Keep up with the top industry updates as we present bi-weekly market insights that are important to investors in the institutional space.
In this week's edition, Kelvin Lam, CFA, Head of Institutional Research for OKX, shares his three predictions for the Institutional crypto market in 2024. Alongside unveiling these predictions, he'll also explain why these trends hold significant importance for institutions currently positioned in crypto space.
3 predictions for the institutional crypto market in 2024
As we head into 2024, it becomes increasingly clear that this year will serve as a pivotal moment for institutional adoption and participation in the crypto market worldwide. While headlines have been focusing on market events like the spot Bitcoin ETFs, the upcoming Bitcoin halving, and potential rate cuts from the Federal Reserve, there are several underlying developments taking place that deserve our attention.
Through extensive interactions with industry experts and participants, we've identified three key predictions that are poised to shape the institutional crypto market in 2024. In this edition of Top of Mind, we highlight three predictions and explore why they are important to institutions that are already active in the crypto market or considering a strategic shift into this dynamic space.
1. Cryptocurrency trading volume will reach new heights, propelled by diverse instruments and platforms
According to various predictions by industry experts and asset managers, the spot Bitcoin ETFs are expected to attract billions of inflows into the cryptocurrency market (see consolidated estimates in the table below). To put the size of the potential inflow in context, the total Bitcoin balance on crypto exchanges is $99B as of Dec 31, 2023 according to Glassnode*, and the 2023 full-year Bitcoin investment product inflow is $1.93B according to Coinshares**. This illustrates just how significant the potential money inflows into spot Bitcoin ETFs (i.e. $15B in a year) are compared to both crypto native trading venues (crypto exchanges) and existing TradFi digital asset products.
While the impact on Bitcoin's price can be uncertain, this new type of financial product offers institutions and the general public convenient access to trade on Bitcoin prices. This should lift the trading volume of cryptocurrency products and increase the number of cryptocurrency traders. Additionally, the cash creation and redemption mechanisms of underlying ETFs are expected to further boost trading volume on spot crypto exchanges as ETF issuers need to buy (or sell) the underlying.
*Source: Glassnode
**Source: Coinshares
Estimated by (in alphabetical order) | Timeframe | Potential inflows (US$) | Key assumptions |
|---|---|---|---|
1 year | $15 billion | Proprietary estimates based on increasing institutional liquidity inflows | |
5 years | $55 billion | Based on flows into bitcoin ETFs listed in other markets. | |
1 year | $14.4 billion | 10% of total available assets in each wealth channel with an average allocation of 1% | |
Not specified | $24-50 billion | 20% of precious metal ETFs market cap and 1% allocation from RIA | |
1 quarter | $2.4 billion | Based on the relative ratios of the SPDR Gold Shares (GLD) ETF and adjusting it to the 2023 macro scenario. |
Source: Alliance Bernstein, Bitwise, Galaxy Digital, Matrixport, VanEck
Apart from the impact of the spot Bitcoin ETF approval, the crypto derivatives market is also poised to pick up in trading volume from two key dimensions driven by institutional adoption in 2024.
The first is on the crypto options market. Traditional financial institutions, already well-versed in options trading, can use crypto options to hedge their positions and manage risk effectively. Sophisticated traders can employ various options strategies to make gains from different market outcomes, such as betting on changes in implied volatility or customizing options to align with specific market conditions. The potential pick-up in demand on the altcoins options market can also drive growth in options market beyond just BTC and ETH options. On the other hand, the entrance from hedge funds and asset managers that are looking to run market-neutral strategies can engage in spread trading. The advancement in trading platforms over the past year has made it easier for traders to employ spread trading strategies and to generate a differentiated source of return.
So what? The cryptocurrency space is set to experience an upswing in institutional trading volumes throughout 2024, and the market landscape is going to look different compared to the past year. To excel in this dynamic environment, it's important to meticulously assess and choose trading venues that are well-suited to your requirements, enabling you to maintain a competitive edge. Nevertheless, it's vital to be mindful about the inherent risks associated with cryptocurrency trading, and exercise prudent risk management and mitigation strategies.
