Source: Grayscale; compiled by Deng Tong, Golden Finance.
Summary
Cryptocurrency valuations fell in December after rising at the beginning of the year. The pullback may reflect more hawkish signals from the Federal Reserve. Similar magnitudes of declines occurred in the last two Bitcoin bull markets.
Spot Bitcoin and Ethereum exchange-traded products (ETP) launched in the U.S. market in 2024. Cumulative inflows have reached $38 billion. Bitcoin and Ethereum fell 3% and 10% respectively in that month.
The financial cryptocurrency sector performed well in December. Grayscale Research believes this sub-sector could benefit from regulatory changes and/or new legislation from the incoming U.S. government, listing several decentralized finance (DeFi) related assets in its updated Top 20 list. The Top 20 also includes assets related to decentralized AI technologies, which remain a focus of the market.
At the beginning of January, the Senate will consider the nominees for Treasury Secretary, Commerce Secretary, SEC Chair, and CFTC Chair nominated by President-elect Trump.
In December 2024, the cryptocurrency market took a slight breather, major indices retreated, and bond yields rose. Grayscale Research believes many market changes are attributable to the more hawkish signals sent by the Federal Reserve during its mid-December meeting. Despite setbacks last month, Bitcoin was still up 121% by the end of 2024.
Traditional markets had mixed performances at the end of the year (Figure 1). The dollar rose in December, and interest rates on the yield curve increased. Guidance from the Federal Reserve to slow down interest rate cuts in 2025 may have fueled trends in the currency and bond markets. Large-cap indices fell, led by cyclical market sectors. Large tech stocks (represented by the Bloomberg Seven Index) were an exception, rising in December with strong returns for the year. Bitcoin saw a slight decline, with risk-adjusted returns (considering the volatility of each asset) being moderate. The FTSE/Grayscale Cryptocurrency Industry Market Index (CSMI) fell 6% in December, giving back about 15% of gains since November 2024.
Figure 1: Risk-adjusted cryptocurrency returns are at a moderate level.
Short-term declines are a common feature of cryptocurrency bull markets. For example, in the latest appreciation phase of the cryptocurrency market cycle (from December 2018 to November 2021), Bitcoin's price rose by approximately 21 times. However, during this period, Bitcoin's price fell at least 10% a total of 11 times, including two significant declines of about 50%. In the previous appreciation phase of the cryptocurrency market cycle (from January 2015 to December 2017), Bitcoin's price fell at least 20% a total of 11 times. We still believe we are in the middle of the current Bitcoin bull market, and as long as the market remains supported by fundamentals, there is potential for further increases in 2025 and beyond (Figure 2).
Figure 2: Price movements of Bitcoin before two bull markets.
In December, the spot Bitcoin exchange-traded products (ETP) listed in the U.S. once again became a major source of new demand, with a total net inflow of $4.7 billion that month. Including the spot Ethereum ETP launched in July, the total net inflow for spot cryptocurrencies ETP listed in the U.S. has reached $38 billion. Although other jurisdictions also saw increased investor demand for cryptocurrency ETPs, cumulative inflows were lower and more stable month over month (Figure 3).
Figure 3: Surge in demand for spot cryptocurrency ETPs listed in the U.S.
Another important source of demand for Bitcoin in the U.S. market is MicroStrategy, a publicly traded company that holds Bitcoin on its balance sheet, primarily operating as a Bitcoin investment vehicle. In December, MicroStrategy was included in the Nasdaq 100 Index. In the fourth quarter of 2024, MicroStrategy purchased 194,180 Bitcoin, with a year-end market value of $18.2 billion. Therefore, the amount of Bitcoin that MicroStrategy purchased in the fourth quarter is equivalent to the net inflow of fourth-quarter spot Bitcoin ETPs. MicroStrategy issues equity and debt instruments to fund its Bitcoin purchases and has announced plans to continue purchasing Bitcoin over the next three years. Given the quantitative significance of this source of Bitcoin demand, cryptocurrency investors should consider monitoring MicroStrategy's financial performance indicators, including the disparity between the company's market cap and the value of its Bitcoin holdings. Generally, if the company's stock trades at a price higher than the value of its Bitcoin, it may incentivize them to issue stock and buy more Bitcoin.
In December, Ethereum (ETH) underperformed Bitcoin (BTC), with the ETH/BTC price ratio consolidating over the past two months (Figure 4). Ethereum is the leading smart contract platform blockchain by market capitalization, but it faces increasing competition from other projects. In 2024, Ethereum's performance lagged behind the second-largest asset by market capitalization, Solana, as investors increasingly focused on alternative first-layer networks such as Sui and The Open Network (TON). When creating infrastructure for application developers, architects of smart contract blockchains face various design choices that may impact technical features such as block times, transaction throughput, and average transaction fees. Regardless of the specific design choices, all smart contract platforms are vying for network fee revenue, which Grayscale Research considers a significant determinant of value accumulation.
Figure 4: Ethereum's performance lagged behind Bitcoin in December and for the whole of 2024.
Grayscale's cryptocurrency industry framework indicates a general pullback in digital asset valuations in December (Figure 5). The worst-performing market segment was the consumer and cultural cryptocurrency sector, primarily due to the price drop of the largest meme coin by market capitalization—Dogecoin. An exception to the overall decline was the financial cryptocurrency sector, which was primarily supported by the rise of Binance Coin (BNB), a token associated with the Binance exchange and Binance Smart Chain smart contract platform. Grayscale Research believes that regulatory changes and new legislation from the incoming U.S. government may particularly support blockchain-based financial applications. Therefore, we highlighted several decentralized finance (DeFi) related assets in our latest Top 20 list.
