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Monthly Market Review - November 2023

We will look at the current market narratives in this update as we finish 2023 and head into 2024. Firstly, on a macro level, Bitcoin has been one of the best-performing assets of 2023, which nobody predicted at the end of 2022. It had a robust rally off a depressed base and now seems to be comfortably above $40’000. This was unthinkable last December, which makes one realise how wrong the crowd can be.


For 2024, we are looking at the following trends:


Questionable Bull Narrative

What I am watching closely is how baked in the ‘bull’ narrative already is. Most traders believe we will undergo a significant bull run with the Bitcoin spot ETF approval predicted in January, the ‘halvening’ due in April, and predicted Fed rate cuts. However, given how the space has developed, I’m not as confident as others in the market that we will see a 2017 or 2021-style blow-off early next year. This rally has been unique as the trading volumes and market depth are still significantly below 2020 and 2022 levels and up to 10x below 2021, indicating that many more participants are still on the sidelines.


Other than Bitcoin narratives, we are yet to have other significant catalysts. The 2017 boom was fuelled by the ICO narrative, allowing start-ups and projects to raise cash for a token quickly. The 2021 rally started with DeFi Summer in 2020, where decentralised finance projects attracted significant capital. As far as I’m aware, other than a small AI hype narrative, the space has yet to coalesce around any narrative other than ‘an ETF is coming’. We will see if that is enough to drive a serious ‘FOMO’ rally.


We will monitor the market depth and liquidity as these need to increase significantly for a blow-off rally. Our current base case is that there will be volatility around the ETF launch, but it will take 12-18 months before there is enough momentum for a FOMO rally to play out.


Reduced Black Swan Risk

A significant black swan risk was Binance, as it’s the largest exchange in the space, but its regulatory clarity was uncertain. On November 21, Binance announced it had settled with the US DOJ, paying a $4.3 billion fine. Changpeng “CZ” Zhao, its CEO, also had to resign as part of the deal. Notably, although the fine is severe, it doesn’t allege any wrongdoing in terms of fraud. Instead, it is related to money laundering concerns and failing to report suspicious activity. A comprehensive DOJ investigation that found no fraud is the strongest signal yet that the company has no issues, so the fine is a positive outcome. For scale and perspective, in 2014, JP Morgan paid a $2 billion fine for Bank Secrecy Act violations. Binance has already started cleaning up its act post the fine as it remains under DOJ surveillance. This outcome has taken the Binance black swan off the table.


The other black swan risk that has decreased is the Tether risk. Tether has over $90 billion in assets, and USDT-denominated pairs are the most common in the space. Tether continues to de-risk for two reasons: firstly, it keeps all the interest it earns, so with the high rates in 2023, it will have a multi-billion revenue source. Additionally, Binance settling has given the DOJ quasi-oversight into Tether as many transactions flow through Binance. This allowed the DOJ to search for any improper Tether behaviour, and there is no indication that they found any such behaviour. The continued monitoring of Binance will ensure that Tether is highly incentivised to behave correctly.


Off-exchange Custodial Solutions

Thirteen months after FTX, there are increased signs of off-exchange settlement via tri-party solutions being enabled. This will allow us to keep our funds in a bank, ensuring we don’t have counterparty risk with exchanges and earn interest on our funds. These solutions will roll out in 2024, and through our relationships, we should be able to access these facilities as soon as they come out. This will reduce our counterparty risk and increase returns.


Increased Capital Fracturing

Capital pools will continue to fracture in 2024 as the regulators impose themselves on the space. Different venues are geared to serve geographical markets with unique regulatory regimes; for example, CME Futures has institutional market participants compared to Asian retail-focused exchanges. The fracturing of liquidity helps us as our structure was set up to allow us to access as many liquidity pools as possible.


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