With the crypto market waiting for the next run up, will history repeat itself?
The cryptocurrency market is widely known to be incredibly volatile and characterized by dramatic blow-off peaks where many crypto assets achieve stratospheric prices, followed by a sustained period of decline — where drawdowns of over 80% is not out of the norm.
This extraordinary price action has made the cryptocurrency market one of the most lucrative sectors to speculate in, both for bulls and bears, since it is possible to obtain impressive returns if the right strategies are applied.
As you might expect, the ability to correctly predict how the market will move, or at a more granular level — which projects and platforms will perform the best — can allow traders to achieve returns that are simply unheard of in other sectors.
And with the discussions that the crypto market may be on the cusp of the next bull run, many speculators are now beginning to form their investment theses. With that in mind, here’s a look at how things might play out.
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The Four-Year Cycle
Widely regarded as the coin that leads the market, Bitcoin has historically demonstrated a roughly 4-year price cycle, with its price action changing depending on its proximity to the halving date — an event that sees Bitcoin’s block rewards, and inflation rate, cut in half every four years.
As mentioned previously, Bitcoin has already been through 3 four-year cycles, having reached a new all-time price high between each halving event.
This cycle can be typically characterized by four smaller phases:
- Accumulation Phase: During this phase, smart money begins to accumulate Bitcoin while its price is low. BTC’s price typically fluctuates within a narrow range while early movers build their positions. Trading volume typically remains low during the accumulation phase.
- Markup Phase: This phase is characterized by a sharp breakout from the accumulation phase as trading volume increases and demand for Bitcoin increases alongside growing adoption. This leads to a significant increase in the price of Bitcoin — with the price typically breaking its previous all-time high during this phase.
- Distribution Phase: This is the period where the early adopters start to take profits as the price continues to rise. This leads to a decrease in the trading volume, and the price starts to plateau. Bitcoin can be described as “trading horizontally” during this phase.
- Panic Phase: This is the final phase where there is a market correction, and the price of Bitcoin drops significantly. This often leads to a sustained bear market which can last months or even years before the accumulation phase begins. During this phase, most people are unable to stomach the drawdown and end up selling at a loss — further crushing the price.
Indeed, if the cryptocurrency market is moving the way it did in previous cycles, then we are currently in either the later stages of the accumulation phase or the early stages of the markup phase. This would mean many fundamentally strong crypto assets are at or close to their lowest likely prices — representing an attractive risk/reward ratio for speculators. Do your own research!
This may at least be true for Bitcoin. According to the ColinTalksCrypto Bitcoin Bull Run Index (CBBI), an indicator that combines nine metrics to see how likely the Bitcoin price is at the top (or bottom), BTC may now be undervalued with its current CBBI value of 16.
To put this into perspective, the last three times Bitcoin's CBBI sat at 16 on an uptrend, it was valued at ~$6,000, $5,000, and $281 respectively (in reverse chronological order).
Changing Narratives
Every bull market brings with it a range of key themes and trends. Projects that fit within these trends often outperform the market average while the first movers can sometimes go on to take a place among the largest and best-known blockchain projects (first-mover advantage).
The most recent bull market saw the meteoric rise of the play-to-earn niche — a sector that sees gaming DApp players rewarded in tokens for their in-game performance or achievements. This gave rise to crypto gaming juggernauts like Axie Infinity, Illuvium, My Neighbor Alice and Alien Worlds.
Check the list of the top P2E projects by market cap.
It also spawned several derivative narratives, like move-to-earn.
The metaverse was also a prominent narrative of the last bull run, with established metaverses like The Sandbox and Decentraland seeing massive growth in terms of daily active users (DAUs) and market capitalization. It also saw a dramatic expansion of the metaverse landscape, with new players like XANA and Bloktopia throwing their hats into the mix.
But most of all, 2019-2022 was characterized by the rapid adoption and expansion of decentralized finance (DeFi) — a sector that has grown to encompass thousands of DApps and hundreds of different use cases.
During this time, Ethereum saw the total value locked (TVL) in DeFi protocols soar to over $100 billion at its peak, while DeFi platforms like Uniswap, Compound and Curve began to rival the activity of their centralized competitors.
Current Narratives
Like previous bull markets, the next bull cycle will likely be dominated by a handful of pervasive themes that determine which projects are built, adopted and funded.
Though the market is constantly changing and it’s impossible to predict which narratives will dominate the next bull market, a handful of potential examples are currently forming — some of which may go on to become key narratives in the next bull run.
Some of the most prominent narratives and projects helping to define new themes currently include:
Artificial Intelligence (AI)
Owed to the massive success of traditional AI products like GPT-3 and ChatGPT, the world’s eyes have now been opened to the sheer potential of artificial intelligence.
