Predicting the prices of Bitcoin and Ethereum in Q1 2024 from a macro and fundamental perspective
Predicting Bitcoin and Ethereum prices in Q1 2024 based on macro and fundamental factors.
Author: Matt Hu, Blofin CEO & Griffin Ardern, Blofin Macro Trader
“Institutional Darling”: Why Bitcoin?
In the contemporary financial system, central banks are the source of liquidity in the financial markets. When central banks start to release/withdraw liquidity, changes in liquidity are reflected in real-time in the price movements of bonds, commodities, foreign exchange, and financial derivatives, as well as in the movements of stock indices. Bitcoin, as a new member of the “macro club,” has not been around for long. However, the US government holds the most Bitcoin, and the inclusion of Bitcoin in investment portfolios is gradually increasing, with top asset management institutions such as Fidelity among the issuers of these ETFs.
Bitcoin ETF list and holdings, 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 considered negligible – this “true decentralization” is also one of the characteristics of a qualified macro investment target. Gold and minerals are generated from the universe; agricultural products are produced by nature; Bitcoin comes from the cyberspace formed by algorithms and information.
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Because BTC is a product of the cyberspace, the magic of central bank liquidity control is ineffective. The USD price of BTC may fluctuate, but 1 BTC always equals 1 BTC. Native crypto investors use BTC as an investment and store of value to counter inflation in fiat currencies.
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 the correlation with US stock indices has also dropped to near 0 in 2023. At the same time, since BTC belongs to a completely different asset class, it means that BTC can to some extent diversify the overall risk of investment portfolios. The compliance of BTC is widely recognized, greatly reducing the legal risks of investing in BTC.
Bitcoin price correlation with gold in the past 90 days from July 2020. Source: CoinMetrics
Bitcoin price correlation with US stock indices from January 2021. Source: Block Scholes
Macro hedge fund managers pay more attention to liquidity. Their strategies usually invest in assets such as bonds, foreign exchange, commodities, and 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 abundant derivatives, the liquidity of BTC can be comparable to that of foreign exchange.
More importantly, due to the high speed and low transaction costs brought about by the Bitcoin network and cryptographic infrastructure, traders can deploy and exit liquidity within seconds without the need to constantly negotiate with numerous third-party institutions over the phone or wait 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.
Bitcoin price changes from January to July 2023. Source: blofin.com
Note the purple parts in the graph, corresponding to the March banking crisis, the May Fed interest rate hike, and the submission of BTC spot ETF in July.
Bitcoin DVOL volatility index compared to realized volatility levels from May 2021 to present. Source: Amberdata Derivatives
It is not difficult to see that the BTC volatility index is more sensitive to macroeconomic changes.
Bitcoin DVOL volatility index compared to “volatility of volatility” levels in August 2022. Source: Amberdata Derivatives
Compared to volatility, BTC’s volatility changes are more rapid and sensitive.
In conclusion, whether it is cryptocurrency believers, traditional market fund managers, or traders from 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 underlying asset that can meet all these needs at once; in other words, BTC is a natural macro trading target.
ETH: A “Software Company” with a P/E Ratio of 312.58
Cryptocurrency market investors like to compare BTC and ETH; in terms of market capitalization, BTC and ETH rank first and second respectively on the cryptocurrency market value rankings, and every cryptocurrency trader will be involved with these two cryptocurrencies. However, traditional market investors are more cautious about ETH. Regardless of the potential compliance risks of ETH, considering the influence of Ethereum’s founders 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 like 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 framework to analyze ETH:
Ethereum income statement. Source: artemis.xyz
Therefore, it seems reasonable to analyze ETH using a fundamental analysis framework based on stocks. Fortunately, due to the transparency of the blockchain itself, obtaining real-time supply and price of ETH is not difficult. Similarly, with the efforts of researchers such as Sam Andrew, we have also obtained the financial situation of the Ethereum network in a feasible way. Let us estimate the current P/E ratio of Ethereum together:
From the start of the introduction of PoS to ETH, the total profit of the Ethereum network in USD from the fourth quarter of 2022 to the second quarter of 2023 is: (3,959*1,301) + (79,210*1,589) + (227,147*1,861) = 553,735,916 USD, with an annualized return of approximately 738,314,555 USD;
The spot price of ETH (July 17th) is approximately 1,920 USD;
The real-time supply of ETH (July 17th) is approximately 120,201,013;
Therefore, the P/E ratio of ETH = 1,920/(738,314,555/120,201,013) = 312.58.
