2024 Post-ETF Crypto Outlook
Expecting a lot more volatility ahead after BTC finally stabilizes.
After 2 years of full-time experience in web3 product development, protocol governance and trading, I thought I would share my crypto outlook for 2024.
TLDR: I think crypto will have more 2-way volatility in 2024 than it has in a long time, marked by an unusual number of different catalysts! Nimble traders will enjoy it, builders will hate it.
Crypto’s relative performance vs. other asset classes is driven by 3 different narratives, around flows, new products, and macro. Let’s break them down.
Flows: Although the ETF was a predictable “sell the news” event (virtually every big catalyst has been historically, including every ETF or futures launch), many market participants were surprised to learn how much BTC demand had been tapped-out through other means, like holding BTC on Coinbase personally. At the same time, MSTR is no longer an aggressive BTC buyer, and flows outside of BTC & ETH are structurally negative (altcoins ex- BTC, ETH, and stablecoins, crypto has ~$400bn of float with >$500m of dilution per week, not counting newly listed coins).
Until altcoins deliver real-world product utilization, altcoin selling flows will overwhelm incremental demand, and altcoins as a group will underperform BTC and ETH. BTC’s April halvening, while it reduces BTC inflation, will force more selling from BTC miners too. While I think the halvening will have a strong “buy the mystery sell the history” trading dynamic, I don’t see it as a major fundamental factor to BTC this year. This also makes clear that an expected ETH ETF approval in May will be a fundamental non-event for the industry.
New products: Crypto is 4 products today: “Liquid gold” (BTC - $800b), Smart Contracts (ETH & all others - $600b), Stablecoins ($125b), and “tax-advantaged, unregulated speculation” (everything except stablecoins). While BTC has delivered spectacularly on its promise to be fungible, digital, liquid gold, and continues to take market share there, Smart Contracts have overpromised and underdelivered on their goal to haul banking into the digital age… for years.
Although VCs have overestimated the scalability of SCs and underestimated the costs of building & maintaining them, the main obstacle to SCs’ potential has been an extremely hostile US regulatory environment. This got much worse in March of 2023, after the FDIC eliminated the Silvergate Exchange Network (which functioned as a programmatic access point between banks and crypto) in the wake of Silvergate’s bankruptcy.
Smart Contracts can’t make finance more efficient as long as banks aren’t allowed to interface with SCs or hold crypto on their balance sheets. Furthermore, the USD is so entrenched within crypto (99.9% of all stablecoin transactions are in USD) that US regulators can effectively create jurisdiction over any crypto event if they want it badly enough, as the US demonstrated in the Terraform Labs case. This has made the risk/reward tradeoff of building on SCs uncompelling. At the same time, TradFi banking institutions, as they learn about SCs’ scaling challenges the hard way, will attempt to graft compliance rules made for the TradFi system onto smart contracts, and will find that when all per-unit costs are considered, SCs create far more headaches than they solve, under a TradFi compliance regime. This lesson was one I became particularly acquainted with in my prior role, where we attempted to build a regulation-compliant stablecoin backed by Real World Assets.
One area of great promise for Smart Contracts lies in machine-to-machine transactions. As AI agents proliferate and skill up to increasingly complex tasks, they will need to be able to be paid – and pay one another – to unlock their real value.
While crypto will always be a tax-advantaged speculative vehicle akin to historical artwork, I believe a radical change in the US regulatory environment is necessary for SCs to realize their game-changing product potential. A continuation of the Biden regulatory regime will mean that the US-based crypto industry, which is already offshoring as fast as possible, will finish leaving, and aggressively push non-USD stablecoins. (This applies to AI as well, where the Biden Administration recently proposed terrible, anti-progressive rules around AI.)
Macro: The macro environment today – inflation seemingly falling, China easing aggressively into a recession, the US running a 7%/GDP deficit during an election-year expansion as it contemplates rate cuts, the BOJ contemplating new bond purchases – is as stimulative as it gets for crypto assets. BTC anchors all other crypto assets, and BTC is highly correlated with QQQ, especially over 6m+ periods. A continuation of the status quo will probably stabilize BTC in the short term; however, any inflection in inflation, or return of US recession fears, could quickly decimate this narrative. This will be doubly dangerous for altcoins, which have high beta to Treasury-sensitive BTC. Given that the US is already running massive bond deficits in an expansion, a recession would be catastrophic for bonds… absent a level of QE that The Powers That Be may find politically unacceptable.
In summary, I believe 2024 will require the crypto sector to digest recent sea changes in flows, a critical US election, new product narratives, and a Goldilocks macroenvironment that “feels too good to be true” and could turn on a dime. 2024 may prove to be as profitable for nimble, responsibly leveraged crypto traders as it will be ulcerous for crypto’s countless invisible builders.