches historical highs (Chart 1), we must ask ourselves: Are we witnessing the beginning of a new bull market?

Chart 1: Total Cryptocurrency Market Cap Approaching Historical Highs

First, let’s clarify what a bull market means. While the exact definition may be difficult, a practical approach is to view a bull market as a roughly three to four-year cycle that begins from the lowest price point of the previous cycle (Chart 2). Typically, these cycles are characterized by gradually rising prices, peaking at the cycle's high point, followed by a period of stability or slight decline.

Chart 2: Visualization of Cryptocurrency Bull Market Cycles

Identifying the elements of a bull market can be challenging: What factors have brought us to this point? What can we expect in terms of duration and sustainability?

Leading Indicator: Bitcoin's Increasing Dominance

Historically, the start of a cryptocurrency bull market is often marked by a surge in Bitcoin's "dominance," which is the ratio of Bitcoin's market cap to the total cryptocurrency market. This trend underscores Bitcoin's role as a leading indicator for the broader crypto market. Typically, Bitcoin's rise precedes a broader rally in altcoins. Encouraged by profits from Bitcoin, investors may take risks by entering higher-risk cryptocurrencies in search of greater returns. This dynamic was observable during the bull market from 2021 to 2022, when Bitcoin's rise quickly led to significant increases in altcoin valuations (Chart 3).

Chart 3: Bitcoin's Rise Often Precedes Altcoin Rallies

While the current cycle exhibits a familiar pattern of increasing Bitcoin dominance paving the way for altcoin rebounds, a significant factor in this cycle is its unique catalysts. As previously discussed, key drivers such as inflows into Bitcoin spot ETFs and enhanced on-chain liquidity not only contribute to the momentum of the current bull market but also signify a departure from the traditional dynamics observed in previous cycles.

Catalyst #1: Inflows into Bitcoin Spot ETFs

A primary difference in this bull market compared to previous ones is the rapid change in positive market dynamics, largely influenced by inflows into Bitcoin spot ETFs. Since the approval of the ETF in January, as of mid-March, these inflows have exceeded three times the issuance of Bitcoin, putting upward pressure on prices (Chart 4).

Chart 4: Cumulative Inflows into Bitcoin Spot ETFs Driving Bitcoin Prices Up

On a broader level, when Bitcoin spot ETFs issue new shares, they need to purchase Bitcoin from the spot market and deliver it to the fund. In other words, issuing new shares necessitates buying Bitcoin to match the increase in fund assets. In short, cash needs to be converted into Bitcoin to meet the demand for primary market issuance. This dynamic is evident when analyzing the hourly premiums of Coinbase's BTC-USD against Binance's BTC-USDT (Chart 5). The higher premium on Coinbase indicates increased spot buying pressure from U.S. investors, which is a sign of the ETF's presence in market dynamics.

Chart 5: Coinbase (CB) BTC-USD Premium Over Binance BTC-USDT Indicates U.S. Buying Pressure

Catalyst #2: Healthy On-Chain Fundamentals

On-chain indicators also suggest that liquidity is continuously increasing. A key indicator of on-chain data is the positive shift in stablecoin inflows. Stablecoins are digital currencies pegged to stable assets like the U.S. dollar, playing a crucial role in the cryptocurrency ecosystem. They are designed to provide a stable medium of exchange and serve as the primary benchmark currency pair for trading on most centralized and decentralized exchanges.

The increase in stablecoin liquidity means more funds are available for trading, whether buying or selling cryptocurrencies. As indicated by the continuous increase in stablecoin reserves on exchanges, the influx of stablecoin capital typically drives the momentum of a bull market (Chart 6).

Chart 6: Stablecoin Inflows Correlated with BTC Prices

Relatedly, on-chain liquidity also appears to be significantly increasing, as evidenced by the total value locked (TVL) in decentralized finance (DeFi) applications (Chart 7). TVL aggregates the total value of assets held across various DeFi protocols and serves as another indicator of ecosystem liquidity. An increase in TVL not only signifies enhanced liquidity within DeFi platforms but also indicates a growing user engagement with the ecosystem. Increased liquidity is vital for the vitality of DeFi, facilitating smoother transactions and broader financial activities. Notably, since the beginning of 2023, the TVL of decentralized applications has more than doubled, from approximately $40 billion to around $100 billion by mid-March 2024.

