Top 5 Drivers Behind the 2023 Cryptocurrency Market Rebound and Outlook for 2024

From Bear Market to Bull Market: 2023 Cryptocurrency Market Turnaround

The cryptocurrency market in 2023 has written a story of recovery. Investors who bottomed out in the second half of 2022 are now enjoying substantial returns. The question facing everyone is: can this upward trend continue into 2024?

History always repeats itself. By reviewing recent market performance, we can forecast possible future directions. Cryptocurrency performance in 2023 has been impressive, driven by five key factors, while the outlook for 2024 will be shaped by three major macroeconomic scenarios.

Key Participants in the Cryptocurrency Market

To succeed in the crypto space, you need to understand the main roles within this ecosystem. The market comprises various types of participants whose interactions create supply and demand balance:

Project Teams and Development Groups — These are innovative companies based on blockchain technology, representing the core supply of the entire market. According to data, there are over 8,800 different crypto projects currently. For investors, it’s crucial to deeply understand the market and develop a scientific investment methodology.

Venture Capital Firms — These participants inject capital into various funding rounds and initial coin offerings (ICOs), often engaging from the early stages of projects.

Whale Investors — Investors who accumulate large amounts of specific cryptocurrencies; their trading volume can influence market prices.

Retail Investors — Individual investors with smaller funds, mostly employing trading strategies. However, data shows that those who hold long-term tend to achieve the best returns.

Institutional Investors — Companies managing large-scale assets, gradually entering the crypto space, seeking structured products based on Bitcoin and Ethereum.

Exchanges — Centralized platforms offering 24/7 trading markets and custody services; decentralized exchanges enable peer-to-peer trading with lower fees.

Traditional Brokers — Conventional intermediaries expanding into crypto and derivatives, including spot and CFD products.

Regulatory Authorities — Securities regulators, central banks, and finance ministries worldwide are defining the boundaries between “traditional securities” and “cryptocurrencies.” Clear definitions will directly impact the adoption and mainstream status of crypto assets.

How to Deeply Analyze Cryptocurrency Investment Opportunities

Assessing the quality of crypto projects requires examining four dimensions: fundamentals, supply mechanisms, market demand, and technical aspects.

A perfect investment target should perform well across all these dimensions. Imagine investing in a technologically advanced project with promising prospects, but entering at a price peak and experiencing a crash—that was the fate of many investors at the end of the 2021 bull run.

Alternatively, you might choose a project that excels in all aspects but has supply issues—no maximum supply cap, circulating tokens reaching billions, or incomplete distribution plans. Such projects require huge capital inflows to achieve market cap growth.

To gain an advantage over other investors, you can use the DACS classification standard (published by industry organizations in 2021), which divides the crypto market into 7 major sectors: Computer Technology, Payment Currencies, Decentralized Finance, Cultural & Entertainment, Smart Contract Platforms, Asset Digitization, and Stablecoins.

Diversifying across this framework is akin to risk spreading by professional investors in the stock market.

The Real Drivers Behind 2023 Cryptocurrency Gains

According to the market composite index, the entire crypto market grew by 123% in 2023, reaching an index value of 1,781.12. Bitcoin and Ethereum, as the two largest projects by market cap, account for 62% and 20% of the weight respectively.

First Major Factor: Bitcoin Halving Expectations

Bitcoin’s algorithm stipulates that every 210,000 new blocks mined, the reward for miners halves. This cycle lasts about four years and is known as a “halving” event. The halving mechanism ensures Bitcoin’s supply becomes increasingly scarce, theoretically increasing its rarity and value.

Historical data is highly persuasive. During the first halving, Bitcoin was priced at just $12; six months later, it surged 950%, and after 12 months, it increased by 8,342%. The second halving saw gains of 38% in six months and 286% in 12 months. The third halving (May 2020) resulted in 83% gains over six months and 562% over 12 months.

This scarcity-driven supply expectation often triggers strong market reactions around halving events. With the next halving scheduled for April 2024, many investors are positioning early. Bitcoin’s strength also creates a “halo effect” on the entire crypto market.

Second Major Factor: Expectations for Institutional-Grade Products

For a long time, unclear regulations prevented “professional capital” from entering the crypto market at scale. But this is changing. In 2023, several top global investment firms submitted applications for spot Bitcoin ETFs to regulators.

While these applications are still under review, market consensus expects approval in early 2024. Unlike existing futures-based funds, these new products will require institutions to buy Bitcoin spot holdings directly as the fund’s underlying asset.

