Grayscale February report: Bitcoin may hit a new high this year

Compilation: W3C DAO

Recently, Grayscale released a February report, which stated that Bitcoin may reach an all-time high again later this year. The following is the content of the report:

In February, the price of Bitcoin rose 45%, surpassing $60,000 for the first time since the fourth quarter of 2021, and is only 9% below its all-time high.

We observe that the price increase may be influenced by large inflows into new US-listed ETFs and expectations of the Bitcoin issuance halving in April.

In a volatile month for traditional assets, the cryptocurrency market posted solid returns in February 2024, as a newly launched spot Bitcoin ETF attracted steady inflows while also benefiting from multiple a positive fundamental development.

Currently, the main risk to digital asset valuations may be the Federal Reserve’s monetary policy: inflation picked up again in February, which could delay interest rate cuts until later this year or longer.

Bitcoin and Ethereum performed well in February across crypto and traditional financial markets, both in absolute terms and in returns relative to volatility.

Global bond markets have fallen this month as a pickup in inflation dimmed the chances of U.S. and European central banks cutting interest rates. Meanwhile, stocks were mostly higher, with China and other emerging market stocks in particular outperforming.

In recent years, the connection between cryptocurrencies and traditional markets has become increasingly closer. However, the performance of major coins in February once again highlighted the diversification benefits of crypto assets.

For Bitcoin, the solid returns may reflect, at least in part, steady inflows into the new U.S.-listed spot Bitcoin ETF.

From its launch on January 11 to the end of that month, the 10 spot Bitcoin ETFs had a cumulative net inflow of US$1.46 billion. In February, net inflows accelerated significantly, with net inflows reaching US$6 billion throughout the month. Across crypto exchange-traded products (ETPs), we estimate net inflows totaled $6.2 billion in February, more than double monthly records dating back to October 2021.

Notably, U.S.-listed gold ETFs have seen net outflows since the launch of the spot Bitcoin ETF, perhaps signaling a shift by investors from one “store of value” asset to another.

From the perspective of spot Bitcoin ETF inflows, according to the current block reward rate, the Bitcoin network will produce about 900 new coins every day, which is worth about 5,400 Thousands of dollars in Bitcoin (assuming an average price per coin of $60,000).

Bitcoin issuance will drop in half by April 2024 - an event scheduled every four years known as the "halving" - when daily issuance will drop to 450 bits currency, that is, Bitcoin worth approximately $27 million.

Net inflows into U.S.-listed spot Bitcoin ETFs averaged $208 million per day in February, far outpacing the pace of new supply even before the halving. We believe an imbalance between new demand and limited new issuance may have contributed to the increase in valuations.

Although Bitcoin delivered solid returns in February, it was beaten by the second-largest crypto asset by market capitalization, Ethereum (ETH), which gained 47% during the month.

The market appears to be anticipating a key upgrade to the Ethereum network scheduled for March 13. Ethereum is pursuing a modular design philosophy, and over time, more activity will occur on the Layer 2 blockchain connected to the Layer 1 mainnet.

The upcoming upgrade will accommodate this growth by providing Layer 2 with designated storage space on Ethereum, aiming to reduce its data costs and thereby increase its operating profits. Ethereum may also benefit from other tailwinds, including a focus on “re-collateralization” technology — Eigenlayer, a leader in the space, raised $100 million from venture capital firm a16z this month — and expectations for the future of the ETH Denver conference , and the prospect of regulatory approval for the ETH ETF.

The best-performing segment in February was the Utilities and Services cryptocurrency space, up 53%. This product category includes tokens related to artificial intelligence (AI) technologies, some of which have seen huge gains.

While not originally designed with artificial intelligence applications in mind, we expect Filecoin (FIL) to have benefited from market interest in this topic. The project initially focused on decentralized storage but now includes smart contracts and computing infrastructure, which could lead to synergies with blockchain-based artificial intelligence applications. On February 16, Filecoin announced an integration with Solana to provide a decentralized block history for the network. Filecoin currently holds the dominant market share (~99%) in decentralized data storage.

On the other hand, the financial cryptocurrency industry is up 34%. Part of the appreciation is due to the proliferation of governance tokens on decentralized exchange (DEX) Uniswap. The platform generates revenue through transaction fees, a portion of which is transferred to the Uniswap Foundation when users visit the front-end website. However, no revenue currently flows directly to holders of the UNI governance token.

On February 23, the Uniswap Foundation’s head of governance proposed distributing fee revenue directly to UNI holders who stake their tokens on the platform and delegate voting rights. If implemented, the UNI token will receive a portion of transaction fees from one of the largest decentralized finance applications by transaction volume.

The increase in valuations in February was accompanied by an increase in transaction volume and a rise in various on-chain metrics, especially Ethereum. For example, average daily ETH spot trading volume reached $5.8 billion in February, the highest level since September 2021, according to Coin Metrics data. The value of all transfers on the Ethereum network also increased to its highest level since June 2022.

Finally, the total stablecoin market capitalization increased by another $5.5 billion this month. In related news, stablecoin issuer Circle announced that it will stop supporting USDC on the Tron blockchain. About 80% of USDC in circulation is on the Ethereum network, and only about 1% is on Tron (of which Tether is the main stablecoin).

The cryptocurrency market has had a strong year on the back of Bitcoin ETF inflows and a variety of fundamental positives. However, an important lesson from the last crypto cycle is that macro factors such as Federal Reserve monetary policy and economic conditions can significantly impact crypto asset valuations.

If the macro market outlook remains positive, a number of tailwinds for the sector – including Bitcoin’s halving and Ethereum’s impending upgrade – could cause token prices to rise further this year. Bitcoin’s price is currently just 9% below its all-time high, so a new all-time high is likely to be reached later this year.

In contrast, a less favorable macro outlook may dampen valuations. In the fourth quarter of 2023, Bitcoin may benefit from the Federal Reserve's shift from raising interest rates to cutting interest rates.

#If the central bank does cut interest rates in the coming months, it could weaken the dollar and support the valuations of assets that compete with the greenback, including Bitcoin. But in January, the steady decline in U.S. inflation appeared to be slowing or pausing on some measures, and markets began to turn higher on the inflation outlook. If inflation remains high, Fed officials may consider delaying rate cuts until later this year or into 2025. Generally speaking, rising U.S. interest rates can be positive for the value of the U.S. dollar and negative for Bitcoin.

We believe that the most likely outcome is that U.S. consumer price inflation will continue to decline, prompting the Federal Reserve to eventually cut interest rates. But cryptocurrency investors should keep an eye on the upcoming inflation report and updated policy rate guidance from the Federal Reserve at its next meeting on March 20.

Written at the end

Grayscale released a February market report stating that the price of Bitcoin rose by about 45% in February, surpassing $60,000 for the first time since the fourth quarter of 2021.

This phenomenon reflects heavy inflows into U.S. ETFs and expectations for Bitcoin’s halving in April.

In addition, as can be seen from the last crypto cycle, macro factors such as the Federal Reserve’s monetary policy and economic conditions may seriously affect crypto asset valuations. If the macro market outlook remains optimistic, it may cause cryptocurrency prices to rise. Further gains have taken place this year, with Bitcoin currently trading just 9% below its all-time high, so a new all-time high may be possible later this year.

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