Recently, Grayscale released its February report, which pointed out that Bitcoin may hit a new historical high later this year. The following is the full report:

Full report

In February, Bitcoin prices rose 45%, breaking through $60,000 for the first time since the fourth quarter of 2021 and just 9% below its all-time high.

We believe the price increase may reflect strong inflows into new US-listed ETFs and anticipation of the Bitcoin halving in April.

Amid a mixed month for traditional assets, cryptocurrency markets produced solid returns in February 2024, helped by steady inflows into new spot Bitcoin ETFs and a variety of positive fundamental developments.

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 were among the best performing assets in both crypto and traditional finance in February, both in absolute terms and in risk-adjusted terms (returns relative to volatility).

Global bond markets have fallen this month as a pickup in inflation dampened hopes for rate cuts by U.S. and European central banks. Stocks have mostly risen, led by gains in China and other emerging markets.

While cryptocurrencies have become increasingly correlated with traditional markets in recent years, the performance of major tokens in February once again highlighted the diversification benefits of the crypto asset class.

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

From their launch on January 11th to the end of the month, the 10 spot Bitcoin ETFs received a cumulative net inflow of $1.46 billion. In February, net inflows accelerated significantly, reaching $6 billion for the month. For the entire cryptocurrency exchange-traded product (ETP), we estimate that net inflows totaled $6.2 billion in February, more than double the monthly record since October 2021.

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

From the perspective of spot Bitcoin ETF inflows, at the current block reward rate, the Bitcoin network produces about 900 new coins per day, which is about $54 million worth of Bitcoin (assuming an average price of $60,000 per coin).

By April 2024, Bitcoin issuance will be cut in half — an event scheduled every four years and known as a “halving” — at which point daily issuance will fall to 450 bitcoins, or about $27 million worth of bitcoin.

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

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

The market seems to be looking forward to the key upgrade of the Ethereum network scheduled for March 13. Ethereum is pursuing a modular design philosophy, and over time, more activities will take place on the layer 2 blockchains 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 thus hopefully improve its operating profits. Ethereum is also likely to benefit from other tailwinds, including attention to “restaking” technology — Eigenlayer, a leader in the field, raised $100 million from venture capital firm a16z this month — as well as anticipation for the upcoming ETH Denver conference, and the prospect of regulatory approval for an ETH ETF.

The best performing segment in February was the Utilities and Services cryptocurrency sector, which gained 53%. This category includes tokens related to artificial intelligence (AI) technology, some of which saw huge gains.

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

On the other hand, the financial cryptocurrency sector rose by 34%. The appreciation was partly due to a surge in the governance token of the decentralized exchange (DEX) Uniswap. The platform generates revenue through transaction fees, a portion of which goes 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 head of governance at the Uniswap Foundation proposed distributing fee revenue directly to UNI holders who stake their tokens on the platform and delegate voting rights. If implemented, the UNI token would receive a portion of the trading fees from one of the most traded decentralized financial applications.

The rise in valuations in February was accompanied by an increase in trading volume and a rise in various on-chain metrics, especially for Ethereum. For example, according to Coin Metrics data, ETH's average daily spot trading volume reached $5.8 billion in February, the highest level since September 2021. 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 is in circulation on the Ethereum network, and only about 1% is on Tron (of which Tether is the main stablecoin ).

The cryptocurrency market has performed strongly this year, supported by Bitcoin ETF inflows and various fundamental positive factors. However, an important lesson from the last crypto cycle is that macro factors such as the Federal Reserve’s monetary policy and economic conditions can have a significant impact on crypto asset valuations.

If the macro market outlook remains positive, the industry’s many tailwinds — including the Bitcoin halving and Ethereum’s upcoming upgrade — could lead to further price gains for tokens this year. Bitcoin’s price is currently just 9% below its all-time high, so a new all-time high could be in the cards later this year.

In contrast, a less favorable macro outlook could suppress valuations.In the fourth quarter of 2023, Bitcoin could benefit from the Fed’s shift from rate hikes to rate cuts.

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

We believe the most likely outcome is that US consumer price inflation will continue to decline, facilitating an eventual rate cut by the Fed. However, cryptocurrency investors should focus on the upcoming inflation report and the Fed’s updated policy rate guidance at its next meeting on March 20.

Final Thoughts

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