A look back at December: Crypto assets sparkled, outperforming other asset classes by far

Cryptocurrencies rose for the fourth consecutive month in December, ending the year with a stellar performance. There are several factors behind the ongoing rally. Signals from the Federal Reserve that interest rates have peaked, combined with the last leg of the race for the expected approval of spot Bitcoin exchange traded funds (ETFs) underway in the US, propelled the price of Bitcoin to a cycle high at 44,614 US dollars early December.

Fears and hopes that Donald Trump will win a second term in the White House also drive investors to Bitcoin. Some investors view Bitcoin as a safe haven, while others expect pro-crypto policies in case he is reelected as US President. The two largest cryptocurrencies, Bitcoin and Ether, both rose 10 percent in December.

Most cryptocurrencies have indeed outperformed other asset classes by leaps and bounds in 2023, as investors returned to the crypto sphere after having been scared off following the collapse of FTX in November 2022. Solana was the best performer among the 10 largest cryptocurrencies, up 965 percent in 2023, tracked by Avalanche and Cardano, up 269 percent and 146 percent respectively. Their performance in 2023 beats that of other assets by a mile, with Bitcoin up 158 percent and Ether up 93 percent. This strong performance can be compared to those of the tech-heavy Nasdaq index, up 54 percent, the broader S&P 500 index up 26 percent and the price of gold up 13 percent.

In December, the monthly cryptocurrency exchange volumes rose to 1.1 trillion dollars – the highest volume since May 2022. Binance remains the largest exchange with a 46 percent market share.

Bitcoin’s importance grows, buoyed by hopes of imminent ETF approvals

The market capitalization of Bitcoin in the global asset ranking climbed to the 10th position in 2023, behind gold, silver and tech stocks such as Apple, Microsoft, Alphabet, Nvidia and Amazon in December, data from 8marketcap shows

Talks between the Securities and Exchange Commission (SEC) and the dozen asset managers that have filed applications for spot Bitcoin ETFs continued and gathered speed throughout the month, with numerous amendments sent back and forth. The time window for approving them is small: between Jan 5 and Jan 10, according to market experts.

“If spot bitcoin ETF not approved in January, might be one of bigger rug pulls in crypto history… Not my base case, but can’t entirely rule out given history here (which is why I said *close* to 100%),” Nate Geraci, the co-founder of the ETF Institute warned.  

SEC’s main issue seems resolved & approval viewed as almost granted

The big stumbling block in the ongoing ETF talks has been the issue of in-kind versus a cash creation and redemption model demanded by the US regulator. In the latter, asset managers exchange cash with a broker-dealer, which then converts it into Bitcoin, which is then stored at their Bitcoin custodians. These transactions are subject to tax. This model also shifts the risks away from the asset managers, thus offering more resistance to market manipulation. The asset managers would have preferred to stick to their conventional in-kind transaction models – Bitcoin being exchanged for ETF shares – transactions which aren’t taxed.

Market participants are optimistic about the ETF applications’ upcoming approvals and expect them to be approved jointly, to avoid competitive disadvantages. Billions of dollars are expected to flow into these ETFs in the first weeks, and up to 50-100 billion dollars over the first five years. The first ads flagging the arrival of these new ETFs are already airing on US TV and social media.

In the US, the first application for a green Bitcoin ETF was filed, tapping into the current ETF hype, and in Hong Kong, the regulator spelled out conditions to the territory’s licensed crypto players for issuing spot Bitcoin ETFs.

Ether: Spot ETFs also on their way

The spot ETF hype has not passed by Ether, which saw both BlackRock and Fidelity apply for a spot Ether ETF in December. The SEC is already scrutinizing the application of Invesco Galaxy, where the deadline for taking a decision was delayed to Feb 6, and those of Grayscale and Hashdex.

Separately, Trump cashed in on parts of the profits made on the royalties from the Trump non fungible tokens (NFTs), reportedly selling Ether for 2.4 million dollars. This may have been a somewhat hasted move, as analysts expect that the bull market for altcoins such as Ether will take off in the coming weeks with the price of Ether likely to run to 3,000 dollars, according to MN Trading’s CEO Michaël van de Poppe. Ether rose 10 percent in December to 2,314 dollars.

Binance’s dominance stands strong despite legal & regulatory setbacks

A little more than a month after its 4.3 US billion-dollar settlement with the US Department of Justice (DOJ), Binance is seeing robust inflows again. “With the overcast gone, user growth has increased, and we are seeing robust inflows now,” Binance’s CEO, Richard Teng, said. By end-December, the world’s largest crypto exchange managed to cross the milestone of 170 million global users.

Binance, the world’s largest crypto exchange, meanwhile faces regulatory setbacks in India where the regulator will close down its website on concerns that it does not comply with the country’s Prevention of Money Laundering Act, and in the Philippines, a market Binance must exit by end-February given it has not registered its exchange. In Abu Dhabi, Binance withdrew its license application with the country’s financial regulator.

