Grayscale: Multiple factors are driving the market recovery, and BTC will continue to rise in 2024

Source/Grayscale

Compiler/Nick

Essentials

BTC prices continued to rise in November, and the cryptocurrency recovery extended to a wider market segment.

There has been a decline in certain macro risks within financial markets, including the geopolitical conflict in the Middle East and the risk of a “hard landing” for the U.S. economy.

Factors such as “tight” token supply, easing macro risks, and a focus on excessive government borrowing in the U.S. presidential election could benefit valuations for BTC in 2024.

BTC is poised to be one of the best-performing mainstream assets in 2023

BTC rebounded 130% in 2023 after a downturn in 2022 and is poised to become one of the best-performing mainstream assets this year. The crypto market continued to recover in November as various macro risks in the financial markets declined. Grayscale Research believes that the fundamentals of cryptocurrencies are gradually improving, and the supply of major tokens is relatively tight. This could be in line with the rise in crypto valuations in the coming year, especially if the Fed has ended its tightening and the US economy can avoid a “hard landing” (recession).

Various tail risks in financial markets have declined over the last month, which has helped assets that have previously underperformed to rebound. For example, positive signs of improvement in the Middle East conflict appear to have reduced fears of wider regional chaos, and assets linked to the Israeli economy have rebounded as a result. Similarly, the price of long-term Treasury bonds rose (yields fell) after the Treasury announced that the increase in borrowing demand was smaller than expected. Consumer price inflation also continues to fall, raising expectations of a Fed rate cut and a possible “soft landing” for the U.S. economy. On a volatility-adjusted basis, BTC had a mediocre month (outperforming since the end of August) but was still up 9%.

Reduced tail risks drove asset market recovery in November

The crypto market is gradually recovering

Recently, BTC has consistently outperformed other crypto assets due to the demand for BTC as a digital alternative to gold and optimism about the approval of BTC spot ETFs. However, the dominance of the crypto market changed in November as the rally extended beyond the BTC.

According to the FTSE Grayscale Cryptocurrency Sector Index, the best-performing segments last month were the financial sector, utilities and services, and consumers and culture. The better performer in the crypto finance sector was Thorchain (RUNE), a token that rose 131%, and the protocol runs the decentralized exchange ThorSwap. On November 28, Illuvium (up 119%) listed its eponymous game on the Epic Games Store, while ImmutableX, a layer-2 blockchain for crypto gaming apps on ETH Square (up 87%), announced a partnership with Ubisoft.

The financial, consumer and cultural cryptocurrency sectors outperformed the broader market

In addition to the latest price movements, the market has refocused on the combination between cryptocurrency and AI technology after the turmoil in OpenAI’s leadership. Grayscale believes that there may be synergies between public chains and artificial intelligence technology. Specifically, blockchain can combat or address the potential societal risks posed by AI, such as deepfakes, bots, and the proliferation of misinformation. In addition, decentralized computing protocols can counter the centralized control of AI models that hold sensitive personal information. Grayscale believes that the main crypto projects related to the AI theme include Akash and Render (GPU sharing), Worldcoin (identity), and Bittensor (open architecture AI development).

As valuations have risen, so have the fundamentals of the crypto industry. For example, BTC’s hash rate, a measure of the total amount of computing power used to secure a network, reached an all-time high in November. This trend can be attributed to the upgrading of miners ahead of next year’s BTC halving, higher token prices, and an oversupply of relatively new machines operated by miner equipment manufacturers. In addition, the increase in stablecoin activity is also responsible for the improvement in crypto fundamentals. In the last month, the total market capitalization of stablecoins has increased by $4 billion, and the gas fees used in stablecoin transactions have also risen.

BTC hash rate is at an all-time high

The fundamental factors that drive BTC prices

After a period of significant gains, active crypto traders can be positioned as relatively “bullish”. For example, CME-listed BTC futures open interest hit an all-time high in November, which could indicate that institutional activity is increasing in the market. Meanwhile, exchange-traded products (ETPs), including futures in the U.S. and spot products overseas, saw net inflows in November. Grayscale Research estimates that the total net inflow of global cryptocurrency ETPs was $1.3 billion in November, and has reached $2.2 billion for the whole year.

Open interest in CME BTC futures is at an all-time high

In terms of the short-term outlook for the market, the position of a “long” trader means that it may be difficult for the price to rise further. The price of mainstream currencies has risen sharply, and the positive expectations have been consumed in advance. In addition, there is a risk that the economic outlook could undermine the positive trend this year. These include a “hard landing” (recession) for the U.S. economy, a resumption of interest rate hikes by the Federal Reserve or a lower-than-expected rate cut, and a prolonged delay in approving BTC spot ETFs by U.S. regulators. All of these risks could hinder crypto recovery, at least in the short term.

That being said, in Grayscale’s view, financial markets and macroeconomic conditions may be favorable for BTC and other crypto assets. The supply of BTC was relatively “tight” before potential investors poured into US spot ETF products. For example, according to Glassnode data, the share of BTC supply held by short-term speculators has reached an all-time low. At the same time, grayscale research analysis also shows that a large proportion of BTC is held by long-term holders. The BTC halving next year will also limit the growth of the new token supply. In Grayscale’s view, the combination of inelastic BTC supply and potential new investor inflows should have a positive impact on valuations.

BTC held by long-term holders accounts for a larger share of the supply

More important than the technical background, however, is the prospect of BTC. BTC is a macro asset that is seen by many as a digital alternative to physical gold. As a result, the price of BTC is likely to be influenced by the factors driving demand for digital gold, including the Federal Reserve’s monetary policy, the health of the U.S. economy, and the soundness of the fiat monetary system.

The market’s reaction to the election of “BTC Maniac” Javier Milei as President of Argentina is the latest example of the impact these factors can have. Despite the uncertainty in the macro outlook, economists unanimously expect the Fed to cut interest rates next year and the U.S. economy to avoid a recession. There will also be a U.S. presidential election next year, which is expected to focus on excessive government borrowing, the independence of the Federal Reserve, and other issues that affect the long-term value of the dollar. Grayscale Research expects this combination to have a positive impact on demand for physical and digital gold and is likely to coincide with rising BTC valuations.