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Welcome to Crypto Long & Short! This week, Beth and Clay Haddock argue that bitcoin ETF approval would improve perceptions of digital assets following a year when the industry faced a backlash. Then, David Liang explores whether bitcoin's price can keep soaring in 2024. As always, get the latest crypto news and data from CoinDeskMarkets.com. – Benjamin Schiller, head of opinion and features at CoinDesk |
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Crypto Had Reputational Issues This Year. 2024 Will Change That |
This time of year brims with intergenerational dialogue and forward-looking optimism. As a mother-son duo immersed in cryptocurrency, we recently explored the opportunities and challenges that crypto will encounter in 2024. While our opinions diverged on topics like decentralized finance, or DeFi, and the U.S. impact on global crypto adoption, we concurred that the coming year, though challenging, could be transformative for the trust and growth of digital assets. A primary hurdle for crypto in the past year has been its tarnished reputation, which we attribute to three main factors: institutional mistrust in digital assets, an unclear valuation process fueling skepticism and an overemphasis on speculative investment. This skepticism was mirrored by influential leaders like JPMorgan Chase CEO Jamie Dimon and Securities and Exchange Commission Chair Gary Gensler, who continue to raise concerns about crypto's association with illegal activities and regulatory noncompliance. Strong institutional support has been hampered by these credibility and utility issues. For example, Berkshire Hathaway's negative stance on crypto contrasts with Warren Buffett's early career, where he invested in speculative pink sheet ventures for value. This hesitation has allowed a narrative of fraud to dominate discussions about crypto's legitimacy as a valuable innovation. We believe that addressing these concerns through effective due diligence, risk management and a zero-tolerance approach to fraud will significantly enhance trust and support. The recent enforcement actions against fraudulent activities in the crypto sector, including the Binance and FTX cases, can be seen as crucial for rebuilding trust. Regulators' firm stance against fraud is a net positive as it makes way for a more trustworthy environment. This is a sentiment echoed by Congress with the unanimous passage of the Deploying American Blockchains Act of 2023, signaling growing support for digital assets. Looking to 2024, two possible developments stand out. First, SEC approval of spot bitcoin ETFs could stimulate more excitement and support for digital assets, clarifying regulatory uncertainties and valuation concerns. The recent excitement about advancements in payment processing, particularly with the introduction of PayPal's U.S. dollar stablecoin, PYUSD, highlights the need for clarity. This excitement, however, was muddled due to the competition with other stablecoins that have varying commitments to reserve, anti-fraud or custody obligations. A new ETF approval could facilitate the growth of other blockchain projects including trustworthy stablecoins. Second, the push for modernizing U.S. capital markets' infrastructure aligns with the demands of digital-native generations for efficiency and transparency. Initiatives like the upcoming T+1 trade settlement deadline and Blackrock CEO Larry Fink's prediction of a tokenomics-driven market future underscore this trend. We expect in 2024 there will be increased institutional support for use cases that are designed to bring that reform, such as Figure's use of the Provenance blockchain. In sum, our collective outlook for 2024 is that the crypto community has an opportunity to champion a narrative emphasizing zero tolerance for fraud and highlighting clear use cases. This approach could reshape perceptions of crypto, fostering trust and setting the stage for a year marked by significant growth and innovation. |
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What to Expect From Bitcoin in 2024 |
Optimism regarding a spot bitcoin ETF application approval ignited an almost 49% gain in BTC's price since October. It is likely that the Securities and Exchange Commission approves or denies multiple applications simultaneously for logistical and consistency reasons. (Figures cited are as of Dec. 18 unless noted otherwise.) Spot BTC trading is concentrated on several exchanges: Coinbase, Binance, Bybit and OKX. They account for about 65% of spot BTC trading. Binance accounts for 35.5%, while Bybit, OKX and Coinbase account for 11.3%, 9.2%, and 8.9%, respectively. The average BTC order size has been decreasing since early 2021 and is about $1,652. While smaller order sizes are associated with retail customers, many, if not most, institutions divide trade orders into smaller orders to minimize slippage. It would be imprudent to suggest retail customers were primarily responsible for recent trading patterns in BTC based on order size analysis alone. Coinbase's third-quarter 2023 trading summary suggests declining volume in three of the past four quarter-over-quarter measures. Volume among retail and institutional traders has fallen at a similar pace over the course of the past year, with retail and institutional customers trading about $4.2 billion and $24.7 billion in the third quarter, respectively. |
Figure 1. Source: CoinBase, Path Digital Advisors Bitcoin futures markets CME Group's BTC futures open interest reached $4.55 billion, accounting for about 25% of total BTC open interest. Current open interest reached a level last seen in the second quarter of 2022. |
Figure 2. Source: CME Group, Path Digital Advisors The majority of CME BTC futures positions are held by asset managers and leveraged funds, with the former exhibiting a long bias and the latter showing a short bias. This appears intuitive as asset managers tend to approach investing with a longer time horizon relative to other buy-side customers. Conversely, hedge funds and commodity trading advisers, or CTAs, tend to trade with a shorter time horizon and engage in basis trading and hedging. Institutional investors are becoming more active in the crypto space. CME Group notes that "average large Bitcoin open-interest holders, with at least 25 contracts, hit an all-time high the week of November 7, 2023." The funding rate aligns the perpetual futures price to the spot price. When the funding rate is positive, long contract holders pay the funding fee to the short contract holders, and vice versa. The funding rate has trended higher with the spot price of BTC, suggesting bullish sentiment and bias. Bitcoin outlook The historical relationship between BTC prices and consumer interest has decoupled recently. If the antecedent that consumer interest is solely driven by retail customers is true, then it appears that either: 1. Retail customers are trading without conducting research, or 2. Institutional investors are having an outsized influence on prices. The sentiment among institutional investors appears to be constructive. The parallel upward shifts of the futures curve in each month of the fourth quarter of 2023 suggest bullish activity and a long bias among institutional investors. The ETF approval is sufficiently baked into bitcoin prices such that positive momentum from the announcement may be offset by traders taking profits off the table. This suggests a possible reversion to the mean in the days after the announcement. Thereafter, the market will likely recalibrate its focus to the halving in April. |
Figure 3. Source: Bloomberg, Path Digital Advisors LLC |
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From CoinDesk Deputy Editor-in-Chief Nick Baker, here is some news worth reading: |
- SOLANA SOARS: Solana debuted to great hype several years ago, as an attempt to solve the Ethereum blockchain's core problem. Solana, it was promised, would be a cheaper and faster place to handle transactions, a better springboard for DeFi and other smart contract-powered activities. And then came 2022 and all that pain. Things looked bleak for Solana (and, let's be honest, most of crypto). Suddenly, though, Solana is just about the hottest thing going. Its SOL token just soared past $100 for the first time since early 2022 and, at $45 billion, it's the fourth-biggest crypto by market cap as I type this. As this story explains, "Solana-based decentralized exchanges are nearing Uniswap's multibillion-dollar trading volumes for the first time, according to DefiLlama." Ethereum remains the leader among smart contract-enabling layer-1 blockchains, but recent events show it may have serious competition now.
- A LONG DECADE: The failure amid a hack of Mt. Gox a decade ago was a milestone for the industry, an early sign crypto would need better infrastructure to thrive or, at least, survive. Some 850,000 bitcoins were stolen in that incident, a hoard now worth about $36 billion. All these years later, it appears former customers are starting to get repaid. From CoinDesk's coverage: "The repayment could have some impact on bitcoin prices, due to the sheer volume of the tokens being released, but would not destablize the market, UBS had said in a report earlier this year."
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Crypto's Big Image Makeover