Grayscale: Bitcoin fluctuates near $100,000, is the bull market over?

Source: Grayscale

Compiled by: Tao Zhu, Golden Finance

summary

• Historically, cryptocurrency valuations follow a distinct four-year cycle, with prices experiencing successive periods of appreciation and depreciation. Grayscale Research believes that investors can monitor a variety of 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) expand market access, and the incoming U.S. Congress may bring greater regulatory clarity to the industry. For all of these reasons, cryptocurrency valuations may eventually outpace the four-year cycles seen in the market’s early history.
• That being said, Grayscale Research believes the current mix of indicators is consistent with the middle stage of the cycle. As long as the asset class remains supported by fundamentals such as app adoption and broader macro market conditions, the bull market is likely to extend into 2025 and beyond.

Like many physical commodities, Bitcoin’s price does not follow a strict “random walk.” [1] Instead, prices show evidence of statistical momentum: rising prices tend to follow rising prices, and falling prices tend to follow falling prices. Over longer time frames, recurring periods of Bitcoin appreciation and depreciation have shaped price cycles around historical upward trends (Figure 1).

 Figure 1: The price of Bitcoin fluctuates repeatedly with an upward trend.

Each past price cycle has had its own unique drivers, and there is no reason why future price returns will fully reflect past experience. Additionally, 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 declines, the cyclical nature of Bitcoin’s price may reshape or disappear entirely. Nonetheless, studying past cycles may provide investors with some guidance on Bitcoin’s typical statistical behavior and therefore inform risk management decisions.

Measure momentum

Figure 2 shows Bitcoin’s price performance during each previous cycle’s appreciation phase. Prices are indexed into the 100 at cycle lows (marking the beginning of the appreciation phase of the cycle) and tracked up to their peaks (marking the end of the appreciation phase). Figure 3 shows the same information in tabular form.

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

 Figure 2: Bitcoin’s trend is relatively close to the past two market cycles

After peaking in November 2021, Bitcoin's price fell to a cyclical low of approximately $16,000 in November 2022. The current period of price increases began then and therefore lasts for more than two years. As shown in Figure 2, the latest price increase is relatively close to the past two Bitcoin cycles, both of which lasted about a year before the price peaked. From a magnitude perspective, Bitcoin's roughly 6x return this cycle, while meaningful, is well below the returns achieved over the past four cycles. All in all, while we cannot be sure that future price returns will be similar to past cycles, Bitcoin’s history tells us that the latest bull market can be extended in both duration and magnitude.

 Figure 3: Four different cycles in Bitcoin price history

Measuring bull market status through various indicators

In addition to measuring price performance over past cycles, investors can also apply a variety of blockchain-based indicators to gauge the maturity of a Bitcoin bull run. For example, common metrics measure the extent to which Bitcoin appreciates relative to buyers' cost base, the extent of new inflows into Bitcoin, and the level of price relative to Bitcoin miners' income.

One particularly popular metric calculates Bitcoin’s market capitalization (MV) (each coin is measured at its secondary market price) and its realized value (RV) (each coin is measured at the price it last traded on-chain). ratio. This metric is called the MVRV ratio and can be thought of as the extent to which Bitcoin’s market capitalization exceeds the market’s total cost base. Over the past four cycles, the MVRV ratio has reached a value of at least 4 (Chart 4). The current MVRV ratio is 2.6, indicating that the latest cycle may continue. However, the MVRV ratio peaks at a lower level every cycle, so the indicator may never reach a level of 4 before the price peaks.

 Figure 4: Intermediate MVRV Ratio

Other on-chain metrics measure the extent to which new money is entering the Bitcoin ecosystem—a framework commonly referred to by seasoned cryptocurrency investors as HODL Waves. Prices may appreciate as new capital purchases Bitcoin from long-term holders at slightly higher prices. There are a variety of specific measures available, but Grayscale Research prefers to use the number of tokens moved on-chain in the last year, relative to Bitcoin’s total free circulating supply (Chart 5). [2] Over the past four cycles, this metric has reached at least 60% - meaning that during the appreciation phase, at least 60% of the free-floating supply was traded on-chain in a year. This number is currently around 54%, suggesting that we may see more tokens changing hands on-chain before the price reaches its peak.

