Arca releases six major predictions for 2024: killer applications will emerge in the fields of gaming, artificial intelligence, and DePIN

*Original Title: *"That's Our Two Satoshis" - Arca's 2024 Outlook: Themes & Narratives*

Author: Jeff Dorman, Arca

Compiled by: Elvin, ChainCatcher

Sources: TradingView, CNBC, Bloomberg, Messari

Predictions have been wrong for two consecutive years!

In the past few years, we have released predictions each year, focusing on the sources of growth and potential risks in digital assets. Over the years, we have had several big ideas that were correct, as well as a few that were completely wrong:

• At the beginning of 2020, we wrote about the rise of DeFi and task rewards.
• By mid-2020, we discussed the rise of NFTs.
• At the beginning of 2021, we talked about the rise of social/sports tokens.
• In 2022, we were almost entirely wrong; nothing went as expected.
• In 2023, we correctly predicted that poor investments in digital assets would yield outsized returns, that digital assets as a whole would decouple from traditional markets, and would once again become an uncorrelated asset class, but we largely missed the themes we thought would drive returns.

The most interesting aspect of the past two years is that the consensus in 2022 was completely wrong, while the consensus in 2023 was even more absurdly incorrect. A survey conducted by Deutsche Bank at the beginning of 2022 showed that only 19% expected negative returns for the S&P 500 that year, and only 3% thought returns would be below -15%. The S&P 500 ultimately lost -19.6%. In 2023, the same survey from Deutsche Bank showed that 39% expected negative returns for the S&P 500 to exceed 10%, while the S&P 500 ultimately rose +24.23%.

It is difficult to summarize the consistent expectations for digital assets, but it is safe to say that very few anticipated the dramatic drop in digital assets like in 2022, and almost no one predicted that digital assets would become the best-performing asset class in 2023, with returns approaching triple digits. As we enter 2024, there may be more obvious reasons for optimism, but there are still many reasons to remain skeptical. Overall, we believe that investors will continue to see returns from investing in this asset class in 2024.

However, to navigate the many ups and downs throughout the year, we must correctly identify the themes and narratives that can drive performance. Admittedly, many themes and narratives will change over time.

Prediction 1: Bitcoin is no longer boring; its performance will once again surpass most stocks, and owning Bitcoin mining stocks will again outperform Bitcoin.

Like most people who entered the digital asset space before 2018, the first blockchain network I used was Bitcoin, when I first purchased BTC. This made sense from both a technical and macro perspective, especially since there were no other mature use cases for blockchain technology at that time. However, over the past six years, our investment focus has largely shifted to other applications and industries enabled by smart contract protocols. Frankly, Bitcoin became a boring financial asset; you might own it, but there was certainly no need to discuss or study it, as it never changed. The developments in NFTs, stablecoins, DeFi, etc., were built on other chains and required constant analysis and education.

This situation changed in 2023. Throughout the year, our discussions and debates about Bitcoin surpassed any other asset and chain, first focusing on the reasons to own Bitcoin (the March regional banking crisis, Blackrock's Bitcoin ETF application), and then on new technological innovations (inscriptions, Ordinals). Therefore, Bitcoin is no longer dull; starting from the most obvious reasons to the least obvious, here are several reasons to own BTC and Bitcoin-related assets:

• Bitcoin has already undergone three halvings, all of which preceded significant price increases. You don’t necessarily have to believe that halvings change any fundamentals (I certainly don’t), but at this point, it has become a self-fulfilling prophecy. The Bitcoin halving in April 2024 is widely viewed as a catalyst.

