Welcome to our analysis of the cryptocurrency market's outlook for year 2024. In this report, we will take a look on the major cryptocurrencies and the cryptocurrency market as a whole.
Before we dive into the analysis, we would like to provide the reader with three points to keep in mind:
1. History doesn’t repeat, but it sometimes rhymes.The history of the cryptocurrencies is relatively short. For Bitcoin, we have so far seen three full market cycles, while for rest of the crypto market we have had only two. With such a limited dataset, one must remain humble and acknowledge that there is a lot of uncertainty associated with all interpretations.
2. Building on the previous point, examining the past is still the central method of assessing the future. The prospects for year 2024 are built upon the developments of year 2023, which, in turn, were largely reactions to year 2022. Cryptocurrency markets are characterized by cyclicality, and many factors oscillate back and forth, sometimes even following the rhythm of calendar years.
3. In the wild volatility of the cryptocurrency market, our principle is "better to be partially right than completely wrong." Our goal is primarily to help cryptocurrency investors avoid being caught completely off guard. Therefore, we aim to provide various scenarios that we believe investors should be prepared for, rather than presenting a single definitive future scenario.
The central theme of 2023 has been the rapid recovery of the cryptocurrency market from the crash of 2022. To quickly summarize the events of the past four years for new cryptocurrency investors in one sentence: the sharp bull market of 2020-2021 turned into a decline at the end of 2021, resulting in an almost 80% drop in the total cryptocurrency market value by December 2022.
Thus, 2023 began from a low point. During the 2023, the total cryptocurrency market capitalization increased by about 100%, and the price of the largest cryptocurrency, Bitcoin, rose by approximately 150%.
An interesting way to view 2023 is to compare it to previous years that have represented the same phase in Bitcoin's halving cycle. Years 2015 and 2019, like 2023, were pre-halving years (more on Bitcoin halving later). In 2015, the price of Bitcoin increased by about 70%, and in 2019, it increased by about 90%.
Compared to these previous years, 2023 with its over 150% increase appears remarkably strong, especially considering that compared to 2019, Bitcoin's market capitalization is about ten times larger, and compared to 2015, it's about 100 times larger. This should, in principle, result in reduced volatility and smaller price fluctuations rather than amplification. It could even be said that the 2.5-fold increase in the price of Bitcoin in 2023 resembles more the actual halving years of 2016 and 2020, during which Bitcoin's price increased 2.5-fold and 4-fold, respectively.
When compared to previous similar years, the significant price increase in 2023 offers three alternative interpretations:
1. If year 2023, as the pre-halving year, resembles the halving years of 2016 and 2020, it could mean that Bitcoin's cycle is ahead of previous cycles, and a significant portion of this current bull market's price increase has already occurred. In this scenario, the post-halving bull market would only see, for instance, a doubling of the Bitcoin price, and the market peak might occur not at the end of previous post-halving years (2013, 2017, and 2021) but possibly by the end of the halving year 2024.
2. On the other hand, if one believes that history repeats itself, and Bitcoin's cycle follows previous patterns, then an exceptionally strong pre-halving year could indicate an even stronger bull market ahead. In this scenario, the market peak would align with previous cycles, likely at the end of 2025. The new price peak could potentially be even higher than the previous one in 2021, possibly reaching $200,000.
3. A third interpretation is that the significant price increase in 2023 may not represent an actual bull market at all, but rather a "mid-rally" year similar to 2019, preceding the halving. In this scenario, we would not be in a sustainable bull market yet, and there could be another dip, perhaps in the range of $20,000 to $30,000, before a more sustainable uptrend. In scenario 1, we would be ahead of previous cycles, while in this scenario, we would be about six months behind the 2019 cycle. We will revisit the events of 2019 later in our analysis.
The year 2024 begins with significant anticipation in the cryptocurrency market. There are three notable catalysts that could have a highly positive impact on the crypto sector:
In the world of crypto, there was excitement on Wednesday, January 10, 2024, as the U.S. Securities and Exchange Commission (SEC) approved the first Bitcoin spot exchange-traded funds (ETFs) for the U.S. market. The spot ETF has been considered a "Holy Grail" of crypto investment since the Winklevoss brothers, who founded the Gemini crypto exchange, submitted the first ETF application in 2013. Until now, the SEC has consistently rejected these applications. In 2021, the SEC approved Bitcoin futures-based ETFs, which allowed investors to gain price exposure to Bitcoin, but were clearly a less favorable option for investing in the actual spot Bitcoin. The approved spot ETFs now provide direct exposure to the spot price of Bitcoin, opening up significant new segments of investors to Bitcoin investment.