Figure 5: The financial cryptocurrency industry performed excellently.
New innovations related to decentralized artificial intelligence technologies are the dominant theme in the 2024 crypto market and may again become the dominant theme in the new year. Most attention remains focused on developments related to AI 'agents'—software that can act independently to pursue a set of complex objectives. These AI agents are fundamentally changing how we interact with blockchain technology, as demonstrated by Luna on the Virtuals protocol. Luna is a female anime-style chatbot whose specific goal is to attract 100,000 fans on X, and notably, she can execute financial transactions by paying users with Luna tokens through her own crypto wallet ('tips'). This integration with blockchain technology is especially significant as it allows AI agents like Luna to access and allocate financial resources directly, surpassing the use cases of previous task-based AI agents.
Since the emergence of AI agent tokens in late October 2024, leading projects in the industry have achieved extraordinary returns, with Virtual skyrocketing 49,000%, and Ai16z rising 8,700%. Notably, the project ai16z, named after investment firm a16z, constructed the top-ranked AI agent framework on GitHub in December and announced a partnership with Stanford University.
Ultimately, 2024 is a milestone year for the digital asset market: new spot Bitcoin and Ethereum ETPs are attracting more investors to the crypto ecosystem, Bitcoin's network experienced its fourth halving event, researchers made breakthroughs in new blockchain application technologies, and cryptocurrencies took a prominent position in the U.S. elections. While some specific themes may change, we expect cryptocurrency investors to remain excited in 2025.
At the beginning of January, the U.S. Senate will begin considering the nominees for cabinet and government agency leaders nominated by President-elect Trump. For the cryptocurrency market, we believe the most important confirmations may be for Treasury Secretary (Scott Bessent), Commerce Secretary (Howard Lutnick), SEC Chair (Paul Atkins), and CFTC Chair (the candidate has not yet been announced at the time of writing). The White House AI and cryptocurrency czar (David Sacks) does not require Senate confirmation. While Grayscale Research expects the next Congress to pass legislation related to cryptocurrencies, this might not happen until lawmakers address tax and other specific issues. Outside the United States, the EU's MiCA regulation will take effect in full on December 30, 2024, implementing stricter regulations on stablecoins, leading to the delisting of unregulated USDT from exchanges starting in 2025 in favor of compliant alternatives like Circle's USDC.
Aside from political factors, the cryptocurrency market seems to be driven by its usual fundamentals: global adoption of Bitcoin as an alternative currency medium, demand for next-generation decentralized network applications, and macro market factors such as central bank monetary policy changes affecting the valuation of all assets. Despite the uncertain outlook, we believe many industry trends appear favorable as the new year begins.
Index definition:
The Bloomberg Seven Total Return Index (BM7T) is a dollar-weighted index that tracks seven companies most widely traded in the U.S. The S&P 500 Industrial Index includes companies classified as members of the GICS industrial sector within the S&P 500 Index. The Bloomberg-Barclays 25+ Year U.S. Treasury Bond Index measures the total return of nominal U.S. Treasury bonds with remaining maturities greater than 25 years. The Dollar Index (DXY) tracks the strength of the dollar against a basket of major currencies. The Russell 2000 Index consists of the smallest 2,000 companies in the Russell 3000 Index, accounting for about 8% of the total market capitalization of the Russell 3000. The S&P Goldman Sachs Commodity Index (S&P/GSCI) is a comprehensive index of commodity sector returns, representing unleveraged, long-only investments in commodity futures that are broadly diversified across various commodities. The FTSE/Grayscale Cryptocurrency Sector Index Series measures price returns of digital assets listed on major exchanges globally.
References:
[1] Source: Bloomberg, Grayscale Investments. Data as of December 31, 2024.
[2] Source: Artemis. Data as of December 31, 2024.
[3] Source: Coin Metrics. Data as of December 31, 2024.
[4] Source: Coin Metrics. Grayscale Investments. Data as of December 31, 2024. Past performance is not indicative of future results.
[5] Source: Bloomberg, Grayscale Investments. Data as of December 31, 2024.
[6] Investopedia, data as of December 23, 2024. Michael Saylor referred to MicroStrategy as a Bitcoin-funded operating company.
[7] Markets.com
[8] Source: Bitcointreasuries.net, Bloomberg, Grayscale Investments. Data as of December 31, 2024.
[9] Spot Bitcoin ETP saw net inflows of $16.5 billion in the fourth quarter, calculated at the value at the time of inflow. The Bitcoin holdings of ETPs in the fourth quarter increased by $18.6 billion based on year-end prices. Source: Bloomberg, Grayscale Investments. Data as of December 31, 2024.
[10] Microstrategy, as of January 3, 2025.
[11] Artemis, FTSE, Grayscale. As of January 6, 2025.
[12] Artemis, FTSE, Grayscale. As of January 6, 2025.
[13] Artemis, FTSE, Grayscale. As of January 6, 2025.
[14] Dexscreener. As of January 2, 2025.
[15] Chain Catcher
[16] Blockworks
[17] Ernst & Young, (Currency Analysis)
