#10: Outlook 2024 - The Opportunity of Opportunities

Since I have been writing about Web3, my thesis on the space has always remained the same. Web3 represents the 're-evaluation' of value. Today, the second out of the arguably most challenging two years in the industry's history draws to a close. And as it does so, we are looking back and ahead, with thesis that have been confirmed in 2023, and main themes that will fertilize the soil for the crypto industry to blossom throughout 2024 and 2025.

The protocol economy is resilient

The industry survived the toxic mix of a globally volatile, geopolitical surrounding with major implications on resource prices and household i.e retail investors' capital allocation, hawkish monetary policies that created a risk-off environment, missing regulatory clarity by US regulators combined with a quite hostile positioning by many of the leading institutions, together with significant scandals around key people and companies.

The total market capitalization of crypto has taken significant hits, tanking by more than 70%, with some leading protocols even losing >90% of their valuation. But the decentralized nature of crypto lives off of the beauty of well-aligned incentive mechanisms, and this value proposition has proven incredibly valuable. Despite the downwards spiral, developer activity has remained relatively stable, with the number of smart contracts deployed on Ethereum approaching the 35 million mark. In the two first quarters of 2023 alone, 280 million addresses have been added to Ethereum L2s.

Ethererum has become the second organization in history to reach the $10 bn revenue mark in less than 7 years, only second to Alphabet (and only considering transaction fees as revenue).

Watch what they do, not what they say

In an environment of retail fear, many of the largest, consumer-facing brands have started focussing on Web3 technologies and partnerships. This has not been reflected in the price-action of crypto-assets.

Brands started realizing the unique opportunities od post-purchase marketing, authenticity proof and product tracement, community and co-creation, IP monetization and rewarding loyalty that Web3 can entail. However, and 2024 will show that, they still only scratch the surface of the value propostion that can be delivered by decentralized protocols.

During the market downturn, crypto has won over the most unlikely allies. BlackRock CEO Larry Fink, and even - eventhough he says differently - Jamie Dimon. The announcement of BlackRock filinng for a BTC spot ETF sent shockwaves through the industry, and in retrospect, will likely be considered the reviving incident of the global crypto-currency market. The financial industries ambition is obvious. Public permissionless blockchains are an imminent threat to the existence of many financial services providers we know today. They solve the problem of natural monopolies as they are credibly neutral, provide global liquidity, are highly composable, transparent and accessible. While Web3 adoption continues to follow the adoption of the internet in terms of users and wallets created, more and more assets are being represented on blockchains. By 2030, the volume of tokennized assets is expected to reach apprx. $11 tn, and that would mean that only 1% of all RWAs are tokenized.

Focus on fundamentals

While the 2021 bull market was focused on rather superficial narratives around Web3, in particular Metaverse and NFT communities, a rather small amount of projects focused on the actual implications of the technology and on improving the overarching UX. Valuations were mainly driven by a low interest rate environment and radical, fiscal stimulus during the covid pandemic that almost forced investors to - partially quite randomly - allocate capital. During the risk-off environment, many of these projects have gone bust. The protocol economy however has not only survived, it has significantly improved. DeFi throughout 2023 has shown resilience to the tough macro and fiscal environment. Projects emphasized in improving the cornerstonnes of the technology, ultimately resulting in much fast, more efficient and performant protocols, and the underlying theses that have emerged now revolve around tangible, relevant use-cases in the data and protocol economy, and across industries and verticals. New, high-profile talent has joined crypto, driven by the increased adoption by traditional, financial institutions.

Looking ahead

2024 will likely be one of the most bullish years the industry has ever seen, and the start of a new cycle.

The current economic landscape is characterized by a unique set of circumstances that at least partially fundamentally differs from what we have seen in the last two years.

Firstly, we are observing a situation where interest rates are surpassing inflation rates. This is a notable development, as it suggests a shift in the monetary environment, with potential implications for savers and borrowers alike. The market has priced that in already, and even mortgage loans are already reacting quite substantially, pricing in the expectation.

Secondly, the yield curve, now at 5%, indicates that the re-pricing of assets might have reached its culmination. This level of the yield curve is significant, as it often serves as a barometer for future economic expectations and investment strategies.

In addition, there's a looming concern about the recurrence of inflation, driven primarily by the expansion of the money supply and rising energy costs. These inflationary pressures could be further exacerbated by the ongoing US deficit and escalating global tensions, which add uncertainty to the economic forecast.

Another point of concern is the upcoming debt maturities, which pose a threat to economic stability. Despite the current high levels of employment, these looming maturities could create significant financial stress, particularly if they coincide with other economic challenges.

Finally, it's worth noting that, as of now, 'risk on' assets are leading the way in the economic recovery. This trend suggests a growing appetite for risk among investors, possibly driven by the search for higher returns in a low-interest-rate environment.

Various 'risk-on' assets have shown significant performance year-to-date. Among these, certain asset classes and specific stocks have stood out:

1. Cryptocurrencies: Solana (SOL) has been one of the most solid and best-performing cryptocurrencies in 2023, with a remarkable increase of 1,072% YTD.
2. Technology Stocks: In the technology sector, companies like Nvidia (NVDA) have shown outstanding performance. Nvidia's stock achieved a YTD gain of 241%, while Advanced Micro Devices (AMD) also performed well with a YTD gain of 118%. Intel (INTC), though facing intense competition, still managed an impressive 80% gain YTD, driven by its diversification strategies and entry into the AI sector.
3. U.S. Equities: As a broader category, U.S. equities have rebounded quickly in 2023, with a YTD return of 9.8% as of May 31, 2023. Big tech companies like Nvidia, Meta, Apple, and Microsoft, many of which are investing heavily in AI, have contributed significantly to this growth.

