As we reflect on the dynamic shifts of 2023, we witness a compelling evolution within the emerging asset class. The market shed the speculative froth of the previous cycle, making way for a groundswell of potential in 2023. The increased interoperability across protocols and projects, coupled with a focus on regulated institutional investors, has, undoubtedly, anchored a transformation in the crypto space.
Amid the changing landscape, leaders in the crypto exchange arena experienced shifts in their hierarchies. Notably, the ascent of regulated players like Coinbase, Bullish (now the owner of CoinDesk), and EDX has steered the market. Concurrently, traditional futures exchanges, including CME, have witnessed surging volumes for bitcoin and ether-linked futures contracts, even surpassing Binance in bitcoin futures open interest (as illustrated below).
The resurgence of efforts to list spot token ETFs in the U.S., highlighted by Blackrock’s unexpected application to the SEC in June, has buoyed the demand for bitcoin as a tangible asset and a hedge against currency debasement. This development has fortified the narrative of broader adoption for digital assets, eliciting a positive sentiment within the market.
Another notable feature of the 2023 period was the reduced macroeconomic correlations across digital assets. This newfound autonomy allowed crypto to break free from entanglements with U.S. equities and gold, signaling a maturation of the market. Surprisingly, ether realized nearly the same level of volatility as bitcoin, eclipsing the historical norm, pointing to the evolution of volatility patterns within the crypto space.
Looking forward to 2024, we anticipate a further uptick in institutional participation in the crypto market. This institutionalization, aligned with the robust performance of bitcoin and ether, bodes well, mirroring their growing acceptance as tangible assets akin to gold and oil. This trend is poised to amplify the demand for bitcoin and ether as liquid alternatives within traditional portfolios, infusing a fresh lease of vigor into the conventional stock and bond paradigms.
The ETF Catalysis
The long-anticipated launch of a spot bitcoin ETF in Q1 of 2024 is on the horizon, and it is poised to be a game-changer. The approval of this ETF is expected to enable a significant inflow of capital into the asset class through a regulated exchange traded product, fostering a more tradable and regulated environment. The exponential demand for these assets, especially within a regulated framework, is underscored by the exceptional performance of Coinbase and MicroStrategy stock in 2023, outstripping the performance of bitcoin over the same period (as depicted below).
The imminent ETF launch is expected to open the floodgates for a diverse cohort of investors, including Registered Investment Advisors (RIAs), pension funds, and hedge funds, fueling a long-term uptrend in the market. This influx of capital, estimated at a staggering $1 to $2.5 trillion from RIAs alone, could potentially reshape the crypto landscape, albeit with a primary focus on bitcoin and ether, setting them apart from smaller digital assets.
Amid this landscape, the onset of a potential U.S. economic recession in the latter half of 2024, coupled with expected interest rate adjustments, could spur a broader adoption of digital assets. Bitcoin’s digital scarcity, post the 2024 Halving, is likely to become more appealing amidst growing federal deficits and spending. Moreover, Ether’s post-merge tokenomics, with a pronounced deflationary tilt, is set to augment its allure in such a scenario.
Opportunities on the Horizon
Under these macroeconomic contours, the Smart Contract Platform, Decentralized Finance (DeFi), and Computing token sectors are poised to emerge as top performers in 2024. These sectors are intrinsically intertwined, with their interplay driving increased on-chain activity and presenting a promising outlook. The Computing sector, housing protocols focused on decentralized computing and AI themes, is expected to sustain its momentum from 2023, buoyed by the ChatGPT, AI-driven narrative.
While the prospect of a recession and interest rate cuts might augur well for digital assets, it could also lead to phases of low liquidity and deleveraging. This underlines the pivotal role of prudent position sizing and portfolio construction in 2024, suggesting the judicious utilization of CoinDesk’s Bitcoin and Ether Trend Indicators (BTI and ETI) to inform allocation decisions across the asset class, arming investors with strategic insights.
Notably, considerations of risk tolerance and investment horizon are paramount when venturing into the digital asset space. For those seeking passive exposure, prominent tokens like Bitcoin and Ether, in their regulated ETF avatars, offer a secure conduit, while rendering the additional potential for yield through staking for Ether. Conversely, diversified indices with caps on bitcoin and ether exposure present an avenue for those eyeing potential in smaller tokens and protocols, heralding a broader altcoin play.
In summation, as we traverse beyond the crypto winter, the ecosystem has emerged stronger and more resilient, fortified by compelling narratives that are set to underpin the new market cycle as we head into 2024.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.