Bear Markets in Perspective
Research Team
October 31, 2008, a message goes out to the cypherpunk mailing list that reads:
I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party.
The paper is available at:
[1] Cumulative returns from 7/17/2010 to 7/4/2022 with Bitcoin Price data from Glassnode
[2] Source: Grayscale Research. This graph is for illustrative purposes only and does not depict actual events. Past Performance is not a guarantee of future results
Source: Grayscale Research. This graph is for illustrative purposes only and does not depict actual events. Past Performance is not a guarantee of future results.
Born out of the 2008 Great Financial Crisis and economic recession, crypto has grown from an idea in a nine page white paper about a decentralized network to a trillion dollar industry innovating areas like sustainable energy, finance, entertainment, art, and more. Although we’ve experienced meaningful price declines and uncertainty continues to cloud crypto markets, contextualizing where we are in this market cycle provides perspective. The length, time to peak and trough, and recovery time to previous all-time highs in each market cycle may suggest that the current market may resemble previous cycles, which have resulted in the crypto industry continuing to innovate and push new highs.
[3] Source: Glassnode, Grayscale Research
Realized price is the sum of all assets at their purchase price or realized market capitalization, divided by the market capitalization of the asset which provides a measure of how many positions are in or out of profit.
Realized Price = Realized Market Cap / Current Supply
A Realized Price below Market Price implies that most assets are held above the price they were bought. Conversely, a Realized Price above Market Price implies that most assets are held below the price they were bought. Determining when most assets are held above the price they were purchased helps to identify when the market begins to transition out of a bear market and into a new cycle (and vice versa).
As of June 13, 2022, the Realized Price of Bitcoin crossed below the Market Price signaling that we may officially have entered a bear market. In the natural pattern of market cycles, some believe these points in the market cycle could present some of the best opportunities to buy. The table below shows the average price of Bitcoin during zones of Realized Price < Bitcoin Market Price. Just 21 days into this zone, we may see another ~250 days of high-value buying opportunities when compared to previous cycles.
[4] Source: Glassnode, Grayscale Research
Market Cycles by the Numbers
According to the aforementioned framework, crypto market cycles have been taking longer to peak each time. In 2012, the market took 603 days to peak, increasing approximately 180 days for each subsequent cycle, with 2016 taking 786 days, and 2020 taking 952 days to peak.
From peak-to-trough, the 2012 and 2016 cycles lasted approximately 4 years, or 1,290 and 1,257 days respectively, and took 391 days to fall 73% in 2012, and 364 days to fall 84% in 2016.
In the current 2020 cycle, we are 1,198 days in as of July 12, 2022, which could represent another approximate four months left in this cycle until the Realized Price crosses back above the Market Price. Bitcoin is 222 days off the all-time high, which means we may see another 5-6 months of downward or sideways price movement. Historically, market bottoms also appear to come one month sooner each time.
In each of the 2012 and 2016 cycles, it took just under three years to regain all-time high (ATH) – 1,082 and 1,059 days respectively. It took another year to push a new all-time high again after that.
[5] Source: Glassnode, Grayscale Research
In contrast to the previous two cycles, the 2020 cycle appears to have had a longer run in the ATH range with two prolonged peaks in contrast to the sharp rise and fall in prior cycles. This may have been due to the growing maturity of the crypto market that did not exist in previous cycles. Not only has crypto become easier to invest in for retail investors, the proliferation of crypto exchange traded products, such as Bitcoin and Ethereum ETFs in Brazil, Canada, and Europe, has brought in institutional investors that may have previously been unable to invest in the asset class. Further, decentralized applications (dApps) have been gaining momentum and finding market fit across decentralized finance (defi), gaming, art, and more.
A Brief History of Crypto Market Cycles
[6] 2009-2012 are omitted from the analysis due to the infancy of the network and ecosystem during that time
2012 - 2015: Hack Era + Beginnings of Ethereum
The major theme of this cycle was the proliferation of new crypto exchanges and wallets. Despite the asset’s infancy, entrepreneurs hoped to capitalize on trading activity. However, the processes around custody and management of assets like Bitcoin were relatively non-existent, resulting in repeated hacks of centralized entities and more than one million Bitcoin being stolen.
[7] Top cryptocurrency prices and charts, listed by market capitalization
[8] Source: Grayscale Research
[9] A smart contract is a computer program or a transaction protocol which is intended to automatically execute, control or document legally relevant events and actions according to the terms of a contract or an agreement.
