Blofin: 2024 Q1 Bitcoin and Ethereum Price Research

Original post by Matt Hu, Blofin CEO, Griffin Ardern, Blofin Macro Trader

Wu said blockchain authorized release

"The darling of institutions": Why BTC?

In the contemporary financial system, the central bank is the source of liquidity in the financial market. When the central bank starts to release/retract liquidity, the changes in liquidity will be reflected in the price changes of bonds, bulk commodities, foreign exchange and financial derivatives in real time, as well as in the changes in stock indexes. Bitcoin has not been a newcomer to the "macro club" for long. However, the U.S. government holds the most bitcoins; and ETFs that include bitcoins in their investment portfolios are gradually increasing. Among the issuers of these ETFs are top asset management institutions such as Fidelity.

Bitcoin ETF list and holdings, as of July 17, 2023. Source: Bitcoin Treasury

Compared to other cryptocurrencies, BTC is truly decentralized. The deeds of His Excellency Satoshi Nakamoto have been widely known, but no one knows "who is he". However, "who he is" may not be important anymore; the Bitcoin network has matured, and anyone's influence on the Bitcoin network has been negligible-this "true decentralization" attribute is also one of the characteristics of qualified macro investment targets. Gold and minerals are generated from the universe; agricultural products are produced from nature; Bitcoin comes from the cyber universe composed of algorithms and information.

Since BTC is a product of the cyber universe, the central bank's liquidity manipulation magic has no effect on it. The USD price of BTC changes, but 1 BTC is always 1 BTC. Native encryption investors use BTC as an investment product and a store of value to combat inflation under the legal currency standard.

For fund managers from traditional markets, they pay more attention to 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 the US stock index will also drop to around 0 in 2023. At the same time, since BTC belongs to another completely different category of assets, it means that BTC can diversify the overall risk of the investment portfolio to a certain extent. BTC compliance is also widely recognized; this greatly reduces the legal risk of investing in BTC.

Changes in the 90-day price correlation between BTC and gold from July 2020 to the present. Source: CoinMetrics

Changes in the correlation between BTC price and US stock index since January 2021. Source: Block Scholes

Macro hedge fund managers will focus more on liquidity. Their strategies usually invest in bonds, foreign exchange, commodities, stock indexes and other targets, and are more inclined to trade through derivatives rather than based on spot. "Liquidity" is the core reason - macro trading needs to accurately grasp the timing of liquidity changes, and enter and exit at the fastest speed and at the lowest cost. As an emerging asset, with the global liquidity of the Bitcoin network and the blessing of rich derivatives, the liquidity of BTC is comparable to that of foreign exchange.

More importantly, due to the high speed and low transaction costs brought about by the Bitcoin network and encryption infrastructure, traders can complete the deployment and exit of liquidity within seconds, without having to negotiate with many third-party institutions on the phone or wait for bids to be accepted in the OTC trading system with poor liquidity. The above advantages make BTC more sensitive to changes in market sentiment and macro events, and are reflected in its price fluctuations and volatility changes.

BTC price change from January to July 2023. Source: blofin.com

Pay attention to the purple parts in the figure, which correspond to the banking crisis in March, the Fed’s interest rate hike in May, and the BTC spot ETF submission around July.

Comparison of BTC DVOL volatility index and realized volatility levels from May 2021 to the present. Source: Amberdata Derivatives

It is not difficult to find that the volatility index of BTC is more sensitive to macro changes.

BTC DVOL Volatility Index vs. "Volatility of Volatility" levels for August 2022. Source: Amberdata Derivatives

Compared with volatility, BTC's volatility changes more rapidly and sensitively.

In short, whether it is an encryption believer, a fund manager in the traditional market or a trader in a macro hedge fund, BTC meets the requirements of almost all investors of different types in terms of utility, compliance, risk management, liquidity and trading. It is difficult to have a macro target that can meet these needs at one time; in other words, BTC is a natural macro trading target.

ETH: "Software company" with a P/E ratio of 312.58

Investors in the encryption market like to compare BTC and ETH together; in terms of market value, BTC and ETH rank first and second in the cryptocurrency market value list, and every encrypted trader will be involved in these two cryptocurrencies. Investors from traditional markets are not. In fact, they are more cautious about ETH: Regardless of the possible compliance risks of ETH, considering the influence of Ethereum founders and developers on the development of the Ethereum blockchain, and 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 are already interpreting ETH with a framework based on corporate finance:

Ethereum profit and loss statement. Source: artemis.xyz

Then, it seems reasonable to analyze ETH with an analysis framework based on stock fundamentals. Fortunately, due to the transparency of the blockchain itself, it is not difficult to obtain the real-time supply and price of ETH. Similarly, with the efforts of researchers such as Sam Andrew, we have also obtained the financial situation of the Ethereum network in a more feasible way. Let us estimate the current price-earnings ratio (P/E Ratio) of Ethereum:

Calculated after the official introduction of PoS by ETH, from the fourth quarter of 2022 to the second quarter of 2023, the total profit (USD) of the Ethereum network is: (3,959* 1,301) + (79, 210* 1,589) + (227, 147* 1,861) = 553,735,916 USD, annualized Proceeds of approximately $738,314,555;

The average spot price of ETH (July 17) is about $1,920;

The real-time supply of ETH (July 17) is about 120,201,013;

Therefore, the PE ratio of ETH = 1,920/( 738, 314, 555/120, 201, 013) = 312.58.

