Original title: December 2024: Crypto Takes a Breather After Roaring Year
Original author: Grayscale Research Team
Original source: https://www.grayscale.com/
Translation: Daisy, Mars Finance
December 2024: The Crypto Market Takes a Breather After an Exciting Year
Cryptocurrency valuations fell in December 2024, following strong returns earlier in the year. This pullback may reflect a more hawkish signal from the Federal Reserve. Bitcoin's last two bull markets also experienced similar magnitude pullbacks.
In 2024, spot exchange-traded products (ETPs) for Bitcoin and Ethereum were launched in the U.S. market, with cumulative inflows totaling $38 billion. Bitcoin and Ethereum fell by 3% and 10%, respectively, in December.
In December, the financial crypto sector performed exceptionally well. Grayscale Research believes this market segment may benefit from upcoming regulatory changes and/or new legislation from the U.S. government, and it included several assets related to decentralized finance (DeFi) in its updated Top 20 asset list. The Top 20 list also includes assets related to decentralized artificial intelligence (AI) technology, which remains a major market focus.
At the beginning of January, the Senate will review the nominees for Secretary of the Treasury, Secretary of Commerce, Chairman of the Securities and Exchange Commission (SEC), and Chairman of the Commodity Futures Trading Commission (CFTC) nominated by President Trump.
In December 2024, the crypto market took a breather against the backdrop of major stock index pullbacks and rising bond yields. Grayscale Research believes many of the market changes stem from the more hawkish signals issued by the Federal Reserve at its mid-December meeting. Despite experiencing a pullback over the past month, Bitcoin ended 2024 with a 121% increase.
Traditional markets had mixed performance at the year-end (see Chart 1). The dollar rose in December, and interest rates generally increased across the yield curve. The Federal Reserve indicated that it would slow the pace of interest rate cuts in 2025, which may have driven volatility in the currency and bond markets. Broad stock indices fell, with cyclical market sectors performing the worst. Large-cap tech stocks (represented by Bloomberg's 'Magnificent 7' index) were an exception, rising in December and performing strongly throughout the year. Bitcoin experienced a moderate decline, with returns at a moderate level on a risk-adjusted basis (i.e., considering the volatility of each asset). The FTSE/Grayscale Cryptocurrency Sector Market Index (CSMI) fell by 6% in December, giving back about 15% of the gains from November 2024.
Temporary pullbacks during a cryptocurrency bull market are common. For example, during the recent bullish phase of the crypto market cycle—from December 2018 to November 2021—Bitcoin's price increased by approximately 21 times. However, during this period, Bitcoin's price dropped by at least 10% on 11 occasions, including two significant pullbacks of about 50%. In the previous bullish phase of the crypto market cycle—from January 2015 to December 2017—Bitcoin's price dropped by at least 20% on 11 occasions. We still believe that we are in the mid-stage of the current Bitcoin bull market and expect further increases in 2025 and beyond, as long as the market remains supported by fundamentals (see Chart 2).
In December, U.S.-listed spot Bitcoin exchange-traded products (ETPs) once again became a significant source of new demand, with a total net inflow of $4.7 billion for the month. Including the spot Ethereum ETP launched in July, the cumulative net inflow of U.S.-listed spot cryptocurrency ETPs has now reached $38 billion. Although there has also been an increase in investor demand for crypto ETPs in other regions, the cumulative inflow is lower and more stable, with smaller monthly fluctuations (see Chart 3).
In the U.S. market, another important source of demand for Bitcoin is MicroStrategy, a publicly traded company that holds Bitcoin as part of its balance sheet, primarily operating as a Bitcoin investment vehicle. MicroStrategy was added to the Nasdaq 100 Index in December. In the fourth quarter of 2024, MicroStrategy purchased 194,180 Bitcoins, ending the quarter with a market value of $18.2 billion. Thus, the Bitcoin purchased by MicroStrategy in the fourth quarter is equivalent to the net inflow of spot Bitcoin ETPs in the fourth quarter. MicroStrategy funds its Bitcoin purchases through issuing equity and debt instruments and announced plans to continue acquiring Bitcoin over the next three years. Given the quantitative significance of this Bitcoin demand source, crypto investors should consider monitoring MicroStrategy's financial performance, including the difference between the company's market capitalization and the value of its Bitcoin holdings. Generally, if a company's stock price is higher than the value of its Bitcoin, it may prompt the company to issue stock and purchase more Bitcoin.