Chart 7: Total Value Locked in DeFi Has More Than Doubled Since 2023

Furthermore, since the local peak of Bitcoin supply in May 2023, the amount of Bitcoin held on exchanges has significantly decreased by 7%, indicating supply tightness, partly due to Bitcoin spot ETFs transferring BTC to custodial cold wallets for long-term storage (Chart 8). According to Glassnode's research, the total amount of BTC held on exchanges has shrunk to about 12% of the circulating supply, marking a five-year low. This trend of moving away from exchanges is traditionally seen as a bullish indicator, suggesting that people prefer to hold rather than sell, reflecting investor confidence in Bitcoin's value. As demand on exchanges gradually exceeds supply, the ensuing liquidity tightening not only highlights the influence of these Bitcoin spot ETFs but also reinforces the market's bullish outlook on the cryptocurrency market.

Chart 8: Decline in Bitcoin Supply on Exchanges

Entering the "Fifth Inning"

Now that we have identified the drivers of the bull market, we need to assess our position. While each cycle has its inherent uniqueness, established on-chain patterns and sentiment data lead us to believe that we are currently in the "mid-point" or "fifth inning" of the current bull market cycle. Despite the progress made, we believe there is still room for development.

Market Cap vs. Realized Value + Unrealized Profit/Loss

The Market Cap/Realized Value (MVRV) metric compares Bitcoin's market value to its "realized value," or the price at which all Bitcoins last changed hands. Using this difference, the Unrealized Profit/Loss (NUPL) calculates the percentage of profit/loss by dividing the difference between market cap and realized value by the market cap. When Bitcoin's price rises and investors who bought at lower costs continue to hold their Bitcoin, the NUPL ratio increases. As of mid-March 2024, the NUPL is around 60%, with historical peaks occurring when profit margins exceed 70%, suggesting we may be approaching a cycle high for this metric (Chart 9).

Chart 9: NUPL Reaches Historical Cycle Highs

Z-Score of Market Cap/Realized Value

Conversely, the Z-score of Market Cap/Realized Value provides a different perspective, indicating potential for further growth. This metric calculates the difference between market cap and realized market cap, adjusting for volatility based on the rolling standard deviation of market cap. Historically, high Z-scores reflect a significant gap between market value and realized value, marking the peaks of cycles. Currently, the Z-score is around 3, well below the levels seen at previous cycle peaks, indicating that the market still has considerable room for upward movement (Chart 10).

Chart 10: Z-Score of Market Cap/Realized Value Indicates We Are Not Nearing the Peak of the Bull Market

ColinTalksCrypto's Bitcoin Bull Market Index

From a broader perspective, ColinTalksCrypto's Bitcoin Bull Market Index (CBBI) provides a comprehensive view by aggregating nine different ratios into a single value that measures the progress of Bitcoin's bull market phase (Chart 11). These ratios encompass various values, including Bitcoin's price relative to its historical performance, on-chain indicators reflecting investor behavior, and broader market sentiment indicators. By integrating data from sources such as the Z-score of Market Cap/Realized Value, the Puell Multiple, and the RHODL ratio, the CBBI aims to provide a snapshot of overall market conditions. As of mid-March 2024, the CBBI stands at 79 (out of 100), indicating that we are approaching the peak of the cycle, although the market still has potential for further upside.

Chart 11: CBBI Indicates We Are Approaching the Peak of the Cycle

Source: colintalkscrypto.com, as of March 18, 2024. The index is unmanaged and cannot be directly invested in. Past performance is not indicative of future results. For illustrative purposes only.