312.58! This is an astonishing price-earnings ratio figure. We have attached the price-earnings ratios of Magnificent 7 (the seven largest technology stocks by market capitalization) in the US 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

*: P/E ratios of all stocks are calculated based on the closing price on July 14. The P/E ratio of ETH is calculated based on the intraday average price on July 17.

There is no doubt that Ethereum has significantly exceeded our original expectations as a "software company". Considering that it does not pay dividends and is still in the stage of rapid growth after turning to PoS, such a high price-earnings ratio is similar to NVDA under the blessing of AI; compared with AMZN's price-earnings ratio, as a core infrastructure provider for the encryption industry, ETH's high price-earnings ratio is not difficult to understand. In summary, investors have given a relatively high valuation to ETH, and are looking forward to the infinite possibilities of ETH's future development.

However, when Ethereum can be completely self-consistent under the company logic, BTC and ETH have officially taken different paths.

parted ways

Under the narrative of "Encryption 3.0", where will BTC and ETH go?

BTC ：Crypto Is Macro

There is no doubt that the price of BTC will depend on macroeconomic conditions and changes in macro conditions within the crypto market. Therefore, for BTC, interest rate and market share will be important influencing factors. Interest rates affect earnings expectations, while market share affects market capitalization.

• Judging from the interest rate market, the Federal Reserve will not cut interest rates in the next six months; the European Central Bank will not show weakness 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 Fed's latest possible rate path through July 17, 2023. Source: CME Group

• In addition, the internal allocation of liquidity in the encrypted market will also affect the price and market value of BTC. From the beginning of 2021 to the end of 2022, affected by the bull market and the "Counterfeit Season", BTC's market share will gradually drop from over 60% to 40% -45%. Then, benefiting from the wave of institutional buying and the return of liquidity, BTC's market share will rebound from January 2023. By July 2023, BTC's market share will be about 50%.

Changes in the market share of mainstream cryptocurrencies, as of July 17, 2023. Source: Coinmarketcap

• At 0% interest rates, the total market capitalization of the crypto market peaked at approximately $3 trillion. At a rate of 5.25%, the total market capitalization of the crypto market is about $1.2 trillion—roughly 40% of its peak. Between November 2021 and March 2022, the crypto market lost about $1 trillion in market value due to the Fed's expectations management. In March, when the Federal Reserve raised interest rates by 25 basis points, the total market capitalization of the crypto market at this time was about 2 trillion US dollars - 67% of the highest point.

• Considering that the Federal Reserve is not expected to adopt the unlimited quantitative easing policy in 2020-2021 in the next few years, the total market capitalization of the market due to expected changes will not exceed $1 trillion.

Changes in the total market capitalization of the crypto market, as of July 17, 2023. Source: Coinmarketcap

Let's expand based on the above logic:

• Considering the current lack of external liquidity in the encryption market, we assume that the future price of BTC depends entirely on changes in interest rates and market expectations, and is reflected in changes in market share.

• Under the circumstances of the high interest rate of 5.25% and the lack of external liquidity entry, it is difficult for the total market value of the encryption market to increase significantly before January 2024. Even if "expectations come first", in the most optimistic scenario, the expected increase in the internal market value of the encryption market will not exceed $500 billion.

• The total supply of BTC is about 19.43 million pieces, and the total supply will not change significantly by more than 5% within a year.

Simply consider three cases:

1. Investors have no more expectations, and the growth of the internal market value of the encryption market is limited. The total market value of the encryption market will be stable at between 1.2 trillion and 1.4 trillion US dollars, and the market share of BTC will not change much, remaining at around 50%. This means that the market capitalization of BTC will fluctuate between $600 billion and $700 billion, and the price will fluctuate between $30,880 and $36,026;

2. The adoption of BTC spot ETF brings good expectations to investors. The market capitalization of the crypto market rebounded to around $1.5 trillion-$1.6 trillion.

• If the market share of BTC does not increase, the market value of BTC will stabilize at about 750 billion to 800 billion US dollars, and the highest price may reach 41,173 US dollars; even if the rebound is not strong enough, the price of BTC will be higher than 38,500 US dollars;

• If the spot ETF is passed, the market share of BTC will rise to 60%. In the best case, the market value of BTC will reach 960 billion US dollars, with a unit price of more than 49,400 US dollars; even if the overall crypto market does not rebound sharply enough, the market value of BTC will rise back to 900 billion US dollars, with a unit price of 46,300 US dollars.

3. The combination of interest rate cut expectations and positive expectations such as spot ETFs and Bitcoin halving has promoted the full return of liquidity in the encryption market, and the market value of the encryption market has rebounded to more than 1.7 trillion US dollars.

