Macro Monthly Report (February)

February marked the first month following the approval of the Bitcoin ETF. After the initial large-scale sell-off by Grayscale, the rapid daily net inflows into the ETF began to boost market sentiment. Later, we saw a swift rise in BTC, pushing its price up to about $57,000. This surge was also fueled by a relaxed macroeconomic environment and a strong performance in the U.S. stock market, with the S&P 500 breaking past its previous highs to reach 5,111 points. It is noted that the cryptocurrency market has often had a high correlation with the U.S. stock market.

Looking ahead to March, we remain bullish on the cryptocurrency market. However, we believe that BTC may enter a period of adjustment, with the main narrative focus shifting from BTC to ETH. The ETH/BTC exchange rate is expected to see significant upward potential.

Consolidation or Keep Pumping

We believe that the narrative surrounding BTC ETFs has officially come to an end. Also, considering the market’s leverage levels and the selling pressure from miners ahead of the halving, the BTC market may enter a period of consolidation as it awaits the narrative of the Bitcoin halving.

To commence with, the narrative of net inflows into BTC ETFs has ended. From the end of January to the beginning of February, due to the positive impact of the ETF's approval and the market sentiment caused by Grayscale's daily large sell-offs, the price of BTC was once depressed. However, by mid-February, the daily net inflows into ETFs continued to strengthen, reaching up to $600 million per day. This increased the market's expectations for capital inflows brought by ETFs.

However, currently, the net inflows into ETFs have begun to weaken, with net outflows even occurring on February 22. We also found that ETFs represent only about 10% of the total BTC trading volume, with the main force still being large crypto exchanges. The current BTC ETFs cannot dominate the crypto trading market.

Market Leverage — Secondly, we believe that the market’s leverage is too high and needs to be reduced during the consolidation period to build up strength for the next rally. Currently, the open interest of BTC perpetual futures contracts has reached a level similar to that of November 2021, around $22 billion, which was about the peak level of the previous bull market. Even if we are in a totally new bull market cycle, holding positions at this level is still concerning. Excessive leverage is not conducive to further market rises and is also expected to trigger deleveraging behavior and higher volatility.

Miner Balance — Thirdly, there is the behavior of miners’ selling before the official halving of Bitcoin. From historical backtesting (except for the last halving during a major bull market), we can observe a rapid decrease in the balance of miners’ wallets before each halving. This is mainly due to the sharp decline in miners’ earnings brought by the halving. Cryptocurrency mining companies require capital investment to upgrade mining machines and equipment in order to mine Bitcoin faster and more efficiently than others. Faced with the short-term financial pressure of these equipment upgrades and mine operations, miners may raise short-term funds by selling their Bitcoins to prepare for fiercer competition after having.

The current halving event seems to be no exception. Starting from the fourth quarter of 2023, Bitcoin miners began selling BTC continuously, and the current reserves have dropped to the lowest point since June 2021. The net outflow is about 4,500 BTC per month, equivalent to approximately $230 million.

Taking over from BTC, ETH will be the main theme in March

Over the past few months, ETH's performance has been quite ordinary as compared to BTC. This situation might change in the coming month, making bets on the ETH/BTC exchange rate a good choice.

One reason is the anticipation of Ethereum ETFs approval. As the second-largest cryptocurrency, more people hold an optimistic attitude towards ETH ETFs after the approval of BTC ETFs. Several institutions, including BlackRock, are actively pushing forward the process of ETH ETFs. Although there is still no broad consensus, just like the BTC ETF last July, the market is actively pricing in this factor.

In terms of trading, a gradual shift from BTC to ETH can also be observed. Although BTC's spot trading volume still surpasses ETH's, the gap in trading volume is steadily decreasing. At the same time, the open interest in futures and options is rapidly climbing at a rate far exceeding BTC's.

Ethereum Dencun Upgrade — On the narrative level, the Ethereum's Dencun upgrade is scheduled on March 13, 2024, which is an important piece in shaping the Ethereum ecosystem and will further enhance ETH's utility and scarcity. For instance, the recent prelude with the restaking race has attracted a new wave of staking enthusiasm through re-staking returns. Currently, the leading protocol Eigenlayer has staked over 2.6 million ETH, equivalent to approximately $8.2 billion USD. As shown in the figure below, due to the strong increase in staking, the circulating supply of ETH has also begun to rapidly decrease in the past three months, which is one of the reasons we are optimistic about the rise in the ETH/BTC exchange rate.

Economic Data & Events to Watch in March 2024

For February's data, the U.S. labor market remains quite robust, but the pace of inflation cooling is slower than market expectations. Overall, the market expects the interest rate, or the target rate, to remain unchanged, data according to the CME FedWatch Tool shows. The data to be released on March 8 and March 12 will send further signals for the upcoming Fed meeting which will be held on March 20. Additionally, March 13 will also see the long-awaited Dencun Upgrade. 

Disclaimer

The content provided in this report is for illustrative purposes only and is intended to offer insights into the cryptocurrency market. It is not, and should not be interpreted as, investment advice or recommendations. The information contained herein is based on sources believed to be reliable; however, we do not guarantee its accuracy, completeness, or suitability for any purpose, and it should not be relied upon as such. Any opinions expressed reflect a judgment at the date of publication and are subject to change without notice. Readers are advised to conduct their own research and due diligence and, where appropriate, seek professional advice before making any investment decisions. The authors and publishers of this report accept no liability for any loss or damage arising from the use of the information provided.

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