Grayscale: An analysis of why Bitcoin prices hit record highs

Source: Grayscale, compiled by: Deng Tong, Golden Finance

• March On Tuesday, the 5th, the price of Bitcoin briefly rose to its previous all-time high of $69,000. While the immediate cause of the rise is inflows into U.S.-listed spot Bitcoin ETFs, marginal demand ultimately reflects investor appetite for the Bitcoin asset Interested in it as an alternative "store of value" and decentralized computing network.

• Active traders’ positions in Bitcoin now appear to be quite long. Valuations for Ethereum and most other tokens remain below the highs of the last cryptocurrency cycle.

• If the macro market backdrop remains favorable, we may see further increases in token valuations, but macro factors may also be a headwind.

On Tuesday, Bitcoin price reached an intraday high of $69,325[1], surpassing the previous high of $69,000 in USD terms from November 10, 2021 (Exhibit 1). [2] A few weeks ago, Bitcoin had already hit all-time highs in terms of other major currencies such as the Euro, Japanese Yen, and Chinese Yuan. Since hitting a cycle low of $15,600 on November 21, 2022, Bitcoin’s price has increased by approximately 330% in U.S. dollar terms. Additionally, as the number of coins in circulation gradually increases over time, Bitcoin’s market capitalization has increased slightly (+340%) during the same period (November 21, 2022 to present). [3]

Chart 1: Bitcoin price hits record high

Why did the Bitcoin price rebound so fast? Grayscale Research believes that The direct cause of the recent price increase is the demand for spot Bitcoin ETFs listed on the U.S. market. Since their launch on January 11, these products have seen cumulative net inflows of nearly $8 billion, a figure that far exceeds new issuance. We believe that an imbalance between growing demand for ETFs and limited new supply of Bitcoin may have contributed to the increase in Bitcoin prices.

While spot Bitcoin ETFs provide a new product structure for cryptocurrency investment in the United States, Marginal demand for Bitcoin ultimately reflects investor interest in Bitcoin as an alternative monetary medium and decentralized computing network.

We believe that Bitcoin is a macro asset that can compete with the US dollar Competing with physical gold (two traditional “store of value” assets). The Federal Reserve has signaled it may cut interest rates this year, and neither political party in the United States appears focused on reining in huge peacetime budget deficits. Falling real interest rates and rising public sector debt could both weigh on the value of the dollar and support competing assets including Bitcoin. Additionally, for some investors, Bitcoin may have an advantage over physical gold because it is easily portable: Bitcoin can be used anywhere in the world as long as the holder has access to the internet and private keys. We believe that increased demand for Bitcoin comes primarily from investors concerned about the medium-term prospects of the U.S. dollar and seeking alternative "store of value" assets. Notably, physical gold prices also hit a new high in U.S. dollar terms on Tuesday.

Additionally, technological advancements over time have expanded the potential use cases of the Bitcoin network. Ordinals Inscription began in December 2022 as a way to inscribe non-fungible tokens (NFTs) onto the Bitcoin network and has quickly grown to become one of the largest NFT networks by volume (Exhibit 2). The emergence of Ordinals not only encourages new users to try Bitcoin, but also spurs new innovation from those who see the potential for other types of use cases, such as trustless Bitcoin-collateralized stablecoin lending and more Bitcoin in decentralized applications. use. Given the rising transaction fees on the main chain, several Layer 2 projects have begun development on Bitcoin to improve scalability and use cases. There is evidence of increasing adoption: since Q3 2023, the total value locked has increased from $160 million to $2.7 billion, a 15x increase in just a few months. [4]

Chart 2: Bitcoin NFT is increasingly popular

Various market indicators It shows that active cryptocurrency traders are currently holding fairly long positions. Funding rates, a measure of the cost of trading leverage, have risen to the high end of their recent range (Chart 3), but remain below the highs of the previous cycle. Futures open interest also rose to its highest level since the fourth quarter of 2021. Finally, an increase in Google searches for the popular retail trading platform Coinbase may also indicate the return of retail traders. The crypto options market is pricing in increased downside risk: higher implied volatility and negative skew (i.e., puts are priced higher than calls). [5]

Chart 3: Position indicators indicate that active traders have gone long

Although Bitcoin has surpassed its previous all-time high, but most other cryptocurrencies have not. For example, Ethereum is still down 21% from its all-time high in November 2021 (based on closing prices). For the remaining assets within our cryptocurrency industry framework (excluding Bitcoin and Ethereum), token prices are still around 70% lower than in November 2021.

The 2020-2022 cryptocurrency cycle reminds us that cryptocurrency market declines can be severe: Bitcoin’s price fell 77% from peak to trough. [6] While investing in Bitcoin has delivered solid returns over the medium term,[7] the asset has also experienced significant drawdowns and volatility. Bitcoin is a high-risk, high-return potential asset with low correlation to stocks. Therefore, for some investors, it can be a useful ingredient in a diversified portfolio. As discussed in our latest monthly update,If the macro market backdrop remains favorable, we may see Token valuation rises further. In contrast, the macro outlook is less positive – for example, a Fed rate hike and/or an economic recession could dampen cryptocurrency valuations.

References

[1] Source: Coinbase.

[2] Source: Bloomberg, as of March 5, 2024. On the day, Bitcoin hit $69,000 on Coinbase and Binance and $69,076 on OkCoin, according to data provider Kaiko.

[3] Source: Calculated via Grayscale using data from Blomberg and CoinMetrics.

[4] Source: DeFi Llama, as of March 5, 2024.

[5] Source: Glassnode, data as of March 5, 2024.

[6] Source: Bloomberg.

[7] For example, over a three-year investment period since 2011, Bitcoin has had an average annualized return of 181 %, with a minimum annualized return of 39%. Grayscale calculations using monthly Bloomberg data through February 29, 2024.