Crypto Market Outlook 2024: ETFs Offer Tailwinds for Other Digital Assets

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.

Can’t
wait
until
next
year’s
outlook?
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out


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