Markets have anticipated the approval of ETFs ever since the asset management giant BlackRock submitted its own application last summer. The rally in Bitcoin's price in the fall of 2023 has been seen as largely pricing in the ETF approval. Due to market anticipation, the reaction to the actual approval has been muted, and there has been no significant "sell the news" phenomenon.
One of the most interesting developments to watch in the coming year is the trading volumes that ETF products will attract. The initial volume of over $4.5 billion on the first day has been considered a strong signal. The general assumption is that after the launch of new ETF products, their integration into the investment processes of institutional investors would take a few months, after which we might begin to see more significant capital flows.
The most significant regularry happening event in the Bitcoin protocol, the so-called halving, will occur in April 2024. In this programmatically predetermined event of the Bitcoin network, the block rewards received by miners, who validate the correctness of transactions on the network and thereby secure its integrity, will be cut in half. Since miner block rewards are the only mechanism by which new Bitcoins are created, their halving also means a halving of the rate at which new Bitcoins are generated, i.e., the so-called inflation rate.
According to the law of supply and demand, when supply is reduced while demand remains the same or increases, market prices should rise. Thus, every previous Bitcoin halving (there have been three, in 2012, 2016, and 2020) has been temporally associated with a strong bull market. The extent to which this is merely a temporal correlation and the extent to which it reflects actual causality is an interesting question that we have addressed in our other articles.
In summary, our view is that halvings are not the primary cause of the bull and bear markets that have occurred around the same time as them. We believe that the primary drivers of Bitcoin's bull and bear markets are changes in the prevailing macroeconomy, such as changes in interest rates or the massive quantitative easing seen in 2020-2021. The halving, as a clear, single, and easily understandable event, mainly offers a narrative that is easy to understand and communicate, which increases general interest in Bitcoin, particularly if already favorable monetary conditions are already present.
Therefore, in the fourth halving in 2024, we do not believe that the halving will be a decisive factor in the realization of a potential bull market. However, it will bring Bitcoin and cryptocurrencies more broadly into discussion in both traditional and social media. This, combined with the above-mentioned Bitcoin ETF investment, which is easily accessible to new investors, and possibly an interest rate reversal around the same time (see the next section), creates conditions where, metaphorically speaking, the halving narrative adds a bit more heat to the sauna.
In addition to the aforementioned Bitcoin spot ETFs and Bitcoin halving, we consider the monetary policy of the U.S. Federal Reserve and the likely interest rate reversal in 2024 to be a more significant market driver. The policy of tightening monetary policy and the historically strong increase in the policy rate, which began in response to sharply rising inflation in 2021, now appears to have peaked, and the Federal Reserve has signaled that the first interest rate cuts are coming. At present, the markets estimate that the interest rate cuts will likely start in March or, at the latest, May.
A decline in interest rates typically has a clearly positive impact on the valuations of risky assets, such as cryptocurrencies. If interest rate cuts will occur as currently expected, they will provide significant tailwinds to cryptocurrency prices that fell during the interest rate hike cycle. Within the cryptocurrency market, interest rate cuts are expected to particularly favor tokens with smaller market capitalizations.
In the previous interest rate cycle in 2019, Bitcoin dominance reached its peak around the same time as the first interest rate cut, and after that, altcoins began to clearly strengthen relative to Bitcoin.
In addition to the dollar-denominated price increases in the cryptocurrency market, another notable feature of the cryptocurrency market in 2023 was the significant rise in so-called Bitcoin dominance, which represents the percentage of Bitcoin's market capitalization in the entire cryptocurrency market. At the beginning of the year, Bitcoin dominance was approximately 44 percent, and during 2023, it increased to around 54 percent.
Bitcoin dominance, despite its significance, may not be a familiar indicator to all cryptocurrency investors, so it may be useful to explain it. The key challenge with a percentage-based indicator is that it can be difficult to intuitively grasp how significant, for example, a 10-percentage-point increase seen in 2023 is.
