CONTRIBUTORS
Christopher Jensen
Research Analyst,
Data Science and Digital Lending Strategies
Tony Pecore,
SVP, Director of Digital Asset Management
Cryptocurrency prices (led by Bitcoin) were rising into the end of 2023 amid support from a series of news headlines that emerged in the latter half of the year. These included the following:
- Repudiation of key crypto individuals and firms that were seen as bad actors—specifically the conviction of Sam Bankman-Fried of FTX for fraud1 and the admission of money laundering violations from founder and CEO of Binance, Changpeng Zhao.2
- Rulings against the US Securities and Exchange Commission (SEC) in high-profile court cases from both Ripple and Grayscale. Judges disagreed with the SEC’s characterization of Ripple’s XRP token as a security3 and called the regulator’s rejection of Grayscale’s spot bitcoin ETF application “capricious and arbitrary.”4
Prospects for increased investor flows into Bitcoin come just as the asset is expected to see the pace at which new supply is created slow down. Bitcoin is expected to reach its next “halving” event sometime between March and May 2024. This refers to a cut in the size of the reward paid to bitcoin miners for verifying transactions on the payment network.
Bitcoin is an algorithmically controlled asset where the release of new supply is pre-programmed into the code. Each time 210,000 blocks of transactions are added to the ledger, the size of the mining reward is cut in half. The bitcoin network has been through three prior halving events. In other cycles, the price of bitcoin has bottomed about 477 days prior to the halving, climbed in the period leading up to the event and then surged in the subsequent months.5 With bitcoin prices having hit a low of US$15,782 in November 2022 and then having rallied to over US$40,000 by early December 2023, this pattern seems to be repeating ahead of the fourth halving event based on price activity to date.
Fundamental considerations and ecosystem metrics for the broader set of crypto coins and tokens also show a growth environment.
- Ethereum, the largest layer-1 blockchain, has generated US$16.8 billion in fees with over 60.0% of this converting into revenue. This means that the Ethereum network surpassed US$10 billion revenue in just seven years, according to research from Caleb and Brown, putting the protocol on pace to match tech leaders Google (Alphabet) and Facebook (Meta) in reaching this revenue milestone in as fast a timeframe.6
- A World Bank and Global Macro Investor study shows that crypto uptake is exceeding the pace of internet adoption. After seven years of development (beginning in 1992), the internet globally had reached 187 million users (+76% yearly growth) whereas crypto adoption (beginning with the launch of Ethereum in 2015) was 425 million (+137% yearly growth).7
- Monthly active addresses in the crypto domain hit an all-time high of 15 million, doubling over the past two years as a growing variety of apps and services offered individuals new ways to engage. More than 700 new apps were created in 2022 alone.8
- Almost 30,000 developers contributed to, or built on, crypto projects in 2023—an increase of +60% in the last 3 years despite crypto winter9 and significant price declines.10
These factors collectively lead us to see continued strength and to expect renewed interest in crypto as an asset class in 2024 as the market sees a definitive end to crypto winter.
Endnotes
- Source: Martinez, A. and Gura, David. “FTX Founder Sam Bankman-Fried is found guilty of all charges including fraud.” NPR. November 3, 2023.
- Source: Gura, David. “CZ, founder of crypto giant Binance, pleads guilty to money laundering violations.” NPR. November 21, 2023.
- Source: “Ripple scores big win against SEC 2024 is looking bullish for XRP.” TheStreetCrypto.com. October 5, 2023.
- Source: Sun, Zhiyuan. “Breaking: Grayscale wins SEC lawsuit for Bitcoin ETF review.” CoinTelegraph. August 29, 2023.
- Source: “Pantera Capital Reveals $149,000 Bitcoin Price Target – Here’s the Timeline.” The Daily Hold. November 16, 2022.
- Source: Caleb & Brown Weekly Rollup. September 26, 2023.
- Sources: Crypto.com, World Bank, Global Macro Investor. Accessed October 16, 2023.
- Source: “State of Crypto 2023.” a16zcrypto. 2023.
- A crypto winter is caused by a decline in the value of cryptocurrency assets and trading volume over a period.
- Source: “State of Crypto 2023.” a16zcrypto. 2023.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
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