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:
A few months later, on January 3, 2009, a person or persons using the pseudonym Satoshi Nakamoto initiated the Bitcoin Network. Thirteen years later, Bitcoin has inspired an entirely new industry and a novel asset class worth nearly 1 trillion dollars. While Bitcoin has been called the ‘Best Performing Asset of the Decade,’ after gaining more than 40,000,000% since inception, the journey has not always been smooth.
 Cumulative returns from 7/17/2010 to 7/4/2022 with Bitcoin Price data from Glassnode
FIGURE 1: EXPECTATION VS REALITY2
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.
Crypto Market Cycles
Identifying Crypto Cycles
Like traditional economic and financial markets, crypto has cycles that ebb and flow. Crypto market cycles, on average, last ~4 years or approximately 1,275 days. While methods vary for identifying crypto market cycles, we can quantitatively define a cycle by when the Realized Price moves below the Market Price (the current trading price of an asset), using Bitcoin prices as a proxy. Note: we exclude the cross in Realized Price below Market Price in March 2021 due to extreme market volatility in response to the Covid-19 pandemic.
FIGURE 2: BITCOIN MARKET CYCLES: PRICE VS. REALIZED PRICE 
 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.
FIGURE 3: REALIZED PRICE OF BITCOIN4
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.
FIGURE 4: CYCLES5
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
From a qualitative standpoint, each cycle has marked fundamental advances in both products and adoption, providing a steppingstone for the next cycle. Outlined below is a brief overview of what has happened in the past beginning with the 2012 market cycle.
 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
In 2012, the crypto market consisted almost exclusively of Bitcoin. CoinMarketCap didn't exist until almost a full year later in 2013, and it tracked fewer than 30 coins. Outside of trading, Bitcoin’s primary use was online purchases of goods from websites like the Silk Road. At the time, the Silk Road was a large driver in onboarding new users to the Bitcoin network, while Mt. Gox, the largest Bitcoin exchange, was responsible for a large majority of Bitcoin transactions world-wide.
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.
 Top cryptocurrency prices and charts, listed by market capitalization
FIGURE 5: 2012 CYCLE - EXTENDED8
8. Source: Grayscale Research
After experiencing setbacks, including the closure of the Silk Road, China banning banks from handling Bitcoin, and the Mt. Gox hack of 850,000 Bitcoin, to name a few — the price of Bitcoin dropped ~80% in the year following the peak on December 16, 2017. The Mt. Gox hack was the last and largest of a series of exploits, marking the end of this bull phase in the cycle. Decreases in price came with a wavering confidence in the asset class, as many of the newer participants left the industry. Those who remained continued to build, developing sophisticated custody procedures for centralized entities and new cryptographic techniques. Arguably, the most important project created during the downturn of the 2012 cycle is Ethereum.
The beginning of Ethereum opened the floodgates to possibilities beyond simply sending and receiving digital assets. Whereas prior innovations featured stepwise improvements, such as larger block sizes and faster block speeds, Ethereum introduced the power of “smart contracts,” which would allow the creation of advanced applications, such as decentralized exchanges, lending platforms, entertainment, and non-fungible assets on-chain. This innovation made it possible to program applications on top of decentralized blockchains, providing functionality beyond simply transferring coins. While Ethereum officially launched in 2015, it would take a few years of bear market building for the applications to gain traction.
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.
The total crypto market cap fell from $700B to $100B – and, while significant, this sell off did not kill the market. Instead, this was a time when Bitcoin dominance fell to all time lows due to capital moving to Altcoins (alts) and ICO tokens.
Despite poor price action, many protocols that now represent most of the core decentralized apps were launched during this period. For example, the automated market maker Uniswap, a concept theorized a year earlier by the founder of Etheruem Vitalik Buterin, was created to allow permissionless asset swapping more efficiently than anything previously available. Aave, a borrowing and lending protocol, was also created during this time, marking one of the first apps that allowed depositors to earn interest through decentralized lending using smart contracts and blockchain. These protocols expanded the utility of Ethereum’s platform and became the foundation for DeFi summer through new user adoption.
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.
FIGURE 6: PROTOCOLS11
11. Source: Grayscale Research, Messari, Defi Llama
The dApps built during this bear cycle would be major catalysts in the next crypto cycle beginning in 2020 sparking trends like ‘DeFi summer.’
2020 - Present: Leverage, Institutions, & DeFi Battle-testing
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.
FIGURE 7: BITCOIN PERPETUAL FUNDING RATES & OPEN INTEREST VS PRICE12
12. Source: Glassnode
Towards the end of summer 2021, it looked like the market had learned from prior mistakes of trading with too much leverage. While open interest began to rise, funding rates were tamer than before. However, during this period the leverage was largely in the hands of Centralized DeFi (CeFi) companies and hedge funds. The lack of transparency in the operations of these businesses led to a second wave of leverage that unwound after the market peaked again at $68.9k on November 10, 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.
Importantly, strategies that arbitrage interest rates are often exposed to various risks, namely macroeconomic challenges, and duration mismatches. When the Federal Reserve started raising interest rates due to inflation concerns, prices began to fall for the second time from all-time highs, and leveraged positions began to unwind. It began with the collapse of the US Terra stablecoin (UST), which wiped out over $35 billion in value from the crypto market. The Anchor protocol – a main component of the UST ecosystem – was one of the primary sources used to generate yield, as it offered ~20% in UST.
