Predicting the prices of Bitcoin and Ethereum for Q1 2024 from macro and fundamental perspectives.
Forecasting Bitcoin and Ethereum prices for Q1 2024 based on macro and fundamental analysis.
Author | Matt Hu, Blofin CEO & Griffin Ardern, Blofin Macro Trader
“Institutional Darling”: Why BTC?
In the contemporary financial system, central banks are the source of liquidity in the financial markets. When central banks start releasing/contracting liquidity, the changes in liquidity are reflected in real-time in the price changes of bonds, commodities, foreign exchange, and financial derivatives, as well as in the changes in stock indices. Bitcoin, as a new member of the “macro club,” has not been around for a long time. However, the US government holds the most Bitcoin, and the inclusion of Bitcoin in investment portfolios through ETFs is gradually increasing, with top asset management institutions such as Fidelity among the issuers of these ETFs.
List and holdings of Bitcoin ETFs as of July 17, 2023. Source: Bitcoin Treasuries
Compared to other cryptocurrencies, BTC is truly decentralized. The achievements of Satoshi Nakamoto are well-known, but no one knows “who he really is.” However, “who he is” may no longer be important; the Bitcoin network has matured, and the influence of anyone on the Bitcoin network can be negligible—the property of “true decentralization” is also one of the characteristics of a qualified macro investment target. Gold and minerals are generated in the universe; agricultural products are produced by nature; Bitcoin comes from the cyber universe composed of algorithms and information.
Because BTC is a product of the cyber universe, the central bank’s liquidity control magic is ineffective against it. The USD price of BTC may fluctuate, but 1 BTC is always 1 BTC. Native crypto investors use BTC as an investment and store of value to counter inflation under a fiat currency system.
For fund managers from traditional markets, they value the role of BTC in diversifying risks. The price performance of BTC and gold has never reached a “strong correlation” level, and its correlation with US stock indices has also dropped to around 0 in 2023. At the same time, because BTC belongs to a completely different asset class, it means that BTC can diversify the overall risk of an investment portfolio to a certain extent. The compliance of BTC is also widely recognized, greatly reducing the legal risks of investing in BTC.
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Changes in the 90-day price correlation between BTC and gold from July 2020 to present. Source: CoinMetrics
Changes in the correlation between BTC price and US stock indices from January 2021 to present. Source: Block Scholes
Macro hedge fund managers are more concerned about liquidity. Their strategies typically involve investing in bonds, foreign exchange, commodities, stock indices, and they prefer to trade through derivatives rather than spot-based trading. “Liquidity” is the core reason—macro trading requires accurately grasping the timing of liquidity changes and entering and exiting at the fastest speed and lowest cost. As an emerging asset, with the global liquidity of the Bitcoin network and the support of a wide range of derivatives, BTC’s liquidity can rival that of foreign exchange.
More importantly, due to the high speed and low transaction costs brought by the Bitcoin network and the cryptographic infrastructure, traders can deploy and withdraw liquidity within seconds without constantly negotiating with numerous third-party institutions over the phone or waiting for bids to be accepted in illiquid over-the-counter trading systems. These advantages make BTC more sensitive to market sentiment and macroeconomic events, which is reflected in its price fluctuations and volatility changes.
BTC price changes from January to July 2023. Source: blofin.com
Note the purple areas in the graph, which correspond to the March banking crisis, the May Fed rate hike, and the submission of BTC spot ETF in July.
Comparison between BTC DVOL volatility index and realized volatility levels from May 2021 to present. Source: Amberdata Derivatives
It is not difficult to see that the volatility index of BTC is more sensitive to macro changes.
Comparison between BTCDVOL volatility index and “volatility of volatility” levels in August 2022. Source: Amberdata Derivatives
Compared to volatility, the volatility of BTC changes more rapidly and sensitively.
In summary, whether it is crypto believers, fund managers in traditional markets, or traders in macro hedge funds, BTC meets the requirements of different types of investors in terms of functionality, compliance, risk management, liquidity, and trading. It is difficult to find a macro target that can meet all these needs at once; in other words, BTC is a natural macro trading target.
