Jan 3, 2024
“Blockchain technology will ignite innovation,
disrupt industries and revolutionize value transmission.”
Innovation and disruption sit at the core of blockchain technology and 2023 presented a unique opportunity to witness some of the brightest technologists build and launch transformative new paradigms. The foundations of the future of blockchain technology are now visible, and the networks that exist can now be used to transact tremendous value and execute smart contracts efficiently. This infrastructure will make 2024 a stimulating year where applications built upon these foundations begin to sprout and become visible. Golden Pear is as excited about crypto as we have ever been.
2023 in Review
Year in reviews are best left to sports montages. For people who have been in the markets, they are not necessarily very productive and frankly, in crypto, many people probably don’t look back very fondly at 2023. It began in the absolute doldrums and many people turned their attention elsewhere. For that same reason, most people missed the massive moves in crypto markets. Bitcoin increased by 154% and Ethereum was up 91%. The key takeaway from last year was that, although many people expected a longer, sustained period of market ambivalence, BlackRock’s filing for a Bitcoin ETF in the USA on June 15th provided a sizeable jolt of excitement. One needs to appreciate the irony of the year beginning with significant enforcement actions by the SEC. These actions were designed to crush the crypto industry’s major exchanges (Kraken, Binance, and Coinbase). Subsequently, markets entered a furor in early June when BlackRock applied for a Spot BTC ETF with the very same SEC. This was probably not the crypto center stage that the SEC thought it would be enjoying in 2023.
For the second half of 2023, the entire spotlight was on the seemingly imminent approval of the ETF, likely in the January 5-10, 2024 period. Near the end of the year, there was also substantial interest in several themes: Solana and its ecosystem, Alt L1s, and memecoins. This sets the scene for 2024.
Macro Factors in 2024
Interest Rates and Liquidity
Interest rate cuts are likely to begin sometime in 2024. Earlier in December 2023, the Federal Reserve indicated that it would not be hiking rates one final time in 2023 and also indicated that with inflation easing and the economy sustaining, three, quarter point rate cuts are likely in 2024. The market priced in double that at 1.5% in rate cuts next year.
What do rate cuts and crypto have to do with one another? The chart below indicates that typical Bitcoin price cycles and macro liquidity cycles tend to coincide. This makes sense as more abundance of capital in the system means that participants take on more risk.
An offshoot to this catalyst is that a reduction in rates could also be a result of worsening economic conditions in the US and globally. The Conference Board predicts a Meagre 0.9% real GDP growth rate in the USA in 2024 and 2.4% globally. If the economy worsens further than expected, one could imagine that retail participation in risk assets would also decrease.
Another macro catalyst on the horizon is the US election, scheduled for Tuesday November 5th, 2024. This hotly contested election will impact markets (and anxiety levels) around the world. Typically, one can expect the administration in power to enact policies that may get them re-elected. While this may have its most obvious implications on the aforementioned liquidity cycle, there may be one other major byproduct for crypto.
The Biden administration has made it abundantly clear that most of its senior members abhor crypto and actively side with the big banks. Furthermore, you have an audience of many US citizens who lost funds in FTX, Celsius and through the severe market downturn that their implosions caused. This could create the conditions for an even more public attack on crypto in order to win votes. On the flip- side, according to a Morning Consult study commissioned by Coinbase, there are roughly 67 million American crypto holders, and it seems there are more Democrat (22%) than Republican (18%) owners. Still, it is likely that many US politicians will make crypto one of their key platforms.
There are also several crypto-specific catalysts expected in 2024. The most prominent is, of course, the spot Bitcoin ETF, expected in January 2024. This instrument has been held out as the holy grail for many in crypto as it would allow advisors, institutions and retail to more easily provide access to holding spot Bitcoin positions. See our article on it authored in October 2023 including some of the research we used to position more aggressively for this likelihood.
With the price of Bitcoin having increased aggressively since the initial BlackRock filing, the question shifts to the likely long and short-term effects of approval. Although 2023 saw the first reversal of stablecoin inflows since the bear market began, it was anaemic by bull market standards.
