Grayscale: Bitcoin fluctuates around $100,000. Is the bull market over?

Source: Grayscale

Compiled by: Tao Zhu, Jinse Finance

Summary

• Historically, cryptocurrency valuations follow a distinct four-year cycle, with prices experiencing consecutive periods of appreciation and depreciation. Grayscale Research believes that investors can monitor various blockchain-based indicators and other measures to track cryptocurrency cycles and inform their risk management decisions.
• Cryptocurrency is a mature asset class: new spot Bitcoin and Ethereum exchange-traded products (ETPs) have expanded market access, and the incoming U.S. Congress may bring greater regulatory clarity to the industry. For all these reasons, cryptocurrency valuations may ultimately surpass the four-year cycles observed in the early history of the market.
• That said, Grayscale Research believes the current combination of indicators is consistent with the mid-phase of the cycle. As long as this asset class remains supported by fundamentals (such as application adoption and broader macro market conditions), a bull market could extend into 2025 and beyond.

Like many physical commodities, Bitcoin's price does not follow a strict "random walk."[1] Instead, the price shows evidence of statistical momentum: price increases often follow upward trends, while price decreases often follow downward trends. Over longer time frames, the recurring appreciation and depreciation of Bitcoin creates price cycles that exhibit phenomena around historical upward trends (Figure 1).

Figure 1: Bitcoin's price fluctuates around an upward trend in cycles

Each past price cycle has its unique drivers, and future price returns have no reason to fully reflect past experiences. Additionally, as Bitcoin matures and is adopted by a broader base of traditional investors, and as the impact of the four-year halving events on supply diminishes, the cyclical nature of Bitcoin's price may reshape or completely disappear. Nevertheless, studying past cycles may provide investors with some guidance regarding Bitcoin's typical statistical behavior, which can inform risk management decisions.

Measuring Momentum

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

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

Figure 2: Bitcoin's performance is relatively close to the past two market cycles

After peaking in November 2021, Bitcoin's price fell to about $16,000 in November 2022, marking a cyclical low. The current price increase has been ongoing since then, lasting over two years. As shown in Figure 2, the latest price increase is relatively close to the previous two Bitcoin cycles, both of which lasted about a year before reaching their peaks. In terms of magnitude, the current cycle's approximate 6-fold return is significant but far below the returns achieved in the previous four cycles. Overall, while we cannot be certain that future price returns will resemble past cycles, Bitcoin's history tells us that the latest bull market could continue in terms of both duration and magnitude.

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

Measuring Bull Market Status Through Various Indicators

In addition to measuring past cycles' price performance, investors can apply various blockchain-based indicators to assess the maturity of the Bitcoin bull market. For example, common indicators measure the degree of appreciation of Bitcoin relative to the buyer's cost basis, the extent of new capital inflows into Bitcoin, and the price relative to Bitcoin miners' income levels.

One particularly popular indicator calculates the ratio of Bitcoin's market value (MV) (measured at its secondary market price per token) to its realized value (RV) (measured at the price of its last on-chain transaction per token). This indicator, known as the MVRV ratio, can be viewed as the extent to which Bitcoin's market value exceeds the total cost basis of the market. In the past four cycles, the MVRV ratio reached values of at least 4 (Figure 4). Currently, the MVRV ratio is 2.6, indicating that the latest cycle may still continue. However, the MVRV ratio peaks at lower levels in each cycle, so it may never reach 4 before the price peaks.

Figure 4: Intermediate MVRV Ratio

Other on-chain indicators measure the extent of new capital entering the Bitcoin ecosystem—experienced cryptocurrency investors often refer to this framework as HODL Waves. Prices may appreciate as new capital purchases Bitcoin from long-term holders at slightly higher prices. There are various specific measures to choose from, but Grayscale Research prefers to use the number of tokens transferred on-chain last year relative to Bitcoin's total freely circulating supply (Figure 5).[2] In the past four cycles, this indicator reached at least 60%—meaning that during the appreciation phase, at least 60% of the freely circulating supply was traded on-chain within a year. Currently, this figure is about 54%, suggesting that we may see more tokens change hands on-chain before the price peaks.