ETH: “Software Company” with a P/E ratio of 312.58
Investors in the crypto market like to compare BTC and ETH; in terms of market capitalization, BTC and ETH are ranked first and second on the cryptocurrency market cap rankings respectively, and every crypto trader will involve these two cryptocurrencies. However, investors from traditional markets are different. In fact, they are more cautious about ETH: aside from the possible compliance risks of ETH, considering the influence of Ethereum’s founder and developers on the development of the Ethereum blockchain, as well as Ethereum’s “smart contract as a service” model, it is more like a “software company” similar to IT giants such as Amazon and Microsoft, rather than a “pure liquidity container” like the Bitcoin network.
In fact, some researchers and traders have been using a corporate finance-based framework to interpret ETH:
Ethereum profit and loss statement. Source: artemis.xyz
So, it seems reasonable to analyze ETH using a fundamental analysis framework for stocks. Fortunately, due to the transparency of the blockchain itself, obtaining real-time supply and price of ETH is not difficult. Similarly, thanks to the efforts of researchers like Sam Andrew, we have also obtained the financial situation of the Ethereum network in a feasible way. Let’s estimate the current price-to-earnings ratio (P/E ratio) of Ethereum together:
- Calculating from the formal introduction of PoS for ETH, from the fourth quarter of 2022 to the second quarter of 2023, the total profit (in USD) of the Ethereum network is: (3,959*1,301) + (79,210*1,589) + (227,147*1,861) = 553,735,916 USD, equivalent to an annualized income of about 738,314,555 USD;
- The spot price of ETH (July 17th) is about 1,920 USD;
- The real-time supply of ETH (July 17th) is about 120,201,013;
- Therefore, the P/E ratio of ETH = 1,920 / (738,314,555 / 120,201,013) = 312.58.
312.58! This is an astonishing P/E ratio. We attach the P/E ratios of the Magnificent 7 (the seven largest tech stocks by market capitalization) in the U.S. stock market for comparison*:
- AAPL: 32.38
- AMZN: 164.24
- ETH: 312.58
- GOOGL: 27.93
- META: 38.32
- MSFT: 36.92
- NVDA: 207.62
- TSLA: 82.76
*: All stock P/E ratios are calculated based on the closing prices on July 14th. The P/E ratio of ETH is calculated based on the intraday average price on July 17th.
Undoubtedly, as a “software company,” Ethereum has significantly exceeded our original expectations. Considering its lack of dividends and still being in a phase of rapid growth after transitioning to PoS, the high P/E ratio of ETH is similar to NVDA with AI support. And compared to the P/E ratio of AMZN, as a provider of core infrastructure for the crypto industry, the high P/E ratio of ETH is not difficult to understand. Overall, investors have given a high valuation to ETH, expecting the unlimited possibilities of its future development.
However, when Ethereum can be fully self-consistent under the company logic, BTC and ETH have already taken different paths.
Under the narrative of “Crypto 3.0,” where will BTC and ETH go?
BTC: Crypto IsMacro
Undoubtedly, the price of BTC will depend on the macroeconomic situation and the changes in the macro situation within the crypto market. Therefore, for BTC, interest rates and market share will be important influencing factors. Interest rates affect earnings expectations, while market share affects market capitalization.
• From the interest rate market perspective, the Federal Reserve will not cut interest rates in the next six months, and the European Central Bank will not be weak under the threat of high inflation. The above situation means that high interest rates will continue to suppress the performance of BTC. However, some potential positive factors are also supporting the price of BTC, such as the possible listing of BTC spot ETF.
The latest possible interest rate path from the Federal Reserve as of July 17, 2023. Source: CME Group
• In addition, the internal distribution of liquidity in the cryptocurrency market will also affect the price and market value of BTC. From early 2021 to the end of 2022, influenced by the bull market and “altcoin season,” BTC’s market dominance gradually declined from over 60% to between 40% and 45%. Subsequently, benefiting from institutional buying frenzy and liquidity returning, BTC’s market dominance started to rebound from January 2023. By July 2023, BTC’s market dominance is about 50%.