The inference is that although there has been an inflow of funds to crypto, the increase in the price of Bitcoin and, subsequently, almost all crypto assets was probably primarily due to crypto native funds positioning accordingly. Based on no other information, the hypothesis would then be to infer that it will be a sell-the-news event. However, this crypto news is different because it itself drives spot buying pressure. If there are large inflows to the ETFs (for instance, from the large market in less-efficient futures ETFs), the spot price could increase, whereas if the response is weaker than expected, there could be a rush to sell the news. For this reason, January is likely to be extremely volatile.
By February to March 2024, it is likely the longer-term effects of the ETFs presence in spot markets will be normalized and this huge narrative will cease to become the prominent story in crypto. Positioning around this time is likely to bring long-term benefits.
Although many participants will be sick of hearing about ETFs by the time the spot Bitcoin ETF is granted, they may not get a reprieve. There are several spot Ether ETF applications that have also been filed. These are led by VanEck and ARK 21 Shares, but importantly, BlackRock and Fidelity have also filed applications. As a result of the fact that we feel that many of the conditions that allowed for the spot Bitcoin ETF to likely be approved also pertain to Ether, we believe this will succeed in 2024. The presence of futures markets, futures ETFs, and recent court judgements seem to indicate that the SEC would be open to being sued successfully again if they were denied. The date when the SEC needs to make a final decision, unless they force filers to withdraw their applications, would be May 23rd, 2024.
However, while we maintain that the narrative of a spot Ether ETF could be substantial, there is less pent-up demand for such a product, and it may be less likely to attract massive inflows without more marketing. In the long term, however, should Ethereum continue to grow and be the clear leading smart contract blockchain, and given that its energy footprint is 99.9% less than Bitcoin, demand driven by ESG-friendly firms like BlackRock could be substantial. Furthermore, due to its deflationary nature, Ethereum has superior tokenomics to Bitcoin and because it can be staked to earn yield, it is likely to be attractive to more sophisticated institutional investors.
The Bitcoin Halving
On roughly April 17th, 2024, the fourth Bitcoin halving will occur. This is when miner rewards will be cut in half, thereby making Bitcoin less inflationary. Typically, participants have referenced this date as a period that leads to increases in price due to miners selling less Bitcoin in the market. However, as noted in the graphic from Delphi Digital above, it is likely that liquidity cycles, which have coincided with halving cycles, may have as much or more of an impact. Regardless of the actual impact of less selling from miners, the narrative of a halving is engrained in crypto, prompting the community and outsiders to position for price increases.
On January 17th, 2024, an update to the Ethereum blockchain titled Dencun will be released on the Goerli testnet. In the weeks or months thereafter, it will go live on Ethereum mainnet. The significance is that in Q1 or Q2 of 2024, the costs to transact on Ethereum L2s will drop by roughly 90%. Golden Pear reviewed some of the technical elements of this in a recent investor call, especially as it relates to the vision of Ethereum.
Recent upgrades to the Ethereum network have been monumental, shifting from proof-of-work to proof-of-stake and allowing for the withdrawal from Ether staking. The significance of the Dencun upgrade is probably less immediately obvious but still important for the long term as it will set the scene for an epic battle – Alternate L1 blockchains vs. Ethereum L2s. This will become a narrative in 2024.
Another highly anticipated upgrade is Firedancer, a new Solana validator client. There are several reasons that this will be crucial in the 2024 narrative. One year ago, Solana was in the midst of an existential crisis. Its biggest backer was SBF/FTX, and much of the Defi network value it had grown turned out to be the deceptive product of two brothers.
One year later, things couldn’t look more different. Solana has become the focus of crypto discussions, and its price has skyrocketed. Solana is currently battling to be included as a “major” alongside Bitcoin and Ethereum, and much of crypto is focused on the technological differences that make it optimal, as well as the burgeoning new technologies being built. Defi, Depin, NFTs, social and gaming applications all seem like they may find a home on Solana. However, as it is still much earlier in its development than Ethereum, it still has issues it needs to deal with.