These performances reflect a dynamic market environment where investors have shown a strong appetite for technology and digital assets, despite broader economic challenges.

In the crypto, the upturn in Bitcoin's value and popularity (and the secondary effects on Altcoins like SOL) is partly fueled by expectations surrounding Bitcoin ETFs. The anticipation of these ETFs has created a positive sentiment among investors, as they are seen as a bridge between traditional finance and the emerging world of digital assets.

Venture Capital investments in fintech and crypto sectors, meanwhile, are at a sustained low, suggesting a period of consolidation. However, there's a general consensus that these sectors are poised for recovery. This potential rebound could be driven by various factors, including new technological advancements, regulatory clarity, and increased mainstream acceptance of digital currencies and fintech solutions.

The most important catalyst for crypto however will be the significant influx of institutional capital. The financial industry has loaded their bags during the bear market environment. For the first time, they will benefit from the price appreciation massively. At the same time, with the DOJ's announcement over a settlement with Binance and the acquisition of Silicon Valley Bank by First Citizen Bank, some substantial risks to the industry have been addressed.

Crypto's value proposition

The technological maturity the industry is reaching will be the main, technological driver of the upcoming cycle, as projects now focus on tangilble, real-world challenges, often at the intersection with AI.

The main themes of this upcoming cycle will, for the first time, be aligned with the interest of corporate investors and innovators. These themes will revolve around all data-heavy industries. My conviction is strong for the following plays:

Machine to Machine - DePIN

Example: peaq

Think of Peaq as a building block set for creating and running decentralized applications, specialized on leveraging synergies for those involving machine to machine communication and micro-payments and IOT devices. It's a platform that lets people build apps where machines can interact and transact with each other without needing a central authority.

L2s

Example: Manta Network is like a privacy shield for blockchain transactions. It helps to keep your cryptocurrency dealings private when you're using certain blockchains. It's like adding a layer of invisibility to your crypto transactions to protect your information. Manta Pacific is their own L2 ecosystem for EVM-native zk applications. This allows devs to build in a scalable and cheap environment for zk applications simply by using Solidity.

AI-backbone plays

Example: Imagine a big, powerful computer that can create stunning 3D graphics. Render Protocol is like that, but it's made up of many computers from all over the world. People who need heavy-duty graphics processing can use this network, and in return, those who provide their computer power get rewarded.

RWAs

Example: Chainlink Labs acts like a bridge between the real world and blockchains. It's a system that feeds real-world data (like weather, prices, etc.) into blockchain networks. This helps smart contracts on the blockchain to interact with and respond to real-world events and data.

L1s

Example: Solana is a super-fast and efficient blockchain platform. It's like a high-speed train for processing transactions and running applications. It can handle many transactions quickly and at a lower cost compared to some other blockchains and has made significant progress in onboarding projects during the bear market environment.

Sensitive Data, i.e. Research - DeSCI

Example: Data Lake

The Data Lake ecosystem leverages Web3 technology to facilitate ethical and democratic data access. Their ecosystem aligns all stakeholders, including patients, researchers and healthcare entities, and each stakeholder has a role in the data lifecycle, contributing to and benefiting from the ecosystem in an ethical and equitable way.

In a nutshell

The resilience of the protocol economy amidst a confluence of geopolitical, economic, and industry-specific challenges stands as a testament to the robustness and potential of Web3. The industry's survival, despite significant valuation hits and scandals, underscores a fundamental re-evaluation of value in the digital era.

2023 has been a pivotal year, marked by stable developer activity, significant growth in smart contract deployments, and notable achievements like Ethereum's revenue milestone. These achievements have not only proven the resilience of Web3 but have also paved the way for further growth and innovation.

Looking ahead, the outlook for Web3, and the broader crypto industry, is bright and promising. The unique economic landscape of 2024, characterized by shifting interest rates, yield curve indicators, and inflation concerns, presents both challenges and opportunities.

The performance of 'risk-on' assets, especially in the cryptocurrency and technology sectors, indicates a strong appetite for innovation-driven investments. Solana's remarkable growth, along with significant gains in technology stocks and U.S. equities, points towards an environment ripe for technological advancement and digital asset integration.

The anticipated influx of institutional capital into the crypto market, coupled with technological maturity focusing on tangible real-world applications, is set to drive the next cycle of growth. The themes of this upcoming cycle, from machine-to-machine communication and Layer 2 solutions to AI-backed platforms and real-world asset integration, highlight the evolving nature of Web3 and its increasing relevance across various industries.

The industry's alignment with corporate interests and its potential to revolutionize data-heavy sectors is not just promising but also indicative of a paradigm shift in how we perceive and utilize technology.

As we step into 2024 and beyond, the industry is poised for a bullish phase, marked by technological innovation, institutional adoption, and a redefined understanding of value in the digital age. The future of Web3, interwoven with advancements in AI, blockchain, and data privacy, is not just an evolution of technology but a revolution in the very fabric of our digital society.

And one thing is certain, the Blockchain Business Series will be there as well.

#Happynewyear #Crypto #Web3 #BTC #SOL #Blackrock #Bullmarket