Bitcoin’s price continued to rise in November and the crypto recovery broadened to a wider array of market segments, the Grayscale team noted.
Grayscale also mentioned in a report that financial markets relaxed “about certain macro risks, including the geopolitical conflict in the Middle East and the risk of a “hard landing” for the US economy.”
The report added that the combination of “tight” token supply, “easing macro risks, and the focus that the US presidential election will bring to excessive government borrowing may be positive for Bitcoin valuations in 2024.”
After losing ground in 2022, Bitcoin has “rebounded 130% in 2023, and is on track to be one of the best performing major assets of the year.”
The report further noted that crypto recovery “continued in November as financial markets relaxed about a variety of macro risks. Within digital asset markets, this resulted in a shift in market leadership away from Bitcoin to an increasingly broad array of crypto market segments. Grayscale Research sees gradually improving crypto fundamentals and a relatively tight supply picture in major tokens (due to Bitcoin’s current ownership structure, for example).”
According to Grayscale, this may be “consistent with rising crypto valuations in the year ahead, especially if the Federal Reserve has finished tightening and the US economy can avoid a “hard landing” (recession).”
Over the last month, financial markets appeared “to relax about a variety of tail risks, which helped previously underperforming assets to rebound. For instance, positive signs from the Middle East conflict seemed to reduce fears about a wider regional disruption, and assets related to Israel’s economy rebounded as a result. Similarly, long-maturity Treasury bonds rose in price (declined in yield) after the Treasury Department announced a smaller-than-expected increase in borrowing needs.”
The report added that consumer price inflation also “continued to decline, raising hopes for eventual Fed rate cuts” and a potential “soft landing” for the US economy. Bitcoin underperformed during the month “on a volatility-adjusted basis (after outperforming since the end of August) but still managed a gain of 9% (Ether increased 13% in November).”
Until recently, Bitcoin had “outperformed other crypto assets due to demand for its properties as a digital alternative to gold as well as optimism around spot Bitcoin ETF approval. However, crypto market leadership shifted in November as the rally broadened beyond Bitcoin.”
A range of crypto industry fundamentals have “improved alongside the move higher in valuations.”
For instance, Bitcoin’s hash rate—”a measure of the total amount of computing power securing the network—reached an all-time high in November.”
Grayscale attribute the trend “to miners upgrading prior to next year’s Bitcoin halving, higher token prices (which allows older machines to operate profitably), and an oversupply of relatively new machines being operated by miner equipment manufacturers.”
They would also “consider rising stablecoin activity to be an improving crypto fundamental. Over the last month, aggregate stablecoin market capitalization increased by $4bn and the amount of gas used on stablecoin transactions moved higher.”
In terms of the short-term market outlook, “long” trader positioning “implies that further price appreciation may be harder to come by.”
Major crypto token prices “have appreciated significantly, and a more positive outlook is now priced in. Moreover, there are risks to the outlook that could derail this year’s positive trends. These include a “hard landing” (recession) for the US economy, a resumption of Fed rate increases or fewer-than-expected Fed rate cuts, and/or a long delay in regulatory approval of a spot Bitcoin ETF for the US market. Each of these risks could hold back the crypto recovery, at least over the near-term.”
The central scenario “for financial markets and the economy are likely to be positive for Bitcoin and other crypto assets, in our view. Bitcoin’s supply is relatively “tight” ahead of potential investor inflows into spot ETF products in the US. For example, according to Glassnode data, the share of Bitcoin’s supply held by short-term speculators reached a record low.”
Similarly, analysis from Grayscale Research also shows “that a significant portion of Bitcoin is held by entities that may be slow to sell into an appreciated market. Next year’s Bitcoin halving will also limit the growth of new token supply. This combination of inelastic Bitcoin supply and potential new investor inflows should be positive for valuations.“
More importantly than the technical backdrop, however, “will be Bitcoin’s fundamental outlook. Bitcoin is a macro asset and considered by many to be a digital alternative to physical gold. Its price, therefore, is likely to be influenced by the factors that drive demand for digital gold, including Fed monetary policy, the health of the US economy, and the perceived soundness of fiat money systems.”