By Hannah Lang
(Reuters) - After ending 2023 on a high, crypto investors will be watching central bank interest rates and a U.S. regulatory decision on new bitcoin products as they decide how to place their bets next year.
Cryptocurrencies staged a recovery this year after a torrid 2022 in which a market meltdown and a string of scandals, including the collapse of FTX and fraud charges against its CEO, Sam Bankman-Fried, undermined the credibility of the industry.
The price of bitcoin, the biggest cryptocurrency and the market's chief barometer, has more than doubled this year, reaching a 20-month high in November of $42,000 per token. As of Friday, 2023 was its best year since 2020 in terms of percentage gains.
The market has been buoyed by expectations that cooling inflation will allow central banks globally to forgo further rate hikes and start easing next year, making risk assets more attractive. A long-anticipated move by the U.S. Securities and Exchange Commission(SEC) to approve a spot bitcoin exchange-traded fund (ETF) has also been a boost.
Those themes, along with bitcoin's expected April "halving" - a process that reduces token supply - will continue to be positives for the market next year, said analysts, although some cautioned the market is unlikely to rescale its 2021 record highs.
"There's quite a few different factors that are likely to fall in line for 2024," said James Butterfill, head of research at asset management firm CoinShares, particularly the end of the rate cycle.
"What popped the bitcoin bubble was rising interest rates, and what will probably help spur the next rally ... will be interest rates being cut," he said.
The U.S. Federal Reserve held its benchmark overnight interest rate steady in the 5.25%-to-5.50% range at the end of its Oct. 31-Nov. 1 policy meeting - and analysts overwhelmingly expect the same outcome this week.
Bitcoin hit a record high of $69,000 in 2021, thanks to retail investors flush with spare cash amid the early days of the COVID-19 pandemic and historically low interest rates.
While the end of rate hiking is a positive for risk assets, Andrea Filtri, the co-head of research at Italy's Mediobanca (OTC:MDIBY), noted crypto market conditions are still far from where they were in 2021.
Fed officials have signaled rates will not be dropping soon, while strong Friday employment data suggested market expectations of a rate cut early next year were probably premature.
"It was easy at the time to have proliferation with easy money," said Filtri. "I am not so sure that, as interest rates go down, you will have the mirror trajectory."
ETF HYPE
The crypto industry endured more damaging scandals this year. Most notably, Binance and its CEO, Changpeng Zhao, pleaded guilty to breaching U.S. rules on money laundering.
The launch of a bitcoin ETF, however, could help legitimize the industry, some say.
Several major financial firms, including BlackRock (NYSE:BLK), have filed applications with the SEC to launch a spot bitcoin ETF which, if approved, could potentially draw several billions of dollars of institutional money into the cryptocurrency.
Reuters reported this week that industry talks with the SEC have advanced ahead of a key January deadline when the SEC is expected to give some products the green light. That has kept traders bullish, although a sell-off on the news is possible.
"The price could go through a correction immediately after their approvals since the market has been pricing in the event, but in the long run spot bitcoin ETFs could rake in several hundred billion dollars a year to the bitcoin market," said Yuya Hasegawa, a crypto market analyst at bitbank, a Japanese-based crypto exchange.
Many crypto watchers are also eyeing the next bitcoin "halving," expected in April. That process is designed to slow the release of bitcoin, whose supply is capped at 21 million tokens - of which 19 million have already been created.
Bitcoin rallied on the previous three halvings, the most recent of which was in 2020. But, given the different market conditions, it's unclear whether it will cause a rally again this time, said CoinShares' Butterfill.
"If we combine it with the high demand from an ETF in the United States and reducing new supply coming in, it could have an impact, but I'm not holding my breath."