Grayscale March Market Report: Bitcoin rebounded strongly and hit a record high before halving

• Bitcoin fully recovered from the 2021-22 decline and reached an all-time high in March 2024. Grayscale Research believes that central banks' eagerness to cut interest rates may be a factor driving demand for alternative stores of value like physical gold and Bitcoin.

• Ethereum successfully implemented a major network upgrade, but the Ethereum (ETH) token underperformed Bitcoin on the month, possibly because the likelihood of spot ETF approval in the U.S. market is considered low.

• The upcoming Bitcoin halving (scheduled for April 19), which will cut the supply of Bitcoin in half, will highlight the predictable monetary policy of the Bitcoin network versus the uncertain outlook of fiat currencies.

Bitcoin has once again rebounded strongly after a significant drop. In the most recent cryptocurrency cycle, the price of Bitcoin peaked at $69,000 in November 2021. It then fell by about 75% over the next year and bottomed out at around $16,000 in November 2022 before beginning to recover. [1] Overall, it took just over two years for the price of Bitcoin to recover to its previous peak (Chart 1). In comparison, it took about three years to recover from the previous two declines, and about a year and a half to recover from the first major decline. Grayscale Research believes that we are now in the "middle" of another Bitcoin bull run, when prices are likely to continue to climb.

Chart 1: Bitcoin has recovered faster than in the previous two cycles

In addition to Bitcoin and Ethereum, many traditional assets also achieved positive returns in March 2024. On a risk-adjusted basis (i.e. taking into account the volatility of each asset), Bitcoin's performance is at the higher end, while Ethereum's returns are closer to the middle (Chart 2).

The best performing traditional asset classes last month included physical gold, non-U.S. developed market stocks and energy-related stocks. Certain stock sectors related to emerging technologies, such as biotech, underperformed the broader market.

Note: The vertical axis shows the percentage change from the end of February to the end of March, divided by the 360-day volatility. Data source: Bloomberg, Grayscale Investments. As of March 31, 2024. Past performance is not indicative of future results. Indexes include S&P 500, Nasdaq-100, MSCI Emerging Markets Index (Local FX) MSCI Global ex-US Index (Local FX), S&P/GSCI, Bloomberg-Barclays U.S. Treasury Index, S&P Biotechnology Select Industry Index. These indices are unmanaged investments and you cannot invest directly in the index itself.

Figure 2: Bitcoin is one of the best performing assets in March 2024

One reason for last month’s overall strong market performance may be the signals from major central banks that interest rates are coming down . All G10 central banks except the Bank of Japan expect to cut their policy rates over the coming year, according to a Bloomberg survey. [2] Various events over the past month have reinforced these expectations. For example, Federal Reserve officials said at their March 19-20 meeting that they plan to cut interest rates three times this year despite forecasts for stronger GDP growth and higher inflation. Similarly, no Bank of England official called for a rate hike for the first time since September 2021, and the Swiss National Bank unexpectedly cut its policy rate on March 21. [3]

Major central banks are eager to cut interest rates despite strong economic growth, which may lead to higher market inflation expectations. For example, the spread between US nominal Treasuries and TIPS (i.e., “breakeven inflation”) has increased across all maturities this year (Chart 3). The risk of rising inflation may stimulate demand for alternative stores of value, such as physical gold and Bitcoin.

Chart 3: Market inflation expectations rise

* Difference between nominal and inflation-linked US Treasuries (“inflation expectations” %): Based on the Fed’s 2% PCE inflation target, adjusted for CPI inflation. Source: Bloomberg, Grayscale Investments. Data as of March 31, 2024: Past performance is not indicative of future results: For illustrative purposes only.

Despite Bitcoin’s record high, it also experienced a mid-month correction of about 13% as traders reduced their positions and inflows into U.S.-listed spot Bitcoin ETFs slowed. [4] Net inflows into U.S.-listed spot Bitcoin ETFs totaled $4.6 billion throughout March, down from $6 billion in February. [5] While net inflows into spot Bitcoin ETFs were lower than last month, they were still significantly higher than Bitcoin network issuance. We estimate that these U.S. ETFs purchased approximately 2,100 BTC per day in March, compared to approximately 900 BTC per day issued by the network during the same period (Exhibit 4). [6] After the April halving, network issuance will drop to approximately 450 BTC per day.

