Thirteen Digital Asset Predictions What’s next?

It has been two years since the crypto market peaked, and while 2023 was somewhat convenient, anyone following the space is certainly wondering: what’s next? 

Will history rhyme and ship yet another four-year cycle on the back of the Bitcoin halving? Will we finally see true crypto adoption based on product-market fit? Will we see an institutional bonanza triggered by a spot ETF approval? Is there a potential black swan looming? And not to forget, when supercycle? 

The contents of this article are based on our combined knowledge and are generally available knowledge derived from historical evidence which might not materialize again even under similar or identical circumstances. The predictions in this article are purely conjectures on what might or might not happen. None of the following content is intended or to be understood to include any advice or recommendation for action or non-action in financial or other matters. 

PLEASE NOTE: The content presented subsequent to this disclaimer should not, under any circumstances, be interpreted as investment advice.

An ETF approval would be monumental for the digital asset space. Not only does Bitcoin mimic gold’s properties as a store of value and inflation hedge, but we do also identify major parallels to the transformative launch of the SPDR Gold Shares ETF (GLD) back in October 2004, the first U.S. gold ETF.

Our predictions

• GLD allowed access for many who could not easily acquire or store physical gold. It had a swift impact on the price of gold as inflows altered the physical supply and demand equilibrium. Ever since its introduction (price quadrupled to date), the supply held in ETFs heavily correlated with the underlying price.
• Like gold, Bitcoin has sound money properties, a fixed supply but is not accessible by most institutional and wealth managers in the U.S.
• Bitcoin emissions are hardcoded and its supply inelastic, even if you throw infinite hashpower at it, you will not be able to mine more, while you are certainly able to ramp up gold mining in case of spiking demand.
• The amount of ETF gold holdings equates to 1.5% of the supply. Yet gold has a 17x larger MCAP and ~36% less supply held in financial vehicles compared to bitcoin, hence every dollar flowing into a Bitcoin ETF will have a greater impact than in gold markets.

Our predictions

• An approval in January will give broad access to the youngest and most disruptive asset class since more than a century. It will bring more regulatory clarity, inclusion, legitimacy, maturity and prevent the industry from moving outside the U.S. bypassing the major miss experienced with semiconductors. 
• It will provide a gateway for a new class of investors, including RIAs, pension funds and other money managers that could not access BTC at scale without an ETF wrapper. 
• Compared to futures-based products that create efficient forward rates markets and yield price reducing mechanics, spot ETFs are more capital- and tax-efficient, simple, transparent, and ensure investor protection in a convenient and familiar way. Put simply, Bitcoin spot is limited, Bitcoin futures are not. They typically lead to a better performance especially for buy and hold strategies that suit portfolios with BTC exposure. 
• NYDIG estimates demand for a Bitcoin spot ETF at around $30 billion, derived from the size of gold ETFs. Matthew Sigel from VanEck expects $1B+ within the first month. Galaxy estimates the inflows to hit $14.4B projecting +75% price performance in the first year, and $38.6B by the third year. At $35k per BTC, we currently face $11.5B in annual supply emissions via block rewards. $14.4B would wipe out the entire structural selling induced by mining. Matthew Hougan from Bitwise Investments expects ETFs to pull in $55B within 5 years based on demand in smaller markets such as Canada that operate spot ETFs already. 
• The Canadian spot ETFs are a good primer for potential demand. They hold around $2B in BTC. The U.S. stock market, however, is 22x the size of the Canadian stock market. Plus, the U.S. may act as a role model for other countries that are hesitant to make an ETF move. 
• The immediate impact upon approval might turn out to be moderate or to be a short-term sell the news event. The long-term gravity of an ETF approval however is substantial and will cause major second order effects in demand and other domains such as adoption across the industry.

