- Bitcoin’s price briefly rose above its previous all-time high of $69,000 on Tuesday, March 5. Although the proximate cause of the rally has been inflows into US-listed spot Bitcoin ETFs, marginal demand ultimately reflects investor interest in Bitcoin’s properties as an alternative “store of value” and decentralized computing network.
- Active trader positioning in Bitcoin now appears fairly long. Valuations for Ether and most other tokens remain below their highs from the previous crypto cycle.
- If the macro markets backdrop remains favorable, we could see further increases in token valuations—but macro factors could also be a headwind.
Bitcoin’s price reached an intraday high of $69,325k on Tuesday[1], exceeding its previous high in US Dollar terms of $69,000 from November 10, 2021 (Exhibit 1).[2] Bitcoin had already reached new all-time-high prices in other major currencies (e.g. the Euro, Yen, and Yuan) in the weeks prior. Since its cycle low of $15.6k on November 21, 2022 to today, Bitcoin’s price has increased by about 330% in Dollar terms. Moreover, because the number of circulating coins increases gradually over time, Bitcoin’s market capitalization has increased by slightly more (+340%) over the same period (November 21, 2022 to today).[3]
Exhibit 1: Bitcoin’s price touched new record high
Why has Bitcoin’s price rebounded so dramatically? In Grayscale Research’s view, the proximate cause of the recent rise in prices has been demand for spot Bitcoin ETFs listed in the US market. Since their launch on January 11 to today, these products have gathered net inflows totalling nearly $8bn—an amount far in excess of the rate of new issuance, even before we reach the Bitcoin halving in April (for more details see our report 2024 Halving: This Time It’s Actually Different). The imbalance between rising demand from ETFs and limited new Bitcoin supply has likely contributed to the rise in Bitcoin’s price, in our view.
While the spot Bitcoin ETFs offer a new product structure for crypto investment in the US, marginal demand for Bitcoin ultimately reflects investor interest in Bitcoin’s properties as an alternative money medium and decentralized computing network.
Bitcoin is a macro asset that, in our view, competes with the US Dollar and physical gold—two traditional “store of value” assets. The Federal Reserve has signaled that it may reduce interest rates this year, and neither US political party appears focused on reigning in large peacetime budget deficits. Lower real interest rates and rising public sector debt could both weigh on the value of the Dollar and support competing assets, including Bitcoin. In addition, for certain investors, Bitcoin may have advantages over physical gold because, for example, it is easily portable: Bitcoin is available anywhere in the world as long as holders have access to the internet and their private key. In our view, rising demand for Bitcoin comes primarily from investors concerned about the medium-term outlook for the US Dollar and seeking an alternative “store of value” asset. Notably, the price of physical gold also reached a new high in US Dollar terms on Tuesday.
In addition, technological advancements have expanded the Bitcoin network’s potential use cases over time. Ordinal inscriptions, which were started in December 2022 as a way to inscribe non-fungible tokens (NFTs) onto the Bitcoin network, have quickly grown to become one of largest NFT networks by volume (Exhibit 2). Not only has the advent of ordinals encouraged new users to try Bitcoin, but has also spurred new innovation for those that see the potential for other sorts of use cases like trustless Bitcoin-collateralized stablecoin loans and greater BTC usage in decentralized applications. Given that transaction fees are rising on the main chain, there are multiple Layer 2 projects that have started developing on Bitcoin to increase scalability and use cases. There is evidence of growing adoption: since Q3 2023, total value locked has increased from $160M to $2.7bn, growing 15x in just a few months.[4]
Exhibit 2: Rising popularity of Bitcoin NFTs
A variety of market indicators suggest active crypto trader positioning is now fairly long. Funding rates (which measure the cost of trading leverage) have risen to the high end of their recent range (Exhibit 3), although they remain below highs from the prior cycle. Futures open interest has similarly risen to the highest levels since Q4 2021. Lastly, an increase in Google search volumes for Coinbase—a popular retail trading platform—may also point to a return of retail traders. Crypto option markets are pricing in an increase in downside risk: higher implied volatility and negative skewness (i.e. the price of puts above the price of calls).[5]
Exhibit 3: Positioning indicators suggest active traders are already long
Although Bitcoin has broken through its previous all-time high, most of the rest of crypto has not. Ethereum, for example, is still down 21% from its all-time high (on a closing price basis) in November 2021. For the remaining assets within our Crypto Sectors framework, excluding Bitcoin and Ether, token prices are still around 70% below all-time highs.
The 2020-2022 crypto cycle offered a reminder that drawdowns in crypto markets can be significant: Bitcoin’s price declined 77% from peak to trough.[6] Although investing in Bitcoin has led to solid returns over the medium-term[7], the asset has also experienced significant drawdowns and volatility. Bitcoin is a high-risk and high-return-potential asset with a low correlation to stocks. It can therefore become a useful ingredient in a diversified portfolio for certain investors. As discussed in our latest monthly update, if the macro markets backdrop remains favorable, we could see further increases in token valuations in the months ahead. In contrast, a less favorable macro outlook—e.g. Federal Reserve rate hikes and/or a recession—could potentially hold back crypto valuations.
[1] Source: Coinbase.
[2] Source: Bloomberg, as of March 5, 2024. According to data provider Kaiko, Bitcoin’s price reached $69,000 on Coinbase and Binance, and $69,076 on OkCoin, on that date.
[3] Source: Calculated by 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 three-year investment horizons since 2011, Bitcoin has produced an average annualized return of 181% and a minimum annualized return of 39%. Grayscale calculations using monthly Bloomberg data as of February 29, 2024.
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