• If the market share of BTC does not increase, the market value of BTC will reach more than 850 billion US dollars, and the price will rebound to more than 43,700 US dollars;

• If the market share of BTC rises to 60%, the market value of BTC will reach more than 1.02 trillion US dollars, and the price will reach around 52,500 US dollars.

In short, macro factors are relatively favorable for BTC, and the ultimate level of BTC price depends on interest rates and market expectations.

ETH: "How to be a More Profitable Company"

Considering that BTC has become the protagonist of the macro narrative, it may be more sensible for ETH to make efforts in applications. Therefore, for ETH, the factors affecting its price mainly come from its own new narrative and whether it can be further widely used in the future. Since these factors will be reflected in the net income of the Ethereum network, we can reverse the possible price changes of ETH based on changes in the price-earnings ratio.

Again, briefly consider three cases:

1. The Cancun upgrade has significantly increased the Layer 2 speed of Ethereum, reduced transaction costs, and promoted the ecological explosion of Layer 2 of Ethereum. The profit momentum of the Ethereum network continues. Before the Cancun upgrade, the quarterly revenue increased by 50%, and the quarterly net income doubled after the Cancun upgrade.

• Assuming no significant change in the ETH P/E ratio, investors' strong expectations drive the P/E ratio to remain around 300. In 2023, the net income of Q2 will be US$423 million, the net income of Q3 will be US$635 million, and the net income of Q4 will be US$953 million. In this case, the total revenue of the ETH network in 2023 will reach 2.137 billion US dollars. Considering that ETH deflation will reduce the total supply of ETH to 120 million, the average price of ETH may exceed $5,300 at the beginning of 2024, and break through $9,700 in the first quarter after the Cancun upgrade.

• Assuming that investors' expectations are more neutral, so that the ETH price-earnings ratio falls back to around 150 (close to the level of comparable companies such as AMZN), in this case, 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 stable, with revenue increasing by 25% per quarter. After the Cancun upgrade, revenue in the first quarter increased by 50% compared to 2023 Q4.

• Assuming no significant change in the ETH P/E ratio, investors' strong expectations drive the P/E ratio to remain around 300. In 2023, the net income of Q2 will be US$423 million, the net income of Q3 will be US$529 million, and the net income of Q4 will be US$661 million. Under such circumstances, the total revenue of the ETH network in 2023 will reach US$1.739 billion, and the average price of ETH may exceed US$4,300 at the beginning of 2024 and US$6,500 in the first quarter of 2024. If the price-to-earnings ratio falls back to around 150, the average price of ETH at the beginning of 2024 may be around $2,150 and break through $3,200 in the first quarter of 2024.

3. The profit margin of the Ethereum network is diminishing. The income of Q3 and Q4 increased by 20% and 15% respectively. The benefits brought by the Cancun upgrade only curbed the trend of diminishing profit margin in the first quarter.

• Assuming no significant change in the ETH P/E ratio, investors' strong expectations drive the P/E ratio to remain around 300. In 2023, the net income of Q2 will be US$423 million, the net income of Q3 will be US$508 million, and the net income of Q4 will be US$584 million. Under such circumstances, the total revenue of the ETH network in 2023 will reach US$1.641 billion, and the average price of ETH may exceed US$4,100 at the beginning of 2024, and break through US$5,400 in the first quarter of 2024. If the price-earnings ratio falls back to around 150, the average price of ETH at the beginning of 2024 may be around $2,050 and break through $2,700 in the first quarter of 2024.

In summary, the development of ETH is highly related to its own profitability. The combination of narrative support and sustainable and growing profitability is the key to driving the price of ETH up-here is very different from BTC.

Junction

In fact, the "partition" in the encryption market has not only existed in theory, but also not only between BTC and ETH. According to statistics, in 2023, not only will the correlation between BTC and ETH drop significantly, but the correlation between BTC and mainstream altcoins will also drop significantly. BTC seems to be going its own way, while the correlation between ETH and different types of currencies such as XRP, LTC, and BNB is also weakening, but it still maintains a solid correlation with public chain coins such as ADA and project tokens that are deeply cultivated in the Ethereum public chain such as CRV.

As the correlation between currencies continues to weaken, the analysis logic and trading strategies that could be fully or partially reused before become no longer effective. The ideal correlation regression no longer occurs in pair trading, 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 fundamentals of the project itself becomes more important.

Changes in the correlation between BTC and other major cryptocurrencies except ETH, as of June 2023. Source: Kaiko

Changes in the correlation between ETH and other major cryptocurrencies except BTC, as of July 2023. Source: CoinMetrics

It’s time to look at the crypto market with two or even more completely different logics. Encryption 3.0 has arrived; the times are moving. Bitcoin will be more closely integrated with the macro economy and traditional markets, while Ethereum needs to become a "great company"; other cryptocurrencies will also have to go their own way. In the crypto market where the macro and micro structures are changing rapidly, we need to keep up with the times.