The accompanying chart illustrates this. The chart in the table shows Bitcoin's performance compared to the rest of the cryptocurrency market (excluding major stablecoins).
The chart can roughly be thought of as depicting Bitcoin's performance against the average altcoin. Therefore, an investor who concentrated their crypto allocation in Bitcoin has increased their allocation's purchasing power by over 40% compared to other crypto tokens on average. This can be considered a very favorable outcome, considering that Bitcoin is generally considered to be a relatively lower-risk cryptocurrency. By concentrating their allocation in the crypto sector's lower-risk option, crypto investors have clearly achieved better returns than the overall crypto market on average.
It is possible that at some point in the coming year, Bitcoin dominance could reach its peak, and the rest of the crypto market could start offering better returns than Bitcoin. In the previous cycle, Bitcoin dominance reached its peak in December 2020 at around 70 percent. This peak occurred shortly after Bitcoin surpassed its previous all-time high in terms of the dollar value.
One possibility is that Bitcoin dominance would peak significantly lower than the previous 70 percent. This would be supported by the idea that the crypto sector outside of Bitcoin has matured significantly, and the relative importance of Bitcoin should gradually decrease. At its extreme, this hypothesis suggests that the 55% dominance seen in December might have been the peak, and from there on, the trend could be downward.
The opposite view would be that the approval of Bitcoin ETF applications would bring so much new capital into Bitcoin that Bitcoin dominance would rise above the previous peak, perhaps to the 70-75% range. In this case, the trend reversal in dominance would also occur later in time, more likely around 2025.
A third perspective could be that regardless of the exact percentages, the peak of Bitcoin dominance would be reached near the time of a new all-time high (ATH) for Bitcoin. A new price record for Bitcoin would lead to extensive media coverage, an increase in the share of less sophisticated investors in the market, and capital seeking returns shifting from Bitcoin to altcoins.
A fourth perspective, partially compatible with the previous one, is that the significant strengthening of altcoins against Bitcoin is primarily linked to the market's risk appetite, which in turn is significantly influenced by the prevailing interest rate level. In this case, a shift in the interest rate policy of the U.S. Federal Reserve, for example, could be the trigger for capital flowing more towards riskier tokens than Bitcoin.
The biggest reason for why we want to discuss Bitcoin dominance and its potential reversal in our 2024 report is that, if it occurs, the reversal could be quite explosive. As seen in the chart below, after Bitcoin dominance peaked in December 2020, the altcoin market more than tripled its value relative to Bitcoin in just a few months. Dollar-wise, the altcoin market temporarily even increased by over sixfold.
Part of the total market capitalization growth of altcoins could be explained by the fact that a significant number of new tokens were issued during the spring of 2021. If we want to stabilize the token count and focus on the largest tokens in the market, we can examine the ten largest tokens in terms of market capitalization at the beginning of 2021. Bitcoin and the stablecoin USDT are excluded from this analysis.
As the chart illustrates, the median return of the largest tokens by market capitalization at the beginning of January 2021 was approximately 300% over the next four months.
The upward movement of altcoins was indeed very sharp, offering exceptional profit opportunities for investors who were prepared for it. To prepare for the possibility of such a scenario repeating, cryptocurrency investors should have a strategy in place. Therefore, we want to bring this theme to the attention of our readers at the beginning of 2024.
It is entirely possible that we may not see an "alt-season" like in 2021 in yearn 2024, or even at all. The first option is entirely plausible, as the biggest altcoin surges in the previous cycle happened in the year following the halving. The latter option, on the other hand, would be likely if Bitcoin fails to break its previous all-time high (around $69,000). So, investors should keep an eye on both Bitcoin dominance and the dollar-denominated price of Bitcoin.
If Bitcoin had a strong performance in 2023, we would give Ethereum's native token, ether, the label of a weak performer in 2023. The world's largest smart contract protocol token declined during 2023 against both the only larger token (Bitcoin, approximately -30%) and against the altcoin market outside of Bitcoin and Ethereum (approximately -10%). Thus, ether did not act as a safe haven in the cryptocurrency market like Bitcoin, nor has it been able to maintain its share of capital flows from Bitcoin to higher-risk tokens.
