Our approach to markets and investment views are based on three key investment pillars: business cycle analysis, valuation analysis and technical analysis. Whether analyzing mega-cap growth stocks or a cryptocurrency (crypto), we believe it is imperative investors follow a disciplined, repeatable process. Here we explore business cycle analysis for crypto markets.

Given the short time crypto has existed, is it even possible to implement our traditional investment analysis process? In our view, absolutely!

Admittedly, some of the approaches may seem unorthodox — our sympathies to students of Benjamin Graham’s “The Intelligent Investor” — this is the upside-down world of crypto!

Is it just “crypto being crypto?”

In our traditional approach to investment analysis, we view the business cycle as having four phases: recovery, accelerating expansion, slowing expansion and contraction. How does this apply to crypto?

For starters, given the inherent volatility in crypto markets, one of the biggest challenges during a pullback is determining if it is the end of a cycle or a “normal” sell-off that could create a buying opportunity for investors. Since its inception five years ago, the Bloomberg Galaxy Crypto Index has had a median annual maximum drawdown of more than 50%, but 2018 was the only year that was considered the end of a cycle! In a nascent ecosystem such as crypto, how can investors distinguish between “crypto being crypto” compared to the next “crypto winter,” like in 2018-2019 when most cryptos saw little performance gains.

Instead of examining measures like GDP growth, industrial production or retail sales, we believe the crypto business cycle is centered on the all-important network effect. Since all transactions on a decentralized blockchain are observable to anyone, investors can analyze how long users are holding onto their coins, analogous to stock turnover.

Long-term users support growth

Crypto investors can use holding period data to assess the strength of the network, and in turn, as a potential gauge of trends in value and price (Figure 1). For example, the early part of a crypto business cycle starts with the HODlers, followed by long-term investors, and finally the speculative short-term traders.

Figure 1. Bitcoin Age Distribution vs. Price
Longer-term bitcoin holders have been increasing


As of 1/25/2022 | Source: glassnode.com, PNC

View accessible version of this chart.

When speculators take more market share of the network, it typically signals a weakening network in which longer-term investors — and potentially miners or node operators — have left the network. That is why network effects are critical for the value of a decentralized blockchain to investors.

Long-term user growth leads to a stronger network as they support growth and maturation in network security and development. The presence of long-term users also indicates which cryptos have enough perceived value to potentially maintain a lasting presence.

Crypto Lingo

Address noun

A unique, public identifier that serves as a virtual location where cryptocurrency can be sent or received. A new address can be generated for every crypto transaction.

HODler noun

Zealous crypto believer. Orginiated in the 2010’s, derived from a misspelling of “hold,” in the context of selling or buying cryptocurrency. Commonly used as an acronym for “hold on for dear life.”

Wallet noun

A device or service that stores keys for cyrptocurrency transactions.

Misleading metrics

Some investors may ask why the number of wallets or addresses of specific cryptos to determine network effects (Figure 2). In our view, using those metrics compared to an investor’s holding time is more precise. Aggregated investment vehicles (e.g., closed-end mutual funds), are unlikely to disclose underlying individual investors. Therefore these potentially large accounts would appear as one address. In prior years, this dynamic led to erroneous reporting, indicating some crypto networks such as bitcoin are not decentralized. Looking at the number of addresses alone could lead to this conclusion, which is why other factors should be considered.

Figure 2. Bitcoin: Price vs. New Addresses
Network effects drive fundamentals

As of 1/25/2022 | Source: glassnode.com

View accessible version of this chart.

Let the cycle be your guide

We believe crypto markets follow a business cycle just like any other investment, and therefore plays a critical role in the investment process.

However, investors should be aware that because most of the crypto ecosystem has not been around that long, the metrics available to track the business cycle are coincident rather than leading indicators.

Combined with the other components of our investment process — valuations and technical analysis — investors can still use business cycle analysis as a guide for long-term investing.



Figure 1. Bitcoin Age Distribution vs. Price - Longer-term bitcoin holders have been increasing (view image)

Date 24 Hours 1 Day - 1 Week 1 Week - 1 Month 1 Month - 3 Months 3 Months - 6 Months 6 Months - 1 Year 1 Year - 2 Years 2 Years - 3 Years 3 Years - 5 Years 5 Years - 7 Years 7 Years - 10 Years
1/1/2021 0.058543 0.154414 0.200426 0.17562 0.072931 0.074555 0.100724 0.095832 0.063725648 0.002185891 0.001041834
3/1/2021 0.040119 0.134582 0.262817 0.297293 0.062945 0.051064 0.057308 0.037714 0.054150652 0.001166505 0.000840855
5/1/2021 0.01997 0.090592 0.204944 0.334868 0.194958 0.041456 0.044908 0.024031 0.042668053 0.000879724 0.000723925
7/1/2021 0.020504 0.050401 0.086036 0.297078 0.326244 0.105668 0.041167 0.0268 0.044415484 0.000593859 0.001087509
9/1/2021 0.030571 0.037785 0.090376 0.152226 0.317024 0.260613 0.039608 0.027983 0.042010058 0.000720153 0.001077145
11/1/2021 0.033582 0.074633 0.141418 0.10507 0.175015 0.367809 0.036999 0.02664 0.037164955 0.000680289 0.000982949
1/1/2022 0.010985 0.064224 0.107731 0.223752 0.105678 0.353529 0.071417 0.021865 0.039125768 0.000735275 0.000949644

Figure 2. Bitcoin: Price vs. New Addresses - Network effects drive fundamentals (view image)

Date Bitcoin Price New Bitcoin Addresses (7 day moving average)
12/31/2013 731.953293 60337
12/31/2014 320.9927121 101265
12/31/2015 430.2114327 182179
12/31/2016 967.742256 305705
12/31/2017 13896.6331 441146
12/31/2018 3741.296795 264907
12/31/2019 7197.527109 344675
12/31/2020 28988.64249 569538
12/31/2021 47191.86839 447835