Bitcoin price breaks through historical high, the main reason is the listing of Bitcoin ETF in the US market attracting fund inflows.

Original Title: "Market Byte: bitcoins price reaches new all time high"

Author: Grayscale Research Team

Translation: Yvonne, Mars Finance

• On Tuesday, March 5th, the price of Bitcoin once broke through the historical high of $69,000. Although the direct reason for the rise is the inflow of funds into the US-listed spot Bitcoin ETF, the marginal demand ultimately reflects investors' interest in Bitcoin assets, considering it as an alternative "store of value" and a decentralized computing network.
• The active traders of Bitcoin holdings now seem quite substantial. The valuation of ETH and most other tokens is still below the high points of the previous crypto cycle.
• If the macro market background remains favorable, we may see further increase in token valuation, but macro factors could also become unfavorable.

On Tuesday, the price of Bitcoin reached an intraday high of $69,325,000, surpassing the high of $69,000 in US dollars on November 10, 2021. In the previous weeks, the price of Bitcoin had already reached historical highs when calculated in other major currencies such as the Euro, Yen, and Renminbi. From the cycle low of $15,600 on November 21, 2022, the price of Bitcoin in US dollars has risen by approximately 330%. Furthermore, as the circulating supply of tokens gradually increases over time, the market value of Bitcoin has increased by 340% during the same period (from November 21, 2022 to present).

Why has the price of Bitcoin rebounded so quickly? According to GrayscaleResearch, the direct reason for the recent rise in the price of Bitcoin is the demand for the spot Bitcoin ETF listed in the US market. Since its launch on January 11, these products have attracted nearly $8 billion in net inflows, a figure that far exceeds the pace of new issuance, even before the Bitcoin halving expected in April (for more details, please refer to our report "2024 Halving: This Time Is Indeed Different"). In our view, the imbalance between the continuously growing demand for ETFs and the limited new supply of Bitcoin may have led to the rise in the price of Bitcoin.

While spot Bitcoin ETFs provide a new product structure for cryptocurrency investments in the US, the marginal demand for Bitcoin ultimately reflects investors' interest in its characteristics as an alternative currency medium and a decentralized computing network.

We believe that Bitcoin is a macro asset that can compete with the US dollar and physical gold (two traditional "store of value" assets). The Federal Reserve has signaled a possible interest rate cut this year, and neither of the two major parties in the US seems to be focusing on controlling the massive budget deficit during peacetime. Lower real interest rates and the continuously rising public sector debt could put pressure on the value of the US dollar and support competing assets, including Bitcoin. Additionally, for some investors, Bitcoin may have advantages over physical gold, for example, it is easy to carry: as long as the holder can access the internet and hold the private key, Bitcoin can be used anywhere in the world. In our view, the rising demand for Bitcoin mainly comes from investors' concerns about the medium-term outlook for the US dollar and their search for an alternative "store of value" asset. It is worth noting that the price of physical gold also reached a new high on Tuesday when calculated in US dollars.

Furthermore, technological advancements over time have expanded the potential use cases of the Bitcoin network. Ordinal inscriptions began in December 2022 as a way to inscribe non-fungible tokens (NFTs) onto the Bitcoin network and have rapidly developed into one of the largest NFT networks (see Figure 2). The emergence of Ordinals not only encourages new users to try Bitcoin, but also stimulates innovation in those who see the potential for other use cases, such as trustless Bitcoin-backed stablecoin loans and more use of Bitcoin in decentralized applications. With transaction fees on the main chain rising, multiple L2 projects have begun to develop on Bitcoin to improve scalability and use cases. There is evidence that more and more people are adopting cryptocurrencies: the total value of cryptocurrencies has increased from $160 million to $2.7 billion since the third quarter of 2023, a 15-fold increase in just a few months.

Various market indicators indicate that active cryptocurrency traders currently hold quite substantial positions. Funding rates (measuring the cost of trading leverage) have risen to the high end of the recent range (see Figure 3), but are still below the high points of the previous cycle. Open interest in futures contracts has also risen to the highest level since the fourth quarter of 2021. Finally, the increase in Google search volume for the popular compliant trading platform Coinbase may also indicate the return of retail investors. The cryptocurrency options market is pricing in increased downside risk: implied volatility and negative skewness (i.e., the price of put options is higher than that of call options) have both risen.

Although Bitcoin has surpassed its previous historical high, most other cryptocurrencies have not. For example, ETH is still down 21% from its historical high in November 2021 (based on closing price). For the rest of the assets within our cryptocurrency industry framework (excluding BTC and ETH), token prices are still about 70% lower than historical highs.

The 2020-2022 crypto cycle reminds us that the downturn in the crypto market can be significant: the price of Bitcoin fell by 77% from peak to trough. While investing in Bitcoin has brought stable returns in the medium term, the asset has also experienced significant declines and volatility. Bitcoin is a high-risk, high-return potential asset with low correlation to stocks. Therefore, it can be a useful component for diversifying investment portfolios for certain investors. As discussed in our latest monthly update, if the macro market background remains favorable, we may see further increase in token valuation in the coming months. Conversely, less favorable macro prospects—such as Fed rate hikes/economic recession—may suppress cryptocurrency valuations.

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