Ether's underperformance in 2023 could be countered by saying that its weak performance was merely a return to the mean (mean reversion). During 2022, Ether strengthened significantly against the declining altcoin market, and over the two-year period, it is still up more than 30% against it.
Regardless of interpretation, it is undeniable that in the latter half of 2023, Ether has significantly weakened, and as the year turns, there are no clear signs of a reversal in the trend.
In the longer term, Ether is in an interesting position. Its price against Bitcoin is now approximately halfway between the lows of the end of 2020 (around 0.03) and the highs of the end of 2021 (around 0.09). It is easy to imagine scenarios where the ratio could continue towards either end or even surpass them.
Bitcoin has traditionally strengthened against Ethereum in both bear markets and the early stages of bull markets. Whether we find ourselves in the early stages of a bull market like the turn of 2019-2020 or a "mid-cycle rally" akin to the summer of 2019 preceding the halving year, it would be easy to envision Bitcoin continuing to gain strength against Ethereum in the first half of 2024.
If one believes that Bitcoin spot ETFs will bring significant capital specifically to Bitcoin within the cryptocurrency market, we could see the ratio approaching the previous low of 0.03 by the end of next year. The scenario where one Bitcoin could get you 25-35 Ether would be a significant opportunity, if one has any belief in Ethereum's long-term future.
On the other hand, if you believe that the ongoing bull market will continue relatively steadily and the aforementioned positive drivers (spot ETF, interest rate cycle, halving) will drive Bitcoin's price to a new all-time high by the fall of 2024, it's possible to imagine a scenario where the ETH/BTC ratio flirts with old highs around 0.09 by next Christmas.
Such a mid-cycle position in the ETH/BTC ratio provides an interesting play for crypto investors with insight. In a tricky situation like this, our primary advice for the beginning of 2024 is to monitor the possible resilience or breakdown of the 0.05 support level. During the TERRA/LUNA crash in 2022, the ETH/BTC ratio halted at that level. If the level were to break early in the year, it is not entirely clear what support levels might be available before the 0.03 bottom.
The realization of the scenario for Ethereum ultimately depends on the overall development of the cryptocurrency market as a whole and macroeconomic events. However, there are at least two interesting Ethereum-related events, each with the potential to act as strong catalysts:
1. The so-called "Dencun" upgrade is expected to take place in the spring of 2024. Dencun marks a significant milestone in the development of the Ethereum protocol. The upgrade will implement a total of nine Ethereum Improvement Proposals (EIPs), with EIP-4844 being one of the most interesting. It is expected to significantly increase Ethereum's transaction capacity and reduce gas fees, particularly for layer-2 solutions. Dencun may not have an immediate positive impact on the price of Ether, but in the long term, it has the potential to enable new use cases and support Ethereum's position as a leading smart contract platform.
2. The deadline for the review of Ethereum spot ETF applications submitted last year is in May 2024. Among the applicants is the financial giant BlackRock, which has a historical success rate of over 99% in getting ETF applications approved. Especially after the approval of Bitcoin spot ETF applications, the likelihood of Ether spot ETF approval is considered quite high. Similar to Bitcoin spot ETF, an Ether spot ETF would open up Ether as an investment option to a significant number of new investor segments. This could give Ether an advantage, especially against its direct competitors like Solana.
A particularly interesting scenario would be if the start of interest rate cuts by the U.S. Federal Reserve coincides with the approval of an Ether spot ETF in May. Interest rate cuts could act as a catalyst for outperformance of alt-coins compared to Bitcoin, and a spot ETF could give Ether an edge over other alt-coins. In this case, Ether could potentially rise among the best-performing tokens within the cryptocurrency market.
As a final note, it's worth mentioning that the first weeks of 2024 have been very strong for Ether. From January 1st to January 12th, 2024, Ether has gained 11% against the US dollar, 7% against Bitcoin, and 15% against the rest of the cryptocurrency market. While it's too early to draw strong conclusions, we will continue to monitor the situation, including the possibility that Ether's relative weakness may have come to an end and the trend may now be upward.
After the recovery of the cryptocurrency market and the increase in Bitcoin dominance, the third most significant event of 2023 was the resurgence of the layer-1 blockchain Solana from its trials in 2022 and the rocket-like surge in the price of its native token, SOL.
In the previous bull market of 2020-21, Solana was one of the biggest success stories. From January to November 2021, its price nearly 70-folded, and it climbed from rank 112 in terms of market capitalization to rank 5.
