Grayscale Report: Bitcoin breaks through $100,000, where are we in this bull market?

Author: Zach·Pandl, Michael·Zhao, Grayscale Rresearch

Compiled by: 0xjs, Golden Finance

Key points:

●From a historical perspective, cryptocurrencies show a clear four-year cycle, going through successive stages of price increases and decreases. Grayscale Research believes that investors can monitor a variety of blockchain-based indicators and other measurements to track crypto cycles and provide a basis for risk management decisions.

●Cryptocurrencies are developing into a mature asset class: New Bitcoin and Ethereum spot ETPs have expanded market access, and the incoming U.S. Congress may bring clearer regulation to the industry. Given the above factors, cryptocurrencies may finally break out of the four-year cycle that characterized the early market.

●Nonetheless, Grayscale Research determines that the current indicator combination fits the mid-term stage of the cycle. As long as the fundamentals are solid, if applications are popularized and the macro market environment improves, the bull market is expected to continue until 2025 and beyond.

Like many physical commodities, Bitcoin prices do not follow a strict "random walk" pattern. In fact, there are signs of statistical momentum in its price: when it rises, it tends to keep rising, but when it falls, it often keeps falling. Looking over a longer time span, Bitcoin’s ebb and flow cycle fluctuates around the historical upward trend line (Figure 1).

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

Each price cycle in the past has been driven by different factors, and future price returns may not replicate past experience. As Bitcoin matures, is accepted by more traditional investors, and the supply impact of the four-year halving event fades, its price cycle may be reshaped or even disappear. However, studying past cycles can help investors gain insight into the typical statistical characteristics of Bitcoin and assist risk management.

measure momentum

Figure 2 shows the price performance of Bitcoin during the rising phase of previous cycles. The price is based on the cycle low of 100 (marking the beginning of the appreciation phase of the cycle) and tracks to the peak (marking the end of the appreciation phase). Figure 3 presents the same information in tabular form.

Bitcoin’s early cycle was short and its rise was rapid: the first cycle was less than one year, and the second cycle was about two years. Both have soared more than 500-fold from their previous cycle lows. The latter two cycles last nearly three years each. In the cycle from January 2015 to December 2017, the value of Bitcoin increased by more than 100 times; in the cycle from December 2018 to November 2021, the increase was approximately 20 times.

Figure 2: The trend of Bitcoin in this cycle is very similar to the trajectory of the previous two market cycles.

After reaching the top in November 2021, the price of Bitcoin fell to a cycle low of about $16,000 in November 2022. This started the current cycle, which has lasted more than two years. As shown in Figure 2, this round of price rise is similar to the previous two Bitcoin cycle trajectories, which both took one year to reach the price peak. In terms of magnitude, the increase in this cycle is about 6 times, which is also impressive, but far inferior to the past four rounds. In short, although it cannot be determined that future price trends will conform to past cycles, history shows that there is room for expansion in the length and magnitude of this bull market.

Figure 3: Four unique cycles in Bitcoin price history

Check key indicators

In addition to analyzing price trends in past cycles, investors can use a variety of blockchain indicators to measure the progress of the Bitcoin bull market. Common indicators include the appreciation of Bitcoin buyer costs, the scale of new capital inflows, the relative level of price and Bitcoin miners’ earnings, etc.

One of the most popular indicators is the ratio of Bitcoin market capitalization (MV, calculated as the secondary market price per coin) to the realized value (RV, calculated as the most recent transaction price on the chain per coin), that is, the MVRV ratio, which can be regarded as The extent to which Bitcoin’s market capitalization exceeds its total market cost. In the past four cycles, the ratio has reached at least 4 (Figure 4). The current MVRV ratio is 2.6, which indicates that there may be subsequent market trends in this cycle. However, the peak value of this ratio gradually decreases in each cycle, and the price may not reach 4 before reaching the top. Figure 4: MVRV ratios are in the middle

Other on-chain metrics consider the degree to which new money is being injected into the Bitcoin ecosystem, which veteran cryptocurrency investors often refer to as "HODL Waves." The price increase may be due to new capital purchasing coins from long-term holders at a higher price. There are many indicators, and grayscale research tends to select the ratio of the amount of coins transferred on the chain to the total circulating supply of Bitcoin in the past year (Figure 5). In the past four cycles, this indicator has reached at least 60%, which means that during the appreciation stage, at least 60% of the circulating supply changed hands within a year. It is currently around 54%, suggesting that we may see further increases in the on-chain turnover rate before the price reaches a peak.

