Tech
Crypto Markets: Bitcoin’s 160% Rebound in 2023 Is a Bet on ETF ‘Demand Shock’
The sense of doom that gripped cryptocurrency markets in late 2022 following the $1.5 trillion loss has 12 months later given way to a very different feeling: greed.
Bitcoin has bounced back this year with an advance of more than 160%, adding around $530 billion to its market capitalization. In its wake, a host of smaller tokens, from Sam Bankman- and Fried-backed Solana to dog- and frog-themed memecoins, took off as investors once again embraced risk. An investor who purchased Solana for $100,000 in early 2023 would now make a profit of more than $800,000.
Underlying much of this bonanza is optimism that U.S. regulators will soon give their first blessing for an exchange-traded fund that invests directly in Bitcoin. Investors will find out by January 10 whether that bet, which cryptocurrency bulls consider an almost certain winner, will be successful.
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“The approval of spot ETFs will be a major catalyst, it will definitely cause a demand shock” as traditional investors currently lack a “high bandwidth and compliant” investment channel for the token, Michael Saylor, co-founder Bitcoin owner MicroStrategy Inc. told Bloomberg Television.
Digital asset markets still have many detractors who argue that cryptocurrencies are fundamentally worthless and a haven for criminals. Binance, the largest exchange, agreed to pay a $4.3 billion fine in November for a series of violations, and CEO Changpeng Zhao was forced to resign. Bankman-Fried was jailed for fraud at FTX and liquidity has yet to fully recover from the collapse of his empire.
Here is a selection of charts showing how cryptocurrencies fared in 2023.
Bitcoin’s rally this year has outpaced stocks and gold. Supporters say a four-year event scheduled for 2024 known as halving – or halvening – will curb supply growth, providing support for the token alongside potential demand for ETFs. The dominant cryptocurrency is still trading well below its November 2021 record of nearly $69,000.
Bitcoin miners Marathon Digital Holdings Inc. and Riot Platforms Inc., major U.S. cryptocurrency exchange Coinbase Global Inc. and software company-turned-Bitcoin investor MicroStrategy all jumped as cryptocurrency markets recovered. Coinbase’s nearly 400% gain has weathered a lawsuit brought by the Securities and Exchange Commission for allegedly operating an unregistered platform, a charge the company disputes.
Bitcoin derivatives have seen an explosion of activity in 2023. Bitcoin options open interest on Deribit, the largest crypto options exchange, topped $16 billion for the first time in December, according to CCData. Open interest in Bitcoin futures has also reached historic levels at CME Group, which is now competing with Binance to become the leading marketplace for such instruments.
The decentralized finance sector has yet to recover from the more than $40 billion collapse of the TerraUSD stablecoin project in 2022. One exception is liquid staking, where the total value of locked assets has risen to a record this year, shows DefiLlama data. Liquid staking protocols offer easier access to rewards earned when tokens are pledged to help manage blockchains. Staking has grown in popularity on Ethereum since the network’s Shanghai Upgrade in April.
According to Nansen data, weekly trading volumes for non-fungible tokens – digital collectibles – have fallen from lows of less than $50 million in October, reaching around $180 million this month. But that’s just a fraction of the $1.8 billion peak seen in 2022, suggesting that cryptocurrencies overall have a lot of work to do to reignite the level of interest the sector attracted during the pandemic, when the world was awash with stimuli.
Although Bitcoin’s price has risen, the cryptocurrency market still bears scars from the collapse of Bankman-Fried’s FTX platform and its Alameda Research trading firm in November 2022. The destruction contributed to a drop in liquidity, making the token harder to trade.
Market depth, or the cryptocurrency market’s ability to accommodate relatively large orders without unduly impacting prices, illustrates the problem. The daily value of transactions that fall within 1% of Bitcoin’s average price on centralized exchanges fell 55% to around $680 million from $1.5 billion in April last year, Kaiko data shows .
There have been big changes in the market share of cryptocurrency exchanges this year. Binance remains the largest venue, but its spot trading share fell to about 44% in mid-December from more than 65% at the start of 2023, according to Kaiko. Asia-focused platforms such as Upbit, Bybit, and OKX have picked up much of the business lost by Binance.