312.58! This is a remarkable P/E ratio. We provide a comparison with the P/E ratios of the Magnificent 7 (the largest seven tech stocks in the US market)*:
*: All stock P/E ratios are based on the closing prices of July 14th. The P/E ratio of ETH is based on the average price of July 17th.
Undoubtedly, as a “software company,” Ethereum has significantly exceeded our original expectations. Considering its non-dividend nature and its high-speed growth phase after transitioning to PoS, its high P/E ratio is similar to NVDA with AI support. Compared to the P/E ratio of AMZN, as a core infrastructure provider in the cryptocurrency industry, the high P/E ratio of ETH is not difficult to understand. Overall, investors have given a higher valuation to ETH, expecting unlimited potential for its future development.
However, when Ethereum can be fully self-consistent under the company’s 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 macroeconomic conditions and macro conditions within the cryptocurrency market. Therefore, for BTC, interest rates and market share will be important influencing factors. Interest rates affect revenue 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 show weakness under the threat of high inflation. These situations mean that high interest rates will continue to suppress BTC’s performance. 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 allocation of liquidity in the crypto market will also affect the price and market value of BTC. From the beginning of 2021 to the end of 2022, influenced by the bull market and the “altcoin season”, BTC’s market share gradually decreased from over 60% to between 40% and 45%. Subsequently, benefiting from the influx of institutional buying and the return of liquidity, BTC’s market share rebounded from January 2023. By July 2023, BTC’s market share is around 50%.
Changes in the market share of mainstream cryptocurrencies, as of July 17, 2023. Source: Coinmarketcap
• When the interest rate is 0%, the total market value of the crypto market is about $30 trillion. When the interest rate is 5.25%, the total market value of the crypto market is about $12 trillion, which is about 40% of the peak. From November 2021 to March 2022, due to the Federal Reserve’s anticipated management, the crypto market lost about $1 trillion in market value. In March, the Federal Reserve raised interest rates by 25 basis points, at which time the total market value of the crypto market was about $20 trillion, 67% of the peak.
• Considering that the Federal Reserve is not expected to adopt the unlimited quantitative easing policy of 2020-2021 in the next few years, the largest expected change in the total market value of the crypto market due to anticipated changes in the market is not expected to exceed $1 trillion.
Changes in the total market value of the crypto market, as of July 17, 2023. Source: Coinmarketcap
Let’s expand based on the above logic:
• Considering that the crypto market currently lacks external liquidity inflows, we assume that the future price of BTC will be entirely dependent on changes in interest rates and market expectations, reflected in changes in market share.
• Under the scenario of a high interest rate of 5.25% and a lack of external liquidity inflows, it is difficult for the total market value of the crypto market to significantly increase before January 2024. Even if “expectations lead,” the most optimistic scenario would not bring internal market value growth of more than $500 billion.
• The total supply of BTC is about 19.43 million, and there will not be a significant change in the total supply of BTC of more than 5% within a year.
Considering three simple scenarios:
1. Investors have no further expectations, and internal market value growth in the crypto market is limited. The total market value of the crypto market will stabilize between $1.2 trillion and $1.4 trillion, and BTC’s market share will not change significantly, remaining 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. If the BTC spot ETF is approved, bringing good expectations for investors, the market value of the crypto market will rebound to around $1.5 trillion to $1.6 trillion.
-If BTC’s market share does not increase, its market value will stabilize at around $750-800 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 is approved and BTC’s market share rises 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 in the cryptocurrency market is not strong enough, BTC’s market value will still rise to $900 billion, with a unit price of $46,300.
3. The expectation of interest rate cuts, combined with positive expectations for spot ETFs and Bitcoin halving, will drive the overall liquidity in the cryptocurrency market to fully recover, and the market capitalization 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 ultimate 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 more wise 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 be further widely used in the future. As 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 price-earnings ratio.
