Graphing Digital Assets

Month in Review — March 2024

A Shift in Market Dynamics

In March, Bitcoin surged past its previous all-time high of ~$69,000, marking a 16.53% increase for the month from $61,179 to $71,289. Concurrently, the cryptocurrency community anticipates the fourth Bitcoin halving scheduled for April 19, which had previously acted as a catalyst for bitcoin price appreciation in the months that follow. Bitcoin market cycles have historically “rhymed”, but let’s consider what is different about this cycle:

  1. New All-Time High Prior to the Halving: This is the first cycle bitcoin’s price has surpassed its all-time high prior to the halving (top graph). Bitcoin recovered to its previous peak price level several months sooner than it did during the past two cycles (bottom graph). This has led to debates among investors, with some viewing it as an "accelerated cycle" potentially ending the traditional four-year pattern. Others believe it signifies the beginning of a prolonged bull run driven by growing digital asset popularity.

  2. Macroeconomic Landscape: The timing of the halving coincides with a critical economic state as both interest rates and inflation across many nations remain elevated. Upcoming monetary policy decisions could disrupt patterns seen during prior market cycles. Digital assets like bitcoin may be viewed as an attractive store of value and hedge against inflation amidst rising economic uncertainty. On the other hand, persistent high rates may deter investment in these riskier assets.

  3. Increased Institutional Involvement: Institutional participation has reshaped the digital asset landscape, providing crucial infrastructure for widespread adoption. Unlike previous cycles, digital assets are now adequately prepared to take in substantial retail and institutional capital, enhanced by increasingly clear regulatory frameworks, institutional-grade custody solutions, more accessible investment products, and increased institutional acceptance of the asset class.

These converging factors suggest a positive trajectory for Bitcoin. With demand at an all-time high as the halving is set to reduce new supply, investors expect to see significant price appreciation this year. However, given the unpredictable nature of this asset class and its ever-evolving dynamics, foreseeing the magnitude and timing of an increase remains challenging.

Source: BTC historical daily price from Investing.com.

Macroeconomic Sentiment

As Q1 came to a close, we examined the effects macroeconomic data releases are having on market sentiment, a contrast to the implications of the Federal Open Market Committee (FOMC) March meeting.

On March 20th, the Federal Reserve released a statement that federal fund rates will remain within the 5.25%-5.50% range, but signaled that it still plans on three 0.25% rate cuts before year-end. Yet, following Chairman Powell’s announcement, and as additional data is released throughout April, economists and U.S. investors are increasingly uncertain about the Fed’s projections, resulting in a range of unanchored forecasts among market participants.

On April 5, the Bureau of Labor Statistics released March employment data. Outperforming expectations, total nonfarm payroll employment rose by 303,000, compared to the average monthly gain of 231,000 over the prior 12 months, while the unemployment rate held relatively steady at 3.8%. The BLS data shifted market expectations regarding imminent rate cuts, with the futures markets on April 8 indicating less than a 50% probability of a first rate cut by June, down from an almost 66% probability the day prior to the announcement. Additionally, bond yields increased following the release, also reflecting the decline in investor confidence in the likelihood of three rate cuts this year.

Released on April 10, the most recent inflation rate exhibits an upward trajectory instead of downward towards the Fed’s target 2% (top graph). The data immediately resulted in a decline in the probability of rate cuts before year end, increasing from a 2.2% probability of no rate cuts at 12am prior to the announcement, to 10.5% at 12pm following the announcement, a significant departure from projections of ~150 basis points in cuts this year at the beginning of 2024. (At the time of this writing, futures markets pointed to a 73% probability of no cuts by June and a 9% likelihood of zero cuts this year, as shown in the bottom graph.)

While the markets remain strong, we will continue to watch the effects of macroeconomic factors and investors’ decreasing confidence in rate cuts.

Source: https://www.usinflationcalculator.com/inflation/current-inflation-rates/. 2024 monthly data: annual inflation rate for the United States for the 12 months ending at each month, according to U.S. Labor Department data. March 2024 data published April 10, 2024.

Source: CME Group CME FedWatch Tool; data accessed April 12, 2024.

Options for Sophisticated Investors

There is growing interest in crypto options among sophisticated investors, reflecting the evolving landscape of the digital asset market. Leading up to the halving, the bitcoin market has seen unprecedented interest in bitcoin options, with the volume of bitcoin options traded across cryptocurrency exchanges reaching a new high in March, surpassing $50 billion (top graph).

Max Minton, Goldman Sachs’ Asia Pacific Head of Digital Assets, recently noted a “resurgence of interest” from their clients for crypto options following the approval of spot bitcoin ETFs, largely from traditional hedge fund clients. Goldman and several other leading financial institutions provide select institutional clients with OTC cash-settled bitcoin and ether option trading capabilities. Goldman is considering extending these offerings to a broader base of clients to meet the heightened demand for crypto options.

Furthermore, exchange-traded options linked to digital assets have gained significant traction in recent months, coinciding with the price surge of bitcoin since last September. In November 2023, bitcoin’s options market overtook its futures market in terms of nominal open interest. This was a significant development, as it was viewed as an indicator of the maturation of the market, evidencing an increase in the level of sophistication of investors in the market.

BTC ATM implied volatility experienced a significant increase in February and March (bottom graph), reflecting investors’ anticipation of heightened volatility leading up to and following the halving. We expect this anticipated surge in volatility to prompt increased involvement from sophisticated investors in the digital asset market, as they seek to make strategic bets on future price movements and market volatility, a move towards ongoing institutional and mainstream adoption of the asset class.

Source: The Block, at-the-money implied volatility (market's forecast of a likely movement in price) for BTC.