Separately, Binance’s charismatic founder and former CEO, Changpeng Zhao (CZ) was ordered to remain in the US prior to his sentencing scheduled for Feb 23 by a court. He faces a maximum prison sentence of 18 months in the US, given he pleaded guilty of money laundering as part of Binance’s multibillion-dollar settlement with the DOJ. CZ is 22 billion richer than in 2022 and his personal wealth was estimated at 34.4 billion dollars on Dec 31, according to the Bloomberg Billionaires Index.

It’s worth pointing out that, Binance’s legal issues with the SEC aren’t over. The regulator has asked the court to consider the guilty pleas made by Binance and CZ in November’s settlement, in its own case. For its side, Binance has requested the court to dismiss the SEC’s case as it would “inappropriately introduce new information and arguments at this litigation stage.”

Binance Coin gained 36 percent in December.

Solana continues shining, while Ripple gains Irish license

Solana has overtaken Ripple Lab’s XRP as the fifth largest crypto token in terms of market capitalization. Two reasons are singled out: the airdrop of Jito (the Solana-based liquid staking protocols) to eligible early Solana holders and Solana now being offered by the Robinhood crypto exchange. The crypto coin rallied 67 percent in December.

As for Ripple, the Irish central bank registered its Irish unit as a virtual asset service provider (VASP). This means the company can now provide digital asset services across the European Economic Area (EEA) once the EU’s Markets in Crypto Assets Regulation (MiCA) enters into force at the end of next year.  XRP put on 0.8 percent in December.

Tether’s market cap hit new high, partners up with FBI to combat illicit stablecoin use

The market cap of the largest stablecoin USDT for the first time exceeded 91 billion dollars in December, up 5 billion dollars over the past month. Its issuer Tether is among the main beneficiaries of the ongoing Bitcoin rally. In May, the company announced it would allocate 15 percent of its net realized operating profits in Bitcoins, around 57,500 Bitcoins. Its unrealized gains are estimated to exceed 1 billion dollars.  

Tether also partnered up with the Federal Bureau of Investigation (FBI) and the DOJ to combat the illicit use of stablecoins and aiding the recovery of funds. It notably blocked more than 30 addresses, having moved billions of dollars during the month.

The issuer of the competing stablecoin USDC, Circle, launched a euro-pegged stablecoin, EURC, on the Ether, Solana, Avalanche and Stellar blockchains in December.

US: IRS aims at crypto assets, new accounting rules & crypto bills loom

The Inland Revenue Service (ISR) will increasingly look for crypto-related tax evasion, on top of money laundering, the US tax authority said in its annual report. Parallelly, Circle warned its clients with annual crypto transactions exceeding 20,000 dollars between 2016 and 2020 that they will be reported to the IRS.

The CEO of JP Morgan, Jamie Dimon, went a step further during a testimony in the Senate Banking Committee calling for a complete ban on cryptocurrencies: "The only true use case for it is criminals, drug traffickers, money laundering, tax avoidance. If I were the government, I'd close it down."

But the fair value accounting rules relating to cryptocurrencies that enter into force in the US this year are expected to encourage companies and/or institutional investors to hold part of their assets in just crypto assets. Companies will not only be able to record impairments when the value of their crypto assets fall, but also to book gains when their value rises.

In Congress, two crypto-related bills, namely the Clarity for Payment Stablecoin Act and the Financial Innovation and Technology for the 21st Century Act (FIT) will be up for vote in the coming weeks. Given the rather unclear regulatory situation in the US as for crypto assets, many crypto players seek to expand outside its border. Coinbase, the country’s largest crypto exchange, obtained a virtual asset service provider (VASP) license from the French regulator during the month.

El Salvador, MicroStrategy profit from Bitcoin rally, Argentina legalizes it

 The bet on Bitcoins made by El Salvador, one of two countries in the world that has made the cryptocurrency legal tender, has greatly benefited from the ongoing Bitcoin rally. “El Salvador's #Bitcoin investments are in the black!” the Central American country’s President, Nayib Bukele announced. Another beneficiary is MicroStrategy, which acquired additional Bitcoins during the month, now holding a total of 189,150 Bitcoins. At today’s price, the stake is worth roughly 8 billion dollars, which makes an unrealized capital gain of 2.1 billion dollars.

In Argentina, contracts can now be agreed in Bitcoin following the victory of Javier Milei, in November presidential elections. In Japan, the government will end its tax on unrealized crypto gains as of April 1, following requests from the industry, which has witnessed how this tax weighed on companies managing and holding crypto assets.

Losses caused by cyber-attacks exceeded $1.8 billion in 2023

Although the number of hacking incidents decreased slightly in 2023, the losses resulting from these incidents still amounted to around $1.84 billion in the year, according to de.fi’s REKT Database. The hack against Euler Finance, where the hackers got hold of almost 200 million dollars, is the largest one to date this year.