However, the year 2022 was brutal for both the Solana project as a whole and especially for the SOL token. In the first half of the year, Solana faced numerous technical issues, which at their worst led to the blockchain coming to a halt. In the second half of the year, the world's third-largest crypto exchange, FTX, experienced a collapse, and due to its close ties, the Solana project was unjustly impacted. During 2022, the price of the SOL token plummeted by as much as 96% from its peak in November 2021.
In 2023, the SOL token experienced a strong recovery, increasing its price by approximately tenfold. Most of this price surge occurred in the last quarter of the year, during which the price rose by about 250%. With this rise, SOL outperformed both the average cryptocurrency market performance and Bitcoin. During the year, SOL moved up in market capitalization rankings from 19th place to 6th place, just one rank below its position during the peak of the previous bull market in late 2021.
Where is SOL heading in 2024? The most obvious interpretation is that in 2022, the token's price dropped significantly, partly due to external factors, and during 2023, this deviation has mostly been corrected.
For those interested in Solana's development, it may be useful to keep an eye on the SOL/ETH ratio. Solana and Ethereum compete for a significant portion of the same developers, applications, users, and investors. In 2023, SOL strengthened against Ethereum by approximately 300%, with the pace accelerating towards the end of the year. Until this trend stabilizes, it is hard to bet against Solana.
As mentioned earlier, there is a good chance that after the halving in 2024 and possibly also into 2025, we could see very positive developments in the cryptocurrency market. While waiting for that, it's essential to keep in mindl the year 2019, especially for newer cryptocurrency investors. Similar to 2023, in 2019, the market was recovering from a significant downturn in the previous year. From January to June 2019, Bitcoin's price rose dramatically, more than tripling. Optimists even saw the possibility of a new all-time high, which would have been quite atypical in the year before a halving event.
However, this optimism faded quickly as the price dropped by about 60% from the June peak throughout the rest of the year. Three months later, during the "Covid crash" in March 2020, Bitcoin dropped by another 40% from the December low. From this trough, a bull market began, during which Bitcoin's value roughly doubled in a little over a year.
This is a reminder that cryptocurrency markets can be highly volatile, and previous patterns do not guarantee future results. Investors should approach the market with caution and consider various factors when making investment decisions.
The purpose of this anecdote is just to remind of the possibility that a similar pattern could repeat itself in the context of this halving as well. In this scenario, the price increase seen at the end of 2023 could be akin to a "pre-halving rally," occurring this time roughly six months later. It wouldn't be entirely surprising if, after the 2023 rally and strong optimism, macroeconomic developments, for example, wouldn't fully meet expectations, and the price of Bitcoin dipped again in the first half of the year, ranging from $20,000 to $30,000.
In such a situation, investors wouldn't necessarily need to lose faith in the upcoming bull market. As we saw in 2019, a +/-50% correction before the halving is entirely compatible with the bull market that follows the halving. Successful cryptocurrency investing has always required tolerating volatility, and regardless of all forecasts, the greatest certainty can be given to its presence next year as well.
So, here is our analysis of the most critical outlooks for the 2024 cryptocurrency market. The cryptocurrency market is exceptionally dynamic, and there are many smaller sub-trends that we haven't covered in this analysis, but we will address them in our future publications.
We hope that our analysis provides food for thought and perhaps opens up new scenarios worth considering. Our overall view is that at the beginning of the year, the prospects are brighter than they have been in a long time, and it's exciting to see to which degree the expectations for 2024 will come to fruition.
In a market as dynamic and eventful as cryptocurrencies, a year is a long time for analysis or predictions. Throughout the year, we will continue to provide regular market monitoring and analyses to keep you updated and support your well-founded investment decisions.
The material contained in the Kvarn Research is produced solely for the purpose of marketing communication. Any information conveyed through Kvarn Research should not be construed as an offer or an invitation to make any purchase or sale decisions, or as an encouragement to make investment decisions about any investment object. Copying or borrowing the content of the article without Kvarn's express permission is prohibited. The information presented in the article pertains to the situation prevailing at the time of writing, and the information may or may not have changed. Kvarn Capital Oy does not guarantee the accuracy or completeness of the information contained in the newsletter or referred to in the article.
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