Grayscale Research Head: Two Scenario Deductions for BTC in the Second Half of the Bear Market

Source: Grayscale Research Director Zach Pandl's column; Compiled by Jinse Finance Claw

Last week, Bitcoin's price fell below $60k, setting a new low for this cycle. Since hitting a peak of $125k in October, Bitcoin has dropped over 50%. We believe this decline represents another cyclical pullback within Bitcoin's long-term upward trend (see Chart 1).

Chart 1: Bitcoin's decline is another cycle around the upward trend.

In recent months, multiple factors have pressured Bitcoin's price. Most importantly, a shift in expectations for Federal Reserve policy has weakened the currency debasement trade. Late last year, prediction markets anticipated that President Trump would nominate the relatively dovish Kevin Hassett as Fed Chair. However, he ultimately nominated the relatively hawkish Kevin Warsh, who officially took office this month. With inflation persisting, the market expects the Fed to raise rates rather than cut them this year (see Chart 2). Spot gold prices, which also compete with fiat currencies like the dollar, have fallen roughly 25% from their highs, comparable to Bitcoin's decline after adjusting for volatility.

Chart 2: Warsh is expected to raise interest rates by the Fed

Beyond the shift in Fed expectations, the crypto market also faces the following issues: (a) uncertainty over the possible passage of the CLARITY Act; (b) pressure on Strategy's leveraged balance sheet; and (c) investor caution regarding digital security risks posed by quantum computing.

At the same time, improving regulatory conditions continue to drive institutional adoption of public blockchain technology — which we see as the most important structural trend in the digital asset market. Just this month, the U.S. Commodity Futures Trading Commission (CFTC) approved the first perpetual futures in the U.S. market, and the growth of stablecoins and tokenized assets will support many leading blockchains. Additionally, broader social and political trends underpinning the crypto asset class remain strong: disorderly growth in government debt, declining trust in intermediaries, and the rise of artificial intelligence may all drive demand for alternative payment systems and technologies that preserve human sovereignty.

Overall, we see two possible paths for Bitcoin to exit this cycle's bear market (see Chart 3).

In our base case, the CLARITY Act passes the U.S. Senate, Strategy takes steps to strengthen its balance sheet, and the Fed refrains from raising rates. If subsequent news develops favorably in this direction, Bitcoin's price may have already neared its low.

In the downside case, the CLARITY Act fails to pass this year, Strategy and other digital asset managers further deleverage, and the Fed is forced to raise rates due to persistent inflation. If downside risks materialize, we could see a modest further decline in Bitcoin's price. In previous cycles, Bitcoin's price fell around 80%, but we believe the decline in this cycle will not be as severe, given the more moderate bull market and more stable institutional demand for digital assets.

Chart 3: Two scenarios for Bitcoin to exit this bear market

Grayscale Research remains highly optimistic about the medium- to long-term outlook for the crypto asset class. Over the past decade, crypto assets have been the best-performing asset class, and we believe they will continue to be over the next decade. Investors manage risk based on short-term catalysts to meet their own needs.

However, we believe the current bear market presents an excellent opportunity for long-term investors to capitalize on the structural growth of public blockchain technology and digital asset valuations over the next decade.

**Key Takeaways: Whether Bitcoin's price has reached a cyclical low depends on upcoming catalysts, including the Fed's interest rate decisions and progress on the CLARITY Act in the U.S. Senate. We see numerous structural tailwinds for the crypto asset class and believe current valuations offer attractive entry points for investors with a long-term investment horizon.