Crypto Market Investment Outlook for 2024

If I were to summarize the crypto market in 2023 in one sentence, I would echo Churchill’s words: “Never let a good crisis go to waste.” Despite facing numerous crises throughout 2023, the crypto market saw its market capitalization grow from $792 billion to the current $16.8 trillion. Each crisis during this period presented an excellent opportunity to buy the dip. From the data, I observed major U.S. financial giants simultaneously exerting regulatory pressure while strategically accumulating Bitcoin.

From the FTX scandal, the world’s second-largest exchange collapsing at the end of 2022, to Bitcoin’s surge of over 160% since then, including a 57% increase during the Silicon Valley bank bankruptcy crisis. Even with Coinbase under SEC investigation, its stock has risen over 460% since the beginning of the year (with expected revenue exceeding market expectations due to ETF influences). Binance Coin (BNB) rose by 50% after Binance paid a whopping $4.3 billion fine to the U.S. Department of Justice. Additionally, there were geopolitical crises in the Middle East. Behind all these dangers lay opportunities, turning bad news into good news.

Crises such as the banking crisis in the United States and the diffusion of geopolitical conflicts reinforced Bitcoin’s position as a safe haven alternative. Furthermore, some top U.S. financial institutions, including BlackRock, applying for spot Bitcoin ETFs, implicitly acknowledged the disruptive potential of cryptocurrencies. These were the trends we witnessed in 2023.

As we are now just 2 days away from 2024, we need to contemplate the investment direction and major events for the coming year.

Countdown to BTC’s fourth halving

Based on current block calculations, Bitcoin is set to undergo its fourth halving on April 22, 2023. Historically, each halving has triggered a subsequent bull market, with BTC prices rapidly rising within 6-12 months, reaching historic highs. After the halving, miner block rewards will reduce from 12.5 BTC-6.25 BTC to 6.25 BTC-3.125 BTC, giving rise to the development of BRC20 tokens as miners seek alternatives in gas fees.

Financing projects with value exceeding US$100 million in 2023

The total investment amount for 2023 witnessed a sharp decline of 68%, falling to $10.6 billion, a stark contrast to the $33.2 billion total investment reported in 2022. Cryptorank has documented six projects that secured financing exceeding $100 million, most of which have completed Series B and C rounds. Among these, the projects garnering significant attention from airdrop enthusiasts are Wormhole and LayerZero, with indications suggesting that both projects may launch their own tokens in 2024. On the other hand, substantial funding has been directed towards artificial intelligence-focused ventures like Worldcoin and character.ai. Considering the recent introduction of several AI projects on Binance, it is foreseeable that AI will become a major force in the crypto market in 2024. Blockchain.com, established in 2011, holds the title of the currently highest-valued project. As of March 2022, the company was valued at $14 billion, and in November of this year, it secured an additional $110 million in financing.

Bitcoin ETF May Be Approved in January

The SEC concluded its review of Bitcoin ETF applications in December, and there is widespread anticipation in the market that the SEC’s final responses, expected in January, will result in the approval of several Bitcoin ETF spot applications. The focus is particularly on the SEC’s response to ARK’s ETF on January 10, which might signal the acceptance of multiple ETF applications simultaneously. This implies that more institutional clients will enter the cryptocurrency space, including both traditional funds and ultra-high-net-worth individuals. The expected approval of a U.S. Bitcoin ETF is poised to further drive this trend, potentially leading to the creation of more sophisticated derivative products and reshaping the market in unprecedented ways. These products would rely on compliance-friendly spot ETFs as their foundation, thereby enhancing liquidity for all market participants.

Indeed, some data has already indicated a growing institutional interest in Bitcoin throughout 2023. The open interest in the options market has expanded to a scale comparable to, or even exceeding, that of the futures market. Both markets have open interest ranging from $16 billion to $20 billion, with Deribit continuing to dominate the options sector (90%+). This suggests that more professional traders are utilizing the options market to deploy complex trading, risk management, and hedging strategies. This is not typical retail behavior, and I believe that the implied volatility metric will garner increasing attention.

In the futures market, a noteworthy shift in dominance has occurred, marked by the regulated Chicago Mercantile Exchange (CME) holding, for the first time in history, a larger open interest than Binance. Both options and CME futures open interest align with the peak of a bull market. October seems to be another crucial moment in this transitional phase, implying that the influx of institutional capital has driven the rise of BTC, closely tied to the introduction of spot ETFs. Currently, what deserves more attention is the post-response behavior of the initiators of this bull market, i.e., options and CME futures open interest, following the approval of BTC spot ETF applications. A decline in open interest in options and CME futures after the positive news may indicate institutional withdrawals, typically preceding a downturn in Binance futures sentiment.

Blockchain infrastructure from payments, gaming and social media has made great progress in the past 2 years, but there is enough infrastructure. I expect more market players to focus on finding potential web3 applications to help cryptocurrencies bridge the gap between early adoption and mainstream usage.

In 2023, many market participants relied on products and professionals from the Web2 era to facilitate their investments in the crypto world. We observed a growing influx of large gaming companies, major financial institutions, and prominent social media platforms entering the crypto space. This trend is likely to phase out some older crypto market products, with new products potentially achieving greater success, a pattern frequently witnessed in the history of the internet.

The Spring of Layer-2

The emergence of OP Stack, Polygon CDK, and Arbitrum Orbit, along with the abstraction of functionality into dedicated layers, has accelerated the rapid growth of Layer-2 scaling solutions. However, despite the significant increase in the number of Layer-2 solutions, they have hardly shifted the activity away from the Ethereum mainnet; instead, they have been absorbing active users from Layer 1.