2016 - 2019: ICO Experimentation Era & the Birth of DeFi
During this period, sentiment recovered and Ethereum brought more programmability to crypto. Initial Coin Offerings (ICOs) gained immense popularity both as fundraising tools and scamming mechanisms. Many retail end-users collectively poured millions of dollars into buying tokens to support visions and projects that would ultimately never be fulfilled. During peak euphoria, projects could raise seed rounds of $10+ million with a website and unknown team. Additionally, the crypto exchange BitMEX launched perpetual swaps (perps) – an innovative futures product that doesn’t exist in traditional finance markets – providing traders new ways to trade with leverage. Leveraged trading on worthless ICO tokens only exacerbated the frenzied price action.
Beginning in October 2017 through 2018, macro drivers, like Quantitative Tightening and trade disputes, caused emerging market and risk assets (i.e. crypto) to sell off. ICO unwinding also wiped a significant share of market cap and value from the market.
[10] Bitcoin Dominance is the percentage of the Bitcoin market cap relative to the total crypto market cap: BTC market cap / cryptomarket cap = Bitcoin dominance.
The dApps built during this bear cycle would be major catalysts in the next crypto cycle beginning in 2020 sparking trends like ‘DeFi summer.’
The 2020 market cycle is a story of leverage. Between the rising popularity of perpetual swaps and the Chicago Mercantile Exchange (CME) launching Bitcoin futures, investors were enticed to begin leveraging up as government spending in response to the COVID-19 pandemic propped up the economy.
Bitcoin hit an initial price peak of $64.8k on April 14, 2021 but unwound due to high leverage from perpetual swaps and other derivatives. Funding rates – periodic payments between traders to align futures price with spot price – were positive, indicating that the market was disproportionately long Bitcoin and willing to pay huge fees to maintain their positions. This positive funding rate environment lasted for more than six months, as traders continued to lever up their positions using crypto as collateral. Collateral prices dropped which caused forced selling and liquidation cascades, sending Bitcoin down to $29k during the summer of 2021.
Centralized DeFi (CeFi) platforms presented themselves as an easy way to access DeFi yields, which could range anywhere from 5% to 20%. CeFi platforms could offer users around 3-8% APY and use the deposits to beat the advertised yield offered to users to capture the difference. Something which—at the height of the market—was relatively easy to do.
[13] CeFi ofers some of the yield benefts of DeFi with some of the ease of use and security of traditional fnancial-services products. With CeFi, individuals can earn interest on savings, borrow money, spend with a crypto debit card, and more. [14] stETH is the tokenized form of staked Ether native to Lido [15] A “peg” is a specifed price for the rate of exchange between two assets [16] As discussed in our June 2022 newsletter, available upon request at info@grayscale.com
In addition to CeFi, many institutional trading firms were heavily affected through their involvement in Terra, stETH, and leveraged trading. Many crypto prime brokers issued loans that ultimately could not be repaid or liquidated, expanding the contagion beyond the firms who lost money for their investors.
Despite tough market conditions, the core DeFi protocols that sparked the growth of the industry continued to operate properly as intended. Unlike their centralized counterparts, Aave, Compound, and MakerDAO’s smart contracts remained resilient to the market, maintaining their loan-to-value and not taking on any bad debt. Additionally, as of July 5, 2022, Uniswap has processed over $42 billion in trading volume over the last 30 days and metaverse coins, such as AXS, MANA, and GALA, have outperformed Bitcoin and Ethereum in the same period.
The 30-Day Exchange Net Position Change, which measures the amount of Bitcoin on centralized exchanges, experienced the largest outflow on record in June 2022, indicating that holders are moving their coins off exchanges and centralized lending platforms. This signals that investors may be wary of keeping funds with centralized lenders who may be experiencing liquidity issues due to riskier strategies employed with user funds. Instead, it appears that users are opting to passively hold their digital assets.
[18] Stablecoins are cryptocurrencies the value of which is pegged, or tied, to that of another currency, commodity or financial instrument
Many of these outflows could be due to investors taking this opportunity to increase their position sizes at a discount. The number of wallet addresses holding .001-.01 BTC, .01-.1 BTC, and .1-1 BTC has increased sharply, reaching new all-time highs. This marks an interesting change in market sentiment as, historically, smaller investors have decreased their positions sizes in times of uncertainty – notably in 2018 after the price of Bitcoin fell from ~$20k.