Another source of yield used by CeFi platforms was liquid ETH staking – mainly through Lido Finance. After rumors of the Ethereum Merge possibly being delayed, in addition to broader market panic, the stETH:ETH peg, which historically traded 1:1, broke down to <.95 causing leveraged stETH positions to be liquidated, further exacerbating the market sell off.
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 firstname.lastname@example.org
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.
What’s Happening On-chain?
The price of digital assets represents only a portion of the broader ecosystem developing in the crypto industry. While the price of Bitcoin has fluctuated alongside traditional financial assets during market uncertainty, the underlying network continues to operate as designed, and is on track to process nearly $18 trillion in value this year, up from $13 trillion in 2021 as seen in the chart below. Mexico, the third largest recipient of remittances, is one of many countries turning to this technology. Bitso, a Mexico-based crypto exchange, saw a 4x increase in cross-border remittances between Q1 2021 and Q1 2022.
FIGURE 8: BITCOIN NETWORK VALUE TRANSFERRED (USD)17
17. Source: Coin Metrics
Smart contract networks, like Ethereum and Solana, could also be used for remittances for users who would prefer to transfer assets other than Bitcoin, such as stablecoins. Regardless of the blockchain used, assuming robust network security, users can securely transfer value to anybody in the world with an internet connection, sometimes for less than the cost of a traditional remittance payment.
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
FIGURE 9: BITCOIN: EXCHANGE NET POSITION CHANGE (BTC) – ALL EXCHANGES19
19. Source: Glassnode
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.
FIGURE 10: BITCOIN: SMALL HOLDER BALANCES20
20. Source: Glassnode
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 CeFi companies and hedge funds facing insolvency used a combination of DeFi protocols, like Aave, and centralized lenders to borrow capital. Interestingly, the DeFi positions were paid back before centralized lenders or equity holders. Decentralized lending protocols operate autonomously, as dictated by the code written in the smart contracts. For decentralized lending protocols, there is no way to negotiate the terms of a position – if it falls below the loan-to-value ratio , it will be liquidated.
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.
FIGURE 11: TOTAL BORROWS ON DECENTRALIZED LENDING PLATFORMS (ETH)21
21. Source: Grayscale Research, Token Terminal, Defi Llama. Note: ‘Other’ includes Benqi, Maple-Finance, Liquity, Truefi, Solend, Euler, Alpha Finance, Goldfinch, Centrifuge, Reflexer, and dForce
Uniswap, the largest decentralized exchange, has also seen impressive growth and performance during this market cycle. Founded in November 2018, during a bear market, it has grown into a core pillar of the DeFi ecosystem. Research by the Uniswap foundation and Paradigm showed that Uniswap has greater market depth for ETH/USD and BTC/USD pairs. This is especially impressive as Uniswap has and delivers all the assets being traded, where a centralized exchange does not need to transfer or deliver assets until the user withdraws into self-custody. The liquidity on stablecoin pairs was also found to be higher than centralized exchanges, with Uniswap having nearly 5.5x more liquidity than Binance – the world's largest crypto exchange – on the USDC/USDT pairs.
FIGURE 12: MARKET DEPTH COMPARISON FOR ETH/USD STABLES AND ETH/BTC22
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.
FIGURE 13: ETHEREUM DECENTRALIZED EXCHANGE VOLUME (USD)23
23. Source: Grayscale Research, Dune Analytics
The creation of Ethereum – a decentralized network like Bitcoin but with smart contract capabilities – opened up infinite possibilities for what could be created. The metaverse is one of the fastest growing categories in crypto, with more than 230 assets valued at over $11 billion according to CoinMarketCap. Axie Infinity, a popular blockchain-based game built on Ethereum, had over 778k active addresses playing the game in the last 30 days. Existing companies have also begun to take interest in the intersection between crypto and gaming & entertainment. Gala games, a blockchain-based game developer, recently entered into a partnership with Epic Games, the studio behind Fortnite. The partnership between Gala and Epic Games will provide more than 194 million users with easy access and exposure to what could be their first ever blockchain-based video game – a huge step forward in the development of the industry.
Another subsector of the crypto markets is decentralized infrastructure. Filecoin – a decentralized file storage network – launched the hyperdrive upgrade in June 2021, resulting in 10-25x increased transaction throughput. The chart below shows the protocol revenue flatlining following the network upgrade despite an exponential increase in network usage (Daily Active Deals). While protocol revenue is important, development is not always dependent on it. In the case of Filecoin, this upgrade scaled the network to continue providing file storage for 0.001% of the cost of Amazon AWS S3 file storage.
FIGURE 14: FILECOIN ACTIVE DEALS26
26. Source: Messari
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.
It can be easy to lose sight of how far we’ve come as an industry, but, in our opinion, bad news can be viewed as good news for investors with a long enough time horizon. What started as a hobby project by an anonymous cryptographer that has time and again, been pronounced dead, is now providing value in countless industries across the globe. Blockchain technology is helping provide financial inclusion and equity in developing countries, sparking innovation in finance and cryptography, and driving progress to a new phase of the internet – one where ownership of digital assets and items is not dependent on a centralized authority.
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.
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