For instance, comparing the bridging specifications connecting Ethereum with Layer 2 and alternative Layer 1, it is evident that the share of ETH locked on Rollup connection bridges has grown from 25% of all bridged ETH in early 2022 to 85% by the end of November 2023. While the usage of Rollups has increased, the transaction volume on Ethereum remains relatively stable, averaging around 1 million transactions per day. In contrast, the combined activity on Arbitrum, Base, Optimism, and zkSync currently exceeds 2 million transactions per day on average.

Noteworthy is the modular theory manifesting itself in a completely unique way in the L2 space. Eclipse relies on the Solana Virtual Machine (SVM) for transaction execution, Celestia provides data availability, Ethereum handles settlement (security), and RISC Zero performs zero-knowledge fraud proofs. This is just an example of how we are starting to experiment with different (non-EVM) virtual machines at the execution layer, and the impact on the ecosystem is yet to be observed. With the upcoming Dencun fork in the first quarter of 2024, which may reduce transaction fees by 2-10 times, I believe that next year will bring spring to Ethereum and Layer2, as already evident in December if you closely observe the performance of the Layer2 sector. Additionally, the ETH ETF is currently delayed until May next year, and if the BTC ETF is approved in January, it may also activate market expectations for ETFs.

On the macro level: Election year, interest rate cuts, and recession

The election of leaders in the United States, Mexico, Taiwan, and Romania is crucial for their attitude towards the crypto market. Due to uncertainties in the elections, households and businesses may adopt a wait-and-see approach, delaying critical economic decisions from large-scale purchases to significant investments.

De-dollarization is a perennial topic, but the US dollar remains the world’s reserve currency. In fact, the dollar plays a significant role in global finance and trade, with its share in all international transactions hovering around 85-90% over the past forty years. However, with the Russia-Ukraine war, the United States intensified sanctions against Russia, triggering a currency war. As more countries sign bilateral agreements to reduce dependence on the dollar, there is an accelerated interest in developing new cross-border payment solutions. For example, countries like France and Brazil have started settling bulk commodity trades in Chinese yuan.

Inscription

The introduction of Ordinals and Inscriptions also led to the emergence of BRC-20 tokens in March 2023, marking the first deployment, minting, and transfer of replaceable tokens on the Bitcoin network. While Inscriptions are the irreplaceable application of the Ordinals protocol, BRC-20 tokens serve as their replaceable counterparts. After the initial frenzy following the launch of Ordinals and BRC-20 tokens, the market cooled down before experiencing a significant resurgence in November. The activity in November marked the highest ever recorded, with a total registration exceeding 8.3 million, a 362% increase from the low point in October. However, most Inscriptions are currently in a conceptual state, lacking practical utility and specific models. It is anticipated that in 2024, Inscription derivatives such as lending and staking products will be introduced.

Blockchain gaming’s development

Interest in Web3 games reignited in 2023. The current potential market size for the gaming industry is around $250 billion, projected to grow to $390 billion over the next five years. Despite the significant investment opportunities, users generally reject the existing Web3 “play-to-earn” model, represented by early projects like Axie Infinity. This has prompted developers to integrate high-quality AAA games with sustainable financial mechanisms. Progress has been seen in Web3 games this year, but surveys indicate that the majority of gamers dislike NFTs, reflecting their resistance to “play-to-earn” or “pay-to-play.” 2021 saw the most intensive early investment in Web3 games, implying that by 2024, game development has been underway for two years. Notably, Binance has increased its focus on blockchain games, potentially driving the prosperity of Web3 games.

RWA (Real World Assets)

Real World Assets (RWA) on blockchain platforms present significant opportunities, including tokenization of various assets such as real estate, gold, and intangible assets like “carbon credit quotas.” This tokenization could increase the liquidity of traditionally illiquid assets, allowing a broader range of investors to enter these markets. The approval of BTC and ETH spot ETFs may also contribute to the development of the RWA field in 2024.

MakerDAO is one of the most prominent decentralized finance (DeFi) protocols on Ethereum. Its DAI stablecoin is over-collateralized by various assets, including RWAs. Its objective is to create a more open and inclusive financial system. Centrifuge enables the tokenization and financing of real-world assets on the Ethereum blockchain. It allows businesses to convert their real-world assets into NFTs, which can then be used as collateral to obtain liquidity.

How long can high-interest rates be sustained

We are entering the second phase of tightening, where high-interest rates will continue to weigh on household and business cash flows. Some weaker businesses may experience a faster deterioration in their financial conditions. I expect the Federal Reserve to start lowering interest rates after the second quarter, but the extent will depend on the economic situation at that time. Currently, the 2% inflation target has not been achieved, and the labor market remains tight. However, I anticipate at least one interest rate cut in 2024 (soft landing), with the possibility of more if a recession occurs.

BTC‘s Key Support Level

Currently, $30,000 is an important support level for BTC. After breaking below this level in 2022, panic selling ensued. Around June 2023, this area became a crucial resistance zone. If the price drops below $30,000 again in 2023, it might reignite demand for BTC, similar to the events in March 2020, subsequently initiating a halving bull market in April.

Summary

The first quarter of 2024 presents various positive factors for the crypto market. First and foremost, attention should be given to the SEC’s response to the BTC ETF spot application in January. This could stimulate more liquidity entering the market, laying the foundation for the halving bull market in 2024, and promoting the adoption of Real World Assets (RWA). Secondly, there is the potential outbreak in the Ethereum ecosystem, with expectations for an ETH spot ETF and the impending Cancun hard fork, which might redirect market focus from BTC to ETH.

On a macro level, high-interest rates will continue to impact household and business cash flows. Elections may introduce uncertainty in the third and fourth quarters, and attention should be given to how BTC’s key support level performs during economic downturns. The rise of Memetic derivatives and new blockchain games is also noteworthy, while the artificial intelligence sector and Layer2 continue to be major themes in 2024.

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