Grayscale: We are in the crypto bull market

• Bitcoin has historically exhibited cyclical behavior, with distinct “bull” and “bear” phases.

  
  

• The current Bitcoin bull cycle appears to be driven by a combination of technical drivers, such as inflows into spot Bitcoin ETFs, as well as strong fundamentals such as increased stablecoin inflows and growth in total value locked (TVL) in DeFi applications.

  
  

• Bitcoin’s cyclical indicators suggest that we are currently in the middle of a bull market (probably around the fifth inning to use a baseball metaphor) and that there is still room for continued growth based on current trends.

  
  

• Given the slew of positive fundamental developments, the bull run is likely to continue. However, investors may want to remain vigilant by monitoring Bitcoin spot ETF flows and macroeconomic indicators for signs of a market turnaround.

Are we in a bull market?

Over the past month, Bitcoin prices have surged rapidly in the United States, breaking through multiple all-time highs and rebounding quickly from the lows of 2023. In more than 30 currency pairs, Bitcoin has even reached new all-time highs earlier. This recovery has attracted the attention of the news media, and there are reports on Bitcoin price movements every day. But it does not seem to stop there: traditional investment managers have even begun to analyze meme coins in their research notes - historically a clear sign of growing mainstream attention to cryptocurrencies. With the overall cryptocurrency market capitalization approaching an all-time high (Chart 1), we must ask ourselves: are we witnessing the beginning of a new bull market?

Chart 1: Total cryptocurrency market capitalization nears all-time high

First, let's clarify what we mean by a bull market. While an exact definition can be difficult, a practical approach is to view a bull market as a cycle of approximately three to four years that begins from the lowest price point of the previous cycle (Chart 2). Typically, these cycles are characterized by a gradual rise in prices that peaks at the cycle high, followed by a period of stability or a small decline.

Chart 2: Visualization of the cryptocurrency bull market cycle

Identifying the ingredients of a bull market can be challenging: What factors have brought us to this point? What can we expect in terms of duration and sustainability?

Leading: Bitcoin’s growing dominance

Historically, the start of a cryptocurrency bull run has often been marked by a surge in Bitcoin’s “dominance,” or the ratio of Bitcoin’s market capitalization to the total cryptocurrency market. This trend underscores Bitcoin’s role as a leading indicator for the broader crypto market. Typically, Bitcoin’s gains precede broader gains in altcoins. Investors, encouraged by Bitcoin profits, may venture into riskier cryptocurrencies in search of greater returns. This dynamic was observable during the 2021-2022 bull run, during which Bitcoin’s gains quickly led to a sharp rise in altcoin valuations (Chart 3).

Chart 3: Bitcoin’s rise often precedes that of altcoins

While the current cycle presents a familiar pattern of Bitcoin’s growing dominance, paving the way for altcoin rallies, the distinguishing factor of this cycle lies in its unique catalysts. As we have previously explored, key drivers such as Bitcoin spot ETF inflows and strengthening on-chain liquidity not only contribute to the momentum of the current bull run, but also mark a departure from the traditional dynamics observed in previous cycles.

Catalyst #1: Bitcoin Spot ETF Inflows

The first difference between this bull run and previous ones is the rapid change of positive market dynamics, which is largely influenced by the inflows of funds into Bitcoin spot ETFs. Since the approval of the ETF in January, these inflows have exceeded the issuance of Bitcoin by more than 3 times as of mid-March, which has also put upward pressure on prices (Figure 4).

Chart 4: Bitcoin spot ETF cumulative inflows drive Bitcoin prices up

At a high level, when a Bitcoin spot ETF issues new shares, the ETF needs to source Bitcoin from the spot market and deliver the Bitcoin to the fund. In other words, issuing new shares results in the need to purchase Bitcoin to match the increase in fund assets. In short, cash needs to be converted into Bitcoin to meet the demand for primary market issuance. This dynamic is evident when analyzing the hourly premium of Coinbase's BTC-USD to Binance's BTC-USDT (Chart 5). Coinbase's higher premium indicates increased spot buying pressure from U.S. investors, an indicator of the presence of ETFs in market dynamics.