Source: TradingView

• The soon-to-be-approved Bitcoin spot ETF will trigger demand from new investors, primarily financial advisors and RIAs. I expect a knee-jerk reaction in Bitcoin spot ETF prices once it is truly approved, primarily driven by algorithms, which will last for a few days, and ultimately the price will stagnate until the ETF truly begins to accumulate assets. The gains in the second half of 2024 may exceed those in the first half. Over 30% of Bitcoin's total supply has not moved in five years, which could lead to liquidity tightening as ETF issuers scramble to buy Bitcoin with each new ETF creation.
• The U.S. presidential election in November, combined with expectations of 3-5 rate cuts, will boost all risk assets, as inflation will take a back seat to politics. Bitcoin is more susceptible to macro liquidity conditions than any other asset.
• The 60/40 investment portfolio is dead and has been for over two years. The correlation between U.S. stocks and bonds has been the highest since 1993-95. If bonds and stocks no longer have a negative correlation, new financial assets will be recommended for inclusion in model portfolios. There is no asset with higher returns and lower correlation than Bitcoin. Bitcoin ETFs will naturally find their way into every modern portfolio configuration.

• The long-awaited Gox bankruptcy distribution will not affect Bitcoin's price. While it is expected that 142,000 BTC (worth over $6 billion) will be distributed to creditors this year, most of it will not be sold. First, most of Mt. Gox's debts have been purchased by bad investors over the past five years, and much of the price risk for Bitcoin has already been hedged. Second, anyone who owned Bitcoin as early as 2013 and held their bankruptcy claims for ten years is likely to be a blockchain and Bitcoin enthusiast, so there is no reason to believe that most creditors will sell their cherished assets, regardless of how much the price rises. Third, after Mt. Gox filed for bankruptcy, Bitcoin Cash (BCH) forked from Bitcoin, meaning that 143,000 BCH will also be distributed. Few (if any) original BTC holders care about BCH, so the likelihood of BCH being sold immediately is greater than that of BTC.
• Bitcoin mining stocks (i.e., MARA, RIOT, CLSK, CIFR, BITF, IREN, etc.) will outperform BTC again in 2024. In 2023, mining stocks collectively rose 399% (compared to BTC's +155%). Historically, BTC halvings have been unfavorable for miners, as block subsidies (which historically accounted for 98% of miners' revenue) are halved, but now, due to the rise of Ordinals and BRC-20s, this issue will be mitigated as they have become a major part of mining revenue. In the past, analyzing mining stocks was very straightforward—fixed costs relative to variable income that fluctuated with BTC prices—but now, stock analysts need to consider these other revenue sources, which has not yet happened. Driven by BRC-20 trading and the use of Ordinals protocol to issue alternative memecoins, Bitcoin's transaction fees soared to an all-time high in Q4 2023.

Prediction 2: Tokenization of Real World Assets (RWA) will happen, but only if you can trade tokens, stocks, and bonds in one place.

The tokenization of RWA is one of the most talked-about new topics of 2023. However, the data can be misleading.

The tokenization of real-world assets refers to the tokenization of everything from financial assets and real estate to personal items like art and jewelry. Theoretically, by converting physical assets into digital tokens, blockchain can enhance liquidity, transparency, and efficiency. This innovation would allow for fractional ownership, broader distribution, and easier access to traditionally illiquid or exclusive investments. The secure and immutable nature of blockchain transactions, combined with the potential for smart contracts to automate and streamline processes, further attracts institutional adoption, marking a new era in asset management and investment.

While the prospects for RWA are vast, what has emerged so far is the rise of tokenized U.S. Treasuries. The reason for this is not any of the above, but rather the cash-rich DeFi applications and on-chain stablecoin issuers that cannot invest outside the blockchain ecosystem. As U.S. Treasury yields rise, tokenized Treasuries provide them with an on-chain solution. The on-chain token market based on U.S. Treasury yields grew sevenfold in 2023, reaching $832 million. This is indeed impressive, but it is just a very specific example of tokenizing real-world assets and does not address any inefficiencies in the traditional financial system.

