Block Scholes x Bybit Report: The Bitcoin Rally May Not Yet Be Over

Key Highlights:

Our Crypto Insights report attempts to answer the key question of whether the current Bitcoin rally is over. We address this from many perspectives, including historical price action, Bitcoin’s correlation with macroeconomic factors, market sensitivity analysis, market asset rotation and institutional influence. 

In this report, we’ll guide you through a comprehensive checklist to identify potential signals that this latest rally has come to an end. After thoroughly evaluating all the indicators on the checklist, we conclude that the current Bitcoin bull cycle has not yet reached its conclusion.

Historical Analysis of the Bitcoin Cycle Suggests the Rally May Not Be Over

Fig 2. Increase in price (log y-axis) from beginning of bull run cycle to its peak in each of the four historical periods considered. Source: Loyce.Club, Block Scholes

Our analysis indicates that the current bull market has been ongoing for approximately 624 days, with a trough-to-all-time-high peak of 3.5x. This is significantly lower than the 20x trough-to-peak ratio observed in the previous cycle, from 2019 to 2022. However, based on the limited historical data of just three prior cycles, the average suggests there may be an additional 350 days remaining in the current run to surpass the previous peak.

Fig 6. Proportion of total market capitalisation of crypto-currencies by BTC (orange), ETH (purple), Stablecoins (green), and all other crypto-currencies (red) from 2013 to July 2024, with Recovery (blue), New ATH (green), and Crash (red) periods indicated by the colour bar at the top of the chart. Source: CoinGecko, Block Scholes

Our analysis of Bitcoin's historical boom-and-bust cycles reveals a consistent pattern. In each previous instance, the broader altcoin market capitalization has risen in tandem with Bitcoin's run to new all-time highs (ATHs), only to then peak following Bitcoin's subsequent crash.

However, the current situation is different. Bitcoin's price peaks haven't been accompanied by the typical increase in market share for Ethereum and other altcoins. Furthermore, Bitcoin itself hasn’t continued pushing to successive new highs; instead, it’s been trading within a relatively tight range for the past four months.

These observations suggest the current market rally may not have yet reached a true peak, unlike the typical pattern seen in previous Bitcoin bull and bear cycles. The lack of altcoin exuberance, and Bitcoin's consolidation (rather than continued record-setting ascent), imply the current market dynamics differ from past cycles.

Our Findings Suggest BTC’s Correlation to Some Macro-Sensitive Assets Doesn’t Work This Time

Fig 14. BTC spot price (orange, left-hand side, log y-axis) and total assets held on the balance sheet of the Federal Reserve (red, right-hand side, linear y-axis). Source: Bloomberg, Block Scholes

We’ve examined a number of macroeconomic factors that have historically exhibited positive or negative correlations with Bitcoin. However, we’ve observed that some of these typical correlations aren’t holding true in the current market cycle.

For example, historically, loose monetary policy and a weaker U.S. dollar have acted as tailwinds for Bitcoin. Yet, despite the absence of these conditions in the present environment, Bitcoin is still experiencing a robust rally.

Additionally, personal savings rates have previously shown a positive correlation with Bitcoin's bull runs, but this relationship isn’t manifesting this time around. These observations suggest that current Bitcoin market dynamics are deviating from the patterns observed in prior boom-and-bust cycles.

ETF Flows Exhibit Higher Correlation With Bitcoin’s Price Movement

Fig 17. BTC Spot price (orange, right-hand side, linear y-axis) with the total number of bitcoins held by US spot ETFs since launch, with the all-time high spot price of BTC marked with a white, dotted, vertical line. Source: Bloomberg, Block Scholes

Until March 10, 2024, the amount of BTC held by Bitcoin Spot ETFs increased steadily, reflecting growing institutional demand that matched the rally of Bitcoin's spot price to a new ATH from early January. However, the abrupt end of these ETF inflows also correlates with the peak of Bitcoin's bull run in mid-March.

Immediately after this price peak (and continuing since), the pace of capital inflows into BTC Spot ETFs stopped abruptly. This suggests the pool of new institutional demand had been temporarily saturated. Crucially, this drop-off in fresh demand then impacted Bitcoin's spot price response to Apr 20, 2024, halving event one month later.

From these observations, institutional demand has been a key driver of Bitcoin's price action during this cycle. Changes in the flow of institutional capital into BTC Spot ETFs directly corresponded with the cryptocurrency's broader market dynamics, including the peak and subsequent price movements.

Bitcoin Halving Cycle Suggests the Bull Run Isn’t Over Yet

Fig 18. BTC spot price normalised by the value recorded on the day of each historical halving event, shown 100 days before and after the halving block. Source: Loyce.Club, Block Scholes

In examining historical Bitcoin price cycles, the cryptocurrency has tended to perform better in the period following each halving event. The observations outlined above suggest we may still see Bitcoin’s price continue to rise.

History Tells Us Current Downbeat Sentiment Doesn’t Necessarily Signal an End to the Rally

Fig 25. BTC spot price (orange, left-hand side, log y-axis) and Block Scholes’ Senti-Meter Index (red, right-hand side). Source:Bloomberg, BEA, Block Scholes

The currently downbeat market sentiment may not necessarily indicate an end to the ongoing Bitcoin bull run. Block Sholes' sentiment indicators take into account the embedded volatility in different types of derivatives.

One clear conclusion from the behavior of derivatives markets in the previous Bitcoin cycle is that dips in sentiment, even to relatively low levels, don’t always signal the conclusion of a bull market. In fact, the eventual peak of the 2021 cycle was achieved after a near-systemic blow to Bitcoin's hash power, which saw sentiment plummet to historically low levels before the market recovered and continued its ascent.

This historical precedent suggests that the current depressed sentiment observed in the market may not be an accurate predictor of an imminent end to the present Bitcoin bull run. The derivatives data tracked by Block Sholes implies that the current downbeat mood could be temporary, and doesn’t necessarily portend the conclusion of the crypto's current uptrend. 

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