Graphing Digital Assets
Month in Review — December 2023
Change is Imminent
As we look to the year ahead, 2024 brings more optimistic prospects for the digital asset market. With increasing opportunities for investors, mainstream adoption may be around the corner.
The imminent SEC approval of bitcoin spot ETFs as early as January is expected to attract substantial retail and institutional capital. As initially reported in October, BTC price rallies since June coincided with news affirming the possible approval of a bitcoin spot ETF (top graph). Looking at the data, we can understand why the upward trend in BTC price has largely been attributed to the anticipation of bitcoin spot ETFs entering the market and the potential positive impact this opportunity may have on the digital asset space.
Moreover, the next Bitcoin halving event, cutting miner rewards in half, is projected for April. Halving has historically resulted in significant positive price movements (bottom graph) as it reduces the rate at which new coins are created, thus preserving the cryptocurrency’s scarcity and thereby increasing its value.
In addition to new investment opportunities, mainstream adoption of digital assets is likely with increasing interest in tokenization of real-world assets, as well as the development of crypto-related services, such as EDX Markets, the crypto exchange backed by Fidelity Digital Assets, Charles Schwab, and Citadel Securities.
As with most asset classes, while some uncertainty will always exist, these converging factors paint an optimistic outlook for digital assets in 2024.
Source for 2023 BTC pricing: Yahoo Finance; source for historical BTC price: investing.com
Macroeconomics Influencing Digital Assets
Macroeconomic factors, including anticipated Fed rate cuts and a decline in 10-year Treasury yields, may further boost the digital asset market, particularly as crypto investing becomes more mainstream.
Following 11 rate hikes between March 17, 2022, and July 26, 2023, the Federal Reserve maintained interest rates for the third consecutive time in its last meeting on December 13, 2023, and hinted at three upcoming rate cuts this year. The crypto sector may stand to benefit from the dovish stance, as the market becomes more risk-tolerant with decreasing rates.
Furthermore, U.S. 10-year Treasury yield experienced a significant decline in Q4 of 2023, falling from its peak of just under 5% on October 19 to 3.87% at year end. Concurrently, BTC increased by 62.34%. This inverse correlation to 10-year Treasury yields, highlighted in the graph, shows that bitcoin may be a valuable alternative store of value and, if the risk-free rate continues its descent, cryptocurrencies may become more attractive as a hedge against inflation and economic uncertainty.
Source for data: Yahoo Finance
Market Makers Making Profits
In December, monthly spot cryptocurrency trading volumes hit an annual high, surpassing $1.1 trillion for the first time since May 2022. Crypto futures and perpetual swaps markets also saw an uptick in trading volumes. Such elevated trading activity creates an optimal landscape for market-making strategies.
Cryptocurrency markets, characterized by extreme pricing inefficiencies and asset volatility, require liquidity to improve efficiency. This presents lucrative opportunities for market makers, whose primary objective is to provide market liquidity and profit from individual trades through bid-ask spreads and exchange fee rebates. High-frequency crypto market-making strategies hold the potential for substantial returns given their ability to execute hundreds of thousands of trades daily, across hundreds of tokens, tens of exchanges, and multiple instruments.
Utilizing our proprietary index that tracks the average gross performance of various crypto market-making strategies in 2023, the graph illustrates the tendency for these strategies to generate significantly higher returns during periods of heightened trading activity.
Given the increased trading volumes expected throughout the year, market-making strategies are positioned to outperform in 2024.
Source for Monthly Spot Trading Volumes: The Block; Market Maker Index Performance sourced from Samara Alpha Management proprietary data.