Retail Market Sentiment

However, sentiment data presents a starkly different picture. The subscription rates of cryptocurrency-related YouTube channels can serve as an indicator of retail investor enthusiasm, but their subscription rates are significantly lower than the fervor seen during the 2020-2021 bull market. However, the recent uptick in subscription growth rates suggests that retail investor interest is slowly increasing (Chart 12).

Chart 12: Cryptocurrency YouTube Subscriptions Remain Tepid

Source: The Block, Social Blade, as of March 24, 2024. For illustrative purposes only.

Similarly, the current level of search interest for the term "cryptocurrency" on Google Trends is significantly lower than the peak in 2021, indicating that broader public curiosity about cryptocurrencies may not have fully rebounded (Chart 13). Google Trends displays the popularity of search terms on a scale from 1 to 100 (Y-axis). This score is based on a sample of Google searches, randomly selected and unbiased. A score of 100 indicates that a term is at its most popular during the selected time and place. This discrepancy raises questions about retail participation in the current cycle.

Chart 13: Search Interest for "Cryptocurrency" Has Declined Compared to the Previous Cycle

Source: Google Trends, as of March 18, 2024. For illustrative purposes only.

Mobile engagement, measured by the download volume of the Coinbase app, seems to indicate a growing interest among potential investors, peaking around March 5 when it entered the top 100 (Chart 14). However, its subsequent drop in ranking suggests that the platforms used by market participants may be cooling or shifting.

Chart 14: Coinbase App Ranking Hovers Around 300

Source: SensorTower, as of March 24, 2024. Only data within this time frame is available. For illustrative purposes only.

To reconcile the rising price/on-chain indicators with the tepid retail sentiment, it can be argued that the retail investors who drove the previous cycle have not fully re-entered the market. In our research, the momentum of this cycle may be driven by different types of investors—those less visible on social media platforms like Twitter or YouTube. The approval of Bitcoin spot ETFs may have attracted investors who are more comfortable with traditional investment tools. This shift suggests that Bitcoin is gaining broader acceptance, potentially extending its appeal beyond typical cryptocurrency enthusiasts to those who prefer established financial products.

Untapped Future Catalysts

The outcome of the bull market remains uncertain. Nevertheless, we maintain a cautiously optimistic outlook, as increased participation from both retail and institutional investors could propel the momentum of the bull market forward.

This cautious stance regarding the behavior of new Bitcoin spot ETF buyers is prudent. Historically, Bitcoin has experienced pullbacks in every bull market cycle, so we are uncertain how these new buyers will react in the face of a pullback. Encouragingly, the pullbacks experienced in this cycle so far have been relatively minor (see Appendix 15), the least severe compared to pullbacks in previous cycles.

Chart 15: Current Bull Market Cycle Has Experienced Minimal Pullbacks

On the other hand, we recognize the presence of untapped demand. In addition to the retail investors mentioned earlier who have yet to return to the market, some institutional investors (such as telecom companies and wealth management firms) remain on the sidelines. However, one specific organization has begun approving the inclusion of Bitcoin spot ETFs in advisor-managed portfolios. This cautious yet hopeful recognition marks a significant but untapped investment potential, and we believe this potential can sustain or accelerate the upward trajectory of the market.

Focus

The inflows into Bitcoin spot ETFs and macroeconomic indicators are currently the primary forces determining the near-term direction of the Bitcoin bull market cycle, much like the two sides of a seesaw, with their influence fluctuating over time. At certain moments, inflows into Bitcoin spot ETFs dominate, while at other times, macroeconomic factors take precedence. This ever-changing dynamic ensures that our attention remains focused on these elements, as they are likely to continue shaping the narrative of Bitcoin market behavior.

Looking ahead, our conviction in Bitcoin's performance as an asset class remains steadfast. Supported by favorable market conditions and its established role as a store of value and hard currency, we believe Bitcoin will continue to succeed. While the market surged strongly in early 2024, investors must remember the inherent volatility of cryptocurrencies, characterized by cyclical pullbacks during bull markets. However, by maintaining a long-term perspective, we believe Bitcoin is clearly in a strong position.