In turn, there has been a major uptick in development activity in the blockchain AI sector, while prominent blockchain AI projects have seen their native assets skyrocket in value amid growing demand.
Indeed, some of the most popular AI projects have seen their native increase by over 500% in the last three months alone — including the likes of SingularityNET (AGIX), Artificial Liquid Intelligence (ALI), and AIDPAD (AIPAD).
Advancement in technology is now enabling the development of the next generation of AI-enabled blockchain projects, some of which may go on to define the industry.
Zk-layer 2s
During the bull market, popular layer 1s like Ethereum, Bitcoin, and even BNB Chain were pushed to their technical limits, as the number of active wallets skyrocketed alongside soaring DeFi activity.
Layer-2 platforms can help to alleviate the load on layer 1s by batching transactions together off-chain before submitting a validity proof to a layer 1 to finalize the transactions. This can help to dramatically scale the number of transactions the L1 can process while improving gas efficiency for smart contracts and users.
The Zk-layer 2 narrative has been gaining momentum in 2023 and dozens of projects are now looking to deliver the benefits of layer 2s to the masses.
Arbitrum Ecosystem
In February, Arbitrum recorded more on-chain transaction activity than the underlying Ethereum blockchain for the first time. Likewise, the total value locked (TVL) in Arbitrum-based DeFi protocols and DApps now sits at almost $2 billion — making Arbitrum the fourth largest blockchain by TVL.
Meanwhile, the number of active Arbitrum addresses has increased significantly in recent weeks — having more than doubled in the first two months of the year alone. In total, the number of active Arbitrum addresses is now up 1,000% in a year.
Moreover, rumors are now circulating that Arbitrum will soon be getting a native token — similar to how major rival Optimism features the $OP token.
This recent growth has led to significant expansion of its DApp ecosystem and projects, and many early movers and lew launches in the Arbitrum ecosystem have clocked in impressive returns in recent weeks.
For more details on Arbitrum and its burgeoning ecosystem, see our recently updated deep dive.
The Current Situation
As you might be aware, the cryptocurrency market is currently expanding. In the first two months of 2023 alone, the total market capitalization of all cryptocurrencies grew from $795 billion to $1.075 billion — with the average cryptocurrency recording a gain of 35% in this time.
YTD, Bitcoin (BTC) increased its value by 41.1%, outperforming the market average by a significant degree. This is common during the accumulation phase of the market cycle, with Bitcoin typically leading the market while fundamentally strong altcoins clock in impressive returns.
As a result, Bitcoin’s market dominance has slightly increased — up from 40% to around 42% since the start of the year. In a full-fledged bull market, it isn’t unusual for Bitcoin’s dominance to top out at over 70% at its peak or fall to under 40% at times.
Bitcoin dominance usually increases in the early stages of a bear market as money drains from altcoins to BTC. As the market shifts gear and moves into a bull market, money then tends to trickle from large caps to mid-caps, and finally small and micro-cap coins. This results in a gradual reduction in Bitcoin’s dominance.
Because of this, the end of a bull market is often coupled with a dramatic rally for altcoins — which serves as the last hurrah before the market enters a bear trend.
Moreover, the number of BTC withdrawn from exchanges (outflows) typically decreases when major market players enter accumulation mode. Increased withdrawals can indicate the market is turning bullish since holders appear less willing to trade their BTC.
Project Funding
In the 2017 bull market, the vast majority of new projects conducted an initial coin offering (ICO) — allowing individual and non-professional investors to buy tokens at the best available price before they list on public exchanges. Many of today’s largest projects conducted an ICO in 2017, including Filecoin and Polkadot.
In the 2020-21 bull market, the main public sale fundraising route shifted, and most projects instead held either an initial exchange offering (IEO) or initial DEX offering (IDO), where projects were able to crowdfund from CEX or DEX users respectively.
These projects could then directly list their token on the associated exchange platform, simplifying the process for projects and participants. IDO and IEO raises tend to be significantly lower than the average for ICOs in 2017, but the total number of projects raising funds was dramatically higher.
For comparison, there were around 966 ICOs held in 2017, compared to several thousand IDOs in 2020.
During the last cycle, standalone launchpads like DAO Maker and BSCPad rose to prominence, helping users access some of the most profitable projects of the time — including MetaVPad, Blocktopia, and Orion protocol — each of which returned more than 25,000% to investors at their peak.
According to recent data, crypto fundraising has increased month-on-month since December 2022 — but the total amount being raised is still at its lowest point since December 2020. Nonetheless, this is the first time since August 2021 that fundraising has increased for three consecutive months.
This indicates that funds are beginning to cautiously ramp up in investments.
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