Grayscale Report: Bitcoin Breaks $100,000, Where Are We in This Bull Market?

Authors: Zach Pandl, Michael Zhao, Grayscale Research

Compiled by: 0xjs, Jinse Finance

Key Points:

● From a historical perspective, cryptocurrencies exhibit a clear four-year cycle, characterized by alternating phases of price increases and decreases. Grayscale Research believes that investors can monitor various blockchain-based indicators and other metrics to track the crypto cycle, providing a basis for risk management decisions.

● Cryptocurrencies are evolving into a mature asset class: new Bitcoin and Ethereum spot ETPs are expanding market access, and the incoming U.S. Congress may bring clearer regulations to the industry. Given these factors, cryptocurrencies may eventually break free from the pronounced four-year cycle characteristic of early markets.

● Nevertheless, Grayscale Research determines that the current combination of indicators aligns with the mid-stage of the cycle. As long as the fundamentals remain solid, such as widespread adoption and a favorable macroeconomic environment, the bull market is expected to continue until 2025 and beyond.

Similar to many physical commodities, Bitcoin's price does not follow a strict "random walk" pattern. In fact, its price shows statistical momentum: it tends to rise after an increase and fall after a decrease. Viewed over a longer time span, Bitcoin's cyclical fluctuations revolve around a historical upward trend line (Figure 1).

Figure 1: Bitcoin price exhibits cyclical fluctuations around an upward trend

The driving factors behind past price cycles have varied, and future price returns may not replicate past experiences. As Bitcoin matures, gains acceptance from more traditional investors, and the supply impact of the four-year halving event diminishes, its price cycle may reshape or even disappear. However, studying past cycles can help investors gain insights into Bitcoin's typical statistical characteristics, aiding in risk management.

Measuring Momentum

Figure 2 shows Bitcoin's price performance during the upward phases of previous cycles. Prices are benchmarked at the cycle low point set to 100 (marking the beginning of the appreciation phase) and tracked to the peak (marking the end of the appreciation phase). Figure 3 presents the same information in tabular form.

Bitcoin's early cycles were short and experienced rapid gains: the first cycle lasted less than a year, while the second cycle lasted about two years. Both surged over 500 times from their previous cycle lows. The last two cycles each lasted nearly three years. From January 2015 to December 2017, Bitcoin appreciated over 100 times; from December 2018 to November 2021, the increase was about 20 times.

Figure 2: This cycle's Bitcoin performance closely resembles the trajectories of the previous two market cycles

After peaking in November 2021, Bitcoin's price fell to around $16,000 in November 2022, marking the start of the current cycle, which has now lasted over two years. As shown in Figure 2, this price increase closely mirrors the trajectories of the previous two Bitcoin cycles, both of which took another year to reach their price peaks. In terms of magnitude, this cycle has seen an increase of about 6 times, which is substantial but still far less than the previous four cycles. In summary, while future price movements cannot be definitively predicted based on past cycles, history indicates that this bull market has room for expansion in both duration and magnitude.

Figure 3: Four distinct historical cycles of Bitcoin price

Examining Key Indicators

In addition to analyzing past cycle price movements, investors can use various blockchain indicators to measure the progress of Bitcoin's bull market. Common indicators include the appreciation of Bitcoin buyer costs, the scale of new capital inflows, and the relative level of prices to Bitcoin miner revenues.

One favored indicator is the ratio of Bitcoin's market value (MV, the price per coin in the secondary market) to its realized value (RV, the price per coin based on the most recent on-chain transactions), known as the MVRV ratio. This ratio can be seen as the extent to which Bitcoin's market value exceeds the total cost in the market. In the past four cycles, this ratio has reached at least 4 (Figure 4). The current MVRV ratio is 2.6, suggesting that this cycle may have further upside. However, the peak values of this ratio have gradually declined across cycles, and it may not reach 4 before the price peaks.

Figure 4: MVRV ratio is at a mid-level

Other on-chain indicators assess the extent of new capital injected into the Bitcoin ecosystem, often referred to by seasoned cryptocurrency investors as "HODL Waves." Price increases may occur as new capital is purchased from long-term holders. With numerous indicators available, Grayscale Research prefers to select the ratio of the amount of Bitcoin transferred on-chain over the past year to the total circulating supply of Bitcoin (Figure 5). In the past four cycles, this indicator has reached at least 60%, meaning that at least 60% of the circulating supply changed hands during the appreciation phase of the year. Currently, it is about 54%, indicating that we may see further increases in on-chain turnover rates before the price peaks.

