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

Authors: Zach Pandl, Michael Zhao, Grayscale Research

Compiled by 0xjs@Golden Finance

Key points:

● From a historical perspective, cryptocurrencies have shown a clear four-year cycle, going through consecutive stages of price fluctuations. Grayscale Research believes that investors can monitor various blockchain-based indicators and other metrics to track the crypto cycle and provide a basis for risk management decisions.

● Cryptocurrency is developing into a mature asset class: new Bitcoin and Ethereum spot ETPs are expanding market access, and the upcoming US Congress may bring clearer regulations to the industry. In view of these factors, cryptocurrencies may eventually break the four-year cycle characterized by early market features.

However, Grayscale Research believes that the current indicator combination fits the 'mid-term stage' of the bull market cycle. As long as the fundamentals are solid, such as widespread adoption and a favorable overall economic environment, the cryptocurrency bull market is expected to continue until 2025 or even longer.

Similar to many physical commodities, the price of Bitcoin does not follow a strict 'random walk' pattern. In fact, its price shows statistical momentum: rising tends to continue rising, and falling tends to continue falling. When viewed over a longer time span, the Bitcoin's cyclical nature revolves around historical upward trend line fluctuations (Figure 1).

Figure 1: The price of Bitcoin exhibits periodic fluctuations around the upward trend

Past price cycle driving factors vary, and future price returns may not necessarily replicate past experiences. With the maturity of Bitcoin, acceptance by more traditional investors, and the supply impact of the halving event every four years being minimal, its price cycle may be reshaped or even disappear. However, studying past cycles can help investors understand the typical statistical characteristics of Bitcoin and assist in risk management.

Measure Momentum

Figure 2 shows the price performance of Bitcoin during the previous upward phases. The price is based on the cycle low point set at 100 (marking the start of the upward phase) and tracked to the peak (marking the end of the upward phase). Figure 3 presents the same information in a tabular form.

The early cycles of Bitcoin were short and rising rapidly: the first cycle was less than a year, and the second cycle was about two years. Both rose more than 500 times from the low point of the previous cycle. The last two cycles were nearly three years each. From January 2015 to December 2017, Bitcoin appreciated more than 100 times; from December 2018 to November 2021, the increase was about 20 times.

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

After reaching its peak in November 2021, the price of Bitcoin fell to around $16,000 in November 2022, marking the start of the current cycle, which has lasted for more than two years. As shown in Figure 2, the current price increase is similar to the previous two cycles of Bitcoin. It took one year for the previous two cycles to reach their price peaks. This cycle has a roughly six-fold increase in magnitude, which is impressive, but it is far less than the previous four cycles. In any case, it is impossible to predict whether the future price trend will follow the previous cycles, but history shows that this bull market has room to expand in terms of duration and magnitude.

Figure 3: Four unique cycles in the price history of Bitcoin Checking key indicators

In addition to analyzing the past price trends, investors can use a variety of blockchain indicators to measure the progress of Bitcoin bulls. Common indicators include the appreciation of Bitcoin buyer's cost, the scale of new fund inflows, and the relative level of price to Bitcoin miner income.

The widely favored indicator is the Bitcoin Market Value (MV) (measured in coin per secondary market price) versus the Realized Value (RV) (measured in coin per recent on-chain transaction price). This ratio, known as the MVRV ratio, can be seen as the degree to which the Bitcoin market value exceeds the total market cost. In the past four cycles, this ratio has reached at least 4 (Figure 4). Currently, the MVRV ratio is 2.6, indicating that there may be a follow-up market trend in this cycle. However, the peak of this ratio in each cycle is gradually decreasing, and it may not reach 4 before the price peaks.

Figure 4: MVRV ratio is at a medium level

Other on-chain indicators consider the degree of new capital injection into the Bitcoin ecosystem, which is often referred to as 'HODL Waves' by senior cryptocurrency investors. The price rises or falls due to new capital purchasing coins from long-term holders. There are many indicators, but Grayscale Research tends to select the ratio of on-chain transfer volume in 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 changes hands during the appreciation phase within a year. It is currently about 54%, implying that we may see further increase in on-chain turnover before the price peaks.