Figure 5: Last year's active Bitcoin circulation was below 60%

Other cyclical indicators focus on Bitcoin miners, the professional service providers securing the Bitcoin network. For example, a common metric calculates the ratio of miners' market cap (MC) (the dollar value of all Bitcoin held by miners) to the so-called "thermal cap" (TC) (the cumulative value of Bitcoin issued to miners through block rewards and transaction fees). The intuition is that when the value of miners' assets reaches a certain threshold, they may begin to take profits. Historically, when the MCTC ratio exceeds 10, the price subsequently peaks within that cycle (Figure 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, this indicator peaks at lower levels in each cycle, and the price may peak before the MCTC ratio reaches 10.

Figure 6: Bitcoin miner indicators are also below previous thresholds

There are many other on-chain indicators, and these may differ slightly from metrics derived from other data sources. Moreover, these tools can only provide a rough understanding of how the current price increase phase compares to the past, and they do not guarantee that the relationship between these indicators and future price returns will be similar to the past. That said, overall, common indicators of Bitcoin cycles remain below the levels observed when prices peaked in the past, suggesting that if supported by fundamentals, the current bull market may continue.

Beyond Bitcoin

The cryptocurrency market is broader than Bitcoin, and signals from other areas of the industry may also provide guidance on the state of market cycles. We believe that, due to the relative performance of Bitcoin and other crypto assets, these indicators may be particularly important in the coming year. In the past two market cycles, Bitcoin's dominance (the share of Bitcoin in the total cryptocurrency market capitalization) peaked about two years after the bull market began (Figure 7).[3] Bitcoin's dominance has recently begun to decline, occurring again around two years into the market cycle. If this trend continues, investors should consider monitoring broader metrics to determine whether cryptocurrency valuations are approaching cyclical highs.

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

For example, investors can monitor funding rates, which represent the cost of holding long positions in perpetual futures contracts. When speculative traders have a higher demand for leverage, funding rates tend to rise. Therefore, the overall level of funding rates in the market can indicate the aggregate positioning of speculative traders. Figure 8 shows the weighted average funding rates of the ten largest crypto assets (i.e., the largest "altcoins") following Bitcoin.[4] Currently, the funding rate is positive, indicating that leveraged investors are demanding long positions, although it has sharply declined during the recent downturn over the past week. Additionally, even at local peaks, the funding rates remain below levels earlier this year and the highs of the previous cycle. Thus, we believe the current levels are consistent with a moderate degree of speculative positioning in the market, rather than necessarily aligning with a mature market cycle.

Figure 8: Funding rates indicate moderate speculative positioning in altcoins

In contrast, the open interest (OI) in altcoin perpetual futures has reached relatively high levels. Before a significant liquidation event on Monday, December 9, the open interest in altcoins across the three major perpetual futures exchanges had reached nearly $54 billion (Figure 9). This indicates that the overall speculative positioning in the market is relatively high. Following a large-scale liquidation earlier this week, the open interest in altcoins fell by about $10 billion but remains elevated. The high long positions of speculative traders may align with the later stages of the market cycle, making it important to continue monitoring this indicator.

Figure 9: High levels of altcoin open interest before recent liquidations

Conclusion

Since the inception of Bitcoin in 2009, the digital asset market has made significant progress, and many characteristics of the current crypto bull market differ from the past. Most importantly, the approval of spot Bitcoin and Ethereum ETPs in the U.S. market has brought in $36.7 billion in net capital inflows and helped incorporate these assets into more traditional portfolios.[5] Furthermore, we believe that the recent U.S. elections may bring more regulatory clarity to the market and help ensure the permanent status of digital assets in the world's largest economy—a significant change compared to the past, when observers repeatedly questioned the long-term future of the crypto asset class. For these reasons, the valuations of Bitcoin and other crypto assets may not follow the four-year cycles observed in the early history of this asset class.

At the same time, Bitcoin and many other crypto assets can be viewed as digital commodities, which, like other commodities, may exhibit some degree of price momentum. Therefore, assessing on-chain indicators and altcoin positioning data can provide insights for investors making risk management decisions. Grayscale Research believes that the current combination of indicators is consistent with the mid-phase of the crypto market cycle: indicators like the MVRV ratio are well above their cyclical lows but have not yet reached levels that marked previous market tops. As long as supported by fundamentals (such as application adoption and broader macro market conditions), we believe there is no reason the crypto bull market cannot continue into 2025 and beyond.