OVERVIEW OF THE 2024 CRYPTO MARKET: ETFS ENCOURAGING ADOPTION OF OTHER ASSETS
Overview of the 2024 Crypto Market: ETFs Encouraging Adoption of Other Assets
2023 was a period when macroeconomic correlations between digital assets decreased. Cryptos were allowed to be crypto, and despite fluctuations occurring at lower levels compared to previous years, they mostly diverged from U.S. stocks and gold throughout the year. Surprisingly, Ethereum witnessed almost the same level of volatility as Bitcoin in 2023. Bitcoin volatility, on the other hand, decreased to levels similar to stocks and more in line with traditional asset classes.
Once upon a time, prominent crypto exchanges like FTX and Binance witnessed many changes as more regulated players such as Coinbase, Bullish, and EDX took the lead in the market. Traditional futures exchanges like CME also recorded increasing volumes in Bitcoin and Ether futures contracts, surpassing Binance in open position numbers.
Moreover, following BlackRock's surprising application to the SEC in June, efforts to list spot token ETFs in the U.S. were reignited. This encouraging institutional development supported the demand for Bitcoin as a real asset, helping hedge against the risk of currency depreciation in a financial system filled with fiat liquidity and supportive incentives, thus strengthening the likelihood of adopting digital assets.
The year 2023 also marked a period when macroeconomic correlations between digital assets decreased. Despite lower levels of volatility compared to previous years, cryptocurrency, given the permission to be crypto, mostly diverged from U.S. stocks and gold throughout the year. Surprisingly, Ether witnessed almost the same level of volatility as Bitcoin in 2023. Meanwhile, Bitcoin volatility decreased to levels similar to stocks and more in line with traditional asset classes.
All these factors indicate the maturation of the crypto market and the transition to an institutional environment. The shift and expansion of the ecosystem towards more traditional, regulated market participants are expected to be at the center of developments for the next market cycle.
General Outlook for the 2024 Crypto Market
We anticipate that 2024 will see further maturation of the crypto market, drawing closer to institutional investors. This institutionalization aligns with a strong performance period for Bitcoin and Ethereum, even during the final stages of the U.S. interest rate hike cycle and amid divergence from short-term macro risk factors. This suggests that they are increasingly perceived as unique real assets, akin to gold and oil. We predict that these characteristics will boost demand for Bitcoin and Ethereum as liquid alternatives and diversifiers to traditional bonds.
In the first quarter of 2024, the launch of a spot Bitcoin ETF is expected. While this is a consensus view, we see a low probability of it being a classic "buy the rumor, sell the news" event in the medium to long term, as it enables significant new capital inflow into the asset class through a familiar and regulated exchange-traded product.
Anyone skeptical of suppressed demand for these assets in a more traditional, regulated package should look at the performance of Coinbase and MicroStrategy shares in 2023, both of which more than doubled Bitcoin's performance during the period.
These newly launched ETFs are expected to facilitate exposure to the asset class for a broader range of investors, such as Registered Investment Advisors (RIAs), retirement funds, and hedge funds, and enable investment banks' structuring teams to create new products on top of the ETF vehicle.
We believe that these ETF entries will provide a long-term incentive for the market that is not fully appreciated. Assuming that the estimated Assets Under Management (AUM) managed by Digital Asset Exchanges (DEAs) hovered around 128 trillion mols in 2022, with a 1-2% portfolio allocation to digital assets through a spot ETF product, it could bring an additional 1 to 2.5 trillion to the crypto ecosystem. However, it is crucial to note that this potential capital influx to the market through ETFs may be limited to Bitcoin and Ether and could potentially further differentiate them from smaller digital assets. Nevertheless, we expect the value derived from these two mega cryptocurrencies to be distributed to smaller protocols in the broader ecosystem as primary value stores among local crypto investors.
If the U.S. economy enters a recession in the second half of 2024 due to the delayed effects of an accelerated interest rate hike cycle, and interest rates are lowered in response, digital assets may benefit significantly from expected and unexpected stimulus measures. Bitcoin's halving in 2024 may become more attractive in an environment where federal deficits and expenditures continue to rise. The tokenomics of Ethereum post-merge has become increasingly deflationary, further enhancing Ethereum's appeal in this potential scenario.
With this macroeconomic background, we expect Smart Contract Platforms, Decentralized Finance (DeFi), and the Computing sectors to perform well in 2024, as these sectors benefit from increased on-chain activities while interacting with each other:
- Smart Contract Platform activities require the use of native tokens for blockchain transactions.
- DeFi tokens benefit from trading volumes and lending transaction fees.
- Oracle tokens in the Computing sector (such as Chainlink) provide necessary price data flows across the blockchain ecosystem to facilitate transactions.
Additionally, the Computing sector includes decentralized computing and artificial intelligence protocols and projects supported by the rising field of artificial intelligence, such as ChatGPT in 2023. We believe this will be significant support in 2024.
While the scenario of a downturn and interest rate reduction presents a favorable macroeconomic setup for digital assets, it may be subject to periods of low liquidity and deleveraging. Therefore, we believe that position sizing and portfolio construction will be more critical than determining the market direction. We recommend readers to use CoinDesk's Bitcoin and Ether Trend Indicators (BTI and ETI) when evaluating allocation decisions across the asset class.
However, investors should also consider their risk tolerance and time commitments when investing in digital assets. For more passive investments, leading tokens such as Bitcoin and Ether, especially with expected ETFs, may be safer options. For those looking to passively invest in smaller tokens and protocols with higher growth potential, altcoins that are likely to benefit from the middle and later stages of the crypto bull market can be recommended, integrated into diversified portfolios with Bitcoin and Ether to manage token-specific risks.
In conclusion, we can say that we entered 2024 with a more robust ecosystem than the previous crypto winter, and with more supportive and broader narratives that should continue into the new market cycle until 2024.
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