• Spot Bitcoin ETFs debuted in the US market, and highlights include high trading volumes and net inflows totalling about $1.5bn.
• Valuations for Bitcoin and Ethereum were little changed during the month, while prices for many “alt coins” declined. Positioning measures suggest active traders reduced risk after US spot Bitcoin ETFs began trading.
• Meanwhile, stablecoin market capitalization continued to rise, markets focused on crypto & AI synergies, and the Federal Reserve signaled it was not ready to begin cutting rates.

More than ten years after the first application, spot Bitcoin exchange traded funds (ETFs) debuted in the US in January 2024. There have been many milestones on Bitcoin’s journey to the center of the global financial system, including the first exchanges, the first derivative products, and the first loans against Bitcoin as collateral. Although these events can be lost in the day-to-day focus on prices and flows, we see the launch of the new Bitcoin ETFs as another major step in the development of the nascent crypto asset class.

Trading volumes for the ten new products demonstrated the breadth of investor interest in accessing Bitcoin through the ETF structure. Since their launch on January 11, the spot Bitcoin ETFs as a group have seen average daily volumes of $2.1bn. Compared to typical trading volumes for all US-listed ETFs, turnover for the new Bitcoin products since their launch would rank 8th—alongside products offering exposure to US equity and bond markets (Exhibit 1). For additional comparisons, the largest non-crypto commodity-based ETF ($GLD) saw average daily volume of about $1.1bn since January 11, while the largest Bitcoin futures-based ETF ($BITO) saw daily volumes of $570mn over the same period.^[1] While there are many ways to own Bitcoin, including self-custody, the successful launch of spot Bitcoin ETFs suggests many investors and financial advisors may value the convenience of liquidity of this product structure.

Exhibit 1: Spot Bitcoin ETF volumes ranked among large equity and bond products

Net inflows into the new products soared at the start of trading and stabilized as the month progressed. Since January 11, net inflows into the US-listed spot Bitcoin ETFs have totalled about $1,460mn (Exhibit 2). This was partly offset by net outflows from crypto exchange traded products (ETPs) overseas (especially Bitcoin funds in Canada), such that net inflows into all products totalled about $1,094mn since January 11 (and $1,285mn for January as a whole).

Exhibit 2: Net inflows into US-listed spot Bitcoin ETFs, outflows elsewhere

From a price return standpoint, both Bitcoin and Ether were close to unchanged on the month, while many other tokens (or “alt coins”) underperformed.^[2] Based on the FTSE Grayscale Crypto Sectors Index Series, the Consumer & Culture Crypto Sector was the worst performing among the five sectors, falling about 12% in January. We see the underperformance of lower-market cap tokens as consistent with a decline in risk appetite among some market participants.

Exhibit 3: “Alt coins” underperformed in January

Although the new Bitcoin ETFs saw healthy net inflows, active trader positioning may have become overextended prior to their launch, resulting in a pull back later in January. For example, open interest in CME-listed Bitcoin futures reached a local high just prior to January 11, but pulled back thereafter (Exhibit 4). Similarly, in options markets, the price of short-expiry (e.g. 2wk) calls rose relative to the price of short-expiry puts, which can be an indication of investor demand for bullish leveraged structures. But like futures open interest, the premium for call options declined in the second half of the month.^[3] In effect, it appears that some market participants were positioned for a sharp increase in Bitcoin’s price once the ETFs began trading; after prices were close to unchanged on the first day of trading, they may have subsequently reduced risk.

