Introduction: Where Are We in the Crypto Cycle?
Cryptocurrencies have been a hot topic for a while now. Many people are curious about where we are in the crypto cycle and if the momentum can continue. In this article, we’ll explore factors that influence long-term crypto growth, such as macroeconomic trends, regulatory shifts, and evolving use cases.
Crypto Prices and Market Trends
The prices of major crypto assets like Bitcoin and Ethereum have been moving in a broad range since March 2024. Some believe that the peak for this cycle happened in the first half of 2024. Here are a few reasons why:
- Market Entrants: There haven’t been enough new people entering the market. Even with new spot Bitcoin and Ethereum ETFs, long-term holders have been selling.
- Policy Easing: The big policy changes that helped the 2020/21 rally were due to the global pandemic, a rare event.
- End-User Demand: There’s not enough demand from regular users through consumer applications, especially compared to the large supply of blockspace created by new scaling solutions.
These arguments make some sense but don’t fully consider all the risks for the next one or two years. Although nothing is certain, many factors suggest that crypto can still grow.
Global Monetary Policy and Crypto
Monetary policy, or how central banks manage money supply and interest rates, affects crypto. Over the past two years, developed markets have seen tight monetary policy, with high short-term interest rates. However, things are changing in 2024. For example, the European Central Bank and the Bank of Canada have cut rates, and interest rate markets are showing a more dovish outlook.
Interest Rates and the USD
The US has had higher interest rates compared to other major economies. This has kept the USD strong. But as interest rates may start to drop, the USD could weaken. If this happens, crypto prices might rise against the USD.
Central Bank Policies
Along with high interest rates, many central banks have reduced their balance sheets to fight inflation. This has led to high long-term real interest rates, negatively affecting housing markets. As central banks become more confident that inflation is under control, they might slow down the reduction of their balance sheets. This could lead to lower long-term real interest rates, another positive factor for the crypto cycle.
Asset Prices and Financial Crises
Policymakers have learned that they cannot allow systemically-relevant asset prices like housing, stocks, and bonds to fall unchecked. Falling asset prices can lead to financial crises, as seen in the 2008 crisis. Policymakers will likely ease policies aggressively if asset prices fall too much, which can benefit crypto. Bitcoin, for example, gains value as an asset outside the traditional financial system.
Improving Regulatory Environment
The regulatory environment for crypto in the US is improving. The upcoming US elections could further improve the situation, with prediction markets favoring the Republican party. They support crypto-friendly policies, such as self-custody of digital assets and Bitcoin mining. Even if the predictions are wrong, crypto might not become as partisan an issue as it was in 2022.
Stablecoin Legislation
Stablecoins are also getting attention. The next session of Congress might address stablecoin legislation. Stablecoins, like Tether, have grown significantly, with Tether owning almost $100 billion in US Treasury assets. This demand for US Treasuries from stablecoin issuers helps support the US economy.
Global Regulatory Climate
Beyond the US, other countries are also becoming more crypto-friendly. For instance, Hong Kong’s regulatory climate has become more supportive over the past year. There is also a possibility that China might lift its ban on crypto. If the US declares Bitcoin a strategic asset and supports USD-backed stablecoins, China might follow suit.
Crypto Infrastructure and Applications
Some people worry that the focus on infrastructure development in crypto is hurting the development of popular end-user applications. Recent Ethereum layer-2 launches are an example. Critics say this is fragmenting liquidity and causing a “vibecession” in the community.
Historical Concerns
Concerns about the state of crypto development are not new. In the 2020-2021 bull market, the high cost of blockspace was a major issue. Before that, scalability solutions were heavily criticized. However, these concerns often prove temporary and don’t affect long-term trends.
Future Applications
Despite current worries, the abundance of blockspace today provides a good environment for new applications to emerge. Prediction markets, for example, are becoming more popular as people use them to track outcomes like the US presidential election. This is more useful than traditional opinion polls.
Stablecoins and Growth
Stablecoins are growing rapidly and benefiting from the current scaling infrastructure. The market capitalization of stablecoins is over $160 billion, almost 80 times what it was five years ago. However, this is still a small fraction compared to major economies’ money supply. With more regulatory clarity, stablecoins can take advantage of the available blockspace to support global payment networks.
Cycle Timing Tools and On-Chain Data
Some concerns about the crypto cycle rely on on-chain data and cycle timing tools, especially for Bitcoin. One common metric is the market capitalization to realized capitalization ratio (MVRV). This shows the difference between the last market price and the price at which coins were last bought. However, as Bitcoin’s use cases expand, the relevance of these metrics may decrease.
Bitcoin and Ethereum ETFs
The introduction of ETFs for Bitcoin and Ethereum allows these assets to be used in broader portfolio strategies. This can increase transaction frequency and reduce the effectiveness of on-chain cycle timing metrics.
In summary, while some believe that the crypto cycle might have peaked, many factors suggest continued growth. Macroeconomic trends, regulatory shifts, and evolving use cases all point to a bright future for crypto. As the market continues to develop and adapt, it’s essential to stay informed and consider all aspects influencing the crypto cycle.
