The State of the Crypto Cycle
Michael Zhao
Last Updated: 5/29/2024 | 14 min. read
Historically, crypto valuations have followed an apparent four-year cycle, with successive periods of price appreciation and depreciation. Grayscale Research believes it is possible for investors to monitor a variety of blockchain-based indicators and other measures to track the crypto cycle and inform their risk management decisions.
Crypto is a maturing asset class: the new spot Bitcoin and Ether exchange-traded products (ETPs) have broadened access to the market, and the incoming U.S. Congress may bring greater regulatory clarity to the industry. For all these reasons, crypto valuations may eventually transcend the recurring four-year cycles that have characterized the market’s early history.
That being said, Grayscale Research sees the current mix of indicators as consistent with an intermediate stage of the cycle. As long as the asset class is still supported by fundamentals — like application adoption and broader macro market conditions — the bull market can potentially extend into 2025 and beyond.
Measuring the Momentum
Exhibit 2 displays Bitcoin’s price performance during the appreciation phase of each prior cycle. Prices are indexed to 100 at the cyclical low point — which marks the start of the appreciation phase of the cycle — and tracked until their peak — which marks the end of the appreciation phase. Exhibit 3 displays the same information in table format.
The first price cycles in Bitcoin’s history were relatively short and steep: the first cycle lasted just under one year, and the second about two years. In both cases, prices increased more than 500x from the preceding cyclical low. The subsequent two cycles each lasted just under three years. During the cycle from January 2015 to December 2017, Bitcoin’s increased more than 100x, while during the cycle from December 2018 to November 2021, Bitcoin’s price increased by about 20x.
Exhibit 2: Bitcoin tracking relatively close to last two market cycles
After peaking in November 2021, Bitcoin’s price declined to a cyclical low of about $16k in November 2022. The current period of price appreciation began at that point and has therefore lasted just over two years. As shown in Exhibit 2, the latest rise in prices has tracked relatively closely to the last two Bitcoin cycles, which both continued for about one more year before prices peaked. From a magnitude standpoint, Bitcoin’s roughly 6x return this cycle, while meaningful, is significantly less than the returns achieved during each of the past four cycles. In summary, while we cannot be sure that future price returns will resemble past cycles, Bitcoin’s history tells us that the latest bull market can extend in terms of both duration and magnitude.
Exhibit 3: Four distinct cycles in Bitcoin’s price history
In addition to measuring the price performance of past cycles, investors can apply a variety of blockchain-based indicators to gauge the maturity of the Bitcoin bull market. Common indicators measure, for example, the degree of appreciation relative to Bitcoin buyers’ cost bases, the extent of new money inflows into Bitcoin, and the level of prices relative to the revenue of Bitcoin miners.
One especially popular indicator calculates the ratio of Bitcoin’s market value (MV) — where each coin is measured at its secondary market price — to its realized value (RV) — where each coin is measured at the price it last transacted on chain. This indicator, known as the MVRV Ratio, can be thought of as degree to which Bitcoin’s market capitalization exceeds the market’s aggregate cost basis. In each of the last four cycles, the MVRV Ratio reached a value of at least 4 (Exhibit 4). Currently the MVRV Ratio stands at 2.6, suggesting the latest cycle could have further to run. However, the MVRV Ratio has peaked at a lower level each cycle, so it is possible this metric never reaches a level of 4 before prices peak.
Exhibit 4: MVRV Ratio at intermediate level
Other on-chain indicators measure the degree to which new money has entered the Bitcoin ecosystem — a framework that experienced crypto investors often refer to as HODL Waves. Prices may appreciate because new capital purchases Bitcoin from long-term holders at marginally higher prices. There are a variety of specific measures to choose from, but Grayscale Research favors the number of coins moved on-chain in the last year, relative to the total free float supply of Bitcoin (Exhibit 5).[2] In each of the past four cycles, this measure has reached at least 60% — meaning that during the appreciation phase, at least 60% of free float supply was transacted on-chain during a one-year period. Currently this number stands at about 54%, suggesting we might expect to see more coins change hands on-chain before prices peak.
