encryption Bull Market, where are we? Grayscale: We are in the mid-term, and the upward trend may continue until this point in time.

From a historical perspective, the cryptocurrency market follows a clear four-year cycle, with prices experiencing consecutive rise and fall phases. Grayscale Research believes that investors can monitor various blockchain-based indicators and other indicators to track the cryptocurrency cycle and provide reference for their own risk management decisions.

Cryptocurrency is a maturing asset class: new spot Bitcoin and Ethereum ETFs are expanding market access channels, and the upcoming Trump administration may bring greater regulatory transparency to the encryption industry. For these reasons, the cryptocurrency market valuation may reach a new historical high.

Grayscale Research believes that the market is currently in the mid-stage of a new round of encryption cycle. As long as the fundamentals (such as application adoption and overall economic market conditions) are reliable, the bull market may continue until 2025 or even longer.

Like many physical goods, the price of Bitcoin does not strictly follow the 'random walk' model. Instead, the price trend of Bitcoin shows the characteristics of statistical momentum: rising trends often follow rising trends, and falling trends often follow falling trends. Although Bitcoin may rise or fall in the short term, in the long term, its price shows significant cyclic trends (Figure 1).

Image source: Coin MetricsFigure 1: Bitcoin's price fluctuates repeatedly, but overall shows a rising trend

Each price cycle in the past has its unique driving factors, and the future price trends will not completely follow past experiences. In addition, as Bitcoin gradually matures and is adopted by a wider range of traditional investors, and with the decreasing impact of the four-year halving event on supply, the regularity of Bitcoin price cyclical changes may be reshaped or completely disappear. Nevertheless, studying past cycles can still provide investors with some guidance on the typical statistical behavior of Bitcoin, which can be referenced for their Risk Management decisions.

Bitcoin historical cycle observation

Figure 2 shows the price performance of Bitcoin during the previous rising phases. The price is indexed at 100 at the cycle low point (the beginning of the rising phase) and tracked all the way to the peak (the end of the rising phase). Figure 3 presents the same information as Figure 2 in tabular form.

The first price cycle of Bitcoin in history was relatively short and volatile: the first cycle lasted for less than a year, and the second cycle lasted for about two years. During these two cycles, the price of Bitcoin rose by more than 500 times from its relative low points. The following two cycles each lasted for less than three years. In the period from January 2015 to December 2017, the price of Bitcoin rose by more than 100 times, while in the period from December 2018 to November 2021, the price of Bitcoin rose by about 20 times.

Image source: Coin Metrics Figure 2: In the past two market cycles, the trend of Bitcoin has been similar

After reaching its peak in November 2021, the price of Bitcoin dropped to around $16,000 in November 2022, marking a cyclical low. The current price uptrend has been ongoing since then for over two years. As shown in Figure 2, the latest price surge is relatively close to the past two Bitcoin cycles, both of which lasted about three years before reaching their peaks. In terms of the magnitude of the rise, the current increase in Bitcoin this cycle is about 6 times, although the return is quite substantial, it is significantly lower than the returns achieved in the past four cycles. Overall, while we cannot be certain if future price returns will be similar to past cycles, Bitcoin's history tells us that the latest bull market can still continue in terms of duration and magnitude.

Image source: Coin Metrics Figure 3: Four different cycles in the history of Bitcoin prices

On-chain index

In addition to observing the price performance of past cycles, investors can also use various blockchain-based indicators to assess the maturity of the Bitcoin bull market. For example, common indicators include the profitability of Bitcoin buyers, the influx of new funds into Bitcoin, and price levels related to Bitcoin miner income.

A popular metric is to calculate the Bitcoin market value (MV) (Bitcoin circulation * current market price) and its realized value (RV) (the sum of the price of each Bitcoin when it was last transferred on the chain) ratio. This metric is called the MVRV ratio and can be considered the degree to which Bitcoin's market value exceeds the total cost basis of the market. In the past four cycles, the MVRV ratio has reached at least (Figure 4). The current MVRV ratio is 2.6, indicating that the latest cycle may continue for a longer period of time. However, the peak value of the MVRV ratio in the past cycle has been declining, so this indicator may never reach the level of 4 in this cycle.

Image source: Coin Metrics Figure 4: Historical trend of Bitcoin's MVRV ratio

Some on-chain indicators assess the extent of new capital entering the Bitcoin ecosystem. Experienced cryptocurrency investors typically refer to this framework as HODL Waves. There are various options for such evaluation indicators, but Grayscale Research prefers to use the ratio of the tokens moved on-chain last year relative to the total free float supply of Bitcoin (Chart 5). In the past four cycles, this indicator has reached at least 60%. This means that during the rising phase, at least 60% of the free float supply is traded on-chain over a year. Currently, this figure is about 54%, indicating that we may see more Bitcoin changing hands on-chain before the price reaches its peak.