Figure 5: The activity level of Bitcoin circulation over the past year is below 60%

Another cyclical indicator focuses on Bitcoin miners, who are the professional service providers maintaining the Bitcoin network. This includes the ratio of miner market capitalization (MC, the dollar value of miners' holdings) to "thermal cap" (TC, the cumulative value of Bitcoin earned by miners through block rewards and transaction fees). The principle is that when miners' assets reach a certain threshold, they may take profits. Historical data shows that when the MCTC ratio exceeds 10, prices often peak during the cycle (Figure 6). Currently, it is around 6, indicating that we are in the mid-stage of the cycle. However, similar to the MVRV ratio, the peak values of this indicator have declined across cycles, suggesting that prices may peak before it reaches 10.

Figure 6: Miner-based indicators are also below past thresholds

There are numerous on-chain indicators, and different data sources may show discrepancies. Moreover, these tools only provide a rough assessment of the current price appreciation phase compared to the past, without guaranteeing a constant relationship between the indicators and future price returns. Overall, common indicators for Bitcoin cycles remain below past price peak levels, and if the fundamentals remain solid, the current bull market may continue.

Other Cryptocurrencies Besides Bitcoin

The cryptocurrency market extends far beyond Bitcoin, and signals from other sectors of the industry can also guide market cycle trends. Given Bitcoin's relative performance against other crypto assets, such indicators will be particularly crucial in the coming year. In the last two market cycles, Bitcoin's dominance (its share of the total market capitalization of cryptocurrencies) peaked around two years into the bull market (Figure 7). Recently, its dominance has declined, coinciding with the two-year mark of the current market cycle. If this trend continues, investors should consider more indicators to assess whether crypto valuations are approaching cycle highs.

Figure 7: Bitcoin's dominance began to decline in the third year of the previous two cycles

For example, investors can monitor funding rates, which represent the holding costs for long positions in perpetual futures contracts. When speculative traders have high leverage demand, funding rates rise. Therefore, the market's funding rate level can measure the overall speculative long position intensity. Figure 8 shows the weighted average funding rate for Bitcoin and the top ten crypto assets (the largest "altcoins"). The current rate is significantly positive, indicating strong demand for long positions among leveraged investors, despite a sharp drop during last week's market crash. Even at local peaks, it remains below the levels seen earlier this year and during the last peak. Thus, the current level aligns with a moderately speculative long position in the market, suggesting that we are still far from the market cycle peak.

Figure 8: Altcoin funding rates indicate moderate speculative longs

In contrast, the open interest (OI) for altcoin perpetual futures has risen to high levels. Before the large-scale liquidation on Monday, December 9, the OI for altcoins on the three major perpetual futures exchanges was nearly $54 billion (Figure 9), highlighting a high level of speculative long positions in the market. After the large-scale liquidation at the beginning of this week, OI dropped by about $10 billion but remains at a high level. High speculative long positions align with characteristics of the later stages of the market cycle, so continuous monitoring is necessary.

Figure 9: Recent open interest for altcoins was at a high level before liquidation

The Music Continues

Since Bitcoin's inception in 2009, the digital asset market has made significant strides, and this bull market in cryptocurrencies differs in many ways from previous ones. A key factor is that the approval of Bitcoin and Ethereum spot ETPs in the U.S. market has introduced $36.7 billion in net capital inflows, facilitating their integration into traditional investment portfolios. Additionally, recent elections in the U.S. are expected to enhance regulatory transparency in the market, solidifying the position of digital assets in the world's largest economy. This transformation is profound, as the long-term prospects of cryptocurrency assets have often been questioned in the past. Therefore, the valuations of Bitcoin and other crypto assets may not necessarily repeat the patterns of the early four-year cycles.

At the same time, cryptocurrencies like Bitcoin share characteristics with digital commodities, and their prices may exhibit momentum traits. Therefore, analyzing on-chain indicators and altcoin holding data can contribute to investors' risk management decisions.

Grayscale Research determines that the current combination of indicators aligns with the mid-stage of the crypto market cycle: the MVRV ratio is above the cycle low, and there is still distance to the previous market peak. As long as the fundamentals remain solid, such as widespread adoption and a favorable macro environment, there is no reason for the crypto bull market not to continue until 2025 and beyond.