 Figure 5: Less than 60% of active Bitcoin circulation last year

Other cyclical indicators focus on Bitcoin miners, the professional service providers who secure the Bitcoin network. For example, a common metric is to calculate the Miner Cap (MC) (the dollar value of all Bitcoin held by miners) versus the so-called “Hot Cap” (TC) (the number of Bitcoins released to miners through block rewards and transaction fees). the cumulative value of coins). The intuition is that when the value of miners' assets reaches a certain threshold, they may start to make a profit. Historically, when the MCTC ratio exceeds 10, prices subsequently peak during that cycle (Chart 6). Currently, the MCTC ratio is around 6, indicating that we are still at the midpoint 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 metrics are also below previous thresholds

There are many other on-chain metrics that may differ slightly from those from other data sources. Additionally, these tools only give a rough idea of ​​how the current phase of price increases compares to the past, and there's no guarantee that the relationship between these metrics and future price returns will be similar to what it was in the past. That being said, taken together, common indicators of the Bitcoin cycle remain below levels seen at past price peaks, suggesting that the current bull market may continue if supported by fundamentals.

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 the market cycle. We believe these metrics may be particularly important in the year ahead due to the relative performance of Bitcoin and other cryptoassets. Over the past two market cycles, Bitcoin’s dominance (Bitcoin’s share of the total cryptocurrency market capitalization) peaked around two years into the bull market (Figure 7). [3] Bitcoin’s dominance has recently begun to decline, again occurring around two years into the market cycle. If this continues, investors should consider looking at broader measures to determine whether cryptocurrency valuations are approaching cyclical highs.

 Figure 7: Bitcoin dominance declines in year three of past two cycles

For example, investors can monitor funding rates, which are the operating costs of holding a long position in perpetual futures contracts. When demand for leverage from speculative traders is high, financing rates tend to rise. Therefore, the level of financing rates across the market can indicate the overall holdings of speculative traders. Exhibit 8 shows the weighted average funding rates for the 10 largest cryptoassets after Bitcoin (i.e., the largest “altcoins”). [4] Funding rates are currently positive, indicating demand from leveraged investors for long positions, although they have fallen sharply during the past week's decline. Furthermore, even at local highs, funding rates remain below levels seen earlier this year and at the highs of the previous cycle. Therefore, we believe current levels are consistent with moderate levels of speculative positioning in the market and not necessarily consistent with a mature market cycle.

 Figure 8: Funding rates indicate that altcoin speculation is at moderate levels

In comparison, altcoins’ perpetual futures open interest (OI) has reached relatively high levels. Prior to the major liquidation event on Monday, December 9, altcoin open interest on the three major perpetual futures exchanges had reached nearly $54 billion (Chart 9). This indicates relatively high speculative trader positions across the broader market. After massive liquidations earlier this week, altcoin open interest fell by around $10 billion but remains elevated. Higher long positions among speculative traders may be consistent with the later stages of the market cycle, so it may be important to continue to monitor this indicator.

 Figure 9: Altcoin open interest levels were high before recent liquidations

Summarize

The digital asset market has come a long way since the birth of Bitcoin in 2009, and many characteristics of the current crypto bull market are different from those of the past. On top of that, the U.S. market’s approval of spot Bitcoin and Ethereum ETPs brought $36.7 billion in net capital inflows and helped integrate these assets into more traditional investment portfolios. [5] Additionally, we believe that the recent U.S. election may bring more regulatory clarity to the market and help secure a permanent place for digital assets in the world’s largest economy—compared to what has been the case in the past. A significant change at a time when observers have repeatedly questioned the long-term future of the crypto asset class. For these reasons, the valuations of Bitcoin and other cryptoassets may not follow the four-year cycle that the asset class had in its early history.

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

Comment

[1] In the context of financial markets, a random walk is when asset prices evolve in unpredictable ways.

[2] Coin Metrics defines the free-floating Bitcoin supply as coins that have been active at least once in the past five years.

[3] Figure 7 only shows the last two cycles because the altcoin market was not fully developed before then.

[4] Defined as the largest coin by market capitalization after Bitcoin for which data is available. There is no data for TON, so the next largest asset, DOT, is included.

[5] Source: Bloomberg, Grayscale Investments. Data as of December 11, 2024.