It Started: What is Happening to Bitcoin?
2021 was all about crypto. Bitcoin went crazy and reached its all-time high. NFTs were being sold like hotcakes, and crypto millionaires were popping up like mushrooms after a good night's rain. But 12 months later, everything changed. The Terra Luna collapse and Sam Bankman-Fried's FTX fiasco made sure that 2022 proved to be a catastrophic year for the crypto industry.
Most people sold their holdings and left the scene, and the interest in crypto dropped. So comparatively, 2023 has been a quiet year for crypto. And if you are someone who already holds or intends to hold this relatively new asset class in the future, this blog will give you a quick refresher on what happened in 2023, all those major events, the market trends, and finally we will look at what's in store for 2024.
Cryptos' performance in 2023 can be summarized in one word: Resurgence. In January, Bitcoin started trading at just about $15,000 but ended the year with an impressive 150% return. Even meme coins like Dogecoin posted gains. But don't take it wrong: 2023 was not an easy ride for the crypto. The industry had its share of problems, but the crypto space showed strong signs of recovery last year.
A notable event was when the US Securities and Exchange Commission took a hard stand on crypto exchanges. For those who don't know, the U.S. Securities and Exchange Commission is an independent agency of the United States federal government with one primary goal: to protect investors against fraudulent and manipulative practices in the market.
Since a major part of crypto investments is unregulated, the SEC issued an advisory in March of 2023, urging investors to be cautious when investing in such assets. They also filed lawsuits against major cryptocurrency exchanges such as Binance, Coinbase, and Kraken, alleging misconduct.
These lawsuits could well run into 2024. However, the one exchange that was most affected by all these developments was Binance. Binance had to plead guilty to a criminal charge and agreed to pay $4.3 billion in fines, one of the largest fines in corporate history, forcing its founder and CEO, Changpeng Zhao, to step down from his position.
These events significantly eroded investors' confidence in cryptocurrency as a safe and reliable asset. However, the impact was somewhat reduced by serious problems occurring in other parts of the finance industry. The Federal Reserve's tight monetary policies to bring down inflation took a toll on the United States banking sector.
SVB ranked as the 16th largest bank in the US, was shut down in March 2023 when depositors withdrew large amounts of money in short notice.
This incident revealed the dangers of fractional reserve banking, where the bank lends most of the customer deposits to borrowers, keeping only a small part for withdrawals.
This was an important event that brought crypto back into the limelight. As more people get fed up with the traditional banking system, they will start to trust alternative ways such as crypto to invest and park their money.
There was also some good news on the technical side. The Bitcoin Ordinals protocol was launched in January 2023. Until then, for trading and minting NFTs, users depended on blockchains like Ethereum and Solana.
The Bitcoin Ordinals protocol offered a new way to store and trade digital objects over the Bitcoin network, and that helped to push the price of Bitcoin up.
Now let's take a closer look at some of the key data that shows how Bitcoin performed in 2023. Before that a friendly warning. Although this is useful information and is important for everyone interested in this asset, this is mainly for the nerds out there. I will keep it short, but if you are not interested, you can skip through the next few paras and read the part where I share my predictions for 2024.
A factor that shows the popularity of Bitcoin could be the number of wallets or addresses. A Bitcoin address is like a virtual location where digital assets can be sent and stored. But keep in mind that one Bitcoin address isn’t necessarily the equivalent of one person.
Addresses with Non-Zero Balances: This metric shows the total number of unique Bitcoin addresses holding any amount of Bitcoin. As of 1st Jan 2023, there were 43.26 million such addresses, which increased to 51.58 million by Dec. 28, 2023. This 20% increase shows that more people are entering the market.
Addresses Holding More than 1 Bitcoin: Another similar metric is the Addresses holding more than 1 Bitcoin. This data is important because it shows the number of serious investors who go beyond just casual holding. Starting the 2023 year at 978,000 and growing to 1.02 billion by the end again shows an increased commitment to the asset.
Accumulation Addresses: Now these are unique addresses that have received at least two non-dust transfers and have never spent funds. Now a transaction is considered "non-dust" when the transferred value is lower than the associated costs. They are kind of sketchy transactions and shouldn't be taken into any metric. So the number of addresses that received at least 2 non-dust transactions increased by 11.37% from 778,385 to 866,854.
Also, the total Bitcoin held in these addresses rose from 3.04 million to 3.17 million BTC.
These addresses are often associated with ‘long-term investors’ or 'holders' and their growth signals a bullish sentiment.
Miner Data: Now let's take a look into some miner data. For those who don't know who miners are, whenever we initiate a new transaction on the Bitcoin network, a series of computers check all our previous transactions in the blockchain to determine if we are eligible to make this transfer. They are the miners, and for their work, they get rewarded in bitcoins.
The total amount of Bitcoin held in miners' wallets started at 1.824 million BTC on 1st Jan and remained more or less the same at 1.820 million BTC by 28th Dec. This indicates that miners were holding on to the Bitcoins they mined and not significantly offloading. Bitcoin mining is an expensive process and if the miners are not under pressure to sell their mined Bitcoin to cover operational costs, it is generally considered as a bullish sign.
Hashrate: Hashrate is the speed of mining a cryptocurrency in units of hash/second. Bitcoin finished 2023 with an unprecedented hash rate of 544 EH/s, doubling since January.
A higher hash rate is good for bitcoin because it means a large number of miners are verifying transactions, and hence the cryptocurrency is more secure. Now two more important metrics and I am done.
Market capitalization: This shows the total value of Bitcoin in circulation. It started at $319.94 billion and increased to $834.73 billion by the end of the year, by a factor of about 160.90% YTD.