Changes in the market dominance of mainstream cryptocurrencies as of July 17, 2023. Source: Coinmarketcap
• When the interest rate is 0%, the total market capitalization of the cryptocurrency market is about $30 trillion. When the interest rate is 5.25%, the total market capitalization of the cryptocurrency market is about $12 trillion, approximately 40% of the peak. From November 2021 to March 2022, due to the Federal Reserve’s expected management, the cryptocurrency market lost about $1 trillion in market value. In March, the Federal Reserve raised interest rates by 25 basis points, and at that time, the total market capitalization of the cryptocurrency market was about $20 trillion, approximately 67% of the peak.
• Considering that the Federal Reserve is not expected to adopt the unlimited quantitative easing policy of 2020-2021 in the coming years, the maximum change in the total market capitalization of the cryptocurrency market due to expected fluctuations will not exceed $1 trillion.
Changes in the total market capitalization of the cryptocurrency market as of July 17, 2023. Source: Coinmarketcap
Let’s develop based on the above logic:
• Considering that the cryptocurrency market currently lacks external liquidity inflows, we assume that the future price of BTC will depend entirely on interest rate and market expectation changes, and will be reflected in changes in market dominance.
• Under the condition of a high interest rate of 5.25% and a lack of external liquidity inflows, it is difficult for the total market capitalization of the cryptocurrency market to significantly increase before January 2024. Even if there is “expectation leading,” the internal market value growth brought by expectations will not exceed $500 billion in the most optimistic scenario.
• The total supply of BTC is about 19.43 million, and there will not be a significant change of more than 5% in total supply within one year.
Consider three simple scenarios:
1. Investors have no further expectations, and the internal market value growth of the cryptocurrency market is limited. The total market capitalization of the cryptocurrency market will stabilize between $1.2 trillion and $1.4 trillion, and BTC’s market dominance will not undergo significant changes, maintaining at around 50%. This means that the market value of BTC will fluctuate between $600 billion and $700 billion, and the price will fluctuate between $30,880 and $36,026.
2. BTC spot ETF approved, bringing good expectations for investors. The market value of the cryptocurrency market rebounded to around $1.5 trillion to $1.6 trillion.
– If BTC’s market share does not increase, its market value will stabilize at around $750 billion to $800 billion, and the price may reach a maximum of $41,173; even if the rebound is not strong enough, the price of BTC will still be higher than $38,500;
– If the spot ETF approval leads to BTC’s market share rising to 60%. In the best case scenario, BTC’s market value will reach $960 billion, with a unit price exceeding $49,400; even if the overall rebound of the cryptocurrency market is not strong enough, BTC’s market value will still rebound to $900 billion, with a unit price of $46,300.
3. The expectation of interest rate cuts, combined with the positive expectations of spot ETFs and Bitcoin halving, will promote the comprehensive return of liquidity to the cryptocurrency market, and the market value of the cryptocurrency market will rebound to over $1.7 trillion.
– If BTC’s market share does not increase, its market value will reach over $850 billion, and the price will rebound to over $43,700;
– If BTC’s market share rises to 60%, its market value will reach over $1.02 trillion, and the price will reach around $52,500.
In summary, macro factors are relatively favorable for BTC, and the final level that BTC’s price can reach depends on interest rates and market expectations.
ETH: “How to Build a More Profitable Company”
Considering that BTC has become the protagonist of the macro narrative, it may be wiser for ETH to focus on applications. Therefore, for ETH, the factors that affect its price mainly come from its own new narrative and whether it can achieve further widespread application in the future. Since these factors will be reflected in the net income of the Ethereum network, we can infer the possible price changes of ETH based on changes in the P/E ratio.
Similarly, let’s consider three scenarios:
1. The Cancun upgrade significantly improves the speed of Ethereum’s Layer2 and reduces transaction costs, promoting the outbreak of the Ethereum Layer2 ecosystem. The Ethereum network continues to make profits, with quarterly revenue increasing by 50% before the Cancun upgrade and doubling after the upgrade.