Firedancer addresses two issues in one fell swoop. Firedancer is the first validator to be built as an alternative to the one made by Solana Labs. Built by Jump Crypto on C and C++ and made Rust compatible, it will be more efficient and add validator diversity to Solana. This diversity is crucial to a network that has been plagued by outages, thereby making it more resilient. Furthermore, in testing, it achieved 1.2 million transactions per second, increasing Solana’s vast speed advantage over alternative virtual machines. What does this mean? It is likely to be more resilient and impervious to downtime, and it will help achieve blockchain speed, which will enable new use cases not available on other chains.
While the future looks bright for Solana and we believe it is likely to become one of the majors over the next several years, Firedancer represents a bridge over a large chasm on its journey. The profitability of the chain, inflation, and other issues still remain unclear, but Solana has a vision and is executing on it. Firedancer is live on testnet and should launch on Solana mainnet in the late summer or early fall in 2024.
Trends Watch in 2024
The above conditions and key events either implicitly or explicitly provide ideas for how to position in 2024. Below are some trends we are likely to see that may also provide ideas. Most of these, as is common in the late stages of a bear cycle, are blockchain infrastructure. However, the apps that will be built upon them may take time to percolate and should be actively monitored for trending narratives.
A Modular Future
One central theme this year will be modularity. For EVM chains that struggle with providing adequate transaction throughput, modularity can be an effective way to increase efficiency. Basically, at the risk of being too technical, it takes key functions of a blockchain and separates those specific competencies into chains of their own. Data availability layers like Celestia and Eigen DA, for instance, can make rollups like Arbitrum, Optimism, and Manta (EVM equivalent, ZK application) cheaper and faster and allow for new paradigms to exist for builders. For instance, EigenLayer, a much anticipated Ethereum restaking service has a bold vision of a wide array of Actively Validated Services (AVSs) that could be built upon it.
As the modular future launches the infrastructure required for more efficient blockchains, we will see a plethora of opportunities both in terms of the infrastructure and apps and services which were hitherto unable to be built. Furthermore, this modular future will be in direct opposition to the more monolithic design choices made by Solana, starkly contrasting the platforms technologically.
Embrace the Monolith
On the opposite side of the modular future, is the monolithic version. At the moment, this is chiefly represented by Solana and its design choices to parallelize transaction processing. This ability to parallelize transactions is now being extended to EVM compatible chains like Sei and Monad. Sei V2, for instance, will improve its V1 transactions per second (TPS) from 45 to 28,300 with 390ms block times and 390ms finality. This is a massive improvement over Ethereum mainnet’s 10-12 TPS.
While the parallelized monolithic and modular visions both aim to increase throughput and speed, it will be a long time before a winner is declared, and it is more likely that specific use cases will migrate to the blockchain tech stack that best suits their needs. For the time being, picking the best technology in each of these categories and then observing where different use cases migrate will be essential.
Within the Ethereum ecosystem, the aforementioned Dencun upgrade will include EIP 4844, proto-danksharding, which will make rollups 90% less expensive to transact on. Combined with the ease of launching L2s, it is likely that L2s will proliferate like crazy. Blast, for instance, an L2 created by Pacman the creator of the NFT trading platform Blur, has locked up $1.1B based on nothing but the promise of tokens. No blockchain even exists yet. This shows how a well-executed hype could bring into being new L2s as a land grab. Likewise, Frax Finance, a well regarded defi protocol, is launching their own L2 for their financial platform. Many more protocols and land grabs will create their own L2s.
The end result, all else remaining unchanged, is increased fractionalization with liquidity spread across multiple protocols on multiple chains. In this vision of a fragmented ecosystem, bridging becomes crucial. Bridge security will be even more important (although ignored by most retail users), and bridges with more robust security guarantees like Circle and Across.to are already seeing more usage.
