2023 Year-End Crypto Update

It’s just about the end of the road for 2023, a year marked by daunting lows and now bubbling with excitement.  If volatility is a defining characteristic of crypto (and the 21st century at large, it is), this year almost past certainly underscored the point.  But through the whiplash and the pain of the lows, the crypto industry has matured dramatically, preparing itself for the next bull run.  In many ways, 2023 was a year of necessary growing pains and skin shedding, laying essential groundwork for the expansion of crypto.  Valmar will share its reflections for 2023 in this expanded Year-End Update.

On A Serious Note:

Volumes:

• 2023 was characterized by three distinct phases. Increasing volumes at the start of the year from the lows of 2022, followed by market apathy, with little to no trading activity for about 6 months from April to October. Mercifully, volumes came back at the end of October as BTC price broke out of its extended range.

Price Volatility: 

• Throughout every cycle, price volatility has remained a defining characteristic of crypto, and this year that was particularly true. Volatility mirrored the pattern seen in trading volumes. During the 6-month period of stagnation, volatility was extremely low for this asset class, but surged when volumes finally returned. That said, it’s worth noting that both realized and implied volatilities of BTC have steadily declined since 2021, so one must wonder about the possibility of a structurally declining volatility as the asset class matures, albeit from extremely high levels.

BTC and ETH Price:

• Prices mirrored volumes and volatility. The first quarter of the year witnessed a strong rally off the lows formed at the end of 2022. This was followed by an extended period of range-bound action until ETF fervor took hold in Q4, propelling prices beyond the $40,000 mark.

Regulations: 

• Two major themes emerged on the regulatory front in 2023: 1) the global nature of financial regulation, and 2) the need for clearly defined regulatory frameworks applied in a consistent fashion. 

• Let’s begin with the world’s two largest financial markets.  In China, the clampdown on crypto began in 2021, with broad bans on mining and trading activities leading to a mass exodus of mining operations to more crypto-friendly jurisdictions. This doesn’t imply that China does not see the benefits of crypto. On the contrary, internal control over its development is essential to the CCP’s interests, and the existence of Hong Kong allows for more open-source participation.  China is keeping its options open, and its ultimate direction will add new complexities, opportunities, and capital flow.

• In the good ol’ USA - home to large piles of crypto companies, talent, and capital - the terrain is also winding, but in a different way.  Instead of hedging its bets, the US is weighing its decision to allow market participation at all.  SEC Chair Gary Gensler, who himself taught a popular course at MIT titled Blockchain and Money, has been blunt about his general distaste of the industry, and Elizabeth Warren would never let truth get in the way of her regressive crusade.  Specifically, the SEC has led a crackdown on exchanges, with lawsuits against Coinbase, Binance, and Kraken. Conversely, a growing bipartisan coalition headed by Senators Lummis and Gillibrand supports the development and implementation of a comprehensive regulatory framework for crypto. Of course, the SEC’s pending decision on a swath of spot BTC ETFs looms large. 

• What to make of it all?  The U.S. political system is historically trapped in a perpetual push-pull tension (a symptom of the two-party system) and regulatory progress will be slow. Yet, as elements of crypto begin to look more and more similar to their counterparts in traditional finance (e.g., products, exchanges, custody solutions, prime brokers), the legal framework will develop, swayed by and favoring large financial institutions. Historically, while China prefers state control, the US inclines toward institutional control with state oversight.

• While China and the US lag, the EU and the UAE have taken the lead on comprehensive regulatory policies.  The introduction of Markets in Crypto Assets (MiCA) regulation has sought to define a thorough and competitive framework for the EU. Although it’s certain to face challenges, we are moving in the right direction. The UK is poised to introduce formal regulations in 2024, and the Euro region’s overall enthusiasm for crypto outpaces that of other Western economic regions. 

• The UAE has likewise morphed into a crypto hub on the back of regulatory developments.  Of note, Abu Dhabi Global Market (ADGM) and the Virtual Asset Regulatory Authority (VARA), have instituted frameworks that provide clarity and confidence for crypto businesses, delineating operational  boundaries and granting access to a growing investor base.  As the industry grows, the UAE aims to fortify its position as one of the largest crypto environments globally, a strategic move to continue to reduce the reliance of its economy on oil. 

• Most market participants do not resist clear, consistent, and detailed crypto regulations.  On the contrary, such frameworks are essential to understanding and navigating the ever-evolving ecosystem.  Regulatory clarity will bolster investments, foster innovation, reduce market risk, and increase institutional and mainstream adoption.  The equilibrium between innovation and regulation still hangs in the balance in certain jurisdictions, but the world is increasingly open for business.

Adoption: 

• What a difference a year makes.  In a staggering U-turn, traditional financial institutions have shifted from mocking skepticism about digital assets to genuine interest and active participation.  We’ve already touched on the impending arrival of BTC ETFs from financial titans (with ETH ETFs stacking behind), and many major players are developing tokenization projects to bring massive amounts of real-world assets on-chain. ETFs will play a pivotal role, serving as a crucial bridge for institutional investors into the space and granting them a secure and regulated avenue to confidently venture into crypto markets.  Tokenization will increase security, unlock new assets to be traded, fractionalize ownership (thus increasing participation), and enable real-time transactions with lower costs and greater operational efficiency.

• Let’s not forget stablecoins, which are fundamental to the stability and long-term growth of the crypto markets.  Stables such as Tether, USDC, and BinanceUSD continue their development and growth, while traditional players such as Visa, PayPal, and Shopify have launched initiatives to bring the technology to their users.  Increased options, competition, and innovation, particularly from prominent financial institutions with vast reputations and capital, represent a positive stride forward. 

• Iconic crypto personalities took a hit throughout the year.  SBF went down flailing (we won’t say “swinging” because 1) we aren’t sure he knows how to swing, and 2) the potential double entendre).  CZ is now ghost of crypto past, and Justin Sun is looking shady.  While acknowledging the importance of some of their contributions, we say good riddance.  Crypto and digital assets should not be led by celebrity or cult-of-personality; it must be led by real technological and market value and utility.  Trim the fat, not the meat. 

• With respect to adoption, it’s fair to say 2023 has largely been about the beginning stages of institutional integration and crypto-native fat trimming.  Expect this trend to only accelerate year-over-year. 

Quick Take Or Two: 

We suppose the nature of this Year-End Update is less quick than our usual installment, and we’re OK with it if you are.

We hosted a handful of lively and in-depth webinars this year:

• On sophisticated crypto trading strategies;

• On crypto “market wizards”; and

• On the progress from leading crypto service providers.

And a few favorite blogs if you can’t get enough:

• Insights from Millennium Management veteran;

• A deep dive into crypto jurisdictions;

• On greed and poorly managed risk:  From the Titanic to hedge funds;

• An ode to Andrea Pirlo and crypto catalysts.

Our quick predictions for 2024:

1. Approved ETFs, rapidly advancing tokenization projects, and further integration with trusted payment systems will introduce more use cases and fuel the growth of additional real-world applications and products, increasing mainstream acceptance.

2. Binance, partially due to its reluctance to engage with a third-party custodial solution, will continue to lose market share and will lose its position as #1 venue by spot volume.

3. While feeling bullish, the market is not just going to go up and to the right; controlled enthusiasm and volatility management will be essential to success.

On The Lighter Side Of Things:

Time this contradictory quality:  at once, it moves fast and slow.  And damn, 2023 both flew past and dragged on.  Have fun this holiday weekend, celebrate the bounce, but we’ve got a lot of work lined up for 2024 and beyond. Let’s get it, responsibly.