Another year and another Crypto Holiday special from the NewsBTC team. Next week, we’ll unpack the twists and turns of 2023, revealing what the next month could bring for cryptocurrency and DeFi investors.
Like last year, we paid homage to Charles Dicke’s classic “A Christmas Carol” and gathered a group of experts to discuss the past, present, and future of the cryptocurrency market. This will help readers discover clues that lead to 2024 and its potential trends.
Crypto Vacation with Blofin: A Deep Dive into 2024
We wrapped up this holiday special with Blofin, a cryptocurrency education and investment company. In a 2022 interview, Blofin spoke about FTX, the Three Arrows Capital (3AC) collapse, and the fallout created by Terra (LUNA). At the same time, the company predicted that Bitcoin and the cryptocurrency market would return from the ashes. Bitcoin’s revival appears to be well underway, with it surpassing $40,000. Here’s what they told us:
Q: Given the prolonged bearish trend observed in 2022 and 2023, how does this period compare to previous recessions in terms of severity and impact? With Bitcoin now crossing the $40,000 threshold, does this mean the definitive end to the bear market, or are there potential market distortions that investors should brace for?
Blofin:
Compared to previous cryptocurrency recessions, the 2022-2023 bear market looks milder. Unlike previous cycles, the widespread use of stablecoins and the entry of large traditional institutions during the last bull market brought more than $100 billion in cash flow into the cryptocurrency market, most of which never left the market. A series of events in 2022.
Even in March 2023, when investors’ macroscopic expectations were most pessimistic, and in the third quarter of 2023, when liquidity bottomed out, the cryptocurrency market still had sufficient support and risk resistance with cash liquidity in the form of stablecoins reaching more than $120 billion. provided. For BTC, ETH and altcoins.
Likewise, due to ample cash flow, the 2022-2023 bear market did not experience ‘liquidity drying’ situations like March 2020 and May 2021. In 2023, liquidity risks will increase as the cryptocurrency market gradually recovers. There was a significant decrease compared to 2022.
The only problem is that risk-free returns of over 5% in the summer and fall of 2023 have forced investors to focus more on money markets, resulting in the lowest volatility in the cryptocurrency market since 2019.
However, low volatility does not mean a recession. The performance of the cryptocurrency market in the fourth quarter of 2023 proves that more investors are indeed sitting on the sidelines. They are not leaving the cryptocurrency market, but are waiting for the right time to enter.
Currently, the total market capitalization of the cryptocurrency market has recovered more than 55% of its previous high. The cryptocurrency market can be seen as having escaped the bear market cycle, but the current stage should be called a ‘technical bull market’ rather than a ‘true bull market’.
Once again, let me start from a cash flow perspective. Although the price of BTC once reached $44,000, the amount of cash flow in the entire cryptocurrency market rebounded slightly, reaching approximately $125 billion. $125 billion in cash supports more than $1.6 trillion in total cryptocurrency market capitalization, meaning an overall leverage ratio of more than 12x.
Additionally, many tokens have seen significant increases in annual funding ratios exceeding 70%. High overall leverage and funding ratios mean that speculative sentiment has as much of an impact on cryptocurrency markets as improving fundamentals. However, the higher the leverage ratio, the lower the investor’s risk tolerance, and the high funding costs are difficult to maintain in the long term. Bad news can trigger deleveraging and lead to large-scale liquidations.
Moreover, no real improvement in liquidity has yet occurred. The federal funds rate currently remains at 5.5%. In interest rate markets, traders expect the Federal Reserve’s first interest rate cut to come as early as March, with the European Central Bank and Bank of England also expected to cut rates for the first time before May. At the same time, central bank officials from around the world have repeatedly emphasized that interest rate cuts “depend on data” and “won’t happen soon.”
Therefore, while the recovery and rebound of the cryptocurrency market is satisfactory if liquidity levels have not really improved, a “leverage-based” recovery is highly related to investors’ financing costs and risk tolerance, and the potential callback risk is relatively high. In fact, in the options market, investors began accumulating put options after experiencing an upward trend in December to prepare for a possible decline after early 2024.