Figure 4: ETF inflows continue to outpace network issuance

Meanwhile, the Ethereum network underwent a major upgrade on March 13, designed to reduce costs on Layer 2 (L2) chains and facilitate Ethereum’s transition to a modular architecture (for more details, see Ethereum’s Coming of Age: Dencun and ETH 2.0). The impact of this upgrade can already be observed on the chain: transaction fees on L2s such as Arbitrum and Optimism dropped from $0.21 and $0.23 respectively in February to less than $0.01 after the upgrade, making it cheaper for end users to transact in the Ethereum ecosystem.

Although the upgrade may have been priced in by the market before, Ethereum (ETH) underperformed Bitcoin (BTC) during the month, with the ETH/BTC price ratio falling to its lowest level since early January (Chart 5). The decline in the expectation of spot ETF approval in the US market may have suppressed ETH's valuation. According to the decentralized prediction platform Polymarket, the market consensus expects the probability of the US Securities and Exchange Commission (SEC) approving a spot ETH ETF to drop from about 80% in January to 21%. We expect the prospect of spot ETH ETF approval or rejection in the current wave of applications to become an important driver of the token's valuation over the next two months.

Chart 5: Despite major network upgrades, Ethereum continues to underperform Bitcoin

Grayscale has developed the concept of Grayscale Crypto Sectors, a comprehensive framework that divides the crypto asset class into five different subsectors that investors can use to track crypto activity beyond Bitcoin and Ethereum. From a crypto subsector perspective, the best performing segment in March was “Consumer & Culture,” reflecting the high returns of “memecoins” (Exhibit 6). [8] Memecoins reflect internet culture, and in the crypto space, meme-related tokens are primarily traded for entertainment purposes; these projects have historically generated neither revenue nor tangible use cases (e.g., payments) and should be considered very high-risk investments. That said, the developers of Shiba Inu (the second-largest memecoin in the Consumer & Culture crypto subsector by market cap) have attempted to expand the scope of the project by launching an Ethereum L2 that runs decentralized finance (DeFi) activities. [9]

Figure 6: Consumer and cultural crypto sectors grew by more than 30%

Several tokens in the “finance” crypto sub-sector have also seen solid returns this month, with top performers including Binance Coin (BNB), MakerDao Governance Token (MKR), THORChain (RUNE), 0x (ZRX), and Ribbon Finance (RBN). In recent months, Binance’s spot volume share has begun to recover (currently at 46%), but remains below its peak reached in February 2023. [10] THORchain is a decentralized exchange that allows native cross-chain swaps, making it possible to exchange tokens across blockchains, such as from Bitcoin to Ethereum, and is likely to benefit from the growth of the broader Bitcoin ecosystem.

Like all other asset markets, cryptocurrency valuations are influenced by both fundamental and technical factors. From a technical perspective, net inflows/outflows into U.S.-listed spot Bitcoin ETFs are likely to continue to be a significant driver of Bitcoin prices in the near term. These products currently hold approximately 4% of the circulating Bitcoin supply, so any small change in demand could create meaningful Bitcoin flows.[11]

However, we believe that investor demand for Bitcoin ultimately stems in part from its perceived value as a “store of value” asset. Bitcoin is an alternative monetary system with a unique and highly predictable monetary policy. While the supply of the U.S. dollar is determined by personnel at the U.S. Treasury and the Federal Reserve, the supply of Bitcoin is determined by pre-existing code: Every four years, daily issuance is halved until a total cap of 21 million coins is reached.

Grayscale Research believes that when investors are uncertain about the medium-term prospects of fiat currencies, they will seek assets with this verifiable scarcity. Currently, this uncertainty seems to be rising: the Federal Reserve is preparing to cut interest rates even though inflation remains above its target, and the US election in November may stimulate macro policy changes that may reduce the value of the dollar over time. Next month's Bitcoin halving event should remind investors of Bitcoin's fundamental properties as a scarce digital asset and an alternative to fiat currencies, the latter of which has uncertainty about its future supply.