Market
BTC crossed the $40,000 mark last Sunday and rallied all the way to as high as $44,700 on Friday, bringing the weekly return to more than 10%. Since October 16, we have witnessed 8 consecutive weeks of BTC rallying. The last time we observed such strong momentum with more than 5 weeks of consecutive rallies was back in 2020 and July 2021, in the midst of the DeFi summer and subsequent NFT summer.
Reviewing this year’s BTC performance, it has been repeating the pattern of a "steep rally -> stabilization -> losing momentum" until mid-October. BTC was up 45% in January 2023, bouncing from the FTX bottom and reacting to increased liquidity in the market. The banking crisis in March 2023 led to another 50% rally in BTC, but the market remained sideways until BlackRock’s spot BTC ETF filing in June 2023 lifted the price by 23%. The market then experienced low volatility and low activity in Q3, despite positive news such as Grayscale winning the lawsuit against SEC and the Fed's decision to pause rate hikes in September for the first time this year.
Finally the fake ETF approval news rekindled market’s optimism regarding the real chance that spot ETF is going to bring mainstream adoption. As we approach the SEC spot ETF response deadline on January 10, 2024, the steady progress issuers made with the SEC and encouraging signs of more supportive monetary policy ahead have sustained this October rally into new highs in December.
So where do we go from here? There are three possible scenarios:
The Cambrian Explosion - BTC rallies past ATH in January 2024, and 2024 becomes the year when selected sectors witness comparable price actions last seen in DeFi summer 2021.
Having experienced a prolonged crypto winter, we often forget that when the market rips, it can rip really high and really fast. According to BTC’s 15-year history, the latest 1-year return of ~120% sits right around the median level. Putting monthly returns in context, during DeFi summer, BTC experienced a close to 100% rally in December 2020 alone.
Source: Lazy Portfolio
Bright spots on the crypto native side could also fuel a growth-driven rally. On the technology side, Ethereum’s Dencun upgrade and Solana’s firedancer are both expected to go live in H1 2024, making significant improvements in blockchain performance. We are also poised to see exponential growth in Web3 gaming as the past 2-3 years of investments start to bear fruit. Not to mention, DeFi coming back, with increased risk appetite in trading altcoins and derivatives as well as growth in RWAs that will blur the line between TradFi and DeFi onchain.
The Steady Growth - BTC continues the same pattern as this year, with positive news driving 20-50% rally and sideways most of the time, ending the year with 50-100% return.
Once the BTC spot ETF is approved, mature and sticky capital could come in as mainstream adoption begins. In the meantime, as blockchain technology adoption climbs up the steep S-curve, we see the return potential goes down commensurate with the risk. Large-cap crypto’s return could gradually decrease from VC-like return to high-growth equities. The actual adoption period could take longer, but the market can price in such a possibility sooner.
Reset and Rebuild - Major market corrections happen and BTC price is back to levels below $30,000.
Many things could still go wrong in 2024. The ETF could be denied on January 10, although we believe eventual approval is going to happen given it exists in other jurisdictions. March would be the next deadline to watch as the SEC response for Blackrock and Fidelity ETFs is due. The denial of the spot ETF might cause a correction in BTC price as investors recalibrate the timing of mainstream inflows. Macro could still have the biggest impact on crypto as we observe the delicate balance between monetary policy and economic condition. A rate cut wouldn’t bring back risk capital if the economy is in a recession. We believe technology could still be a big risk factor as Ethereum goes through its major scalability upgrade. The rapid modular chain development is still being battle tested to ensure they function smoothly without sacrificing Ethereum security.
We believe the first two scenarios are more likely given the strength of the tail winds behind us. Although there could be volatility and downward corrections along the way. Spot BTC ETF seems to be on track for January approval. Global liquidity conditions have started improving since October 2023, and the market is predicting rate cuts as early as March 2024. Furthermore, the supply side of BTC is very positive for a further price rally. Past BTC rallies have been accompanied by long-term holders selling BTC to short term holders to monetize gains. The long-term BTC holders are still in accumulation mode with the recent rally, as seen in the ATH long-term to short-term holder ratio.
The BTC halving is scheduled to happen in April 2024, which will further add pressure to BTC supply. The halving is widely anticipated to correlate with BTC price, based on the stock- to-flow model, typically used for commodities. BTC has rallied 10X five months after the rally in the previous halvings, except for 2016, which coincides with a decline in global liquidity in H2 2016. The upcoming halving is more likely to happen in an improving liquidity environment, which could add fuel to a potential rally.
As smart money positions itself to take advantage of the spot ETF tailwind and prepares to move into the next hot opportunities, while FOMO investors join the market from the sidelines, and ETF issuers work diligently toward ETF approval, it's bound to be a busy and exciting holiday season for many of us. Stay tuned!
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Decentral Park is a founder-led cryptoasset investment firm comprised of team members who’ve honed their skills as technology entrepreneurs, operators, venture capitalists, researchers, and advisors.
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