Our predictions

• Prior to Bitcoin, it was hard to pick the best per - forming asset class year in year out. Savvy people managed to, but most did not, which is why diversification is so crucial. 
• In the last 11 years, that changed somewhat as the new kid on the block altered the game. Looking at the ten most important asset classes, there is not much shuffling when it comes to annual top performers. From 2013, Bitcoin managed to dominate any other asset class on an annual basis in 8 out of 11 years. In that period, it managed to ship an annualized return of 95.4%, it is a performance unheard of. It is the best performing asset over a 1y, 3y, 5y, and 10y period, basically any timeframe one wants to pick. 
• As the market matures, we will see diminishing returns, less intense blow-off tops, but also less severe drawdowns and overall a less volatile asset class. Data shows decreasing volatility peaks over the last 3 years, an overall contracting envelope, and since recently it is converging with the CBOE volatility index for U.S. stocks. 
• Based on the cycle dynamics of Bitcoin and other analyses in this Outlook, we expect Bitcoin to print a new ATH and continue to outperform other asset classes in 2024.

Our predictions

• The institutionalization of market structures is well underway. As such, we observe new ATHs in Bitcoin under management within ETPs, flashing institutional demand, increased institutional confidence and elevated sentiment. A recent survey conducted by Institutional Investor Custom Research Lab supports our view. 
• They found that according to 250 surveyed institutional investors, digital assets are likely to become a widely adopted investment vehicle within 3-5 years. 
• 64% that had previous exposure are doubling down on digital assets, 45% without exposure plan initial allocations, a material signal.

Our predictions

• Another key indicator in adoption metrics signals that most of the transactional volume in crypto is already happening via institutional channels. The U.S. in particular is highly driven by institutional activity, 77% of transaction volume stems from transfers above $1M, more than any other region.
• As the perception of Bitcoin transforms into an institutional asset, pensions, endowments, and other financial structures will likely bring passive and long-term buy-side flows, and it does not take large allocations of these capital heavy entities to move the needle.
• With a looming systemic threat from Binance being likely off the books, the digital asset space is ready for institutions.

Our predictions

• According to our model portfolios, adding a bitcoin allocation to a traditional diversified portfolio that includes cash, gold, bonds, and equities yields significant benefits. 
• Not only are we able to diversify from uncommon sources of systemic risks in balanced portfolios, but it also improves overall performance and enhances the portfolio’s overall risk adjusted returns. Notably, the largest marginal yield improvement is with BTC allocations between 1% and 2.5%, respectively, with only minor changes in volatility. 
• Bitcoin’s historical impact on a traditional diversified portfolio is substantial across many timeframes yielding improved returns and improved Sharpe ratios. 
• At this point, it is hard to ignore Bitcoin. With the ETF opening the gateway, we project that BTC earns a distinct role in the long-term construction of balanced portfolios

Our predictions

• Via nation-state mining proxies, various energy-rich nations such as UAE, Oman or Bhutan signaled strategic fitness for reserve Bitcoin at the sovereign level. 
• We project the next sovereign following El Salvador’s legal tender path stems from the Middle East, LATAM, Sub-Saharan Africa or Central/Southern Asia. They host mostly emerging countries that rank high in global crypto adoption, face monetary debasement or substantially rely on trade. 
• According to Chainalysis, Argentina ranks 15th in global crypto adoption, and 1st in cryptocurrency value received between 2022-2023 in LATAM. If Milei follows through, we might experience a landmark event in sovereign crypto adoption as Argentina bolsters almost 17x in GDP compared to El Salvador ($487B vs. $29B). 
• Another area that we believe is warming up to digital assets is company balance sheets.
• The odds of Argentina making that move are elevated given the recent momentum of pro Bitcoin president-elect Javier Milei, persistent inflation, a rather young population compared to OECD countries and a high smartphone penetration rate.

Our predictions

• Gaming giant Boyaa Interactive based in Hong Kong plans to invest $90M or 20% of their 2022 gross revenue into BTC and ETH. 
• As digital assets enter mainstream mindshare, we expect more companies, even non-crypto affine, to take a more progressive approach towards this new asset class. ETFs will ease access as well as acceptance and these signals will not stop radiating at the leaden wall of companies.

