Original author:Grayscale Research

Original compilation: Felix, PANews

Main points

• Bitcoin prices continued to rise in November, with the cryptocurrency’s recovery extending to broader market segments.

• Certain macro risks in financial markets have declined, including geopolitical conflicts in the Middle East and the risk of a hard landing for the U.S. economy.

• The combination of a “tight” supply of tokens, easing macro risks, and a U.S. presidential election that will focus on excessive government borrowing could be beneficial to Bitcoin’s valuation in 2024.

Bitcoin has rebounded 130% in 2023 after losing ground in 2022, and is on track to become one of the best-performing mainstream assets this year. Crypto markets continued to recover in November as various macro risks declined in financial markets. In the digital asset market, this has resulted in a shift in market leadership from Bitcoin to an increasingly broad segment of the crypto market. Grayscale believes that the fundamentals of cryptocurrencies are gradually improving, and the supply situation of major coins is relatively tight (such as due to Bitcoin’s current ownership structure). This may be consistent with rising cryptocurrency valuations in the coming year, especially if the Federal Reserve has ended its tightening policy and the U.S. economy can avoid a hard landing (recession).

Various tail risks in financial markets appear to have declined over the past month, helping previously underperforming assets rebound. For example, positive signs from the conflict in the Middle East appeared to reduce concerns about broader regional chaos, and assets related to the Israeli economy rebounded as a result (Figure 1). Likewise, long-term Treasury prices rose (yields fell) after the Treasury Department announced a smaller-than-expected increase in borrowing demand. The Consumer Price Index (CPI) also continued to fall, increasing market hopes for a rate cut by the Federal Reserve and a possible soft landing for the U.S. economy. On a volatility-adjusted basis, Bitcoin has underperformed this month (after outperforming since late August) but is still up 9% (Ethereum was up 13% in November).

Chart 1: Reduced tail risks drive asset market recovery in November

Broader Crypto Market Recovery

Bitcoin has been outperforming other crypto assets recently due to demand for it as a digital alternative to gold and optimism over the approval of a Bitcoin spot ETF. However, crypto market leadership changed in November as the rally expanded beyond Bitcoin.

Under new framework of crypto asset class standardsindex(Note: Grayscale is a crypto index product launched in cooperation with FTSE Russell, a subsidiary of the London Stock Exchange and London index provider. This index series has five different crypto industry indices: currency, smart contract platform, finance, consumption Consumers Culture, Utilities Services, covering more than 150 protocols), the best performing segments last month were Financial Indexes, Utilities Services, and Consumers Culture (Table 2). The standout performer in the financial sector was the Thorchain (RUNE) token’s 131% gain; Thorchain operates decentralized exchange ThorSwap, which has seen an increase in trading activity recently. Standout performers in the consumer and culture sector were the growth of gaming-related tokens ImmutableX and Illuvium. On November 28, Illuvium (up 119%) listed its namesake game on the Epic Games Store, while ImmutableX (up 87%), a Layer 2 blockchain for crypto gaming applications on Ethereum, announced a partnership with Ubisoft.

Exhibit 2: Financial, Consumer Cultural Cryptocurrency Sectors Outperform

In addition to the latest price movement, the market is once again focused on the marriage between cryptocurrencies and AI technology following the leadership turmoil at OpenAI. In Grayscale’s view, there may be synergies between public chains and AI technology. Specifically, blockchain can combat or address potential social risks posed by AI, such as deepfakes, bots, and the proliferation of misinformation. Additionally, decentralized computing protocols can counter centralized control of AI models that hold sensitive personal information. Major crypto projects that Grayscale considers relevant to the AI ​​topic include Akash and Render (GPU sharing), Worldcoin (identity), and Bittensor (open architecture AI development).

As valuations move higher, the fundamentals of the crypto industry also improve. For example, Bitcoin’s hash rate, a measure of the amount of computing power used to secure the network, reached an all-time high in November (Table 3). This trend can be attributed to miner upgrades ahead of next year’s Bitcoin halving, higher token prices (which make older machines profitable), and an oversupply of relatively new machines operated by mining equipment manufacturers. Additionally, increased stablecoin activity is also responsible for improving crypto fundamentals. Over the past month, the total stablecoin market capitalization has increased by $4 billion, and the amount of gas used in stablecoin transactions has also increased.

Chart 3: Bitcoin hash rate hits all-time high

Fundamental factors driving Bitcoin price

Active crypto traders are positioning themselves relatively “long” after a period of significant gains. For example, open interest in Bitcoin futures listed on the Chicago Mercantile Exchange (CME) hit an all-time high in November, which may indicate increased institutional activity in the market (Figure 4). Meanwhile, exchange-traded products (ETPs), including futures products in the United States and spot products overseas, saw net inflows in November. Grayscale estimates global net cryptocurrency ETP inflows totaled $1.3 billion in November, taking the full year to $2.2 billion.

Chart 4: CME Bitcoin futures open interest hits record high

In terms of the market’s short-term outlook, the positioning of “long” traders means it may be difficult for prices to rise further. Major crypto token prices have experienced significant gains, and the benefits have been consumed in advance. Additionally, there are some risks to the economic outlook that could derail this years positive momentum. These include a “hard landing” (recession) of the U.S. economy, a resumption of interest rate hikes by the Federal Reserve or a lower-than-expected rate cut, and/or a prolonged delay by regulators in approving a Bitcoin spot ETF for the U.S. market. These risks could hinder the recovery of cryptocurrencies, at least in the short term.

Having said that, in Grayscale’s view, financial market and macroeconomic conditions could be favorable for Bitcoin and other crypto-assets. Before potential investors flocked to U.S. spot ETF products, Bitcoin’s supply was relatively “tight.” For example, the share of Bitcoin supply held by short-term speculators reached a record low, according to Glassnode data (Table 5). Likewise, Grayscale’s analysis also shows that a large portion of Bitcoin is held by long-term holders (related reading:Grayscale reveals the pattern of Bitcoin holders: only 2.3% own more than 1 Bitcoin). Next year’s Bitcoin halving will also limit the growth of new coin supply. In Grayscale’s view, the combination of inelastic Bitcoin supply and potential new investor inflows should have a positive impact on valuations.

Chart 5: Long-term holders hold a larger share of Bitcoin supply

More important than the technical background, however, is Bitcoin’s fundamental outlook. Bitcoin is a macro asset viewed by many as a digital alternative to physical gold. As a result, Bitcoin’s price may be affected by 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 currency system. The market’s reaction to the election of Javier Milei (a Bitcoin-friendly man) as president of Argentina is the latest example of the impact these factors can have (related reading:A quick look at the past experience and main views of Argentina’s new president: severing ties with parents and supporting Bitcoin). Although there is uncertainty about the macro outlook, economists unanimously expect the Federal Reserve to cut interest rates next year and the U.S. economy to avoid 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 expects this combination to have a positive impact on demand for physical and digital gold and may coincide with rising Bitcoin valuations.