This seemingly subtle difference is actually significant. Futures traders only need to speculate on price movements without owning the actual asset. But approval of spot products will force institutional investors to buy real Bitcoin, greatly increasing demand. Coupled with the upcoming halving, this could generate strong upward momentum.

The world’s largest asset manager—Blackstone Group—manages over $9.4 trillion. If regulators approve such products, it would be a major bullish signal for the crypto market.

Third Major Factor: The AI Wave

The emergence of ChatGPT has sparked a global AI investment frenzy. Tech stocks soared, and the crypto market also benefited from this enthusiasm.

Blockchain-based AI projects are building new AI tools and services. Unlike traditional cryptocurrencies, tokens in these projects have practical utility, serving as “digital shares” of the AI project.

Since September, with tech stocks continuing to rise, the crypto market has gained additional momentum.

Fourth Major Factor: Market Capital Flow Shift

A common misconception is “when supply exceeds demand, prices rise.” But logically, this is incorrect—markets always transact at the equilibrium price where supply equals demand. Prices truly rise because buyers are willing to pay higher, believing the asset will continue to appreciate.

In 2023, the total market cap of cryptocurrencies increased by 99.2%, adding nearly $750 billion. This indicates a continuous influx of fresh capital supporting rising prices. The realization that the worst times are over has fueled a “fear of missing out” mentality.

Trading volume data shows that the current average daily turnover (~$14 billion) far exceeds the six-month average (~$7.9 billion). Technical analysts generally agree that without trading volume support, prices cannot rise substantially. Sustained price increases accompanied by strong buying pressure confirm this principle.

Fifth Major Factor: Surge in Futures Market Participation

Another key indicator is the open interest in Bitcoin and Ethereum futures contracts. This reflects market participants’ expectations for future price movements.

Open interest can increase (new long or short positions), stay flat (closing old positions while opening new ones), or decrease (closing many old positions).

In 2023, Bitcoin futures open interest has surged since August, reaching 17,321 contracts. Ethereum’s open interest shows a similar trend, now at 6,114 contracts.

Rising open interest alongside rising prices indicates new participants entering the market or existing ones increasing their positions. This reflects growing optimism. Professional investors pay close attention to futures trends because futures market sentiment often drives spot prices higher.

What Will Happen in 2024? Three Macro Scenarios

The performance of cryptocurrencies in 2024 largely depends on the global macroeconomic environment, especially the delicate balance between inflation control and economic growth.

Scenario 1: Soft Landing and Loose Liquidity

If inflation continues to decline and the economy remains stable or improves, central banks will pause rate hikes and eventually start cutting rates. In this loose monetary environment, stock markets (especially tech stocks) could see a new rally.

But cryptocurrency performance is uncertain, as high-growth stocks may attract more capital, potentially diverting funds.

Scenario 2: Inflation Rebound and Defensive Asset Demand

If inflation re-emerges due to various reasons, central banks will resume rate hikes. Stock markets may face pressure, but bonds and defensive assets (like Bitcoin) will become more attractive.

Bitcoin, with its fixed supply, can theoretically hedge against inflation, similar to gold. However, crypto’s technical attributes also make it sensitive to interest rate environments, especially for projects with unlimited or non-deflationary supply.

Scenario 3: Stagflation and Dilemma

If economic growth slows while inflation persists, central banks will face a dilemma. Raising rates could harm growth, while cutting rates might fuel prices. This puts pressure on both tech and crypto sectors.

But persistent inflation may push investors to seek assets like Bitcoin as a hedge, supporting the entire crypto market.

External factors like geopolitical risks and the US election cycle should not be overlooked for potential shocks.

2023 Return Rate Insights: Why Participate in 2024

Looking at 2023 data makes it clear:

• Bitcoin’s return: 79.85%, 6.3 times the S&P 500, 2.5 times the Nasdaq 100
• Ethereum’s return: 40.45%, 3.2 times the S&P 500 and 1.3 times the Nasdaq 100

Smaller cap projects performed even more astonishingly, with many doubling or more.

Is it worth participating in crypto investments in 2024? The answer is yes. But only if you establish a systematic investment methodology. A practical tip is to split your funds into two parts: one for large-cap projects like Bitcoin and Ethereum as a stable foundation, and another for high-growth small-cap projects that could yield 10x, 50x, or even 100x returns.

Long-term Holding or Short-term Trading?

Based on recent performance of Bitcoin and Ethereum, long-term holding has generated the best returns. This aligns with stock investment logic.

Of course, short-term trading can accelerate capital accumulation, but with higher risks. Depending on your risk tolerance, consider dividing your funds: part for long-term holding, part for trading—provided you have professional risk management skills and sufficient market experience.