Our predictions

• From an investment perspective, ETH feeds a different rationale than Bitcoin as it represents a global computing platform that will likely host the new fabric of global financial markets. It derives value from cashflows, its network effects, large developer base and lindyness. It already blends into the physical world via tokenization, payments, commerce, and gaming.
• ETH has not lost interest from a fundamental perspective. Blockspace demand is sufficient, the net issuance, accounting for new ETH emissions minus burned ETH, is deflationary and MEV burn might boost these dynamics. Bitcoin’s supply peaks in a century, Ethereum’s supply likely peaked already. We expect deflation to increase as on-chain activity heats up and real yield spikes.
• $450B and provides $60B in economic security (Bitcoin provides $10B according to Justin Drake), more than any other chain. It has best-in class client diversity, and soared past 100M addresses with balance recently. Ethereum’s L1 full time developer dominance rose above 50%. Plus, ETH is a great collateral asset, providing access to its flourishing ecosystem in a non-custodial fashion.
• It currently secures a total value of more than ETH is net deflationary, generated $2.1B in fees in 2023, $1.75B in revenue (supply burned). In its first 7 years, Ethereum surpassed $10B in overall revenue, outpacing most of blue-chip tech stocks including Microsoft and Meta. Remarkably, that revenue stems from a period of less than 3 years starting with the introduction of Ethereum’s burning mechanism.

Ethereum will act as benchmark for TradFi to cross the chasm into tokenized and digital assets, likely yielding a monetary and liquidity premium over other networks. With its unique feature set, ETH will likely become the second of two assets that meet institutional interest, making it one of the most compelling investor opportunities globally.

Our predictions

• Among others, Fidelity and BlackRock recently filed for spot Ethereum ETFs, indicating high conviction of financial powerhouses and demand from clients. We expect approvals to happen within 2024 following a BTC ETF approval. ETH would then achieve regulatory parity to BTC, a crucial puzzle piece that is still missing. Notably, while the SEC did not officially acknowledge ETH as a commodity yet, their prior actions implied accepting its commodity status.
• Once the dust of the Bitcoin ETF and the halving event settles, we project the mainstream focus to shift to Ethereum, capturing flows that previously went to BTC with the difference that Ethereum has a way lower market cap. We expect that Ethereum’s yield bearing properties will play a decisive role here, likely following the stock lending model in traditional equities yet with the crypto equivalent of dividends. 
• Simply holding ETH in these ETFs won’t be enough. Institutional staking and fixed yield strategies are fields we expect to fly in 2024. ETH’s productive cashflow properties will bring additional yield enhancement through staking and hence a higher return on ETF holdings in addition to Ethereum’s vanilla growth potential. We saw first products like the 3iQ Staking ETF already launching in Canada. 
• We have a high conviction that asset managers will capitalize on additional fees and thus put serious effort into a product with intrinsic yield that fits the ESG narrative. A story that is easy to sell and not priced in yet. 
• We expect the entirety of the outlined properties and conditions to act in favor of ETH as an asset.

Our predictions

• We predict that 2024 will see a major vortex of innovation hitting the Bitcoin network. Post halving, we expect that transaction fees exceeding 50% of the overall miner rewards will not be outliers anymore.

Our predictions

• On the risk side, we expect further development progress and stage 2 maturities (see L2Beat). Arbitrum leads these efforts with operational fraud proof systems and a broad validator base. 
• Another trade-off introduced with the Cambrian explosion in distinct rollups is composability, liquidity fragmentation and a UX burden on users that are forced to navigate across various ecosystems. We predict that sufficient solutions will be available in time. Among them are based rollups, L3 communication hubs aggregating proofs across chains (e.g. zkLink, Polyhedra, Succinct Labs), shared sequencing, IBC enabled rollups (zk-IBC, Polymer Labs). The friction involved on the user surface level will be abstracted away.

