December 2023: Fed's Pivot Helps Push Valuations Higher
Research Team
Last Updated: 1/2/2024 | 8 min. read
Digital assets again produced positive returns in December, led by the Smart Contract Platforms Crypto Sector. Grayscale Research believes the Fed’s discussion of possible rate cuts helped support valuations in both crypto and traditional markets last month.
Ethereum’s ETH token gained but significantly trailed Solana. We believe competition among Smart Contract Platforms should be a focus for crypto investors in 2024.
Many have speculated that the SEC could approve a spot Bitcoin ETF this month. This would be an important milestone, but Grayscale Research would argue that Bitcoin’s fundamentals will ultimately prove more important for its price.
Exhibit 1: Interest rates declined on Fed “pivot”
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.
Exhibit 2: Lower real interest rates likely a tailwind for Bitcoin
However, sustained demand for Bitcoin from end investors will ultimately be more important for its price than these shorter-term supply/demand technicals. Although Bitcoin has other potential applications, the token is primarily held as a “store of value” asset and digital alternative to gold. Therefore, its price will be influenced by the factors that drive demand for gold-like investments, including changes in real interest rates and/or geopolitical tail risks. Bitcoin and many other digital assets produced strong returns in 2023, but crypto remains a volatile asset class, and investors should be mindful of both the macro and micro factors that can drive crypto valuations.
[1] Source: Bloomberg as of December 31, 2023.
[2] For example, from the transcript of Chair Powell’s press conference on December 13, 2023: “the other question, the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that, that begins to come into view and is clearly a discussion—topic of discussion out in the world and also a discussion for us at our meeting today.”
[3] In a survey conducted by Bloomberg prior to the meeting, about one quarter of economists expected fewer than three rate cuts in 2024, despite comparable projections for economic growth. Source: Bloomberg News, December 10, 2023.
[4] Source: Bloomberg, as of December 29, 2023.
[5] The ETH/BTC price ratio was 0.0545 as of December 29, 2023.
[6] Source: Bloomberg as of December 31, 2023.
[7] Source: Artemis, data as of 12/28/2023
[8] According to Glassnode data, inscriptions (including text) accounted for around 25% of Bitcoin fees paid in December 2023.
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