Bitcoin (BTC) gained 13% in December 2023 (and is trading at over $45,000 to start off the new year). These price moves punctuate a year of strong returns, but the largest crypto asset was, in fact, “outpaced by other market segments last month,” the team at Grayscale noted in a new research report.
The update from Grayscale pointed out that although the broadening crypto recovery has many drivers, valuation gains “over the last month can be partly attributed to Federal Reserve monetary policy, and specifically signs that policymakers have finished raising interest rates and are now discussing the timing of cutting interest rates.”
The Grayscale report also mentioned that US inflation has “been trending lower for more than a year, but Fed officials now appear ready to consider when this could warrant easier monetary policy.”
In the projections offered at its December 12-13 meeting, “the median Federal Reserve official expected three quarter point rate cuts in 2023, more than some economists had previously anticipated.“
The Grayscale report added that the Fed’s apparent readiness “to consider rate cuts resulted in a sharp decline in US bond yields as market expectations for interest rates shifted lower. It also stimulated a rally in many financial assets, including higher-risk market segments like CCC-rated corporate bonds and emerging market debt.
According to the Grayscale report, “like gold, Bitcoin is an alternative money system that competes with the US Dollar.”
Therefore, changes in fundamentals “that worsen the competitiveness of the US Dollar—including lower real interest rates—can be positive for Bitcoin. Guidance at the Fed’s December meeting about possible rate cuts resulted in lower real interest rates and a weakened Dollar, and likely supported Bitcoin’s valuation, in our view.”
The report from Grayscale further noted that “although Bitcoin delivered solid returns last month, it significantly lagged certain other digital assets. For example, the FTSE Grayscale Smart Contract Platforms Index was up nearly 42% in December, led by Ethereum competitors (‘Alt L1s’) Solana, Avalanche, and Cardano.”
The report stated that Ethereum’s Ether (ETH) token “underperformed Bitcoin (BTC) in 2023 but regained some ground in December: the ETH/BTC price ratio ended the month slightly higher and well-above its mid-month low point.[5] Ethereum is pursuing a “modular” development approach, in which an ecosystem of Layer 2 blockchains will build upon the Layer 1 chain to allow activity to scale.”
Grayscale Research expects Ethereum’s scaling strategy “to be a major focus for crypto markets in 2024.”
According to the Grayscale update, if the Securities and Exchange Commission (SEC) “approves trading of spot Bitcoin ETFs, this may “broaden the number of investors with regulated access to digital asset investment products, and potentially result in new net demand for Bitcoin.”
In light of a relatively ‘tight’ supply backdrop, as well as the halving of Bitcoin issuance scheduled for April 2024, new net inflows into the asset “should have positive implications for Bitcoin’s valuation,” according to Grayscale’s analysis.
