VanEck Mid-September 2024 Bitcoin ChainCheck: 1-Year Review Edition

Please note that VanEck has exposure to bitcoin.

Bitcoin's (BTC) YTD (+36% as of 9/16) performance surpasses nearly every other major asset class (again),¹ but some investors have been spooked by the recent drawdown, a ~21% correction from the March peak. In this note, we examine the current state of the Bitcoin blockchain, including its recent fundamentals, correlation with other assets, volatility, ETP traction, our take on the likely impact of the U.S. election, and express our more global view on the role of decentralized networks in increasingly censored digital landscapes.

• Bitcoin Fundamentals
• Bitcoin Miner Behavior
• Rising Institutional & Sovereign Adoption
• Asset Correlations & Volatility
• Impact of the Fed & U.S. Elections
• Decentralization: A Global Need
• Conclusion

Bitcoin Fundamentals

Sources: Glassnode, Artemis.xyzs of 16/09/2024. Past performance is no guarantee of future results.

Sources: Glassnode, Artemis.xyzs of 16/09/2024. Past performance is no guarantee of future results.

We begin our analysis with the tables above, which reveal how Bitcoin’s key fundamentals have changed over the past year. Twelve months to date, bitcoin’s price is up 124%, outperforming nearly every major asset class. Even within crypto, BTC has outperformed. Bitcoin dominance, a measure of Bitcoin’s market cap versus crypto’s total market cap, is up 15% YoY to 56%.

There is clearly much more interest in Bitcoin and digital assets today than one year ago. Bitcoin trading volumes have grown 173% YoY, significantly outpacing equity trading volumes, up ~18% YoY. Although price returns for equities have been great, capital formation has been dismal. Capital raised from global equity IPOs is on a $68B pace for 2024, a 31% decline vs. 2023. The number of IPOs is on pace to fall by 42%. (For context, $748B was raised in 4,000 IPOs in the debt-fueled 2021 bonanza). Among private transactions, U.S. Venture Capital invested is up 9% y/y, while Crypto VC flows are up 87% over the same period.

Bitcoin’s adoption as an investment vehicle isn’t driven by the same forces today as in 2023 when it rose 155%. Then, Bitcoin inscriptions were a viral innovation enabling users to store media files directly on the Bitcoin blockchain. Inscriptions ushered in a viral new wave of blockchain-based art, notably bringing retail liquidity and trading fees to the Bitcoin blockchain, which was previously left out of the NFT craze of the last market cycle. Like previous NFTs, however, the trend ended in a crash, reflected by the 93% YoY drawdown in daily inscriptions transactions. The decline in inscriptions undoubtedly explains the 34% and 52% YoY declines in daily active addresses and transaction fees, respectively. With Bitcoin’s on-chain activity diminished, bitcoin’s price appreciation this year is better explained by growing adoption as money: a vehicle for storing and transferring value.

Despite fewer on-chain retail transactions, USD-denominated on-chain Bitcoin transfer volumes are up 202% YoY, implying larger overall ticket sizes. In parallel, despite lower fees, Bitcoin-related equities are capturing value by facilitating the growth of its monetary network’s adoption, with their collective market cap up 87% YoY.

Based on month-over-month (MoM) price changes by region, the long-term trend of Asia selling BTC to North America continued in 2024, with investors enjoying outsized benefits during US trading hours.

Bitcoin Miner Behavior

2024 has been a terrible year for Bitcoin Miner fundamentals. The Bitcoin Hashprice, a unit of profitability in the industry that measures the revenue earned for each one trillion cryptographic hash calculations per second, is down 97% y/y, far exceeding its 10-year CAGR of 69%, otherwise known as Bitcoin Miners’ “melting ice cube.” However, publicly traded miners entered the year reasonably well-capitalized, and with their low power costs and benefits of scale, now control 27% of the Bitcoin hash rate (a measure of total compute power securing the network), compared to 15% back in 24% a year ago and 15% in 2022. Now, with the halving well behind us, USD-denominated transfer volumes from miners to exchanges (a proxy for selling pressure) are down 60% YoY, indicating that miners have weathered the halving event and are now in financial solid positions—especially when considering the recent emergence of AI growth strategies.

Let’s dig deeper into the hash rate and the post-halving action. Following the halving on 19 April, the 7-day moving average of Bitcoin’s hash fell ~15% from its all-time high of 650 EH/s to 552 EH/s by 28 June, in line with what we predicted before the event. This period corresponds to miners continuing to sell BTC, presumably indicating the forced exit of weaker, less efficient players. By 26 July, however, the network hash rate had rebounded to reach a new all-time high of ~670 EH/s, indicating that these more well-capitalized miners filled the void by increasing capacity. With today’s mining difficulty at all-time highs, miners compete harder than ever for their share of the network’s block rewards. However, the most recent data show that miners have begun accumulating bitcoin holdings for the first time since the halving.