Our predictions

• 3.1B people or 39% of the global population play games. The total gaming space is estimated to hit $610B by 2032, while crypto gaming is valued at ~$15B today. More than $100B of which is estimated to be captured within GameFi at a CAGR of more than 27%. We have high conviction that there is no bigger trojan horse for crypto adoption, it is a superset of all other crypto narratives. Messari confirms, that the game segment is also becoming the leading sector by investor attention. 
• We observe major enthusiasm from gaming companies like Ubisoft or EpicGames, that could boost the industry’s expansion from the traditional shore. The hyped launch of GTA VI with along with rumors of a potential crypto integration will put the gaming narrative into focus. 
• Games with underlying blockchain technology enable true ownership of in-game items. There are massive markets trading such items from e.g. World of Warcraft or Counterstrike that would benefit in efficiency, cost, price discovery, ownership, liquidity or provenance. In a first ever. they would allow for cross-platform utility, a future that even Roblox CEO David Baszucki is an advocate of. Others like game publisher Square Enix (Final Fantasy) announced the launch of its first NFT game, Symbiogenesis. If these players move, we believe that most AAA publishers will follow suit. 
• We expect gaming to finally meet longstanding expectations, likely attracting the major share of new on-chain citizens.

The timing could not be better as it coincides with a vortex of gaming funding within 2021 and 2022. 2024 will be the 2-3 mark, a typical timeframe needed for game development. Games leaving stealth mode that we are excited about are Shrapnel, Hytopia, Matr1x Fire, Parallel TCG, Altered State Machine, Sidus Heroes, Illuvium, Sipher, Oh Baby Kart, Off the Grid, Portal, Domi Online, or Nounish Punk and Treeverse. On the platform, network and ecosystem side, one should watch out for Immutable X, Treasure DAO, Beam and Nakamoto Games. We expect at least one of these projects to go viral.

• Fortnite: 243M MAU | $5.8B Revenue
• Roblox 214M MAU | $2.4B Revenue
• Minecraft 163M MAU | $380M Revenue

Decentralized gambling and betting are another area to watch. After the ICO era, and the first two waves of DeFi protocols, the industry desperately seeks real yield and sustainable cash flows. Protocols such as Rollbit (P/S =0.69 annualized based on November revenue of $56M,) and WinR (P/S=1.3 annualized based on November revenue of $0.13M) a fully decentralized platform with no operators nor owners running on immutable smart contracts, provide just that. They essentially allow you to become the house. In our view, the next expansion cycle of these platforms is close. Mostly because fully homomorphic encryption (allows computation on encrypted data) and zk technology now enables games like on-chain Poker with code-level fairness in a truly decentralized fashion.

Our predictions

• Opposite of Solana sits Celestia, the first production ready alternative DA solution fostering the modular paradigm. It allows rollups to thrive on cheap, scalable data availability based on innovations such as data availability sampling. The market agrees on its relevance while other projects such as NEAR join the race with their DA layer. On our DA watchlist: Celestia, NEAR, EigenDA and Avail.

Our predictions

• Kaspa popped with an efficient PoW and GhostDAG consensus mechanism trying to follow the steps of Bitcoin. Meanwhile, Stacks, a Bitcoin L2, made noise as the only protocol to offer native Bitcoin yield. Its milestone Nakamoto upgrade expected in early 2024 brings sBTC and major optimizations across the stack. Both projects are worth monitoring, providing a potential beta play on BTC.
• Lastly, fundamentally attractive projects that lean into the AI narrative will likely not lose steam in the months ahead as computing and storage becomes a bottleneck and debates around decentralizing AI ramp up. This affects most components in the decentralized machine learning supply chain from storage to data pre-processing and model training. Projects worth mentioning are Render, Bittensor, Filecoin or Akash.

