Bitcoin may reach a new high in the second half of this year

The recently released February market report shows that the price of Bitcoin surged by approximately 45% in February, breaking through the $60,000 mark for the first time since the fourth quarter of 2021. Currently, the price of Bitcoin is only 9% lower than its historical high.

Analysis suggests that this wave of growth may stem from two main factors: first, the newly listed Bitcoin ETF products in the United States have attracted a large influx of funds; second, investors have high expectations for the Bitcoin halving event that is set to occur in April.

In February, when traditional assets showed uneven performance, the cryptocurrency market delivered impressive results. This is mainly due to the newly launched spot Bitcoin ETF continuously attracting funds and a series of favorable fundamental developments.

However, the main risk facing the current valuation of digital assets may come from the Federal Reserve's monetary policy. The inflation data for February has risen again, which could delay the interest rate cut until the second half of this year or even later.

In terms of absolute return rate and risk-adjusted return rate, Bitcoin and Ethereum were among the best-performing assets in February in both the cryptocurrency and traditional financial markets.

Although the correlation between cryptocurrencies and traditional markets has increased in recent years, the outstanding performance of major tokens in February once again highlights the diversification advantages of the crypto asset class.

For Bitcoin, the strong upward trend likely reflects, in part, the continuous influx of funds into the newly launched spot Bitcoin ETFs in the United States. From their launch on January 11 to the end of February, the 10 spot Bitcoin ETFs have seen a cumulative net inflow of $7.46 billion, with a staggering net inflow of $6 billion in February alone.

It is worth noting that since the launch of the spot Bitcoin ETF, there has been a net outflow of funds from gold ETFs listed in the United States, which may indicate that investors are shifting from one "store of value" asset to another.

From the perspective of Bitcoin supply and demand, according to the current block reward rate, the Bitcoin network produces about 900 new coins daily, approximately 54 million USD ( assuming an average price of 60,000 USD ). By April 2024, after the Bitcoin halving, the daily output will drop to 450 coins, approximately 27 million USD.

In contrast, the average daily net inflow of the spot Bitcoin ETF listed in the U.S. in February reached $208 million, far exceeding the current and post-halving rate of new supply. This imbalance between demand and supply may have driven the increase in Bitcoin valuation.

Despite the impressive performance of Bitcoin in February, it was still surpassed by the second largest crypto asset, Ethereum, which saw a 47% increase that month. The market seems to be anticipating an important upgrade to the Ethereum network on March 13. This upgrade will provide dedicated storage space for layer 2 solutions, potentially reducing its data costs and improving operational efficiency.

In addition, Ethereum may also benefit from other positive factors, such as the attention on "re-staking" technology, the upcoming ETH Denver conference, and the expectations for the approval of the ETH ETF.

The best-performing segments in February were utility and service cryptocurrencies, with an increase of 53%. This category includes some tokens related to artificial intelligence technology, and some tokens achieved significant gains.

The financial cryptocurrency sector rose by 34% in February. Among them, the governance token UNI of the decentralized exchange Uniswap surged significantly, mainly due to the platform potentially distributing part of the trading fees to holders of staked UNI and delegated voting rights.

In February, the valuation of cryptocurrencies rose alongside increased trading volumes and improved on-chain metrics, particularly for the Ethereum network. For example, the average daily spot trading volume of ETH in February reached $5.8 billion, marking a new high since September 2021. The total value of transfers on the Ethereum network also rose to its highest level since June 2022.

With the inflow of funds into Bitcoin ETFs and various favorable factors supporting it, the cryptocurrency market has performed strongly this year. However, an important lesson from the last crypto cycle is that factors such as the Federal Reserve's monetary policy and macroeconomic conditions can significantly impact the valuation of crypto assets.

If the macro market outlook remains optimistic, many favorable factors in the industry ( such as Bitcoin halving and Ethereum upgrades ) may drive token prices further up this year. Given that Bitcoin is currently only 9% lower than its historical high, a new historical high is expected to be set in the second half of this year.

On the contrary, a less favorable macro environment may suppress the rise in valuations. In the fourth quarter of 2023, Bitcoin may benefit from the Federal Reserve's shift from raising interest rates to cutting rates. If the Federal Reserve cuts rates in the coming months, it may weaken the dollar, thereby supporting the valuations of dollar-denominated assets competing with Bitcoin.

However, the decline in U.S. inflation in January seems to be slowing or stagnating, and the market is beginning to worry about the rising inflation outlook. If inflation remains high, Federal Reserve officials may consider delaying the interest rate cut until later this year or 2025. In general, rising U.S. interest rates may benefit the dollar, but could be detrimental to Bitcoin.

It is expected that consumer price inflation in the United States will continue to decline, eventually prompting the Federal Reserve to cut interest rates. However, cryptocurrency investors should closely monitor the upcoming inflation report and the updated policy interest rate guidance from the Federal Reserve's meeting on March 20.