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

There is also a cyclical indicator focusing on Bitcoin miners, who are professional service providers that maintain the Bitcoin network. It compares the commonly used Miner Cap (MC, the dollar value of the miner's holdings) with the Thermal Cap (TC, the accumulated value of Bitcoin obtained through block rewards and transaction fees). The principle is that miners may profit when their assets reach a certain threshold. Historical data shows that when the MCTC ratio exceeds 10, the price tends to peak within the cycle (Figure 6). Currently, it is around 6, indicating that it is in the middle stage of the cycle. However, similar to the MVRV ratio, this indicator has a downward trend in each cycle peak, and the price may peak before it reaches 10.

Figure 6: The indicator based on Bitcoin miners is also below the previous threshold.

There are many on-chain indicators, and different data sources may have differences. These tools can only roughly judge the current price appreciation stage and compare it with the past, and cannot guarantee a constant relationship between the indicators and future price returns. Generally speaking, common indicators of the Bitcoin cycle are still below previous price peak levels. If the fundamentals are solid, the current bull market may continue.

Other cryptocurrencies

The cryptocurrency market goes far beyond the scope of Bitcoin, and signals from other industries can also guide market cycles. Given the relative performance of Bitcoin and other cryptocurrencies, such indicators will be especially critical in the coming year. In the past two market cycles, Bitcoin's dominance (as a percentage of the total market capitalization of the cryptocurrency market) reached its peak in about two bullish years (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 cryptocurrency valuation is approaching a cycle high.

Figure 7: Bitcoin dominance began to decline in the third year of the first two-cycle cycle.

For example, investors can monitor the funding rate, which is the holding cost of long positions in perpetual futures contracts. When there is high leverage demand from speculative traders, the funding rate rises. Therefore, the level of the market's funding rate can measure the overall speculative bullishness. Figure 8 shows the weighted average funding rate of the top ten cryptocurrencies (the largest 'competing coin') excluding Bitcoin. The current rate is significantly positive, indicating strong demand from leveraged investors, despite the sharp drop in the market last week. Even at local highs, it is lower than the early this year and the previous peak. Therefore, the current level aligns with a moderately speculative bullish market and is far from the market cycle peak.

Figure 8: Funding Rate for Competitive Coins Shows Moderately Speculative Long

In contrast, the open interest (OI) of competitive coins perpetual futures has reached a high point. Before the large-scale liquidation on Monday, December 9th, the OI of competitive coins on the three major perpetual futures exchanges was nearly 54 billion US dollars (Figure 9), highlighting the high speculative long positions in the market. After the large-scale liquidation at the beginning of this week, the OI decreased by about 10 billion US dollars but remained high. The high speculative long positions are in line with the late-stage characteristics of the market cycle, so continuous monitoring is required.

Figure 9: The recent open interest of the competing coins before liquidation is at a high level, followed by music

Since the birth of Bitcoin in 2009, the digital asset market has developed rapidly, and this round of cryptocurrency bull market is different from the past in many aspects. The key lies in the approval of Bitcoin and Ethereum spot ETP to enter the US market, attracting a net inflow of 36.7 billion US dollars, and promoting their integration into traditional investment portfolios. Moreover, the upcoming US election is expected to enhance market regulation transparency, consolidating the position of digital assets in the world's largest economy. This reform has far-reaching implications, as the long-term prospects of past cryptocurrency assets have been repeatedly questioned. Therefore, the valuation of Bitcoin and other cryptocurrency assets may not necessarily follow the early four-year cycle.

At the same time, digital assets such as Bitcoin are digital commodities, and their prices may have momentum characteristics. Therefore, analyzing on-chain indicators and competitive coin holdings data can add bricks and tiles to investors' risk management decisions.

Grayscale Research determines that the current indicator combination is consistent with the mid-term cycle of the cryptocurrency market: the MVRV ratio is higher than the cycle low, and it is still far from the previous market top. As long as the fundamentals are solid, such as widespread adoption and a favorable macroeconomic environment, there is no reason why the cryptocurrency bull market should not continue until 2025 or even longer.

(The above content is excerpted and reproduced with the permission of the partner PANews, original link | Source: Golden Finance)

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