Looking back, 2023 was unmistakably a year of transition for the emergent asset class. Positioning, leverage and the speculative excesses from the previous market cycle were swept away in 2022, allowing for the seeds of the next cycle to sprout in 2023. What persisted and remains is a market with increased interoperability across protocols and projects, with builders and market participants catering to regulated institutional investors with an eye towards greater real-world utility.
Once prominent crypto exchanges like FTX and Binance have seen changes in leadership, with more regulated players like Coinbase, Bullish (now owner of CoinDesk), and EDX leading the market. Meanwhile, traditional futures exchanges like CME are seeing growing volumes for bitcoin and ether-linked futures contracts (see chart below), which now exceed Binance in bitcoin futures open interest.
We also witnessed renewed efforts in the U.S. to list spot token ETFs, with Blackrock surprising the market with its application to the SEC in June. This encouraging institutional development helped support the demand for bitcoin as a real asset and a currency debasement hedge for a financial system awash with fiat liquidity and supportive stimulus, strengthening the narrative of broader adoption for digital assets.
The 2023 period was also one of reduced macroeconomic correlations across digital assets. Crypto was allowed to be crypto, and mostly decoupled from US equities and gold over the year (see rolling correlation chart above), albeit with lower levels of realized volatility than in prior years. Surprisingly, ether realized nearly the same level of volatility as bitcoin in 2023, breaking from the historical norm of generally realizing ~20% higher, with bitcoin’s volatility dropping towards levels akin to single stock volatility, and more in line with traditional asset classes.
Collectively, these developments signal a maturation of the crypto market and an ongoing transition to an institutional landscape. This transition and broadening of the ecosystem towards more traditional, more regulated market participants is expected to lie at the core of the narrative for the next market cycle.
We expect 2024 will see further maturation of the crypto market towards institutional investors. This institutionalization is coinciding with a period of strong performance for bitcoin and ether, even during the ending stages of a U.S. interest rate hiking cycle and the decoupling from short term macro risk factors, suggesting that they are increasingly seen as unique real assets, similar to gold and oil. We anticipate these properties will boost demand for bitcoin and ether as liquid alternatives and diversifiers to traditional bonds, and help asset allocators reinvigorate their traditional stock/bond portfolios with a new and novel source of price appreciation.
We expect the launch of a spot bitcoin ETF in Q1 of 2024. While this is a consensus view, we see it unlikely the approval will be the classic “buy the rumor, sell the news” event, over the medium to longer term horizon, as it allows for a significant new conduit of capital into the asset class through the familiar and regulated exchange traded product.
Anyone who doubts the pent up demand for these assets in a more traditional, regulated wrapper should look to the performance of Coinbase and MicroStrategy stock over 2023, which both more than doubled the performance of bitcoin over the period (see chart below).
These newly launched ETFs would make it easier for a broader range of investors, such as Registered Investment Advisors (RIAs), pension funds and hedge funds to gain exposure to the asset class, and allow investment bank structuring teams to build new products on top of the ETF vehicle.
We believe these ETF inflows will provide a long term tailwind for the market that isn’t fully appreciated. With the current AUM managed by RIAs hovering around an estimated $128 Trillion in 2022 (source: Investment Advisor Association Outlook 2022), and assuming a 1-2% portfolio allocation to digital assets via a spot ETF product, this could bring an additional 1 to 2.5 Trillion of new capital into the crypto ecosystem. However, it’s important to note that this potential influx of capital into the market via ETFs will be limited to bitcoin and ether, potentially further distinguishing them from smaller digital assets (i.e. “altcoins”). That being said, we do believe that appreciation from these two mega cap tokens will be distributed across the wider ecosystem into smaller protocols since they’re primary stores of values across the crypto native investors.
If the U.S. economy enters a recession in the later half of 2024 due to the lagged effects of an accelerated rate hiking cycle and interest rates are cut in response, we would expect digital assets to benefit broadly from expected and anticipated stimulus measures. Bitcoin’s digital scarcity, having gone through the 2024 Halving, would be increasingly appealing in an environment of further increasing federal deficits and spending. Ether’s post-merge tokenomics have also become increasingly deflationary, further sweetening the appeal of Ether in this potential scenario.
Under this macroeconomic backdrop, we would expect Smart Contract Platform, Decentralized Finance (DeFi) and Computing token sectors to be top performers in 2024, as all three of these sectors benefit from increased on-chain activity as they interplay together:
The Computing sector also contains protocols and projects focused on decentralized computing and AI themes, which are further supported by the ChatGPT, AI driven narrative, which lead the sector to outperform all others in 2023 and we should expect this to be a continued pillar of support for the sector into 2024. More info regarding crypto sector definitions here.
While the recession and interest rate cut scenario might be a favorable macroeconomic setup for digital assets, it would be subject to periods of low liquidity and deleveraging. For this reason, we believe position sizing and portfolio construction will be more important in 2024 than calling market direction, and suggest our readers utilize CoinDesk’s Bitcoin and Ether Trend Indicators (BTI and ETI, respectively) when considering allocation decisions across the asset class. More info about BTI and ETI is available here and here.
Investors should also consider their risk tolerance and time commitment when investing in digital assets. For those seeking more passive exposure, major tokens like Bitcoin and Ethereum, in their expected and regulated ETF wrappers, may be safer choices for many seeking to gain beta exposure to the asset class. Additional yield can be generated on top of ether positions through staking, with annualized staking rates and benchmark staking indices provided by our Composite Ether Staking Rate (CESR). More info about CESR is available here.
For those seeking passive exposure to smaller tokens and protocols with greater growth potential, we’d suggest broadly diversified indices with limits on bitcoin and ether exposure to manage idiosyncratic token risk while tilting towards altcoins, which tend to benefit from the middle to later stages of a crypto bull market.
In conclusion, we’ve exited the crypto winter with an ecosystem more robust than the previous cycle and with more supportive and broader narratives that should support the new market cycle well into 2024.
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