In a blended period for conventional assets, the cryptocurrency markets delivered substantial returns throughout February 2024, bolstered by consistent capital inflows into novel spot Bitcoin Exchange-Traded Funds (ETFs) and a spectrum of favorable fundamental developments. Presently, the primary threat to the valuation of digital assets potentially lies in the Federal Reserve's monetary policy: with a resurgence in inflation observed in February, any further acceleration could defer the initiation of interest rate reductions until later this year or beyond.

Bitcoin and Ether emerged as standout performers across both the crypto and traditional financial landscapes in February, excelling in both absolute terms and concerning risk-adjusted metrics (returns in relation to volatility). Global bond markets experienced depreciation during the month, given an uptick in inflation that dimmed expectations for central bank interest rate reductions in the United States and Europe. Equity markets predominantly saw gains, propelled by equities in China and other burgeoning markets. While crypto has displayed increased correlation with traditional markets in recent years, the February performance of major tokens once again underscored the diversification advantages inherent in the crypto asset class.

Bitcoin and Ether outperformed many other major assets

For Bitcoin, substantial returns are likely a consequence, at least partially, of consistent capital inflows into the newly listed spot Bitcoin Exchange-Traded Funds (ETFs) in the United States. From their initiation on January 11 until the close of that month, the ten spot Bitcoin ETFs accumulated net inflows amounting to $1.46 billion. In February, the pace of net inflows escalated significantly, reaching a total of $6 billion for the entire month. Within the realm of cryptocurrency exchange-traded products (ETPs), our calculations indicate that net inflows for February reached $6.2 billion—more than twice the previous monthly record set in October 2021. Notably, US-listed gold ETFs have witnessed net outflows since the launch of spot Bitcoin ETFs, potentially indicating a shift among investors from one "store of value" asset to another. 

Record net inflows into crypto ETPs

To contextualize the inflows into the spot Bitcoin Exchange-Traded Funds (ETFs), consider that, at the current pace of block rewards, the Bitcoin network generates approximately 900 new coins daily, equating to around $54 million worth of Bitcoin (assuming an average coin price of $60,000). Come April 2024, Bitcoin issuance will undergo a halving—a scheduled event occurring every four years—resulting in a reduction by half. Following the halving, daily issuance will decrease to 450 coins or approximately $27 million worth of Bitcoin (for a detailed exploration of the Bitcoin halving, refer to our report "2024 Halving: This Time It’s Actually Different"). Throughout February, net inflows into the US-listed spot Bitcoin ETFs averaged $208 million per day, surpassing the pace of new supply, even before the impending halving. This imbalance, marked by heightened demand and constrained issuance, likely contributes to the surge in valuations.

Despite Bitcoin delivering robust returns in February, it was narrowly outpaced by Ether (ETH), the second-largest cryptocurrency by market capitalization, which recorded a 47% gain during the month. Market sentiments seem forward-looking to a pivotal upgrade to the Ethereum network, slated for March 13 (for additional insights, consult "Ethereum’s Coming of Age: ‘Dencun’ and ETH 2.0"). Ethereum adopts a modular design philosophy, envisioning increased activity over time on Layer 2 blockchains linked to the Layer 1 mainnet. The impending upgrade aims to accommodate this growth by providing Layer 2s with designated storage on Ethereum, anticipating a reduction in data costs and, consequently, an enhancement in operating margins. Ethereum may also enjoy tailwinds from "restaking" technology, with Eigenlayer, a notable player in this domain, securing $100 million from venture capital firm a16z during the month. Additionally, prospects for regulatory approval of an ETH ETF and anticipation surrounding the ETH Denver conference (Feb 29-Mar 3) contribute to Ethereum's positive trajectory.

The standout market segment in February was the Utilities & Services Crypto Sector, marking a 53% gain. This product category encompasses tokens linked to artificial intelligence (AI) technologies, with several witnessing substantial increases. While not initially designed with AI applications in mind, Filecoin (FIL) is presumed to benefit from market interest in this thematic realm. Originating as a decentralized storage project, Filecoin has expanded to include smart contracts and infrastructure for computation, potentially synergizing with blockchain-based AI applications. On February 16, Filecoin disclosed integration with Solana to provide a decentralized block history for the network. Currently commanding a dominant market share (~99%) in decentralized data storage, Filecoin positions itself at the forefront of this sector.

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