Sophia’s Thoughts On The End of the Crypto Winter

CryptocurrencyNVDIAArtificial Intelligence
Written By Gustavo Schwenkler

The crypto winter is coming to an end after a powerful rally in February. With Bitcoin inching closer to breaking its all-time high, what can we expect as we enter the crypto spring?

These are Sophia's Thoughts:

  • The crypto market rallied in February after it mostly flatlined in January. A big driver of this performance were the large inflows into the recently approved spot Bitcoin ETFs.

  • Another big component was the AI rally ignited by NVIDIA’s recent earnings announcement, which defied all expectations. Several AI coins have seen large appreciations in value.

  • Sophia sees sentiment as a big driver of performance going forward while fundamentals remain fair.

  • As long as the conversation and hype around AI and the spot crypto ETFs continues, we see more potential for upside.

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🚀 Last week’s market performance

The crypto market and Bitcoin (BTC) gained 5% each last week. The best performing coin was Theta Network (THETA), an AI coin boosted by NVIDIA’s record earnings. THETA gained 41% last week. The worst performing coin of the week was Siacoin (SC). It had an unusual trajectory. Siacoin first pumped during the first half of the week, gaining more than 50%. Then it dumped, losing another 51%.

🧐 What is your crypto mood today?

In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!

🥶 A Rally to End the Winter

What a ride crypto has been on in the last few weeks. The crypto market has gained 29.5% so far in February. Bitcoin (BTC) breached the USD 57,000 mark and is now only trading USD 12,000 away from its all-time high of USD 69,000 in November 2021. Putting everything in perspective, it is fair to say that the crypto winter appears to be over. Since November 2023, the crypto market seems to be thawing.

A large part of the rise in crypto valuations has to do with the newly approved spot Bitcoin ETFs in the US. The expectation that spot Bitcoin ETFs would be approved led to a strong rally in November and December of last year, as investors started buying crypto ahead of the approval. But the performance of the spot Bitcoin ETFs was somewhat muted after they were approved by the SEC on January 10. This led to a lousy month of January for crypto, with Bitcoin (BTC) flatlining. Even though the performance for the ETFs in January was not as good as anticipated, we conjectured that this likely had less to do with the fundamentals of the crypto market. Instead, we believed that the underperformance in January was due to rebalancing effects, whereby funds were flowing from the expensive Grayscale Bitcoin Trust into other spot Bitcoin ETFs as investors adjusted to the new market reality.

And February proved us right, with more and more funds flowing into the spot Bitcoin ETFs. More than USD 1 billion were traded in shares of BlackRock’s iShares Bitcoin Trust (IBIT) yesterday. That’s enough to rank IBIT as “11th among all ETFs (Top 0.3%) and Top 25 among stocks” in terms of trading volume yesterday, according to Bloomberg analyst Eric Balchunas. The nine new spot Bitcoin ETFs that are not Grayscale now hold more than 300,000 Bitcoins, which are worth around USD 17 billion. And the mass exodus from the Grayscale Bitcoin Trust (GBTC) slowed down, bottoming at USD 22 million in daily outflows. That’s a mere fraction of the USD 650 million in daily outflows Grayscale was experiencing right after the ETFs got approved.

Funds are flowing into spot Bitcoin ETFs. The excitement around this development is pushing sentiment up, which is driving crypto valuations up. But this is not the whole story. There was another important development last week. And it involves NVIDIA.

🤖 The NVIDIA Effect

Last Wednesday, NVIDIA (NVDA) released its latest earnings results. And the results exceeded even the most optimistic expectations by investors. Earnings per share were about 12% higher than expected, while quarterly revenue was around 8% higher than expected. Now, NVIDIA has been on a roll ever since the AI hype got ignited by OpenAI’s ChatGPT release. So everybody expected NVIDIA to report positive results. Nonetheless, the degree to which NVIDIA would beat expectations in its earnings announcement was important for investors. Modest results would have insinuated that the AI hype may be cooling, which could have been worrisome for investors. Instead, what we saw are impressive results. And they provided renewed ignition for the enduring AI boom.

What does NVIDIA have to do with crypto? A lot, it turns out. For one, the NVIDIA results boosted all things AI. That includes AI-linked cryptocurrencies. Several of the top performers of last week were AI coins:

  • Theta Network (THETA) is an AI cloud computing platform. It gained 40.7% over the course of the last 7 days.

  • SingularityNET (AGIX) is a blockchain-based network for AI services. It gained 35.5%.

  • Render (RNDR) is a decentralized GPU rendering platform used for AI applications. It gained 19.6%.

  • The Graph (GRT) is an indexing protocol for the management of large data sets. It also gained 19.6%.

AI coins command around 1.5% of the total crypto market cap. So their strong performance provided a small boost for the overall market.

More importantly, NVIDIA’s results may have bolstered investors’ risk appetite. With the AI hype continuing to provide returns, investors may feel more confident in taking riskier bets. There is evidence that investor sentiment improved after the NVIDIA results came out. The VIX, which is a measure of investor uncertainty implied by S&P 500 option trades, immediately dropped after NVIDIA announced its earnings. And the CNN Fear and Greed Index became more positive and jumped further into Greed territory after the announcement. While these metrics are not crypto specific, they tell us that investors felt reassured by NVIDIA’s results. That may increase their risk tolerance, resulting in a higher propensity to invest in risky cryptocurrencies. We reported in the past that crypto returns tend to be high when investor confidence and risk tolerance are high.

All in one, NVIDIA had a big impact on crypto.

🧠 Sophia’s Intelligence

Sophia has been mostly bullish (34% of instances) or neutral (49% of instances) over the last four weeks. There have only been a few bearish turns (17% of instances). But, overall, Sophia’s intelligence has been spot on. Sophia’s current 4-week accuracy rate is 57%, with the accuracy rate being as high as 66% for all bullish calls.

Sophia’s measurement of crypto market sentiment is currently very positive. That is good news for the crypto market. Sentiment has been providing a lift for crypto valuations over the last 4 weeks, according to Sophia’s intelligence. However, fundamentals appear to be fairly priced. This suggests that any upswing we may see going forward will likely be sentiment driven.

Our conjecture is that the conversation around spot crypto ETFs will continue to drive the performance of the market in the short run. For one, if we continue to see further inflows into spot Bitcoin ETFs, then sentiment may remain strong and valuations high. In addition, the chatter about spot Ethereum ETFs continues to fuel the valuation of coins that may soon see ETFs approved as well. The Grayscale Ethereum Trust (ETHE) gained 40% over the last 4 weeks.

There is an event on the horizon that may change this situation: the Bitcoin halving that’s expected by the end of April. That may shift the influence of fundamentals on crypto valuations and provide an additional lift for the crypto market.

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Gustavo Schwenkler
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