2. Institutional use cases for tokenization bring innovations to the financial industry
In the realm of cryptocurrencies, traditional financial institutions such as major investment banks and top asset managers have faced stringent regulations that hinder direct engagement with digital assets. Instead, their focus has been on tokenization of real-world assets (RWAs) into on-chain digital assets. This shift gained momentum in 2023 due to the macroeconomic environment, where treasury yield reached a high level. The demand for tokenization primarily stems from the crypto-native user base in 2023.
Total value locked (TVL) of the RWAs sector
Source: DefiLlama
However, 2024 marks a significant turning point as traditional institutions have spent the past year exploring and planning the tokenization of financial assets. These efforts have already been underway, albeit behind the scenes. Notably, JP Morgan's Onyx division unveiled its Tokenized Collateral Network (TCN), and both BlackRock and Barclays went live on the Onyx Digital Assets platform in October 2023*, signaling a seismic shift in the embrace of blockchain technology by these financial institutions. These advancements are poised to propel the market forward in 2024, bringing innovation to the traditional financial industry.
Furthermore, the growing trend of supporting tokenization is reinforced by governments worldwide. Reforms in regulations have been introduced to better accommodate the tokenization of real-world assets. For instance, the UK's Investment Association collaborated closely with the country's Financial Conduct Authority (FCA) to grant approval for tokenization of investment funds**. Meanwhile, the Securities and Futures Commission (SFC) in Hong Kong has published requirements for launching tokenized products. These developments highlight the global push to embrace blockchain technology and its potential to revolutionize the financial sector.
So what? Asset tokenization holds the potential to unleash trillions of dollars worth of real-world value onto blockchain networks, presenting a vast array of trading and investment opportunities for both institutions and individuals. Furthermore, the use of blockchain technology could allow institutions to capture value through novel frameworks, such as providing liquidity to tokenized assets on trading platforms. However, it's important to recognize that the future of the traditional asset sector's development in RWAs relies heavily on the regulatory roadmap to be unfolded in the coming years.
*Source: Cointelegraph, Oct 11, 2023
**Source: The Block, Nov 24, 2023
3. The great migration to Web3
As capital begins to flow back into the Web3 space in search of investment opportunities and real-world use cases, the acceleration of user migrations to Web3 will be driven by increasing recognition of the potential benefits and opportunities that new Web3 applications can offer to users. The potential economic slowdown in global economies serves as an added catalyst for traditional Web2 companies and users to explore alternative avenues for growth, propelling them into the new and dynamic Web3 space. In 2024, there are two specific areas that are likely to see significant growth.
Decentralized Physical Infrastructure Networks (DePIN)
DePIN leverages the power of blockchain and Web3 to decentralize the ownership and operation of tangible infrastructure. It aims to revolutionize the way physical infrastructure is built and maintained by applying the power of the crowd and incentivizing individuals to contribute their resources.
By integrating DePIN with blockchain, it's possible to democratize the digital economy and empower users to monetize their own data. DePIN has significant potential in emerging Web3 markets and is already being used in real-world applications by companies like the Helium Network, IoTEX, and Filecoin. For example, Helium network applies a decentralized global network of Hotspots (a device that supports network miners and provides wireless access points) to connect anything to the internet via a decentralized wireless network like 5G. Hotspots can be deployed by anyone and enable individuals to earn Helium’s native token in exchange for providing devices with connectivity.*
*Source: Helium
GameFi
The term GameFi may not be unfamiliar to market participants, as it gained attention during the previous bull cycle due to the frenzy surrounding some play-to-earn projects. However, the initial hype proved short-lived and didn't attract real gamers into the Web3 space. This year, the GameFi industry is poised for a transformative journey, anticipating substantial growth and widespread adoption, particularly with the scheduled release of several AAA titles. This year could mark a significant milestone for GameFi as it seeks to disrupt the traditional gaming market, offering gamers exciting opportunities to play and earn through the adoption of Web3 technologies.
So what? The Web3 space offers abundant growth opportunities fueled by tangible real-world use cases. The rapid pace of emerging projects and ongoing developments mirrors the fast flow of information into traditional financial markets. To effectively capitalize on these opportunities, it's crucial to stay well-informed and conduct thorough research before engaging in related trading activities. Moreover, institutions with a higher risk appetite or a willingness to explore new ideas can consider alternative strategies like token farming and acquiring NFT assets. By embracing these strategies, institutional traders can position themselves to benefit from the dynamic and evolving landscape of the Web3 space.
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