Chart 5: Coinbase (CB) BTC-USD is trading at a premium to Binance BTC-USDT, indicating US buying pressure

Catalyst #2: Healthy on-chain fundamentals

On-chain metrics also indicate increasing liquidity. A key indicator of on-chain data is the positive shift in stablecoin inflows. Stablecoins are digital currencies pegged to stable assets such as the U.S. dollar and play a vital role in the cryptocurrency ecosystem. They are designed to provide a stable medium of exchange and serve as the main base currency pairs traded on most centralized and decentralized exchanges.

Increased stablecoin liquidity means more funds are available for transactions, whether buying or selling cryptocurrencies. As shown by the growing reserves of stablecoins on exchanges, the influx of stablecoin capital often drives bull market momentum (Chart 6).

Chart 6: Stablecoin inflows correlate with BTC prices

Relatedly, on-chain liquidity also appears to be growing significantly, as evidenced by the total value locked (TVL) in decentralized finance (DeFi) applications (Exhibit 7). TVL aggregates the total value of assets deposited in various DeFi protocols and serves as another metric for assessing ecosystem liquidity. The increase in TVL not only means greater liquidity within DeFi platforms, but also indicates increasing user engagement with the ecosystem. Increased liquidity is critical to the vitality of DeFi, helping to facilitate smoother transactions and broader financial activity. Looking back at basic on-chain activity, it is worth noting that the TVL of decentralized applications has more than doubled since the beginning of 2023, when the TVL was approximately $40 billion, to approximately $100 billion in mid-March 2024.

Chart 7: Total value locked in DeFi has more than doubled since 2023

Additionally, the amount of Bitcoin stored on exchanges has decreased significantly by 7% since Bitcoin supply’s local peak in May 2023, indicating tight supply, in part due to Bitcoin spot ETFs moving BTC to custodial cold wallets for long-term storage (Chart 8). According to Glassnode research, the total BTC held on exchanges has shrunk to around 12% of the circulating supply, a five-year low. This movement away from exchanges is traditionally seen as a bullish indicator, indicating a preference for holding rather than selling, and investor confidence in the value of Bitcoin. As demand on exchanges gradually outstrips supply, the resulting liquidity crunch not only highlights the influence of these Bitcoin spot ETFs, but also reinforces the market’s bullish outlook for the cryptocurrency market.

Chart 8: Bitcoin supply on exchanges is falling

Entering the "Fifth Round"

Now that we have identified the drivers of the bull run, we need to assess where we stand. While each cycle is inherently unique, established on-chain patterns and sentiment data lead us to believe that we are currently in the “mid-term” or “fifth inning” of the current bull cycle. Despite the progress that has been made, we believe there is still room to grow.

Market value and realized value + unrealized net profit/loss

The Market Value/Realized Value (MVRV) metric compares Bitcoin's market value to the "realized value," or the price of all Bitcoins when they last changed hands. Using this difference, the Net Unrealized Net Profit/Loss (NUPL) is calculated as a percentage of profit/loss by dividing the difference between market value and realized value by market value. The NUPL ratio rises when Bitcoin prices rise and investors who bought at a lower cost still hold on to their Bitcoin. As of mid-March 2024, the NUPL is around 60%, with historical peaks occurring at profit ratios above 70%, and it appears that we may be approaching a cycle high for this metric (Chart 9).

Chart 9: NUPL reaches historical cycle high

Market Cap/Realized Value Z-Score

In contrast, the Z-score of market value/realized value provides a different perspective, indicating the potential for further growth. This indicator calculates the difference between market value and realized value and adjusts volatility based on the rolling standard deviation of market value. Historically, high Z-scores reflect large gaps between market value and realized value, marking cycle peaks. Currently, the Z-score is around 3, well below levels at previous cycle peaks, suggesting that the market has considerable room to rise (Exhibit 10).

Chart 10: Market capitalization/realized value Z-scores suggest we are not near the peak of the bull market

ColinTa lksCrypto's Bitcoin Bull Index

From a broader perspective, ColinTalksCrypto's Bitcoin Bull Index (CBBI) provides a broader perspective by combining nine different ratios and converting them into a single numerical value to measure the progress of Bitcoin's bull phase (Figure 11). These ratios cover a variety of values, including Bitcoin's price relative to its historical performance, on-chain indicators that reflect investor behavior, and broader market sentiment indicators. By integrating data from sources such as market capitalization/realized value Z-scores, the Puell Multiple Index, and the RHODL ratio, the CBBI aims to provide a snapshot of broad market conditions. As of mid-March 2024, the CBBI is at 79 (out of 100), which suggests that we are approaching the peak of the cycle, although the market still has the potential for further gains.

