Bitcoin and Ethereum, as well as other crypto currencies, have staged a dramatic comeback in late 2023, confounding many investors and analysts. Prices for both cryptocurrencies are up over 50% from their lows earlier this year. What is driving this resurgence, and what could it mean for crypto in 2024?
FTX and the fall of Sam Bankman-Fried has triggered an aggressive regulatory backlash. On charges of widespread fraud and market manipulation, the Justice Department and SEC are pursuing FTX with RICO statutes - alarming words for the industry. Meanwhile Binance faces a separate CFTC probe and sanctions violations, as well as aggressive pursuit of its well-known founder Changpeng Zhao (“CZ”). As regulators attempt to retroactively tame crypto’s wild west past, expect shocking revelations, lawsuits, and headline drama that keeps markets nervous through 2024.
Behind the Bitcoin Bounce
Bitcoin’s meteoric rise over $40,000 seems puzzling on the surface. High inflation and recessionary fears typically do not favor risky assets like cryptocurrencies. However, there are several factors providing tailwinds. First, the dollar has weakened considerably from its peak strength. With the Fed signaling it may limit rate hikes, currency traders have moved from the dollar to alternative stores of value. In addition, the spectacular collapse of major crypto exchange FTX paradoxically built confidence. Bitcoin emerged unscathed as the most decentralized network, burnishing its reputation as “digital gold.”
Macroeconomic uncertainty is also driving Bitcoin purchases. With anxieties about inflation and economic stability elevated, a growing cohort of investors views Bitcoin as a hedge against market turmoil. If inflation remains high in 2023, Bitcoin could attract additional safe haven inflows.
One potential catalyst that could supercharge institutional flows into Bitcoin is the long-awaited approval of a spot cryptocurrency ETF in the United States. While Bitcoin futures ETFs have already launched, a spot Bitcoin ETF that directly owns BTC could draw billions in fresh inflows from asset managers, pensions, and sovereign wealth funds who face restrictions around owning futures. In late 2023, firms like Fidelity and SkyBridge renewed their SEC spot ETF applications on hints the agency is finally warming up to the idea. If the SEC greenlights even a single spot Bitcoin ETF in 2024, further asset acceleration could occur. An approved product would eradicate many barriers deterring large institutional players from allocating to Bitcoin—setting the stage for a shift of capital.
Ethereum Energized
Like Bitcoin, Ethereum has rallied sharply after months in the doldrums. The fundamental drivers behind Ethereum’s resurgence are quite different. The long-awaited “Merge” finally occurred in September 2022, transitioning Ethereum from an energy-intensive proof-of-work system to a more sustainable proof-of-stake protocol. This technological leap has rejuvenated developer and investor confidence, evidenced by surging application and transaction volumes on the network.
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The Merge has also set the stage for further Ethereum upgrades that will expand capacity and functionality - for example, sharding (on the 2024 roadmap). This innovation promises to dramatically boost Ethereum’s throughput, paving the way for lower gas fees and wider enterprise adoption. As developers return to Ethereum, its first-mover advantage in blockchain apps is looks resilient.
Look Ahead to 2024
As we look ahead to 2024, cautious optimism seems warranted when forecasting crypto prices. While another plunge is possible, Bitcoin and Ethereum both exhibit long-term momentum coming off 2023 lows. Expanding institutional investment also appears highly likely after moves by organizations like Blackrock in late 2023.
Several leading asset management companies are in a waiting phase for the Securities and Exchange Commission (SEC) to decide on their proposals to launch spot Bitcoin Exchange-Traded Funds (ETFs). These ETFs would directly invest in Bitcoin, unlike the current ones that are based on Bitcoin futures contracts.
Simultaneously, on November 1, the Federal Open Markets Committee (FOMC) decided to maintain the federal funds interest rate within the range of 5.25% to 5.5%. This decision marked the second consecutive meeting where the FOMC chose not to increase rates. Generally, higher interest rates decrease the appeal of riskier investments, as they tend to reduce investor risk appetite, consequently affecting the prices of stocks and cryptocurrencies negatively. However, the FOMC's decision to keep the rates steady could be viewed as a stabilizing factor for these markets.
While regulators squeeze shady offshore entities, the outlook looks brighter for above-board US crypto exchanges like Coinbase and Gemini in 2024. Coinbase appears well positioned with customers. Approved to offer staking and advanced features, Coinbase provides a credible bridge to institutions anxiously awaiting a regulated on-ramp. Their recent partnerships with BlackRock and Wells Fargo affirm confidence big finance have in Coinbase. Meanwhile Gemini continues to provide a squeaky-clean, New York-regulated alternative. As offshore exchanges burdened by checkered pasts come under intensifying scrutiny, trustworthy American platforms like Coinbase and Gemini stand ready to assume crypto leadership guided by US standards.
Both Bitcoin and Ethereum have reestablished their reputations and value propositions after weathering the FTX fiasco and 2023 volatility. While crypto likely faces further growing pains on the path to mainstream adoption, the foundations look increasingly robust for both networks to reward patient investors. 2023’s crypto comebacks could presage an era of renewed stability and institutional adoption beginning in 2024.