Figure 5: The activity of Bitcoin circulation in the past year was less than 60%

Another cyclical indicator focuses on Bitcoin miners, the professional service providers who maintain the Bitcoin network. For example, the ratio of commonly used miner market capitalization (MC, the dollar value of miners’ currency holdings) to the “thermal cap” (TC, the cumulative value of Bitcoin earned by miners through block rewards and transaction fees). The principle is that miners may take profits when their assets reach a certain threshold. Historical data shows that after the MCTC ratio exceeds 10, prices tend to peak during the cycle (Figure 6). It is currently around 6, indicating a mid-cycle stage. However, similar to the MVRV ratio, the peak value of this indicator declines in each cycle, and the price may peak before it reaches 10.

Figure 6: Bitcoin miner-based indicators are also below past thresholds

There are many indicators on the chain, and there may be differences between different data sources. Moreover, these tools only roughly judge the similarities and differences between the current price appreciation stage and the past, and cannot ensure that the relationship between indicators and future price returns is constant. Taken together, common indicators of the Bitcoin cycle are still lower than past price peak levels. If fundamental support is solid, the current bull market may continue.

Cryptocurrencies other than Bitcoin

The crypto market goes far beyond Bitcoin, and signals from other areas of the industry can also guide market cycle trends. Metrics like these will be particularly critical in the year ahead given Bitcoin’s relative performance against other cryptoassets. In the past two market cycles, Bitcoin’s dominance (share of the total market capitalization of the crypto market) reached its peak about two years into the bull market (Figure 7). Its recent decline in dominance coincides with the two-year node of this market cycle. If this trend continues, investors should consider more indicators to determine whether crypto valuations are approaching cycle highs.

Figure 7: Bitcoin dominance began to decline in the third year of the first 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 climb when speculative traders' demand for leverage is high. Therefore, the level of market funding rates can measure the overall degree of speculative long positions. Figure 8 shows the weighted average funding rates of the top ten crypto assets (the largest “altcoins”) outside of Bitcoin. Rates are currently significantly positive, indicating strong long demand from leveraged investors, despite falling sharply last week when the market tanked. Even the local highs are lower than the peaks at the beginning of this year and the previous round. From this point of view, the current level is consistent with the market's moderate speculative long position and is still far from the peak of the market cycle.

Figure 8: Altcoin funding rates indicate moderate speculative longs

In contrast, altcoin perpetual futures open interest (OI) rose to highs. Before the large-scale liquidation on Monday, December 9, altcoin OI on the three major perpetual futures exchanges was nearly US$54 billion (Figure 9), highlighting the high speculative long positions in the market. After large-scale liquidations at the beginning of this week, OI fell by about $10 billion but remained high. Highly speculative long positions are consistent with late market cycle characteristics and require continued monitoring.

Figure 9: Altcoin open interest remains high before recent liquidations

Then play music

Since the birth of Bitcoin in 2009, the digital asset market has made great strides in development, and this crypto bull market is different from the past in many aspects. The key is that the US market Bitcoin and Ethereum spot ETPs were approved to introduce a net capital inflow of US$36.7 billion, promoting their integration into traditional investment portfolios. In addition, the recent elections in the United States are expected to increase the transparency of market supervision and consolidate the status of digital assets in the world's largest economy. This change is of far-reaching significance. In the past, the long-term prospects of crypto assets have been repeatedly questioned. Therefore, the valuation of Bitcoin and other crypto assets may not necessarily repeat the mistakes of the earlier four-year cycle.

At the same time, cryptoassets such as Bitcoin are similar to digital commodities, and their prices may have momentum characteristics. Therefore, analyzing on-chain indicators and altcoin holding data can contribute to investors’ risk management decisions.

Grayscale Research determines that the current indicator combination is in line with the mid-term of the crypto market cycle: the MVRV ratio is higher than the cycle low and is still far from the previous market top. As long as the fundamentals are solid, such as the popularity of applications and the improvement of the macro environment, there is no reason why the crypto bull market cannot continue until 2025 and beyond.