Chart 11: CBBI shows we are approaching the cycle peak

Source: colintalkscrypto.com as of 3/18/24. Indexes are unmanaged and it is not possible to invest directly in an index. Past performance is not indicative of future results. For illustrative purposes only.

Retail market sentiment

However, sentiment data presents a different picture. Subscription rates for cryptocurrency-related YouTube channels, which can serve as an indicator of retail investor enthusiasm, are significantly lower than the enthusiasm during the 2020-2021 bull run. However, the recent increase in subscription growth rates suggests that retail investor interest is slowly growing (Exhibit 12).

Chart 12: Cryptocurrency YouTube subscriptions remain low

Source: The Block, Social Blade, as of March 24, 2024. For illustrative purposes only.

Similarly, current levels of search interest in the term "cryptocurrency" on Google Trends are significantly lower than their 2021 peak, suggesting that the broader public's curiosity about cryptocurrencies may not have fully rebounded (Exhibit 13). Google Trends shows the popularity of search terms by giving them a score from 1 to 100 (Y-axis). The score is based on a sample of Google searches, selected randomly and without bias. A score of 100 indicates that a term is at its peak at the selected time and place. This discrepancy raises questions about retail investor participation in the current cycle.

Chart 13: Compared with the previous cycle, the search popularity of "cryptocurrency" has decreased

Source: Google Trends, as of 3/18/24. For illustrative purposes only.

Mobile engagement, as measured by Coinbase app downloads, appears to indicate growing interest from potential investors, peaking around March 5 when it entered the top 100 (Chart 14). However, its subsequent decline in ranking suggests a possible cooling or shift in platforms used by market participants.

Chart 14: Coinbase app ranking hovers around 300

Source: SensorTower, as of March 24, 2024. Data available only within this time frame. For illustrative purposes only.

To reconcile rising price/on-chain metrics with depressed retail sentiment, it can be argued that the retail investors that drove the last cycle have not yet fully re-entered the market. In our research, the momentum of this cycle may be driven by a different type of investor—one that is less visible on social media platforms such as Twitter or YouTube. The approval of a Bitcoin spot ETF may have attracted investors who are more comfortable with traditional investment vehicles. This shift suggests a broader acceptance of Bitcoin, potentially expanding its appeal beyond typical cryptocurrency enthusiasts to include those who prefer mature financial products.

Untapped Catalysts for the Future

The outcome of the bull run is yet to be determined. Nevertheless, we remain cautiously optimistic as increased retail and institutional participation could propel the bull run momentum forward.

This cautious approach to the behavior of new Bitcoin spot ETF buyers is wise. Historically, Bitcoin has experienced retracements in every bull cycle, so we are unsure how these new buyers will react when faced with a retracement. Encouragingly, the retracements experienced so far in this cycle have been relatively small (see Exhibit 15), and are minimal compared to retracements in past cycles.

Chart 15: The current bull market cycle has the least drawdown

On the other hand, we recognize that there is untapped demand. In addition to the previously mentioned retail investors who have yet to return to the market, some institutional investors, such as telecommunications companies and wealth management firms, remain on the sidelines. However, one particular organization has begun approving the inclusion of a Bitcoin spot ETF in advisor-managed portfolios. This cautious but hopeful endorsement signals a huge but untapped investment potential that we believe could sustain or accelerate the market’s upward trajectory.

focus

Bitcoin spot ETF flows and macroeconomic indicators are currently the main forces determining the near-term direction of the Bitcoin bull cycle, and like the two sides of a seesaw, their influence fluctuates over time. At certain moments, Bitcoin spot ETF flows dominate, while at other moments, macroeconomic factors prevail. This ever-changing dynamic ensures that our attention remains focused on these elements, as they are likely to continue to dominate the narrative of Bitcoin market behavior.

Looking ahead, our conviction in Bitcoin’s performance as an asset class remains unwavering. Supported by favorable market conditions and its established role as a store of value and hard currency, we believe Bitcoin will continue to succeed. Despite the market’s strong run-up into early 2024, investors must remember the inherent volatility of cryptocurrencies, which is characterized by periodic pullbacks during bull markets. However, by maintaining a long-term perspective, we believe Bitcoin is clearly in a strong position.