Extended 2023 Year-End Update And Look Forward
Well, the New Year came and went, and as of this morning a BTC ETF is trading. Went from sleepy to kinetic in a flash. Feeling the excitement, we wanted to provide some extended thoughts on the year just past and an ever-ripening 2024.
Over the course of the year, prices rallied substantially, with BTC showing an impressive +154% increase. However, the market's trajectory created a challenging environment for numerous active strategies. In our view, 2023 was marked by three distinct phases.
Phase 1: Strong Rally Off the Bottom
2023 kicked off with a sizable rally off the lows established at the end of 2022. The first quarter of 2023 witnessed an upward trajectory in prices, trading volumes, and volatility, albeit from quite depressed levels from the end of 2022.
Phase 2: Market Apathy
The initial momentum was short-lived as the market entered an extended period of apathy and stagnation from April to October. During this time, trading activity dwindled, and the market was directionless, with BTC trapped in a 6+ month-long range between $25,000 and $30,000. This phase presented unique challenges for traders and investors, as the lack of volume and volatility made it difficult to generate alpha.
Phase 3: ETF Fervor Reawakens Market
The fourth quarter of 2023 brought a renewed sense of excitement as ETF fervor gripped the market. The possibility of a Bitcoin spot ETF injected fresh enthusiasm and renewed interest among investors, propelling BTC beyond $30,000 and testing $45,000 by year’s end. The breakout in prices was accompanied by a resurgence in trading volumes and volatility, signaling a return to more active market conditions.
Valmar Alpha+ in 2023
Despite the overall positive performance of cryptocurrencies in 2023, the year presented its fair share of challenges for active strategies, especially during period from April to October, as highlighted above. Those active strategies generally seek to capture arbitrage, momentum, mean reversion or relative value opportunities.
The core of Valmar’s strategy, dubbed Alpha+, is a combination of mid-frequency, systematic strategies incorporating basis arbitrage, statistical arbitrage and momentum components (active strategies). Despite the challenging environment for such models, Alpha+ generated quite positive returns with an attractive Sharpe ratio and well-controlled drawdowns. While we’re proud of this performance, we believe the coming year should offer a better trading environment for Alpha+. In addition, we continue to identify promising trading teams and strategies to include in our portfolio, either through internal hire or external SMA allocation. Please contact us to learn more about Alpha+.
Forward Outlook into 2024
Looking ahead to 2024, there are reasons to be optimistic about digital assets. Several factors contribute to a positive market outlook and provide opportunities for alpha generation:
1. ETF Has Arrived: The BTC ETF is a game changer for crypto. The ETF approval brings true traditional investment exposure to crypto, elevates its legitimacy, and further pushes it into the mainstream. A truly pivotal moment for the long-term growth of the industry.
2. Bitcoin Halving: The Bitcoin halving is projected to occur in April, which will reduce BTC emissions and miner sell pressure by half. Historically, halvings have played a pivotal role in influencing BTC’s price, often leading to increased scarcity and heightened market interest/attention. The graph below shows how prices have reacted to the three prior data points.
3. Regulatory Shift: In the United States, the regulatory headwinds are beginning to shift into tailwinds.The aforementioned approval of the BTC ETF (with an ETH ETF likely to follow) should unlock greater regulatory clarity, leading to improved volumes and activity. Globally, the introduction of Markets in Crypto Assets (MiCA) regulation seeks to define a regulatory framework for Europe; via the FCA, the UK is poised to introduce formal regulations in 2024; and the UAE has grown as a global crypto hub thanks to frameworks instituted by Abu Dhabi Global Markets (ADGM) and the Virtual Asset Regulatory Authority (VARA).
4. Improving Volumes: Market volumes have shown significant improvement towards the end of 2023 and have room to grow from here. While BTC 30D spot ADV has recovered to $22B, it averaged $29B since 2019 and peaked at $70B in 2021.
5. Improved Counterparty Risk: The Binance settlement has reduced fears surrounding the largest crypto exchange, and Binance’s influence in the markets continues to wane as volumes slowly flow to other exchanges (such as the CME). Additionally, potential resolution of FTX and Celsius creditor claims should reduce the fear of estate liquidations and create a potential wealth effect when the assets are returned. Meanwhile, several off-exchange settlement solutions, notably Copper's ClearLoop, have emerged during the bear market. The adoption of these solutions is expected to enhance market structure further.
6. Macro: In our opinion, it isn’t a coincidence that BTC broke out of its extended trading range when the 10yr UST topped out. With inflation continuing to moderate, we expect that the 10yr will as well, which is supportive of long-duration assets like technology and digital assets.
7. Adoption: Ultimately this is a technological revolution. More and more traditional firms are starting to come around and see the benefit of tokenization and atomic transactions facilitated by generalized blockchains and smart contracts. What once was mere experimentation is evolving into real world use cases with many large traditional finance institutions piloting tokenization and/or stablecoin projects. As adoption increases, our industry becomes increasingly legitimized, new products and applications are created, and institutional investment continues to flow.
In conclusion, it is crucial to underscore that despite entering a bull market, the persisting volatility and dynamic nature of crypto markets continue to be defining features. This reinforces our preference for a diversified, primarily market-neutral approach. The year 2023 marked a period of pause and subsequent recovery in the crypto market. As we venture into 2024, the crypto landscape appears to hold even greater promise, presenting active strategies with the potential to generate alpha in a more favorable environment.