Exhibit 4: Elevated futures open interest prior to spot Bitcoin ETF launch

The Utilities & Services Crypto Sector included some of the best and worst performing tokens in January. For example, both the UMA (+105%) and ENS (+81%) tokens gained significantly.^[4] The UMA token benefited from the announcement of Oval, a project focused on protecting lending protocols from maximal extractable value (MEV).^[5] Meanwhile, Worldcoin (WLD), also a component of the Utilities & Services Crypto Sector, was one of the worst performers (-34%).^[6] For Worldcoin, the weakness in January marked a reversal from strong performance in December, on reports that it was conducting a fundraising round.^[7]

In 2023, synergies between crypto and artificial intelligence (AI) technologies emerged as a standout theme, and AI-related crypto assets outperformed every Crypto Sector. The topic remained in focus in January, with Ethereum cofounder Vitalik Buterin offering his views. Grayscale Research believes that public blockchain technology could offer the potential to help mitigate AI-related societal issues, including the rise of deepfakes and concerns around data privacy. While the intersection between these fields is still nascent, early signs of progress can be seen in decentralized GPU (graphics processing unit) marketplaces such as Akash and Render. In January, asset performance in this theme varied significantly, with some market outperformers in Bittensor (+71%) and Akash (+20%), assets that performed in line with the market in Render (-6%) and Fetch AI (-17%), and Worldcoin (-34%), which significantly underperformed the market.^[8]

Although AI and other themes often steal the limelight, the steady recovery in stablecoin adoption remains another key trend. Stablecoins offer a way to hold and transfer Dollars (or other fiat currencies) on a public blockchain, so we’d expect rising adoption to likely accrue value to blockchain tokens. Total stablecoin market capitalization rose by $5bn in January, mostly due to growth in Tether (Exhibit 5). In fact, Tether “dominance” (its share of the stablecoin market) rose to a new high of 71% during the month.^[9] Tether has a variety of use cases, including as a cash asset held in trading applications, as well as a payments medium. Howard Lutnick, the CEO of financial services firm Cantor Fitzgerald, said in mid-January that his firm manages a significant portion of Tether’s assets and noted that the stablecoin maintains reserve assets.^[10] Separately, Circle, issuer of the USDC stablecoin, filed for an IPO.^[11]

Exhibit 5: Tether driving growth of stablecoin adoption

With the launch of spot Bitcoin ETFs behind us, crypto market focus may turn back to macro, political, and technological developments. On Wednesday (January 31), the Federal Reserve said while inflation risks have come into “better balance”, it was not quite ready to begin lowering interest rates. Any changes to monetary policy that reduce real interest rates will tend to be positive for Bitcoin’s valuation. Crypto investors may also begin looking ahead to the US Presidential election, where a variety of issues important to voters intersect with the crypto investment thesis, and where candidates’ views on the asset class are still taking share. Grayscale continues to track the role of crypto in the election through a partnership with the Harris Poll (see 2024 Election: The Role of Crypto for details). Lastly, on the technological front, we expect ongoing focus on the Bitcoin halving, as well as debate about Ethereum scaling, ahead of the ETH Denver conference in late February and Ethereum Improvement Proposal (EIP) 4844, which is scheduled to be enacted in April.^[12]

^[1] Source: Bloomberg, as of January 31, 2024.

^[2] Source: Bloomberg. Returns measured from December 29, 2023 through January 31, 2024.

^[3] Source: Glassnode data, as of January 31, 2024..

^[4] Source: CoinGecko, as of January 31, 2024.

^[5] Source: The Block.

^[6] Source: CoinGecko, as of January 31, 2024.

^[7] Source: Reuters.

^[8] Source: CoinGecko, as of January 31, 2024.

^[9] Source: DeFi Llama, Grayscale Investments. As of January 31, 2024.

^[10] Source: The Block.

^[11] Source: CNBC.

^[12] Source: Consensys.

Important Information

Investments in digital assets are speculative investments that involve high degrees of risk, including a partial or total loss of invested funds. Investments in digital assets are not suitable for any investor that cannot afford loss of the entire investment.

All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale.

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any investment in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. This content does not constitute an offer to sell or the solicitation of an offer to sell or buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this content to make an investment decision and any information contained herein should not be used as a basis for this purpose.

This content does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors.

Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability, or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.

There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.