Image source: Coin Metrics Figure 5: The ratio of active Bitcoin to circulation in the past year is less than 60%

Some cyclical indicators focus on Bitcoin miners, who are professional service providers that protect the Bitcoin network. For example, a common evaluation criterion is to calculate the Miner's Position (MC) (the dollar value of all Bitcoins held by miners) to the so-called 'thermocap' (TC) (the cumulative value of Bitcoins distributed to miners through block rewards and transaction fees). Typically, miners may start making profits when the value of their assets reaches a certain threshold. Historically, when the MCTC ratio exceeds 10, the price subsequently reaches a peak within that cycle (Figure 6). Currently, the MCTC ratio is around 6, indicating that we are still in the middle stage of the current cycle. However, similar to the MVRV ratio, the peak of this indicator is continuously decreasing in the recent cycle, so the price peak may come before the MCTC ratio reaches 10.

Image source: Coin Metrics Figure 6: The peak value of Bitcoin miner indicator MCTC is also continuously decreasing.

There are many other on-chain indicators, and these indicators may have slight differences compared to other data sources. In addition, these tools can only give a rough understanding of the current stage of Bitcoin price rise compared to the past, and cannot guarantee that the relationship between these indicators and future price returns will be similar to the past. However, overall, common indicators of the Bitcoin cycle are still below the levels reached in the past price peaks. This suggests that if the fundamentals are reliable, the current bull market may continue.

Market indicators other than Bitcoin

The cryptocurrency market is not just about Bitcoin; signals from other industries may also provide guidance on market cycle conditions. We believe that these indicators may be particularly important in the next year due to the relative performance of Bitcoin and other encryption assets. In the past two market cycles, Bitcoin's dominance (Bitcoin's market share in the total cryptocurrency market value) peaked at around two years into the bull market (Figure 7). Bitcoin's dominance has recently started to decline and is at the point of about two years into this market cycle. If this trend continues, investors should consider focusing on broader valuation indicators to determine if cryptocurrency valuations are approaching cyclical highs.

Image source: Coin Metrics Figure 7: In the past two cycles, Bitcoin's dominance has been declining in the third year

For example, investors can monitor the funding rate, which is the cost of holding a long position in perpetual futures contracts. When speculators have a high demand for leverage, the funding rate tends to rise. Therefore, the overall funding rate level in the market can indicate the overall position of speculators. Chart 8 shows the weighted average funding rate of the next 10 largest encryption assets (i.e., the largest 'altcoins') after Bitcoin. Currently, the funding rate is clearly positive, indicating a demand from leveraged investors for long positions, despite a sharp drop in the funding rate during the past week's decline. Furthermore, even though it is currently at a local high, the funding rate is still lower than earlier this year and the peak of the previous cycle. Therefore, we believe that the current funding rate level indicates that the market speculation has not reached its peak yet.

Source: Coin Metrics Figure 8: The funding rate indicates the speculative level of altcoins to be at a moderate level.

By contrast, the open interest (OI) of altcoin perpetual futures has reached a relatively high level. Before the major liquidation event on December 9th, the OI of altcoin perpetual futures contracts on the three major exchanges had reached nearly $54 billion (Figure 9). This indicates that the overall market speculation traders' positions are relatively high. After the massive liquidation, the OI of altcoin perpetual futures contracts dropped by about $10 billion, but still remained high. The high long positions of speculative traders may be consistent with the later stage of the market cycle, so it may be important to continue monitoring this indicator.

Image source: Coin Metrics Figure 9: Recently, the holding volume of altcoins before liquidation is relatively high

The bull market will continue

Since the birth of Bitcoin in 2009, the cryptocurrency market has made significant progress, and many features of the current rise in Crypto Assets differ from the past. Most importantly, the approval of spot Bitcoin and Ethereum ETFs in the US market has brought in a net capital inflow of $36.7 billion and helped to incorporate encryption assets into a broader traditional investment portfolio. In addition, we believe that the recent US election may bring more regulatory clarity to the market and help ensure the permanent position of encryption assets in the world's largest economy. This is a significant change from the past when observers repeatedly questioned the long-term prospects of the encryption asset class. For these reasons, the valuation of Bitcoin and other encryption assets may not follow early historical patterns.

At the same time, Bitcoin and many other encryption assets can be seen as digital commodities, which may exhibit a certain degree of price momentum like other commodities. Therefore, evaluating on-chain indicators and altcoin data may be helpful for investors to make Risk Management decisions. Grayscale Research believes that, overall, the encryption market is in the mid-term of a bull market: indicators such as MVRV ratio are far higher than the cycle low, but have not yet reached the levels that symbolize previous market tops. As long as the fundamentals (such as adoption and overall economic market conditions) are reliable, we believe the encryption bull market will continue until 2025 and beyond.

[Disclaimer] The market is risky, and investment should be cautious. This article does not constitute investment advice. Users should consider whether any opinions, viewpoints, or conclusions in this article are applicable to their specific circumstances. Invest at your own risk.

This article is authorized to be reprinted from: "Foresight News"

Original authors: Zach Pandl, Michael Zhao

"Where is the bull market for encryption? Grayscale: We are in the middle term, and the rise may continue to this point in time." This article was first published in "Encryption City"