Bitcoin Market Analysis: Grayscale Research Insights and 2024 Outlook
Key Takeaways:
- Historical Bitcoin corrections and investment returns.
- Assessment of the current market cycle and the potential for a new high.
- Potential catalysts for price increases: interest rate cuts and legislation.
- Performance of privacy-focused crypto assets.
- Expansion of the ETP (Exchange Traded Product) market.
Introduction
Despite the significant returns Bitcoin investors have reaped, they have also experienced numerous major pullbacks. The roughly 30% decline since the beginning of October is consistent with historical averages, marking the ninth significant correction in this bull run. Grayscale Research believes Bitcoin will not experience a deep and prolonged cyclical downturn, expecting prices to reach new all-time highs next year. Tactically, some indicators point to a short-term bottom, but the overall picture remains mixed. Potential positive catalysts before year-end include another interest rate cut by the Federal Reserve and progress in cryptocurrency-related legislation. Beyond mainstream cryptocurrencies, privacy-focused crypto assets have stood out; simultaneously, the first exchange-traded products (ETPs) for XRP and Dogecoin have begun trading.
Historical Returns and Risks of Bitcoin
Historically, investing in Bitcoin has yielded substantial returns, with annualized returns over the past 3-5 years ranging from 35%-75%. However, Bitcoin has also experienced numerous major pullbacks: its price typically declines by more than 10% at least three times a year. Like any other asset, Bitcoin's potential investment return can be seen as compensation for its risk. Bitcoin investors who have committed to long-term holding (HODL) have been greatly rewarded, but they have also had to endure the pressure of sometimes severe pullbacks.
Analysis of the Recent Correction
The Bitcoin correction that began in early October continued for most of November, with a maximum decline of 32% (see Figure 1). To date, this pullback is close to the historical average. Since 2010, the Bitcoin price has fallen by more than 10% approximately 50 times, with an average decline of 30%. Since Bitcoin bottomed out in November 2022, there have been 9 declines of more than 10%. Despite the extreme volatility, this is not an unusual phenomenon in a Bitcoin bull market.
The Four-Year Cycle: Is it Over?
Bitcoin supply follows a four-year halving cycle, and large cyclical price pullbacks have historically occurred approximately once every four years. Therefore, many market participants believe that the Bitcoin price will also follow a four-year cycle—after three consecutive years of gains, the price will see a decline next year. Despite the uncertainty, we believe that the four-year cycle theory will prove to be wrong, and Bitcoin prices are expected to reach new all-time highs next year. The reasons are as follows: First, unlike previous cycles, there has been no parabolic price surge that might signal overbought conditions in this bull run (see Figure 3); second, the Bitcoin market structure has changed, with new money primarily flowing through exchange-traded products (ETPs) and crypto asset treasuries (DATs), rather than through retail investors; finally, as mentioned below, the overall macro environment remains favorable for the Bitcoin market.
Technical Indicators and Potential Bottoms
There are already some signs that Bitcoin and other crypto assets may have bottomed out. For example, Bitcoin put option skew is at extremely high levels (Note: Option skew is a measure of the asymmetry of an option's implied volatility curve, reflecting differences in market expectations for the future price volatility direction of the underlying asset.), especially for 3-month and 6-month options, indicating that investors have broadly hedged downside risk (see Figure 4); net asset values are lower than the value of their assets, CNA asset value after value, and the lowest asset value after value (i.e., its value after value is less than 1.0), which indicates that speculative positions are light (usually a precursor to recovery).
Privacy Assets Shine
According to our Crypto Sectors classification index, Bitcoin's decline in November was moderate among investable crypto assets. The best-performing market sector was the "Currency Crypto Assets sector" (see Figure 6), excluding Bitcoin, this sector achieved gains during the month. The gains mainly came from a number of privacy-focused cryptocurrencies: Zcash (+8%), Monero (+30%), and Decred (+40%). Broad interest in privacy technologies has also emerged in the Ethereum ecosystem: Vitalik Buterin unveiled a privacy framework at the Devcon conference, and the privacy-focused Ethereum layer-2 network Aztec launched its Ignition Chain. As discussed in the previous monthly report, we believe that without privacy elements, blockchain technology will not be able to fully realize its potential.
ETPs and Market Expansion
In addition, the crypto ETP market continues to expand due to the new universal listing standard approved by the U.S. Securities and Exchange Commission (SEC) in September. Last month, issuers launched ETP products for XRP and Dogecoin, and more single-token crypto ETPs are expected to be listed before the end of the year. According to Bloomberg data, there are currently 124 crypto-related ETPs listed in the United States, with total assets under management of $145 billion.
Future Outlook: Rate Cuts and Legislation
In many ways, 2025 will be a landmark year for the crypto asset industry. Most importantly, regulatory clarity is driving a wave of institutional investment, which is expected to be a foundation for the continued growth of the industry in the coming years. However, valuations have not kept pace with long-term fundamental improvements: our market capitalization-weighted Crypto Sectors index has fallen by 8% since the beginning of the year. Although the crypto market in 2025 is volatile, fundamentals and valuations will eventually converge, and we are optimistic about the outlook for the crypto market for the end of the year and 2026. In the short term, the key variable may be whether the Federal Reserve cuts interest rates at its meeting on December 10, and guidance on policy interest rates for the coming year. Recent media reports indicate that Kevin Hassett, director of the National Economic Council, is the leading candidate to succeed Federal Reserve Chairman Powell. Hassett may support lowering policy interest rates: he said in an interview with CNBC in September that the Federal Reserve's 25-basis-point interest rate cut was a "good first step" towards a "substantial interest rate cut." Under other conditions being equal, a decrease in real interest rates usually has a negative impact on the value of the U.S. dollar and benefits assets that compete with the U.S. dollar, including physical gold and some cryptocurrencies (see Figure 8).
Another potential catalyst is the ongoing bipartisan efforts in crypto market structure legislation. The Senate Agriculture Committee (responsible for overseeing the Commodity Futures Trading Commission) released a bipartisan draft text in November. If cryptocurrency can maintain bipartisan consensus and not become a partisan issue in the midterm elections, the market structure bill may make further progress next year, potentially driving more institutional investment into the industry and ultimately pushing valuations higher. While we are optimistic about the short-term market outlook, the real gains may come from long-term holding.
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