11 Dec 2023

2023 - Year in review

A year of low volatility, low retail participation, active regulators and active institutions.
2023 - Year in review

Solid upside, soft volumes

2023 was a solid year. Bitcoin has seen YTD gains of 163%, compared to Nasdaq’s 44%, S&P 500’s 18% and gold’s 12%. However, the growth throughout the year has been peculiar – it has occurred in a low-volatility environment, with shallow trading volumes and a low degree of retail participation.Price fluctuations typically originated from news in 2023. Massive volatility emerged from the U.S. banking crisis, at first pushing markets lower, partly due to uncertainty regarding Circle’s $3bn deposit stuck at Silicon Valley Bank. After the initial scare, prices surged as Bitcoin’s bearer asset properties grew traction amid bank deposit uncertainty fueled with new bank funding programs from the FED. Then, since the summer, ETF prospects have been the leading force pushing prices higher, with surges in volatility often stemming from ETF-related headlines. Throughout the year, retail participation was low. The year saw declining website traffic to crypto exchanges and retail volumes pushing to multi-year lows on Coinbase. We ascribe the reduced activity levels to the challenging macro backdrop, with higher costs of living and a subdued ability to invest in crypto. Nonetheless, we note that Bitcoin’s correlation to equities and gold has pushed to zero throughout the year. The declining correlations are driven by a combination of positive idiosyncratic news related to bitcoin and long-term holders accumulating throughout the year.

Altcoins underperforming vs. BTC

Ether underperformed significantly versus BTC in 2023, while seeing 89% gains in USD. There have been many forces at play leading to this underperformance. First, bitcoin’s strength has predominantly been caused by Bitcoin-specific news pushing prices higher. Second, on-chain activity on Ethereum has been shallow throughout the year, leading to reduced demand for gas. Surprisingly, the Ethereum blockchain faced competition from Bitcoin this year, as Ordinals emerged, periodically seeing higher weekly trading volumes than Ethereum NFTs.Ether was far from alone in underperforming BTC in 2023. Only 24% of the coins within the top 50 outperformed BTC. A few outperformed BTC significantly, namely the most pressured coins from 2022’s FTX collapse, with Solana shining as the strongest performer with a massive YTD return of 567% as of December 7. While some yearly performances have been strong, several of the largest altcoins still trade at a drawdown of 70% or more from their all-time highs, and we anticipate that multiple altcoins will never see newall-time highs again. CME became the new top dog in BTC derivatives. Within derivatives, 2023 has seen CME surge to become the largest derivatives exchange for BTC after pushing new all-time highs in 2023. The former leader, Binance, saw declining activity alongside a murky and challenging regulatory backdrop. In addition to CME’s rise in 2023, options saw growing adoption throughout the year, with options OI pushing to all-time highs in a year where options flows primarily have been structured around upside exposure.

Constructive conditions for bulls as we enter 2024

We predict that BTC will reach new all-time highs by the end of 2024 while also anticipating that the current rally will peak in January alongside ETF launches. Three factors primarily cause our constructive 2024 thesis.1. Stubborn holders Supply is deeply concentrated in the hands of fanatics. Historically, long-term holders tend to sell and realize profits after prices break past all-time highs.2. The halvingMiners sell their miner rewards. We expect the annual decline in sell-side liquidity of 164,250 BTC to lead to a positive drift in BTC prices. 3. ETF approvalsETFs further simplify access to BTC, in addition to incentivizing Wall Street’s most influential asset managers to argue in favor of BTC exposure. We expect diversification to be one of the core arguments for building BTC exposure, as correlations have trended towards its pre-Covid norm.
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