Exhibit 5: Less than 60% of Bitcoin free float active in last year
Additional cyclical indicators focus on Bitcoin miners, the specialized service providers who secure the Bitcoin network. For example, one common measure calculates the ratio of miner cap (MC) — the dollar value of all Bitcoin held by miners — to the so-called “thermocap” (TC) — the cumulative value of Bitcoin issued to miners through block rewards and transaction fees. The intuition is that miners may begin to take profits when the value of their assets reaches a certain threshold. Historically, when the MCTC Ratio has exceeded 10, prices have subsequently peaked for the cycle (Exhibit 6). Currently the MCTC Ratio stands at about 6, suggesting we are still at an intermediate point of the current cycle. However, similar to the MVRV Ratio, this measure has peaked at a lower level each cycle, and prices could peak before the MCTC Ratio reaches 10.
Exhibit 6: Bitcoin miner-based indicators also below previous threshold
There are many other on-chain indicators, and there can be small differences in these measures from alternative data sources. Moreover, these tools can only provide a rough sense of how the current phase of price appreciation compares to the past, and there is no guarantee that the relationship between these indicators and future price returns will resemble the past. That being said, taken together, common indicators of the Bitcoin cycle are still below levels when prices have peaked in the past, suggesting the current bull market could continue, if supported by fundamentals.
Exhibit 7: Bitcoin dominance declined in third year of last two cycles
For example, investors could monitor funding rates, or the running cost of holding a long position in perpetual futures contracts. When speculative traders have higher demand for leverage, funding rates tend to rise. Therefore, the level of funding rates across the market can give an indication of the overall degree of speculative trader length. Exhibit 8 shows the weighted-average funding rate for the 10 largest crypto assets after Bitcoin (i.e., the largest “altcoins”).[4] Currently, funding rates are meaningfully positive, which suggests demand for long positions from leveraged investors, although they declined sharpy in the drawdown over the last week. Moreover, even at their local highs funding rates were still below levels observed earlier this year, as well as the highs of the last cycle. We would therefore consider current levels consistent with an intermediate amount of speculative length in the market, and not necessarily consistent with a mature market cycle.
Exhibit 8: Funding rates show moderate level of speculative length in altcoins
In contrast, perpetual futures open interest (OI) in altcoins has reached relatively high levels. Prior to the major liquidation event on Monday, December 9, altcoin OI reached nearly $54bn across the three largest perpetual futures exchanges (Exhibit 9). This points to a relatively high degree of speculative trader length across the broader market. After a large wave of liquidations earlier this week, altcoin OI declined by about $10bn but remains elevated. High speculative trader long positioning can be consistent with the later stages of a market cycle, so this indicator could be important to continue to monitor.
Exhibit 9: High level of altcoin open interest before recent liquidations
The Beat Goes On
At the same time, Bitcoin and many other crypto assets can be considered digital commodities, and like other commodities, probably will show a certain degree of price momentum. Therefore, an evaluation of on-chain indicators, as well as altcoin positioning data, could be informative for investors making risk management decisions. Grayscale Research sees the current mix of indicators as consistent with an intermediate stage of the crypto market cycle: measures like the MVRV Ratio are well above their cyclical low point, but not yet at levels that have marked prior market tops. As long as supported by fundamentals — like application adoption and broader macro market conditions — we see no reason why the crypto bull market can’t continue into 2025 and beyond.
[1] In a financial markets context, a random walk refers to the idea that asset prices evolve in an unpredictable way, in which information of past events holds no information about future results.
[2] Free Float Bitcoin supply defined by Coin Metrics as tokens active at least once in last five years.
[3] Exhibit 7 only shows the two most recent cycles, because the altcoin market was not sufficiently developed before that point.
[4] Defined as the largest tokens by market capitalization after Bitcoin with available data. No data was available for TON, so next largest asset DOT included instead.
[5] Source: Bloomberg, Grayscale Investments. Data as of December 11, 2024.
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