Crypto Animal Spirits Are Back. What’s Ahead for 2024.

Investors are looking forward to a profitable 2024, fueled by a few catalysts. First and foremost is regulatory approval of Bitcoin exchange-traded funds, likely in early January. A revival of trading by retail investors and cuts in the supply of new Bitcoin tokens could support prices across the crypto universe. Recent legal victories for the industry have raised hopes that a sweeping crackdown by the Securities and Exchange Commission isn’t in the cards.

None of this may play out as crypto backers hope. Approval of a Bitcoin ETF could be delayed or come as a letdown after such a big run in prices. JPMorgan Chase strategists say they’re “cautious” on crypto, seeing a high chance of “buy the rumor/sell the fact” once the SEC approves a Bitcoin ETF.

Crypto remains a crapshoot on several themes and developments.

The big hope is Bitcoin ETFs that own the token directly. Companies such as BlackRock, Fidelity, and ARK Investment Management are all awaiting approval for those ETFs; a conversion of the Grayscale Bitcoin Trust into an ETF could also come soon. Backers think the flurry of such ETFs will bring in tens of billions of dollars and open up crypto as an asset class to far more financial advisors and institutional investors.

“It’s hard to overstate the importance of the ETF,” says Matt Hougan, chief investment officer at Bitwise Asset Management, a firm with an SEC application for a Bitcoin ETF. “It will be a sea change in Bitcoin’s stance in the world.”

Crypto backers are also looking forward to far less new issuance of Bitcoin. Roughly every four years, the network’s software automatically cuts in half the number of tokens created and doled out to “miners” in exchange for adding blocks of transactions to the network. The next ”halving” is expected in April, cutting the block reward to 3.125 Bitcoins, or about $137,500 at recent prices.

All of this may already be baked into prices. JPMorgan’s crypto strategists see a reshuffling of crypto capital among stocks, ETFs, and tokens, rather than a new flood coming in to buy Bitcoin ETFs; the products have existed in Canada and Europe for some time without gaining much interest, they point out.

The industry racked up some legal wins in 2023, including a ruling on

Grayscale Bitcoin Trust

that is paving the way for Bitcoin ETFs. The SEC’s claim that most tokens aside from Bitcoin qualify as securities took a blow in a case involving Ripple Labs, with a court ruling that trading didn’t violate securities laws. But the regulatory outlook is far from settled.

Binance, the world’s largest exchange, is now under supervision by the Justice Department, following a criminal guilty plea by the firm and its founder Changpeng Zhao. Binance must pay $4.3 billion in fines and penalties for allowing money laundering and other illegal practices, according to the Justice Department.

Coinbase also faces legal threats, notably from the SEC, which has sued the company, claiming it operates an unregistered securities exchange. In January, a judge will hear oral arguments which might give an indication of how likely the case is to proceed. Coinbase has said it is operating legally under statutes on the books.

As a proxy for crypto, Coinbase illustrates both the peril and promise. Bulls on the stock argue it should do well as retail investors come back and trade crypto again. A retail revival is in the “early innings,” according to Needham analyst John Todaro, who rates the stock a Buy. Low retail interest has historically meant that tokens are in the early stages of an upward cycle, Todaro wrote in a recent note.

Wall Street may also be underestimating Coinbase’s revenue. In 2024, analysts tracked by

FactSet

expect Coinbase to post $3.3 billion in sales, a 15% increase from 2023. A return of retail trading, which has historically followed rebounds in crypto prices, could help Coinbase top those estimates.

What it’s all worth remains a guessing game. Coinbase trades around $186, well above the average Wall Street target of $99. Bottom line profits remain elusive. The company is expected to keep racking up losses for years, based on Generally Accepted Accounting Principles, including a $245 million pretax loss in 2024. Shares trade at 11 times estimated 2024 enterprise value to sales, nearly double the multiple in 2021.

Mizuho Securities’ Dan Dolev, a bear on Coinbase, recently raised his price target to $54, but maintained his Underperform rating. While acknowledging the run-up in Bitcoin, “we emphasize that we remain cautious on COIN’s business model over the medium-term,” he wrote. Coinbase faces ongoing fee pressure, more competition from rivals like

Robinhood Markets
,

and cannibalization from an ETF, in his view.

Coinbase did not respond to a request for comment.

The industry is looking for a helping hand from Congress. Coinbase and other companies have lobbied Congress to pass bills that could provide far more regulatory clarity and a shield against the SEC’s stance on crypto, but so far that effort hasn’t received enough bipartisan support to move forward. Coinbase also petitioned the SEC to write new crypto-related rules, but in December the SEC rejected that request.

“No one looking fairly at our industry thinks the law is clear or that there isn’t more work to do,” wrote Coinbase Chief Legal Officer Paul Grewal in a post on X after the SEC rejected the petition.

Buying Coinbase stock now—or crypto broadly—is a bet on a few things going right: Bitcoin keeps rallying, ETFs bring in fresh capital, and the SEC doesn’t shut down wide swaths of the industry through regulatory actions or court wins.

Bitcoin’s backers argue it’s gaining traction beyond trading. Argentina’s new libertarian government, facing an economic crisis, said financial contracts could be denominated in Bitcoin; El Salvador is offering expedited citizenship to foreigners making a “donation” to the government in Bitcoin.

Yet Bitcoin has a long path to becoming anything more than a trading vehicle. Years of software development and investment have failed to push blockchain networks into mainstream finance, while hacks, theft, and money laundering continue to be among the main uses beyond trading.

Crypto is still gambling on an unproven technology. Investors who rolled the dice in 2023 won big. They will have to roll again in the new year to keep the party going. 

Write to Joe Light at joe.light@barrons.com