Key Themes for 2024
Some of the key themes that are likely to shape the crypto market in 2024 include:
- Bitcoin hegemony: Bitcoin dominance increased in 2023 as institutional flows transitioned to higher quality assets. We believe bitcoin will remain the anchor for the crypto market in 2024, especially in the first half as spot ETF approvals could drive further adoption.
- Resetting the macro framework: The US may avoid a recession in 2024 but economic growth will likely be softer. Lower capital costs from potential Fed rate cuts could support risk assets. A weaker USD trend is also an opportunity for cryptocurrencies.
- Reading the regulatory tea leaves: More incremental regulatory clarity is expected in the US, but uncertainty will persist. Offshoring of talent and resources may accelerate without comprehensive legislation. International jurisdictions are progressing regulations more quickly.
- Connecting to the real world: Tokenization, gaming, decentralized identity, compute and infrastructure are areas that could drive further crypto adoption if meaningful use cases emerge. Developer focus may pivot towards these applications.
- The layer 1 equilibrium: Rollups are dominating over alternative L1s. Chains are specializing by sector or function. The modular vs integrated blockchain debate continues without clear resolution.
Bitcoin rallied strongly in 2023, driven by oversold conditions after FTX, its safe haven credentials during geopolitical and economic turmoil, and spot ETF filings in the US. We expect the upcoming bitcoin halving in April 2024 and potential ETF approvals to further support bitcoin in the coming year.
On the network side, the halving could lead to a hashrate slowdown if prices don’t rise to support miner profitability. Technical upgrades like Taproot and the Lightning Network continue advancing bitcoin’s capabilities, but meaningful usage and fee generation may be years away. Selling pressure from Mt Gox repayments and FTX liquidations could also impact prices at times.
Ether underperformed bitcoin in 2023 despite appreciating, with its market dominance falling to under 18% currently. On-chain activity has declined versus 2022 but total value locked is set to end 2023 higher. Rollups now dominate over alternative L1s in terms of both activity and liquidity based on bridged ETH.
The Cancun hard fork in early 2024 aims to further reduce rollup costs and unlock new use cases. Validator growth has slowed following staking withdrawals being enabled. Restaking and proposals around limiting validator growth could introduce new revenue streams. Developer focus may pivot towards applications leveraging infrastructure upgrades.
The L1/L2 Landscape
Rollups now account for the majority of activity that was previously on alternative L1s like Polygon and Avalanche, consolidating the EVM space. Specialization is occurring either by sector, function or execution environment. Modular blockchains using services like Celestia are gaining traction compared to integrated chains.
Solana has claimed significant developer mindshare with its scalability approach and Rust programming environment. Its outperformance in 2023 underscores this. Other non-EVM chains aim to handle scalability at the base layer like Aptos, Sui and Monad. Rollup consolidation is also occurring as new entrants struggle for meaningful market share.
Tokenization regained momentum in 2023 as higher yields increased the appeal of capital efficiency. Total assets held in tokenized US Treasuries grew 6x to over $3B. Institutional participation expanded with initiatives like Maker RWA and JPMorgan’s multi-chain demo. Most efforts remain permissioned currently.
Regulatory progress in the EU, UK and Singapore is enabling the theme, while the US lacks comprehensive rules. Interoperability between private chains fragments liquidity. Standardized KYC integration and regulatory-compliant tooling will facilitate further growth. Yield-bearing stablecoins may capture more demand.
Stablecoin market cap declined 9% in 2023 to $127B, in line with lower crypto liquidity. USDT dominance rose to nearly 70% as BUSD unwound. Stablecoin yields recovered in 2H23 to 5-6% as rates rose. Regulatory clarity is needed globally as the importance of stablecoins grows for payments and as a reserve asset.
Regulatory uncertainty persists in the US from the SEC’s enforcement-centric approach and banking regulators’ unfavorable stance. This risks offshoring of talent and resources without comprehensive legislation. International jurisdictions like the EU, UK, Singapore, UAE and Hong Kong progressed rules more decisively in 2023.
Coinbase grew its regulated offerings including futures in the US and Europe. Infrastructure was scaled for potential spot ETFs. New order types, portfolio margin and the Base L2 were launched to better serve institutions. Venture funding slowed for crypto but Coinbase Ventures remained actively deploying capital across infrastructure, consumer, DeFi and protocols.
In summary, while macroeconomic and regulatory headwinds may persist, the foundations for crypto’s next growth phase were strengthened in 2023 through infrastructure developments, expanding regulated access points, and maturation of key themes like tokenization. If 2024 brings more clarity on regulations and spot ETF approvals in the US, this could accelerate the secular trend of institutional adoption.