Last week’s approval of spot bitcoin exchange traded funds (ETFs) was quite an event. For a brief few days our industry was the belle of the financial ball, with over $4.5 billion trading on Thursday’s debut. Pretty amazing to consider how long it took to get a proper ETF. Some things are worth the wait.

Crypto Market Reality Check:

2024 sees the crypto market growing up, rubbing shoulders with its larger asset class peers. Despite some rocky and uncertain economic terrain over the past year, Bitcoin and Ethereum are strutting their stuff and becoming increasing favorites, serving as desirable alternatives to your run-of-the-mill stocks and bonds. Asset allocators are taking note of 2023’s performance, which means demand for Bitcoin and Ethereum is on the rise.

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Spot Bitcoin ETFs – Don't Ignore Them:

While the jury is still out on whether or not Bitcoin spot ETF launch week was a “buy the rumor, sell the news” event, in the medium to long term, it will likely mark a turning point in crypto adoption rates. Why?

Because it's a more familiar, regulated way to allocate capital into the crypto market. Check out Coinbase and MicroStrategy stocks in 2023 – they outperformed Bitcoin, and that's no coincidence. These ETFs will open the floodgates for Registered Investment Advisors (RIAs), pension funds, and hedge funds to get in on the action. Plus, investment banks will start concocting new products based on these ETFs and the CBOE is awaiting approval to begin listing options on these new ETFs.

Keep an eye on this space – it's gonna be a ride.

Inflows and the Big Numbers:

Get ready for a tsunami of cash entering the crypto scene. RIAs are managing roughly $130 trillion, and a 1-2% portfolio allocation to digital assets through ETFs could send 1 to 2.5 trillion into the crypto world, roughly equivalent to the current market capitalization of the digital asset market.

Here's the catch: this flood of cash is gonna flow mainly into Bitcoin and Ethereum. Sorry, altcoins, you might have to wait your turn for the time being. But, the rise of Bitcoin and Ether should trickle down into other digital assets, as crypto native investors take profits on the majors and allocate capital into smaller tokens. This will put crypto native players in the driver-seat of bitcoin dominance (see chart below), as they will be the investors capable of playing in the basis and spreads between the majors and altcoins.

Macro Factors Ahead:

Now, let's talk about recession and interest rates. If the U.S. economy takes a nosedive in late 2024 due to higher interest rates, we will enter into a dovish period of the interest rate cycle and guess who benefits? Yep, digital assets.

Bitcoin, with its digital scarcity, and Ethereum, with its increasingly deflationary post-Merge tokenomics, will shine bright in a world of growing deficits, government spending and abundant fiat liquidity. But keep your expectations tempered. There will inevitably be volatile moments of low liquidity and deleveraging within digital assets.

Play It Smart with Portfolio Construction:

In 2024, forget about trying to predict where the market's heading. Instead, focus on portfolio construction and position sizing. Price momentum indicators, such as the CoinDesk Bitcoin and Ether Trend Indicators (BTI and ETI), can be useful inputs in moderating net exposure and managing overall market exposure.

If you find yourself itching for some altcoin exposure to take advantage of an upward trending market, consider diversified exposure. Indices like the newly launched CoinDesk 20 (CD20) offer diversified altcoin exposure while capping major tokens (Bitcoin to 30%, Ether to 20%, respectively) to better manage market volatility and diversify potential altcoin risks of specific token adoption rates and regulatory impacts. (More information on the CD20 is available on coindeskmarkets.com and here.)

Preparing for Altcoin Season:

It's time to consider tilting your portfolio towards altcoins while keeping a firm grip on Bitcoin and Ethereum. Altcoins shine when the rest of the crypto market is humming along, and there's no denying their potential for growth. But keep in mind the benefits of portfolio construction as markets never move in straight lines and there’s always a twist in the tale.

Opinion Crypto Long & Short Spot bitcoin exchange traded fund ETF Ria Registered Investment Advisors Altcoins

Todd Groth

Todd Groth was the Head of Index Research at CoinDesk Indices. He has over 10 years of experience involving systematic multi-asset risk premia and alternative investment strategies. Before joining CoinDesk Indices, Todd served as Head of Factor Insights at Premialab, an institutional fintech analytics company, and as a Managing Director at Risk Premium Investments (RPI), a systematic multi-asset asset manager. Before RPI, Todd was a Quantitative Portfolio Manager at Investcorp and began his finance career at PAAMCO, a fund of hedge funds, as a manager within the risk analytics group. Todd holds a BS in Mechanical Engineering from the University of California, San Diego, an MS in Mechanical Engineering from the University of California, Los Angeles, and a Master of Financial Engineering from UCLA Anderson School of Management. Todd holds BTC and ETH above CoinDesk’s disclosure threshold of $1,000.