- Digital assets again produced positive returns in December, led by the Smart Contract Platforms Crypto Sector. Grayscale Research believes the Fed’s discussion of possible rate cuts helped support valuations in both crypto and traditional markets last month.
- Ethereum’s ETH token gained but significantly trailed Solana. We believe competition among Smart Contract Platforms should be a focus for crypto investors in 2024.
- Many have speculated that the SEC could approve a spot Bitcoin ETF this month. This would be an important milestone, but Grayscale Research would argue that Bitcoin’s fundamentals will ultimately prove more important for its price.
Bitcoin gained 13% in December, punctuating a year of strong returns, but the largest crypto asset was in fact outpaced by other market segments last month.[1] Although the broadening crypto recovery has many drivers, valuation gains over the last month can be partly attributed to Federal Reserve monetary policy, and specifically signs that policymakers have finished raising interest rates and are now discussing the timing of cutting interest rates.[2]
US inflation has been trending lower for more than a year, but Fed officials now appear ready to consider when this could warrant easier monetary policy. In the projections offered at its December 12-13 meeting, the median Federal Reserve official expected three quarter point rate cuts in 2023, more than some economists had previously anticipated.[3] The Fed’s apparent readiness to consider rate cuts resulted in a sharp decline in US bond yields as market expectations for interest rates shifted lower (Exhibit 1). It also stimulated a rally in many financial assets, including higher-risk market segments like CCC-rated corporate bonds and emerging market debt.
Exhibit 1: Interest rates declined on Fed “pivot”
Like gold, Bitcoin is an alternative money system that competes with the US Dollar. Therefore, changes in fundamentals that worsen the competitiveness of the US Dollar—including lower real interest rates—can be positive for Bitcoin. Guidance at the Fed’s December meeting about possible rate cuts resulted in lower real interest rates and a weakened Dollar, and likely supported Bitcoin’s valuation, in our view.
Exhibit 2: Lower real interest rates likely a tailwind for Bitcoin
Although Bitcoin delivered solid returns last month, it significantly lagged certain other digital assets. For example, the FTSE Grayscale Smart Contract Platforms Index was up nearly 42% in December, led by Ethereum competitors (“Alt L1s”) Solana, Avalanche, and Cardano (Exhibit 3).[4] Ethereum’s Ether (ETH) token underperformed Bitcoin (BTC) in 2023 but regained some ground in December: the ETH/BTC price ratio ended the month slightly higher and well-above its mid-month low point.[5] Ethereum is pursuing a “modular” development approach, in which an ecosystem of Layer 2 blockchains will build upon the Layer 1 chain to allow activity to scale. Grayscale Research expects Ethereum’s scaling strategy to be a major focus for crypto markets in 2024 (for more details see Ether “Underperforms” with 80% Gain in 2023).
Exhibit 3: Smart Contract Platform Crypto Sector outperformed in December
Solana’s SOL token gained 72% in December and ended the year 916% higher.[6] Although SOL is still down roughly 59% from its all-time high, this year’s gain represents a remarkable turnaround following a challenging 2022. In addition to price appreciation, the blockchain has seen a notable uptick in on-chain activity, including rising stablecoin transfer volume and active addresses exceeding both Bitcoin and Ethereum for the first time.[7] In contrast to Ethereum, Solana is pursuing a “monolithic” development approach centered around advanced hardware, and generally offers a compelling user experience, in our view. At the same time, much of the recent on-chain activity represents speculative trading (e.g. “meme coins”), and it remains to be seen whether the chain can encourage sustained user growth.
Bitcoin faces a similar debate around the rise of ordinals, a type of digital collectible on the oldest and largest public blockchain. We see Bitcoin’s core use case as a “store of value” asset and digital alternative to gold, but its applications can possibly expand over time due to adoption trends and/or technological developments. In December, the Bitcoin blockchain saw a record number of transactions, largely due to trading of ordinals and related assets (Exhibit 4).[8] The rise in ordinals trading should be considered a positive for Bitcoin’s valuation, in our view, because it expands the blockchain’s addressable markets.
Exhibit 4: Ordinals drive record Bitcoin transaction volumes
If the Securities and Exchange Commission (SEC) approves trading of spot Bitcoin ETFs, this may broaden the number of investors with regulated access to digital asset investment products, and potentially result in new net demand for Bitcoin. In light of a relatively “tight” supply backdrop, as well as the halving of Bitcoin issuance scheduled for April 2024, new net inflows into the asset should have positive implications for Bitcoin’s valuation, in our view.
However, sustained demand for Bitcoin from end investors will ultimately be more important for its price than these shorter-term supply/demand technicals. Although Bitcoin has other potential applications, the token is primarily held as a “store of value” asset and digital alternative to gold. Therefore, its price will be influenced by the factors that drive demand for gold-like investments, including changes in real interest rates and/or geopolitical tail risks. Bitcoin and many other digital assets produced strong returns in 2023, but crypto remains a volatile asset class, and investors should be mindful of both the macro and micro factors that can drive crypto valuations.
[1] Source: Bloomberg as of December 31, 2023.
[2] For example, from the transcript of Chair Powell’s press conference on December 13, 2023: “the other question, the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that, that begins to come into view and is clearly a discussion—topic of discussion out in the world and also a discussion for us at our meeting today.”
[3] In a survey conducted by Bloomberg prior to the meeting, about one quarter of economists expected fewer than three rate cuts in 2024, despite comparable projections for economic growth. Source: Bloomberg News, December 10, 2023.
[4] Source: Bloomberg, as of December 29, 2023.
[5] The ETH/BTC price ratio was 0.0545 as of December 29, 2023.
[6] Source: Bloomberg as of December 31, 2023.
[7] Source: Artemis, data as of 12/28/2023
[8] According to Glassnode data, inscriptions (including text) accounted for around 25% of Bitcoin fees paid in December 2023.
Investments in digital assets are speculative investments that involve high degrees of risk, including a partial or total loss of invested funds. Investments in digital assets are not suitable for any investor that cannot afford loss of the entire investment.
All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale.
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any investment in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. This content does not constitute an offer to sell or the solicitation of an offer to sell or buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this content to make an investment decision and any information contained herein should not be used as a basis for this purpose.
This content does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors.
Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability, or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.
There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.
Related content