– Assuming that the P/E ratio of ETH does not change significantly, investors’ strong expectations will maintain the P/E ratio at around 300. The net income for Q2 2023 is $423 million, for Q3 is $635 million, and for Q4 is $953 million. In this scenario, the total revenue of the Ethereum network in 2023 will reach $2.137 billion. Considering that ETH deflation will reduce the total supply of ETH to 120 million, the average price of ETH at the beginning of 2024 may exceed $5,300 and exceed $9,700 in the first quarter after the Cancun upgrade.
– Assuming that investors have a relatively neutral expectation, resulting in the ETH price-earnings ratio falling to around 150 (close to the level of comparable companies such as AMZN), in this scenario, the average price of ETH will reach around $2,670 in early 2024 and close to $4,900 in the first quarter after the Cancun upgrade.
2. The profitability of the Ethereum network is relatively robust, with quarterly revenue increasing by 25%, and revenue in the first quarter after the Cancun upgrade is expected to increase by 50% compared to Q4 2023.
– Assuming that the ETH price-earnings ratio does not change significantly, strong investor expectations will maintain the price-earnings ratio at around 300. The net income for Q2 2023 is $423 million, Q3 net income is $529 million, and Q4 net income is $661 million. In this scenario, the total revenue of the Ethereum network for 2023 will reach $1.739 billion, and the average price of ETH in early 2024 may exceed $4,300 and exceed $6,500 in the first quarter of 2024. If the price-earnings ratio falls to around 150, the average price of ETH in early 2024 may be around $2,150 and exceed $3,200 in the first quarter of 2024.
3. The profitability of the Ethereum network shows marginal decline, with revenue growth of 20% and 15% in Q3 and Q4 respectively, and the positive impact of the Cancun upgrade only mitigates the trend of declining profitability in the first quarter.
– Assuming that the ETH price-earnings ratio does not change significantly, strong investor expectations will maintain the price-earnings ratio at around 300. The net income for Q2 2023 is $423 million, Q3 net income is $508 million, and Q4 net income is $584 million. In this scenario, the total revenue of the Ethereum network for 2023 will reach $1.641 billion, and the average price of ETH in early 2024 may exceed $4,100 and exceed $5,400 in the first quarter of 2024. If the price-earnings ratio falls to around 150, the average price of ETH in early 2024 may be around $2,050 and exceed $2,700 in the first quarter of 2024.
In conclusion, the development of ETH is highly correlated with its own profitability. The combination of narrative support and sustainable and growing profitability is the key to driving the rise in ETH price – which is different from BTC in this respect.
In fact, the “divergence” in the cryptocurrency market is not only theoretical, nor is it only between BTC and ETH. According to statistics, in 2023, not only did the correlation between BTC and ETH decrease significantly, but the correlation between BTC and mainstream altcoins also decreased significantly. BTC seems to be going its own way, and the correlation between ETH and different types of coins such as XRP, LTC, and BNB is also weakening, but it still maintains a strong correlation with public chain coins like ADA and project tokens deeply rooted in the Ethereum public chain like CRV.
As the correlation between currencies continues to weaken, the previous analysis logic and trading strategies that could be fully or partially reused are no longer effective. Pair trading no longer exhibits the ideal correlation regression, and the general investment framework based on market value and track is also no longer applicable to some extent – this means that further analysis based on the fundamental aspects of the project itself becomes more important.
BTC correlation changes with major cryptocurrencies other than ETH, as of June 2023. Source: Kaiko
ETH correlation changes with major cryptocurrencies other than BTC, as of July 2023. Source: CoinMetrics
Now is the time to approach the crypto market with two or even multiple completely different logics. Crypto 3.0 has arrived; the era is advancing. Bitcoin will become more closely integrated with the macroeconomy and traditional markets, while Ethereum needs to become a “great company”; other cryptocurrencies also need to find their own path. In the rapidly changing crypto market where macro and micro structures are both at play, we need to keep up with the times.