DeFi has also had an interesting year. In the book The Sovereign Individual by James Dale Davidson published in 1997, Davidson predicts:
“A proliferation of jurisdictions will mean proliferating experimentation in new ways of enforcing contracts and otherwise securing the safety of persons and property.”
The transparent nature of on-chain activity also gave market participants insight into these institutions' positions – where traditional markets could be more opaque – giving the market time to prepare and adjust for potential liquidations. Despite capital outflows due to users deleveraging their positions, the total borrows on lending platforms, like Aave and MakerDAO, remain higher than at the start of 2022.
[22] Source: Uniswap Labs, ParadigmMonthly decentralized exchange (DEX) volume has also remained stable amidst volatile market conditions. A year ago in June 2021, DeFi was nearly non-existent, with DEXshandling a few billion dollars in volume. As of June 2022, DEXs on Ethereum, like Uniswap, did approximately $75 billion in trading volume. July 2022 DEX volume also remained on par with February 2022 volume when the price of Ethereum was ~2.5x higher at approximately ~$2800 vs. ~$1100 respectively.
Seasoned crypto investors are no strangers to wild price swings and 80% drawdowns – it is to be expected in a nascent asset class. We believe the technology underpinning the entire industry has the potential to revolutionize all aspects of digital life, from fintech to entertainment. In the 40 years since the internet became publicly available, there has never been a way to truly own digital assets without personally operating the physical hardware it lives on, until Bitcoin was created.
At the time of this writing, every market cycle that the crypto industry has gone through has left the ecosystem stronger than the previous.In crypto, we have seen that failure has not been fatal to the industry, but, instead, a necessary step in progressing to the future. This market cycle has already provided us with battled-tested DeFi and infrastructure protocols, innovations in scaling solutions, a growing metaverse industry, and more. Despite price declines, liquidations, and volatility, the crypto industry continues to build and innovate, pushing the boundaries of what is possible.
Important Disclosures & Other Information
All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular.
This material is strictly for illustrative, educational, or informational purposes and is subject to change. This content does not constitute an ofer to sell or the solicitation of an ofer to sell or buy any security in any jurisdiction where such an ofer or solicitation would be illegal. There is not enough information contained in this content to make an investment decision and any information contained herein should not be used as a basis for this purpose.
This content does not constitute a recommendation or take into account the particular investment objectives, fnancial situations, or needs of investors. Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fuctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse efects on the value or price of, or income derived from, certain investments.
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to difer materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.
Carefully consider each Product’s investment objectives, risk factors, fees and expenses before investing. This and other information can be found in each Product’s private placement memorandum, which may be obtained from Grayscale and, for each Product that is an SEC reporting company, the SEC’s website, or for each Product that reports under the OTC Markets Alternative Reporting Standards, the OTC Markets website.
Reports prepared in accordance with the OTC Markets Alternative Reporting Standards are not prepared in accordance with SEC requirements and may not contain all information that is useful for an informed investment decision. Read these documents carefully before investing.
Investments in the Products are speculative investments that involve high degrees of risk, including a partial or total loss of invested funds. Grayscale Products are not suitable for any investor that cannot aford loss of the entire investment. The shares of each Product are intended to refect the price of the digital asset(s) held by such Product (based on digital asset(s) per share), less such Product’s expenses and other liabilities.
Because each Product does not currently operate a redemption program, there can be no assurance that the value of such Product’s shares will refect the value of the assets held by such Product, less such Product’s expenses and other liabilities, and the shares of such Product, if traded on any secondary market, may trade at a substantial premium over, or a substantial discount to, the value of the assets held by such Product, less such Product’s expenses and other liabilities, and such Product may be unable to meet its investment objective.
The shares of each Product are not registered under the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (except for Products that are SEC reporting companies), the Investment Company Act of 1940, or any state securities laws. The Products are ofered in private placements pursuant to the exemption from registration provided by Rule 506(c) under Regulation D of the Securities Act and are only available to accredited investors. As a result, the shares of each Product are restricted and subject to signifcant limitations on resales and transfers. Potential investors in any Product should carefully consider the long-term nature of an investment in that Product prior to making an investment decision. The shares of certain Products are also publicly quoted on OTC Markets and shares that have become unrestricted in accordance with the rules and regulations of the SEC may be bought and sold throughout the day through any brokerage account.
The Products are distributed by Genesis Global Trading, Inc. (Member FINRA/SIPC, MSRB Registered).