Aggregate BTC Supply Held by Miners Increased for the First Time since the Halving

Source: Glassnode as of 13/09/2024.

Observing the divergence in miner behavior has been fascinating and relevant to share performance. Some miners like Cleanspark (CLSK), Cipher Mining (CIFR), and Marathon Digital (MARA) are leveraging their strength by aggressively increasing their BTC positions. Generally, those are underperforming. A handful of others, notably Core Scientific (CORZ), Bit Digital (BTBT), and Hut8 (HUT), have reduced their holdings to pay off debts, upgrade their fleets, and pursue new business opportunities.

Some Publicly Traded Miners Adjust BTC Holding Strategies, Anticipating BTC Price Action & New Business Opportunities

Source: Company Filings, Monthly Production Reports as of 10/09/2024. Past performance is no guarantee of future results.

Some bitcoin miners are increasingly capitalizing on a new revenue opportunity by entering the AI and high-performance computing (HPC) markets. AI “hyperscalers” are placing a premium on access to near-term power due to bottlenecks in grid expansions, cloud computing’s strong pricing power, and the resulting power capacity arms race. CORZ, for example, has secured multiple contracts with AI hyperscaler CoreWeave, which is projected to generate over $4.7 billion in revenue by providing 382 MW of infrastructure over the next 12 years. This compares to the company’s last 12 months’ revenues of $574M. While miners’ pivot to AI is a time arbitrage opportunity in the near term, it may also prove to be a long-term strategic advantage by dampening revenue volatility and lowering the cost of capital for miners. Our previous research estimates that if 20% of miners’ energy capacity is allocated to AI/HPC, the total additional yearly profits could exceed $13.9 billion for a cohort of companies who collectively lost $350M net over the last 12 months. We see substantial value in this strategy.

Historical Context of The Halving

143 days post-halving, bitcoin is overdue by historical standards to reach and sustain prices above its price at halving. Below, we explain why we think a catch-up rally is the most likely outcome. The TLDR is that bitcoin’s price lags behind previous cycles due to a mix of election anxiety and specific sales by entities unlikely to repeat. Meanwhile, the most important adoption from our perspective, that of nation-states, is accelerating. We will explain this in detail below.

History Suggests Logarithmic BTC Price Growth Post-Halving

Source: Glassnode as of 12/09/2024. Past performance is no guarantee of future results.

Rising Institutional & Sovereign Adoption

Growth Drivers

The diverging trends between Bitcoin’s on-chain activity and its growth as an investment vehicle can be attributed to two main forces: institutional adoption and the increasing involvement of sovereign nations in mining and cross-border trade. First, driven by technical abstractions and regulatory improvements (e.g., custody solutions, ETPs), individuals and corporations increasingly gain exposure to Bitcoin without touching the blockchain themselves. Second, there is a growing trend of countries adopting Bitcoin for monetary and trade purposes. Combined, these trends are shifting the dynamics of both Bitcoin’s on-chain fundamentals and off-chain markets.

Clearly, institutional adoption has increased. Since launching in January of this year, bitcoin ETPs gained over $19 billion in new inflows from hedge funds, RIAs, insurance companies, and pension funds through August. However, while hedge fund holdings of bitcoin ETPs grew 38% in Q2, RIA bitcoin ETP holdings only grew 4%.² Full-service, national brokerage (so-called ‘Wirehouse’) adoption of bitcoin ETPs has clearly been slower than some hoped. We attribute this to a lack of updated “60/40” macro model portfolios that include bitcoin. While we believe this “sell-side” research will eventually materialize, some managers are increasingly marketing and distributing “all in one” or model portfolios incorporating bitcoin. While we wait for potentially more aggressive allocations from brokers like Morgan Stanley and UBS, it is possible that their hesitancy may accelerate market share losses to independent advisors and vertically integrated models. We will closely watch institutional inflows or outflows into crypto as these can serve as leading indicators of broader market sentiment.

Shifting focus from institutional to sovereign adoption, seven nations are now mining bitcoin with direct support from the national government, with three new entrants this year (Ethiopia, Kenya, and Argentina). We believe this trend is a key indicator of the global shift towards de-dollarization. For example, Russia's pilot of cross-border trade denominated in crypto raises questions about which nations might follow suit, especially when the war inevitably ends. The implications for Bitcoin are significant, as government-level mining and cross-border crypto transactions could bolster Bitcoin’s role as a global reserve asset, as we wrote about in recent research. As de-dollarization gains momentum, we anticipate more countries and increased governmental involvement in digital assets, especially Bitcoin.

