The Comeback Kid of 2023

Year End 2023 Wrap-Up

What a turnaround year 2023 has been for the digital assets market. Although we seemed to have had an inauspicious start, we have steadily built the foundations for a solid 2024 and beyond.

One could be forgiven for writing off the rest of 2023 at the beginning of the year. A series of small- to mid-sized banking failures due to the mismanagement of the durations between the assets and liabilities was unfairly blamed on cryptoassets and caused stablecoins to momentarily de-peg in March. Increased regulatory and legislative activities across the globe threatened digital assets development and adoption. Of course, all this was against the backdrop of central bankers raising interest rates to combat rising inflation while risking pushing economies into recession.

But under this gloom of macro uncertainty, the cryptoasset community did what it has always been doing – build.

The Ethereum network steadily progressed with its roadmap by going through with its Shanghai upgrade that allowed validators to withdraw their staked ETH, if they chose to. After the upgrade, many chose not to, and instead, others clamored to become validators. As of the time of this writing, the amount of staked ETH has doubled since the Merge, to a current amount of 28.6 M or 24% of the circulating supply [1]. Scaling remains a key focus of infrastructure development, whether it is Lightning on the Bitcoin chain, or on other chains through the use of L2 solutions leveraging optimistic verifications or zero-knowledge proofs. All this has reignited the institutional investor community to think about the range of investment opportunities. Spot Bitcoin ETF applications submitted in mid-2023 are widely anticipated to be approved by the SEC in January 2024. Work is being done to tokenize real world assets to allow for broader, fractionalized ownership of assets that previously were limited to a small group of accredited individuals. The summary judgement that the XRP token is not a security was just the cherry on top of all this.

Many prognosticators point to the upcoming Bitcoin Halving, expected in April 2024, as the catalyst for the next leg of the bull market in digital assets. We’re optimistic for the digital assets market in 2024 but we think it is more underpinned by the strong foundation that has been building. Infrastructure work continues with blockchain modularization, scaling, digital identity, and account abstraction which altogether should improve the user experience, speed of finality, and security, while lowering the costs of transactions. Better investment accessibility through ETFs and asset tokenization will lead to broader investor adoption. However, regulatory risks still loom large, as foretold by the SEC Chairman Gary Gensler’s 2023 year-end comments, and we should not expect a steady path towards regulatory clarity during this upcoming US election year. There is great promise for digital assets in 2024 but as is especially true for this new(ish) asset class, we need to keep a sharp eye on the fundamentals and risk management, and our investment horizons on the long-term.

[1] Charts - Open Source Ethereum Blockchain Explorer - beaconcha.in - 2023