Similarly, let’s consider three scenarios:
1. The Cancun upgrade significantly improves the Layer2 speed of Ethereum and reduces transaction costs, promoting the outbreak of the Ethereum Layer2 ecosystem. The profitability of the Ethereum network continues to grow, with quarterly revenue increasing by 50% before the Cancun upgrade and doubling after the upgrade.
-Assuming that the price-earnings ratio of ETH does not change significantly and investors’ strong expectations push the price-earnings ratio to remain around 300. The net income in Q2 2023 is $423 million, in Q3 it is $635 million, and in Q4 it is $953 million. In this scenario, the total annual revenue of the Ethereum network in 2023 will reach $2.137 billion. Considering that ETH deflation will cause the total supply of ETH to decrease to 120 million, the average price of ETH at the beginning of 2024 may exceed $5,300, and in the first quarter after the Cancun upgrade, it may exceed $9,700.
– Assuming investors have a relatively neutral expectation, causing the PE ratio of ETH to fall to around 150 (close to the level of comparable companies such as AMZN), under this scenario, the average price of ETH will reach around $2,670 in early 2024, and approach $4,900 in the first quarter after the Cancun upgrade.
2. The profitability of the Ethereum network is relatively stable, with quarterly revenue increasing by 25%, and revenue in the first quarter after the Cancun upgrade increasing by 50% compared to Q4 2023.
– Assuming the PE ratio of ETH does not change significantly, strong investor expectations drive the PE ratio to remain around 300. Net income in Q2 2023 is $423 million, net income in Q3 is $529 million, and net income in Q4 is $661 million. Under this scenario, the total revenue of the Ethereum network in 2023 will reach $1.739 billion, and the average price of ETH in early 2024 may exceed $4,300, and surpass $6,500 in the first quarter of 2024. If the PE ratio falls to around 150, the average price of ETH in early 2024 may be around $2,150, and surpass $3,200 in the first quarter of 2024.
3. The profitability of the Ethereum network shows marginal decline, with revenue growth rates of 20% and 15% in Q3 and Q4 respectively. The positive impact brought by the Cancun upgrade only mitigates the trend of declining profitability in the first quarter.
– Assuming the PE ratio of ETH does not change significantly, strong investor expectations drive the PE ratio to remain around 300. Net income in Q2 2023 is $423 million, net income in Q3 is $508 million, and net income in Q4 is $584 million. Under this scenario, the total revenue of the Ethereum network in 2023 will reach $1.641 billion, and the average price of ETH in early 2024 may exceed $4,100, and surpass $5,400 in the first quarter of 2024. If the PE ratio falls to around 150, the average price of ETH in early 2024 may be around $2,050, and surpass $2,700 in the first quarter of 2024.
In summary, the development of ETH is highly correlated with its own profitability. The combination of narrative support and sustainable and continuously growing profitability is the key to driving up the price of ETH – which is fundamentally different from BTC in this regard.
In fact, the “divergence” in the crypto market exists not only in theory, but also not 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 solid correlation with public chain coins like ADA and project tokens deeply rooted in the Ethereum public chain like CRV.
As the correlation between cryptocurrencies continues to weaken, the previously fully or partially reusable analytical logic and trading strategies become ineffective. Pair trading no longer exhibits ideal correlation regression, and the general investment framework based on market capitalization and track is also no longer applicable to some extent – this means that further analysis based on the fundamental aspects of the project becomes more important.
Correlation changes between BTC and other major cryptocurrencies except for ETH, as of June 2023. Source: Kaiko
Correlation changes between ETH and other major cryptocurrencies except for BTC, as of July 2023. Source: CoinMetrics
Now is the time to adopt two or even multiple completely different logics to view the cryptocurrency market. Cryptocurrency version 3.0 has arrived; the era is moving forward. Bitcoin will be more closely integrated with the macroeconomy and traditional markets, while Ethereum needs to become a “great company”; other cryptocurrencies should also follow their own path. In the rapidly changing cryptocurrency market with both macro and micro structures, we need to keep up with the times.