Bitcoin’s 160% rebound in 2023 is a gamble on ETF ‘demand shock’

THE sense of doom that gripped crypto markets at the end of 2022 following a US$1.5 trillion wipeout has 12 months later given way to a very different sentiment: avarice.

Bitcoin stormed back with a more than 160 per cent advance this year that added some US$530 billion to its market capitalisation. In its wake, myriad smaller tokens ranging from Sam Bankman-Fried-backed Solana to dog- and frog-themed memecoins took off as investors embraced risk again. An investor who bought US$100,000 of Solana at the start of 2023 would now be sitting on a more than US$800,000 gain.

Underpinning much of the bonanza is optimism that US regulators will soon give their first blessing for an exchange-traded fund that invests directly in Bitcoin. Investors will find out by Jan 10 if that bet, which crypto bulls consider a near-certain winner, pans out.

“The approval of the spot ETFs is going to be a major catalyst, it’s going to definitely drive a demand shock” as mainstream investors currently lack a “high bandwidth, compliant” investment channel for the token, Michael Saylor, co-founder of Bitcoin holder MicroStrategy, said on Bloomberg Television.

Digital-asset markets still have plenty of detractors who argue cryptocurrencies are fundamentally worthless and a haven for criminals. Binance, the largest exchange, in November agreed to pay a US$4.3 billion fine for a range of violations and chief executive officer Zhao Changpeng was forced to step down. Bankman-Fried has been jailed for fraud at FTX, and liquidity has yet to fully recover from the collapse of his empire.

Bitcoin’s rally this year topped stocks and gold. Supporters say a quadrennial event due in 2024 known as the halving – or halvening – will curb supply growth, providing a prop for the token alongside potential ETF demand. The dominant cryptocurrency is still trading well below its November 2021 record of almost US$69,000.

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Bitcoin miners Marathon Digital Holdings and Riot Platforms, top US crypto exchange Coinbase Global and software-company-turned-Bitcoin-investor MicroStrategy all jumped as crypto markets recovered. Coinbase’s almost 400 per cent gain weathered a lawsuit from the Securities and Exchange Commission for allegedly running an unregistered platform, an accusation the company contests.

Bitcoin derivatives saw a burst of activity in 2023. Bitcoin options open interest on Deribit – the largest crypto options exchange – exceeded US$16 billion for the first time in December, according to CCData. Bitcoin futures open interest also hit landmark levels at CME Group, which is now vying with Binance to be the top marketplace for such instruments.

The decentralised finance sector has yet to recover from the more than US$40 billion collapse of the TerraUSD stablecoin project in 2022. One exception is liquid staking, where the total value of locked assets rose to a record this year, data from DefiLlama show. Liquid staking protocols offer easier access to the rewards earned when tokens are pledged to help operate blockchains. Staking grew in popularity on Ethereum after the network’s Shanghai update in April.

Weekly trading volumes for nonfungible tokens – digital collectibles – have climbed off lows of less than US$50 million in October, reaching about US$180 million this month, according to figures from Nansen. But they are a fraction of the US$1.8 billion peak seen in 2022, suggesting crypto generally has much work to do to reignite the level of interest the sector attracted during the pandemic, when the world was awash with stimulus.

While Bitcoin’s price has jumped, the crypto market still shows scars from the collapse of Bankman-Fried’s FTX platform and his trading house Alameda Research in November 2022. The wipeout contributed to a drop in liquidity, making the token harder to trade.

Market depth, or the crypto market’s ability to shoulder relatively large orders without unduly impacting prices, illustrates the problem. The daily value of trades falling within 1 per cent of the mid-price of Bitcoin on centralised exchanges has dropped 55 per cent to about US$680 million from as much as US$1.5 billion in April last year, Kaiko data shows.

There have been big shifts in the market share of crypto exchanges this year. Binance remains the largest venue but its share of spot trading fell to about 44 per cent by mid-December from over 65 per cent at the start of 2023, according to Kaiko. Asia-focused platforms such as Upbit, Bybit and OKX picked up much of the business Binance lost. BLOOMBERG