A higher market cap often indicates that the asset has been more widely adopted.
Institutional capital inflows: An institutional investor is a company or organization with employees who invest on behalf of others. There has been more money coming in recently from traditional institutional investors into crypto in the form of investment products, such as bitcoin futures. Why is this good? Institutional investors are the big guys on the block, the elephants with a large amount of financial weight to push around. Even if a share of it comes to crypto, then that's enough for the prices to soar. And this will see more traction with the Bitcoin Spot ETF approval, which brings us to the most important question.
What to Expect From Bitcoin in 2024?
There are two major events happening in 2024, that will decide the future of Bitcoin. The first one is the approval of the Bitcoin Spot ETF.
For those who don't know what an ETF is, they are exchange-traded funds that track a particular index, sector, commodity, or any other asset. For example, S&P500 ETFs track the performance of the S&P500 stock market index. Now we already had bitcoin ETFs since 2017, but they were not directly tracking the price of a bitcoin, instead, they track bitcoin future contracts.
Now future contracts are agreements between two parties to buy or sell a specific amount of an asset at a predetermined price on a specific date in the future.
With this, an investor can speculate on the price of a security or a commodity. So, a Bitcoin future contract is simply a legal agreement to buy or sell Bitcoin at a future date at an agreed price. Two parties make a bet: one believes that BTC will go up in price in the future, and another bet that BTC will fall in price. The person who gets it wrong pays the other party a cash settlement. Simple as that.
But the important thing to note about Bitcoin's future contract ETFs is that you can trade them on official stock exchanges without directly holding bitcoins. This gives investors the chance to get into the crypto market through their normal brokerage accounts. So this money has been coming in for some time and this accounted mostly for institutional capital inflows we saw in 2023.
Now something that’s new is a spot Bitcoin ETF. A spot Bitcoin ETF is an ETF that directly tracks the price of Bitcoin. When an investor buys shares of a spot Bitcoin ETF, they are not betting on some future price of Bitcoin but instead indirectly buying a portion of the Bitcoin at the current price. Just like the Bitcoin future contracts ETF, the main benefit of Bitcoin Spot ETFs is that investors can gain exposure to crypto market without holding the digital currency itself. SEC approved Bitcoin Spot ETF in January of this year and they are available for purchase from financial institutions such as iShares, Fidelity, Invesco, etc.
Of course, nothing in life comes for free, so you have to pay a fee to the fund manager to safely store and transact your cryptocurrency. This is the trade fee or the fund expense ratio and can range from 0.39% to 0.95%. But all this means more acceptance and popularity for bitcoin, and more money coming in.
The second major event that will take place in a few months and could be good news for Bitcoin is the halving event happening in April. We talked about miners and mining earlier. What the miners basically do is validate transactions on the crypto blockchain. And they get rewarded in the form of Bitcoin for their work. That's how new bitcoins are brought into the network. And the way Bitcoin was designed, about every four years, the rewards for Bitcoin miners get cut in half. That means less bitcoin in the market and if the demand remains the same, applying the supply-demand formula, the price of each bitcoin will rise ideally.
Another factor that could also impact the price of Bitcoin is the interest rates set by the US Federal Reserve. The feds have been increasing the rate for the last few years to counter the high inflation. When interest rates are high, investors move to more traditional options such as bonds because the returns are good with lower risk. Now the inflation is back to manageable levels and there is a strong indication that the Fed is done with its rate hikes and could begin cutting the rates in the first half of this year.
And when interest rates stabilize or fall, riskier investments such as Bitcoin become more attractive for investors to park their money.
But then there is also increasing hostility towards cryptocurrency and Bitcoin. If Bitcoin threatens countries' monopoly on money due to widespread adoption, governments could move to restrict it. So considering all this, is it possible to predict the price of a bitcoin in 2024? To help us here, we have two mathematical models.
Stock-To-Flow Model
If there are any dependable tools for analyzing Bitcoin’s price trends, the stock-to-flow model is surely one of the best. As its name suggests, the model assesses two attributes: stock and flow. Stock is the total existing supply of a commodity. Flow is the new supply of the commodity. The model measures the scarcity of an asset by comparing its existing supply or stock with the rate of new supply or flow over a specified period.
When Satoshi Nakamoto created Bitcoin, he set a strict limit on the number of Bitcoin that could ever exist. There will never be more than 21 million bitcoins. And the regular halving events reduce the rate of new coins coming in until they reach the 21 million limit.
Between 2015 and late 2021, this model predicted Bitcoin’s price accurately. If things go according to this model, the stock-to-flow model predicts bitcoin price will get to $400,000 by 2024.
And then, there is the latest analysis from finance YouTuber Andrei Jikh about power law and how it can predict the price of Bitcoin. And according to the model, bitcoin will get to $1 million in 2033.
So does all this mean, I am going to buy more bitcoins? Not exactly.
Don’t get me wrong. I still believe in crypto as a form of digital currency or a decentralized currency. And I invest in Bitcoin for two main reasons:
It’s a backup against the collapse of our financial system.
Its price tends to go up over time.
But I am not stupid to take blind risks. I have around 5% of my investment in crypto and I invest only based on my personal investment strategy that considers some key indicators such as the 200 Day Moving Average and the Mayers Multiple.
If 2023 teaches us something, it's that crypto is going to stay. And for the 15th straight year, it stubbornly refused to die! It offers an alternate option for investors, and the new developments seem to be promising. But before you jump ahead to dip your toes into this market, remember this one thing. When we are buying or investing in any asset, we are not just trading money. We trade our time and happiness too. Consider the value of those things when you make investment decisions.
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Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.