DEMAND

Our predictions

• Macro: rate cycle peaked, possible QE measures upon yield curve un-inversion, global liquidity is coming back (M2 bottomed), expansionary fiscal policies, federal debt service at ATHs, election year with multiple pro crypto candidates, an overall risk-on setup is looming. 
• Institutional: a potential ETF does not just mean significant inflows upon approval, but it elevates digital assets in acceptance, legitimacy, and regulatory clarity. This aligns with the plain benefits of having digital assets in diversified portfolios. Adoption: gaming, betting, social applications, tokenized dollars in countries tortured by inflation, DeFi and RWAs attract millions of new users. 
• Risk mitigator: digital assets as a solution to looming threats from CBDCs (3.7 billion people are living under authoritarian regimes experimenting with CBDCs), deep fakes, privacy (FHE, zk), decentralized and democratized AI, data ownership. 
• Demographics: the great intergenerational wealth transfer is the most overseen component. The wealthiest generation, baby boomers, will retire through 2045, transferring more than $70t in assets to younger generations, mostly millennials, a wealth transfer eclipsing any in the past. By 2030, millennials will hold 5 times more wealth than today. So what? The digital asset adoption rate of millennials is factors higher than that of baby boomers, on average 5x. One in five Americans hold digital assets, 60% of which are millennials and gen Z. It is reasonable to assume that a fair share of that wealth is flowing into digital assets. Galaxy estimated a resulting capital flow of $20M-$28M daily over the next 20 years.

SUPPLY

Our predictions

• Halving: the 4th Bitcoin halving is estimated for April 2024. Post-halving, there is $5.75B less structural supply hitting the market (calculated based on BTC at $35k). Historically, Bitcoin yielded strong gains in the year that followed the halving and early trends of this 4 years cycle echo past patterns. 
• Long term holders: the supply dynamics indicate that long-term holder supply is on a sustained upward trajectory (BTC ATH at 70% not moved in >1Y, ETH ATH at 76% not moved in >1Y). The short-term holder supply flashes exhaustion and mid-term holder supply is ranging at multi-year lows. We derive strong signs of holder conviction, leaving ample room for growth as increasing supply age is a proxy for illiquidity. Historically, cycle tops are skewed towards short- and mid-term holder supply. There are no signs however of a trend inversion and long-term holder supply distribution. Note that supply held in TradFi vehicles such as spot ETFs is increasing too. 
• Exchange reserves: showing a sustained multi-year decline, recently hitting an ATL of 2M BTC. It suggests that BTC is migrating towards more illiquid and less speculative venues that puts the available supply at historical lows, another strong signal of elevated long-term positioning and accumulation. Note that supply leaving exchanges is also subject to institutional and TradFi vehicles like custody.

Combining the above, there is a major supply crisis assembling. For a fair number of holders, Bitcoin is a one-way street, a buy and never sell asset held by a community of believers with high conviction. The potential solution to debt money in a world that seeks safe haven alternatives. Meanwhile, regulatory derisking and major streams of adoption will materialize, bringing multiple demand verticals that stumble into the halving event. Never in digital asset history did we have such a textbook setup for price discovery. 

Please note that there is a chance of macroeconomic turmoil in 2024 and there is a chance of the SEC rejecting ETFs. Such events may however be considered as an opportunity. The overall odds are heavily in favor of digital assets. And while this entire article focuses on dynamics that may influence performance, it is key to understand context. Vehicles such as ETFs are solely tools. The core primitives of digital assets provide the substance, offering a disruptive emerging monetary technology in a permissionless, inclusive and immutable fashion. Price is only a lagging indicator of fundamentals. 

To sum up, we project that liquidity will chase strong narratives. And since digital assets are a very rhythmic and reflexive asset class, we might face the culmination of catalysts engineered for more than a decade. This could result in an endless twap into digital assets with ever reinforcing feedback loops while institutional demand runs into supply constraints. Digital assets are ready for prime time. In our view, the supercycle is closer than ever.