Which phase of the bull market are we in? What are the two key drivers?

• 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 spot Bitcoin ETF inflows, as well as strong fundamentals such as positive stablecoin inflows and increased 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 based on current trends, there is room for continued growth.

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

Are we in a bull market?

Bitcoin prices have rapidly surged, breaking through multiple all-time highs in the U.S. Over the past month, Bitcoin has rebounded rapidly from its 2023 lows. 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, with reports on Bitcoin price action appearing every day. But it doesn’t seem to stop there: traditional investment managers have even begun analyzing memecoins in their research notes—historically a clear sign of growing mainstream interest in cryptocurrencies. With the overall cryptocurrency market capitalization approaching all-time highs (Chart 1), we must ask ourselves: are we witnessing the beginning of a new bull run?

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?

Premise: Bitcoin’s growing dominance

Historically, the start of a cryptocurrency bull run has often been marked by a surge in Bitcoin’s “dominance,” a measure of Bitcoin’s value relative to the entire 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’s 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 has exhibited 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 ETF spot inflows and increased 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: Spot Bitcoin ETF Flows

The first key difference in this bull run compared to previous ones is the rapid change in positive market dynamics, which is largely driven by inflows into spot Bitcoin ETFs. Since the ETF was approved in January, these inflows have consistently exceeded Bitcoin issuance by more than 3 times as of mid-March, which has put upward pressure on prices (Chart 4).

Chart 4: Cumulative inflows into spot Bitcoin ETFs have pushed up Bitcoin prices

At a high level, when new shares of a spot Bitcoin ETF are created, the ETF needs to source Bitcoin from the spot market and deliver the Bitcoin to the fund. In other words, creation results in the need to purchase Bitcoin to match the increase in fund assets. In short, cash needs to be converted into Bitcoin based on the creation in the primary market. This dynamic is evident when analyzing the hourly premium of Coinbase BTC-USD vs. Binance BTC-USDT (Chart 5). The higher premium on Coinbase 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 point to 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 primary base pair for trading 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 substantially, 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. Increased TVL not only signals greater liquidity within DeFi platforms, but also indicates growing user engagement with the ecosystem. Increased liquidity is critical to the vitality of DeFi, helping to facilitate smoother transactions and broader financial activity. Considering underlying on-chain activity, it is noteworthy 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, exchanges are holding significantly less Bitcoin , down 7% since the local peak of Bitcoin supply in May 2023, indicating tight supply, in part due to spot Bitcoin ETFs moving BTC to custodial cold wallets for long-term storage (Chart 8). According to Glassnode research, the total BTC held by exchanges has shrunk to around 12% of the circulating supply, the lowest level in five years. This move 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 spot Bitcoin ETFs, but also reinforces the market's bullish outlook for the cryptocurrency market.

Chart 8: Bitcoin supply on exchanges is falling

Entering the mid-term bull market

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 run.

Market value/realized value + unrealized net profit or 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 Profit or Loss (NUPL) is calculated as a percentage gain or loss by dividing the difference between market value and realized value by market capitalization. As Bitcoin prices rise, and as investors who bought at a lower cost continue to hold Bitcoin, the NUPL ratio rises. As of mid-March 2024, the NUPL is around 60%, with historical peaks occurring at profit margins 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

MVRV Z-Score

In contrast, the MVRV Z Score provides a different perspective, indicating the potential for further growth. This metric calculates the difference between market value and realized cap, 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 the peak of the cycle. Currently, the Z score is around 3, well below the levels of previous cycle peaks, and there seems to be a lot of room to rise (Exhibit 10).

Chart 10: MVRV Z-scores suggest we are not near the top of the bull market yet

ColinTalksCrypto Bitcoin Bull Market Index

From a broader perspective, the ColinTalksCrypto Bitcoin Bull Index (CBBI) provides a comprehensive view by combining nine different ratios into a single number that measures the progress of the bull market phase (Exhibit 11). These ratios cover a variety of values, including Bitcoin's price relative to its historical performance, on-chain indicators that indicate investor behavior, and broader market sentiment indicators. By integrating data from sources such as the MVRV Z-score, Puell Multiple, and RHODL Ratio, the CBBI aims to provide a snapshot of broad market conditions. As of mid-March 2024, the CBBI is 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 closer to the cycle peak

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 interest, are significantly lower than the enthusiasm during the 2020-2021 bull run. However, the recent increase in subscriber growth rates suggests that retail investor interest is slowly growing (Exhibit 12).

Chart 12: Cryptocurrency YouTube subscriptions remain low

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 highest popularity 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

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

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 spot Bitcoin 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.

Future Catalysts for the Bull Market

The outcome of the bull run is yet to be determined. Nevertheless, we remain cautiously optimistic, buoyed by potential catalysts such as increased retail and institutional participation, which could help drive momentum in the cycle.

One thing we are cautious about is the behavior of new Bitcoin ETF spot buyers. Historically, Bitcoin does experience retracements in every bull cycle, so we are unsure how these new buyers will react when faced with a retracement. Encouragingly, this cycle has seen relatively small retracements so far (Chart 15); the retracements have been minimal in amount compared to 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 telecom companies and wealth managers remain on the sidelines. However, one particular organization has begun approving the inclusion of a spot Bitcoin 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.

Summarize

Spot Bitcoin ETF flows and macroeconomic indicators are currently the primary forces determining the near-term direction of the Bitcoin bull cycle, and like two sides of a seesaw, their influence fluctuates over time. At certain moments, spot Bitcoin 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 rally 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.