Asset Correlations & Volatility

Do Sharp Deviations in BTC and NASDAQ’s Correlation Predict a Shift in BTC’s Price?

Source: Bloomberg as of 11/09/2024. Past performance is no guarantee of future results.

Digging into broader market correlation and volatility data, we observe signals that suggest a potential breakout, marking the end of the summer doldrums that have defined Bitcoin’s post-halving price action. After a sharp decline, BTC’s correlation with the NASDAQ printed a local bottom on 13 March—the day of Bitcoin’s all-time high. Six months later, the correlation between these assets peaked on 06 September This peak coincides with bitcoin miners’ slowdown in coin selling and a 3+ year high in long-term holders adding to their BTC positions. We think this might indicate a possible shift in market structure.

Long-Term BTC Holders Ended the Summer by Buying BTC at Record 3Y Rates

Source: Glassnode as of 11/09/2024. Past performance is no guarantee of future results.

On the topic of correlation, such a focus among clients, we want to highlight that despite the rising daily correlation in recent months, our analysis revealed a weak Pearson correlation of -0.056 between bitcoin’s daily price changes and its 90-day correlation with the NASDAQ over the 365 days leading to 10 September, 2024. Why is the Pearson Correlation important? To explain this, imagine two runners (bitcoin and the NASDAQ) running side by side. Regular correlation shows that they generally move in the same direction—speeding up or slowing down together over time. However, Pearson correlation looks at the details, such as how closely their individual strides match each other. Even if they’re running in the same general direction, their steps might not align. One runner could have uneven, unpredictable steps while the other moves more consistently. In this case, bitcoin’s daily price changes are like those uneven steps, which don’t strongly influence how closely it tracks the NASDAQ in the long term. We believe these headline correlations exaggerate the real connection between bitcoin and NASDAQ, especially when focusing on short-term fluctuations.

As we look ahead, volatility remains a key factor in determining bitcoin’s near-term price action. By comparing the annualized volatility of bitcoin and other major assets, we can gain insight into how Bitcoin’s current stability fits into broader market trends. For example, while BTC and ETH are trading close to their 1Y average volatility, traditional assets like the S&P 500, NASDAQ, and JPY are experiencing higher-than-usual vol. This divergence suggests to us that Bitcoin may be poised for a breakout from its current pattern.

The S&P 500, NASDAQ’s, and JPY’s Current Volatilities are at Relative 1Y Highs Compared to BTC’s, ETH’s, and Gold’s

Source: Bloomberg as of 11/09/2024. Past performance is no guarantee of future results. Volatility refers to the fluctuation in the returns of an asset or portfolio as measured by the standard deviation of returns.

The question, of course, is whether bitcoin’s next volatile move will be to the upside or downside. We note that a combination of entity-specific selling and political uncertainties have kept most of the risk-on capital that typically flows to bitcoin sidelined. In July and August, the German & U.S. governments transferred 62k bitcoin to exchanges, presumably for sale, while Mt. Gox and Gemini bankruptcy distributions totaled another 124k bitcoin. That’s $11B in non-repeatable sales, roughly equivalent to the net inflows to bitcoin ETPs in the first two months of trading. The market’s cautious risk appetite has instead favored tech companies like NVIDIA, which has driven outsized returns for the NASDAQ. However, we believe that much of the fear surrounding carry trade unwinds and election outcomes are largely priced in. Thus, we anticipate the bitcoin breakout will be bullish with the upcoming debt ceiling deadline on September 30th and the approaching U.S. Presidential Election the most obvious catalysts for upside volatility.

Furthermore, while BTC’s correlation with the NASDAQ fluctuates, its more consistent inverse correlation with the USD offers a more logical and persistent explanation for its outsized performance. As illustrated in the chart below, the low interest rates, quantitative easing, and money printing of 2020 only intensified this process. More simply, in the parlance of that era, “money printer go brrr.”

Impact of the Fed & U.S. Elections

Intensified by 2020’s ‘Money Printing’, BTC is Persistently Negatively Correlated with USD

Source: Bloomberg as of 11/09/2024. Past performance is no guarantee of future results.