Ethereum (ETH) underperformed Bitcoin (BTC) in December, with the ETH/BTC price ratio consolidating over the past two months (see Chart 4). Ethereum is the largest smart contract platform blockchain by market capitalization but faces increasing competition from other projects. In 2024, Ethereum tokens performed worse than the second largest asset by market cap—Solana, as investors increasingly focused on alternative Layer 1 networks such as Sui and the Open Network (TON). When creating infrastructure for application developers, designers of smart contract blockchains face various design choices that affect technical characteristics such as block time, transaction throughput, and average transaction fees. Regardless of the specific design choices, all smart contract platforms compete for network fee revenue, which Grayscale Research believes is an important determinant of value accumulation (for more details, see Grayscale Research Insights: Q1 2025 Crypto Industry Sectors).
The Grayscale Digital Asset Sector Framework shows a broad pullback in digital asset valuations in December 2024 (see Chart 5). The worst-performing market segment is the consumer and cultural crypto sector, primarily due to the decline in Dogecoin prices, which is the largest meme coin by market capitalization. An exception is the financial crypto sector, mainly benefiting from the rise of Binance Coin (BNB), a token associated with the Binance exchange and its smart contract platform, Binance Smart Chain. Grayscale Research believes that regulatory changes and new legislation under the new U.S. government may particularly support blockchain-based financial applications. Therefore, we have listed several assets related to decentralized finance (DeFi) in our latest Top 20 list.
New innovations related to decentralized artificial intelligence technology are the dominant theme in the 2024 crypto market and may continue to be a hot topic in the new year. Much attention remains focused on developments related to AI 'agents'—software capable of acting independently to pursue complex goals (for more details, see (When You Give AI a Wallet)). These AI agents are fundamentally changing the way we interact with blockchain technology, as demonstrated by Luna's performance on virtual protocols. Luna, a female anime-style chatbot, aims to reach 100,000 fans on the X platform, and notably, she can execute financial transactions for users through her own crypto wallet and pay users with Luna tokens (as 'tips'). This integration with blockchain technology is particularly significant because it enables AI agents like Luna to directly access and allocate financial resources, surpassing the use cases of task-based AI agents.
Since the emergence of AI agent tokens at the end of October 2024, leading projects in the industry have seen extraordinary growth, with Virtual soaring by 49,000% and Ai16z rising by 8,700%[14]. Notably, ai16z is a project named after investment firm a16z, which created the top-ranked AI agent framework on GitHub in December 2024[15] and announced a partnership with Stanford University[16].
Overall, 2024 is a milestone year for the digital asset market: new Bitcoin and Ethereum spot ETPs attracted more investors into the crypto ecosystem, the Bitcoin network experienced its fourth halving event, researchers made breakthroughs in blockchain application technology, and crypto played a significant role in the U.S. elections. While some specific themes may change, we expect that in 2025, crypto investors will continue to experience exciting moments.
At the beginning of January, the U.S. Senate will begin considering cabinet nominees and heads of government agencies nominated by President Trump. For the crypto market, we believe the most important confirmed positions may be the Secretary of the Treasury (Scott Bessent), Secretary of Commerce (Howard Lutnick), Chairman of the Securities and Exchange Commission (SEC) (Paul Atkins), and Chairman of the Commodity Futures Trading Commission (CFTC) (candidates have not yet been announced at the time of writing). The newly created position of White House Director of Artificial Intelligence and Crypto Affairs (David Sacks) does not require Senate confirmation. While Grayscale Research expects the next Congress to address crypto-related legislation, it may not happen until legislators deal with tax and other issues. Outside the U.S., the EU's MiCA regulation will come into full effect on December 30, 2024, strengthening regulation of stablecoins, leading to the delisting of Tether's unregulated USDT from exchanges in favor of compliant alternatives like Circle's USDC starting in 2025.
Aside from political factors, the crypto market seems likely to continue being driven by its usual fundamentals: the adoption of Bitcoin as a global alternative currency, demand for next-generation decentralized web applications, and macro market factors affecting the valuation of all assets, such as changes in central bank monetary policy. Despite the uncertain outlook, we believe many industry trends appear favorable as the new year begins.
Index Definition:
The Bloomberg Magnificent 7 Total Return Index (BM7T) is an equally weighted index that tracks the performance of the seven most widely traded companies in the U.S. The S&P 500 Industrials Index includes all companies classified as members of the industrials sector in the S&P 500. The Bloomberg-Barclays U.S. Treasury Index measures the total return of nominal U.S. Treasuries with maturities greater than 25 years. The U.S. Dollar Index (DXY) tracks the strength of the dollar against a basket of major currencies. The Russell 2000 Index consists of the 2000 smallest companies in the Russell 3000 Index, representing 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, broadly covering various commodities. The FTSE/Grayscale Crypto Sectors Index series measures the price returns of digital assets listed on major global exchanges. The Nasdaq 100 Index is a stock index of the 100 largest companies by market capitalization listed on the Nasdaq exchange.