Q: Currently we are seeing Bitcoin reach new highs. Do you think we are in the early stages of a full-fledged upswing? What changes in the market have made the current price action possible? Is it the Bitcoin spot ETF or the US Federal Reserve that is hinting at a loser policy or an upcoming halving? What will be the big story that will happen in 2024?
Blofin:
As mentioned above, we are still far from the early stages of a full-fledged bull market. “Technical bull market” better describes the current market situation. This technical bull market began with improved expectations. The spot Bitcoin ETF story has sparked investor expectations for a return of capital to the cryptocurrency market, while record high federal funds rates and expectations of a rate cut next year have reflected this improvement. At the macro environment level.
Additionally, some funds from traditional markets have become “early birds” and have tried to enter the cryptocurrency market early. This is a key reason why BTC price returned above $40,000.
However, we believe that among the above factors, changes in the macro environment are the most influential factor. With the advent of interest rate cut expectations, investors could see the dawn of a bull market return for risk assets. In November and December, it is not difficult to find that not only Bitcoin, but also the Nasdaq, Dow Jones, and gold all hit record highs. These patterns typically occur at or near the end of each economic cycle.
The beginning and end of a cycle can have a significant impact on asset prices. At the start of the cycle, investors typically convert risky assets into cash or government bonds. At the end of the cycle, investors will bring cash flow back into the market and purchase risk-free assets without distinction. Risk assets in general are currently experiencing “widespread and significant” gains. The above situation is what we experienced in the fourth quarter of 2023.
As for the Bitcoin halving, we prefer that the positive effects it brings come from improvements in the macro environment rather than as a result of the “halving”. Bitcoin did not become a mainstream, institutionally accepted asset when the first and second halvings occurred. However, as the market microstructure changes after 2021, institutions have gained enough influence over Bitcoin that each halving coincides with the economic cycle to a greater degree.
In 2024, we will witness the end of the austerity cycle and the beginning of a new cycle of easing. However, compared to all previous cycle changes, this cycle change may be relatively stable. The era of high inflation is over, but there is still “one step” left before inflation returns to the target range.
All major central banks will therefore be wary of releasing liquidity too quickly and causing the economy to overheat again. For the cryptocurrency market, a solid liquidity release will likely lead to a mild bull market. We probably won’t have a chance to see a bull market like 2021, but the new bull market will likely last relatively longer. With more new investors joining and new narratives emerging, more new opportunities will emerge.
Q: Last year we talked about the most resilient sectors during the cryptocurrency winter. Which sectors and coins could benefit from the new Bull Run? We are seeing the Solana ecosystem blossom along with the NFT market. What trends could help you in the coming months?
Blofin:
What is certain is that exchanges (whether CEXs or DEXs) will be the first beneficiaries when the bull market returns. As trading volumes and user activity begin to rebound, we can expect their income (including exchange fee income, token listing income, etc.) to increase significantly, which may also benefit the performance of their exchange tokens.
At the same time, infrastructure related to trading and capital circulation will also benefit from new bull markets such as public chains and layer-2. Cryptocurrency infrastructure will be an essential part as liquidity returns to the cryptocurrency markets. Before liquidity can be transferred to various projects and native tokens, they must first enter the public chain.
In the last bull market, the congestion and high gas costs of the Ethereum network were criticized by many users, which became an opportunity for the emergence and development of Layer-2 and also promoted the development and growth of many non-Ethereum public chains. Solana and Avalanche are some of the biggest beneficiaries.
Therefore, as the new bull market emerges, more usage scenarios and possibilities will be discovered for Layer 2 and non-Ethereum public chains. Ethereum will naturally not be far behind. In 2024, we could witness a new boom in public chain ecosystems and tokens.
Additionally, in exploring the latest applications of BTC, the development of BRC-20 cannot be ignored. BRC-20, a new token issuance standard based on the BTC network emerging in 2023, will allow users to deploy standardized contracts or mint NFTs based on the BTC network, a new explanation for the oldest and most mature public chain. and use cases are provided.
As liquidity recovers, the exploration and development of BRC-20-related applications can gradually begin, and together with other public chain ecosystems, we will make great strides in the new “moderate but long-term” bull market.
Cover image from Unsplash, chart credit
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