Abstraction and Intents to the Fore
Clearly, this degree of fragmentation is not sustainable for the Ethereum community. However, another important area to watch will be the combination of account abstraction, chain abstraction, and intents. We believe that we will soon see consumer-facing applications that use EIP 4337 to create software wallets secured in a Web 2.0 fashion, removing the need to care for seed phrases. These wallets will also abstract away the need to dictate chains. Instead, using intent infrastructure, a user will declare what they would like to happen and an army of bots will rush to fulfill the request across chains, across protocols, and perhaps even across off-chain sources in order to most efficiently accomplish the request. We believe that some of the intent infrastructure currently used by the likes of Across and Uniswap, and which will benefit from more infrastructure being put in place by Flashbots and others will combine to reduce the annoyance of current methodologies of transacting on-chain. Wallets, bridges, and intent fulfillers could stand to benefit greatly from this trend. Golden Pear has recently been researching and experimenting with intent infrastructures and specifically their ability to create delta neutral revenue.
Let the Fight Begin
Less than a month after Jamie Dimon lashed out at crypto in a Senate Banking Committee hearing, saying, “the only true use case for it is criminals, drug traffickers … money laundering, tax avoidance,” JPMorgan’s name appeared as one of two Authorized Participants on the BlackRock spot ETF refiling. Hmmm. How do we reconcile those two statements?
JPMorgan also has a blockchain of its own called Onyx. This private, permissioned blockchain now sees more than $1B in transaction volume a day and employs 250 people with a direct line to the most senior bank officers. Digital Assets, another blockchain created by and for American banks, has 9 of the 10 largest global investment banks building on it.
Both crypto and bankers agree that the technology is interesting and transformative but the values that each hold dear are almost completely antithetical to each other. Over the next couple of years, perhaps exacerbated by the US elections, this collision in values will play out increasingly in public. How this important creative destruction resolves itself will present great investment ideas.
What Sits on Top?
As noted, many of these trends to watch relate to infrastructure. When crypto finally gets over its terrible 2022, realizes that remarkable things have been built in 2023 and starts looking towards the future, more talented builders will come out of the woodwork to take advantage of the foundations. These app builders will build in new sectors and will bring new models of gaming, social, NFTs, decentralized physical infrastructure (DePin), and derivatives trading.
We believe that gaming represents a tremendous opportunity for crypto projects as “value” is a central part of gaming. Gaming7, a Web3 gaming DAO, issued a report claiming that since 2018, $19B has flowed into Web3 gaming-related products, with more than $1.5B coming in the first three quarters of 2023. However, building good quality, addictive games with strong tokenomics remains elusive and the winners may not be obvious in the early stages.
The concept of building social applications on blockchains was also given a shot in the arm in 2023 with the adoption (and subsequent cooling off) of Friend.tech. Will 2024 see our first large social application take shape? Probably not. Although Friend.tech was interesting and attracted some non-crypto natives, it was fleeting and reinforced how difficult it is to supplant the established social media players.
NFTs are dead. Or so they say. Our belief is that NFTs will have a resurgence in 2024, particularly if the rest of the market makes gains. Old, well-recognized projects will increase in value, new projects will create buzz and launch, and trading exchanges will once again become highly profitable.
We also believe that decentralized physical infrastructure, like Helium and Hivemapper, may benefit from the reduced costs and increased throughput of the above infrastructure. However, similar to social applications, we would need to see some critical mass in order to see real adoption.
Derivatives trading is also likely to be a popular sector in 2024. As 2022 and 2023 served to further erode the trust in centralized crypto exchanges, and as more innovation takes root in applications like SNX, Infinex, Aevo, and DYDX, we believe that more volume will shift to decentralized exchanges.
2024 will be an exciting year for Crypto. Although it is likely that we will continue to see volatility in markets, particularly at the beginning of the year, keeping an eye on the technology that has been created and how applications are likely to put it to best use to attract new audiences will be crucial. There are a myriad of new chains and applications which are likely to perform exceedingly well in 2024 and into the future.
Allan Matheson is the founder of Golden Pear Capital, a crypto asset-focused investment management company.
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