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Is the crypto bear market over?

Key takeaways

  • Crypto enthusiasts are hoping 2023’s crypto market rally can be sustained in 2024.
  • Several significant events are on the horizon for Bitcoin, including a halving and a regulatory decision on a spot bitcoin ETP.
  • Fed-policy shifts, new crypto applications, and potential crypto regulations may affect market moves in the new year.

2023 renewed optimism in the cryptosphere as the market partially rebounded from 2022's harsh sell-off. As of late November, bitcoin has rallied over 100% from its 2022 low. Now the bounce has crypto enthusiasts hoping a new bull market is brewing. Will the rally continue in 2024? And what else might be in store for crypto?

Here's a look at 5 themes crypto investors are watching this year.

1. Will the Fed lower interest rates?

Compared to equities and many other assets, crypto has had a relatively short history. Nevertheless, given the data that's available, crypto prices have tended to rise amid periods of low interest rates. During the 2020-2021 bull run, for example, bitcoin and other cryptocurrencies surged to record highs after the Fed implemented near-zero interest rates. The inverse has held true as well. In 2022, when the Fed raised rates to combat surging inflation, bitcoin tumbled more than 70% and several crypto platforms went bankrupt.

It's no surprise, then, that crypto advocates are paying close attention to whether the Fed cuts rates or keeps them steady.

Fidelity Digital Assets℠ Research Director Chris Kuiper says changes to interest rates and central bank liquidity policies could be a “big driver” for crypto market performance in 2024. “Our research shows digital assets have so far been highly correlated to measures of liquidity and money creation,” Kuiper says. “We continue to watch interest rates and central bank balance-sheet changes.”

The chart depicts the performance of bitcoin's price compared with the path of US interest rates.
Past performance is no guarantee of future results. Bitcoin performance compared with the path of interest rates over the past 6 years. Source: Federal Reserve, Coin Metrics.

As of late 2023, the economy has made progress reining in inflation, but Fed Chair Jerome Powell has also suggested that more rate hikes may be necessary. Decelerating inflation may lead to lower interest rates, which could in turn create more favorable conditions for crypto.

2. Will the Bitcoin halving help the rally continue?

One of the most hotly anticipated crypto events of 2024 is the next Bitcoin halving, projected to take place in April. Halvings cut the amount of bitcoin mining rewards in half, reducing the rate at which new bitcoins are created. The goal is to help prevent inflation, generate scarcity, and maintain bitcoin’s aspiration as a store of value.

Halvings generate excitement because, historically, bitcoin has made new all-time highs following every halving. Of course, past performance is no guarantee of future results. It's worth noting that a study by Fidelity Digital Assets℠ found that the effect on price from each halving event has been changing over time.

“The magnitude of price appreciation has gotten less and less with each halving cycle,” says Kuiper. “Even though the bitcoin issuance rate gets cut in half, it is getting cut in half from a smaller and smaller number amid a bigger market cap, so each halving event has had less of an impact on price over time.”

Table shows bitcoin' historical performance trends post-halving.
Past performance is no guarantee of future results. Source: Fidelity Digital Assets, Coin Metrics.

Nevertheless, making a new all-time high to keep the streak alive will require a herculean effort, since it would require bitcoin to rally at least 350% from its 2022 low. Moreover, when bitcoin rallies, the rest of the crypto market has historically rallied as well.

3. How might the spot bitcoin and ethereum ETP decisions impact the market?

Another eagerly anticipated crypto event is the SEC’s decision on whether to approve spot bitcoin and ethereum exchange-traded products (ETPs). These crypto ETPs would be the first to hold actual crypto as their underlying asset.

Many crypto advocates are excited about the ETPs because they allow investors to gain exposure to specific cryptocurrencies without actually buying crypto themselves. “It could unlock another market subset of people that would like exposure but can't, or don't want to get it yet, until they can do so through an ETP,” says Kuiper.

For example, there are would-be investors who are hesitant to buy crypto due to its complex nuances and cybersecurity considerations. An ETP may make it easier for this demographic to enter the crypto market, and may also make it easier for financial advisors to recommend crypto as part of an investment portfolio. Ultimately, advocates hope that the net result is more money flowing into crypto—perhaps enough to help kick off a new bull run.

Of course, there are also challenges ahead. First, it remains to be seen whether the SEC will approve crypto ETPs at all. Second, it’s also far from certain whether spot crypto ETPs will achieve widespread adoption, as they will come with risks and limitations including some that may be different from that of bitcoin. For example, you can only trade ETPs during traditional market hours, even though crypto often makes big moves outside of these hours. Third, some believe the market has already factored the possibility an ETP approval into price, hence 2023’s rally.

4. Will Layer 2 projects catch on?

Bear markets aren’t all doom and gloom. They can also be opportune times to focus on innovation—free from the distractions of market hype and media frenzy that typically accompany bull markets.

So what noteworthy projects are emerging amid the current bear market? Parth Gargava, Product Architect at Fidelity Labs, says one crypto sector that’s gaining traction is Layer 2 protocols tackling scalability issues.

Layer 2 protocols are blockchains designed to make other blockchains more efficient. For example, a common complaint about Ethereum is that its fees can be high and its transaction settlement times can be slow when it experiences heavy traffic. To alleviate this, a Layer 2 blockchain that processes transactions on a separate, faster ledger can be built on top of Ethereum’s network.

This is significant because one of the current barriers to widespread crypto adoption is that some blockchains can be impractical to use in daily life. For example, some cryptocurrencies aim to be used as money, but their fees are often too high to be sensibly used in everyday transactions. Layer 2 protocols aim to remove this roadblock. If they succeed, crypto could become more practical to use.

“The improvements in blockchain infrastructure mean that you will likely not have these bottlenecks in congested blockchains and users complaining about high fees,” Gargava says. “These infrastructure railroads could create opportunities for new projects during the next potential bull market.”

The question, of course, is whether these projects can gain traction. Their goal may be noble, but they don’t come without challenges. For example, critics say they can lead to a more fragmented ecosystem, which could be a potential disadvantage for widespread adoption. Like many new technologies, these emerging Layer 2 projects will likely have to work through growing pains before they achieve widespread adoption.

5. Will there be new regulatory developments?

Regulatory clarity has been a recurring item on the crypto wish list, and 2024 is no different. Many crypto advocates believe defined regulations can benefit crypto in several ways, like allowing crypto exchanges to operate with more certainty, and attracting investors who would otherwise be hesitant.

“What is clear is the industry really needs and wants clarity so it can move forward,” says Kuiper.

While the decision on spot bitcoin ETPs will provide some much-needed progress, there are many areas of crypto that still need to be addressed. For example, investors are watching closely for whether cryptocurrencies will be classified as securities, which could have implications on how they're regulated going forward.

While the US regulatory outlook remains relatively uncertain for the time being, other global regions have been advancing various measures. In 2023, the European Union established licensing requirements for exchanges and wallet providers. Meanwhile, the UK government has said it intends to enact formal legislation in 2024, which includes bringing certain crypto activities under the same oversight as banks and financial-services firms.

Given the lack of regulatory certainty, only buy crypto with an amount you can afford to lose. Also remember that in general, bitcoin and other cryptocurrencies are highly volatile, and may be more susceptible to market manipulation than securities. Moreover, crypto holders do not benefit from the same regulatory protections applicable to registered securities, and the future regulatory environment for crypto is currently uncertain. Crypto is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.

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