Fed Rate Cuts

Both the Fed’s upcoming rate decisions and the U.S. presidential election present significant potential impacts on the digital assets space. Suppose the Fed continues cutting rates in response to slowing economic growth. In that case, it may be bullish for risk-on assets like bitcoin, which may once again benefit as investors seek high-return alternatives to low-yield bonds. As we have illustrated, digital assets have shown a strong correlation to a weak dollar and money supply growth (global liquidity), making them particularly sensitive to shifts in monetary policy. Investors should also closely monitor the actions of other central banks, as the Bank of Japan’s recent mere 0.25% interest rate hike caused cascading liquidations due to over-levered carry trades unwinding around the globe. While such events clearly threaten the near-term risk appetite for Bitcoin and other digital assets, we think they reveal the weakness underlying today’s fiat currencies and thus underscore the rising popularity of decentralized monetary assets like bitcoin and gold.

U.S. General Election

On the political front, we think that while Kamala Harris and Donald Trump are bullish for Bitcoin, each presents more nuanced implications for the broader digital asset markets. Both administrations will likely maintain fiscal spending if not further accelerate, which could lead to further quantitative easing—especially if exacerbated by anti-business policies. Suppose Kamala Harris were to retain Gary Gensler as SEC Chair or align closely with the Elizabeth Warren wing of the Democratic Party when it comes to finance policy, which looks increasingly likely. In that case, the digital assets industry generally is expected to confront a tightening regulatory environment that would dampen institutional adoption of digital assets in the U.S., further restricting domestic entrepreneurial activity. On Bitcoin alone, however, we would argue that a Kamala Harris presidency might be even better for Bitcoin than a second term for Trump because it would, in our view, accelerate many of the structural issues that drive Bitcoin adoption in the first place. You can find our explanation of those issues in this research. Should that happen, Bitcoin’s unique regulatory clarity will likely make it even more competitive than other digital assets.

Conversely, we believe a Trump presidency is generally bullish for the entire crypto ecosystem, as it would likely produce more deregulation and business-friendly policies—perhaps particularly so for crypto entrepreneurs, who regulators have increasingly scrutinized in the past four years. Regardless of the election outcome, the trend of growing fiscal deficits and rising national debt will likely continue. This suggests a weakening of the U.S. dollar, a macroeconomic environment in which Bitcoin has historically thrived.

Decentralization: A Global Need

Through a broader political lens, 2024 has seen escalating global efforts to police online speech, with growing implications for financial freedom. Australia's just-proposed Misinformation Bill is a prime example of how spreading information that undermines public confidence in the banking system could become illegal. Given that Australian banks have increasingly frozen customer accounts in recent years, this law raises the chilling possibility that if your bank freezes your account, discussing it could make you a criminal. This highlights how far-reaching and ambiguous such attempts to police misinformation can be.

Similar laws have been passed in other countries, such as Brazil’s Fake News Bill, which led to the ban of X (formerly Twitter) in September 2024 due to the platform’s failure to meet transparency requirements. In Canada, platforms like Meta have already blocked access to news in response to legislation. Privacy-focused platforms like Telegram are under scrutiny. After Telegram’s founder Pavel Durov was arrested in France, the platform updated its FAQ to reflect more aggressive content moderation policies and a potential new law enforcement reporting system.

Source: VanEck research as of 17/09/24.

As Big Tech withdraws from key markets to avoid liability, the fragmentation of information and rising criticisms about “fake news” appear to be an inevitable result. Indeed, we argue that the ideological and political capture of centralized internet behemoths like Google threatens individuals’ access to credible and independent information. Earlier this year, when asked to generate historically accurate depictions of 18th-century British royalty, Google’s newly released AI produced images of Asian and Black kings. When asked to create an image of "crypto programmers being bros in a sparse office," it refused, stating that the request furthered “harmful stereotypes” about "brogrammers.” These walled garden AI offerings are not credible, and we believe there is considerable white space for open-source competitors to gain share, many of whom use crypto tokens to bootstrap their networks.

Conclusion

We believe Bitcoin's long-term growth is driven by powerful, enduring mega-themes: the rising need for decentralized, censorship-resistant networks, growing institutional adoption through ETPs and model portfolios, and increasing sovereign involvement in mining and cross-border trade. As inflation and currency devaluation continue challenging fiat monetary systems, bitcoin can serve as a vital hedge. Demographically, Bitcoin enjoys strong support from younger generations, positioning it to potentially benefit as Boomer wealth turns over. As these structural forces deepen, bitcoin’s role as a global reserve asset continues to strengthen, reinforcing our conviction that the long-term Bull Market is intact.

Notes:

Net unrealized profit/loss ratio (NUPL) can be calculated by subtracting the realized market cap from the market cap and dividing the result by the market cap. When a high percentage of Bitcoin’s market cap consists of unrealized profits, it can be interpreted that investors are greedy. Background reading here.

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