Source: Coinbase

Currently, only those who have already entered the cryptocurrency ecosystem will care about the tokenization of RWA (especially U.S. Treasuries) because it solves a specific use case for them. To attract more attention, the tokenization of RWA must provide a compelling value proposition. One or both of the following conditions must be met:

• Someone will tokenize assets that have actual demand. Tokenizing one-off hotel assets will not excite anyone. Tokenizing NBA contracts will not excite anyone either. However, if you tokenize something that has real value to people, like Apple stock, the Mona Lisa, or municipal project financing debt that benefits residents if they own the token, then you can create new demand. Tokenizing for the sake of tokenizing will not drive demand.
• The chicken or egg problem arises, but as long as the brokerage industry and the cryptocurrency world remain completely separate, there is no need to tokenize anything. Ultimately, all assets need to be ownable and tradable on-chain; otherwise, they should not be owned or traded. Those with brokerage accounts do not need to trade stocks and bonds on-chain, and those who trade entirely on-chain do not have a large enough financial audience to attract the tokenization of brokerage assets. The real value driver is that when you can integrate all valuable assets onto the same layer, you transcend traditional liquidity and promotional barriers. For example, selling a collectible car to the mass market on-chain, using DeFi rates of 2% to 3% (while global market rates are 5% to 30%) to borrow against the user's property, or consuming "money" as a proportional reduction of all assets. Money is online, communication is online, news is online… the world is online now. But money and assets remain separate, which simply does not work.

Prediction 3: Before TradFi normalizes the industry, this will be the last "super cycle" for digital assets.

The similarities between 2019 and 2023 are increasing, with sentiment hitting rock bottom, followed by Bitcoin's resurgence, and ultimately the rise of other first-layer protocols and applications. After Bitcoin's performance surpassed everything in 2019, we saw the rise of DeFi, stablecoins, and ultimately the rise of NFTs in 2020-2021. Ultimately, 2024 may follow in the footsteps of 2020, with decentralized applications rising again and some new domains emerging.

Currently, we are seeing a similar environment forming, and the adoption of digital assets and the subsequent appreciation may soon reach another massive peak. One of the main resistance factors, concerns about U.S. regulation, may also become a tailwind, meaning that as the regulatory environment becomes clearer, TradFi participants become more at ease, potentially bringing a significant influx of new capital into the ecosystem. After the last "super cycle," returns may become more normalized.

While the idea of cryptocurrencies existing without rules and the liberal dream of no government sounds good in theory, for digital assets to truly exist, Wall Street will inevitably get involved, and we are already beginning to see this happen.

• The world's largest asset management firm, Blackrock, may manage the largest BTC fund (ETF) by the end of this year.
• Companies like Citadel, Jane Street, and Goldman Sachs will become the largest market makers.
• Bank of New York Mellon will become the largest custodian of Bitcoin.
• CME's Bitcoin futures trading volume has already surpassed that of Binance.
• The next wave of digital asset issuance is likely to come from corporations, municipalities, and universities, underwritten by investment banks. So far, most tokens have been issued by decentralized and/or jurisdictionally ambiguous entities; however, tokens issued by corporations, municipalities, and universities help align stakeholder incentives.

But in 2024, most investor and institutional funds will flow into BTC through new ETFs. Other parts of the digital asset industry will still be fleeting in the eyes of most investors and may still be too small for the majority. Therefore, in the next 12-24 months, digital assets will still provide outsized returns for a small portion of non-Bitcoin digital asset investors. Following this surge in expectations, I believe that other parts of the industry will also become institutionalized. However, in 2024, investors can still gain early access to airdrops, rewards, and analyze on-chain data. After another cycle, old investment methods will still be effective, but soon, excessive popularity and homogenized valuation techniques will shrink returns.

Prediction 4: Interoperability solutions will improve.

Ultimately, no one should really care which chain they are on, nor should they have to. Interoperability between chains was a theme we focused on last year, but the emphasis has shifted from first-layer and zero-layer chains (like Cosmos and Polkadot) to middleware providers (Chainlink CCIP, zero-layer OFT, Circle's CCTP, etc.). Over the past two years, we have seen an increasing number of new first-layer and second-layer solutions, leading to an overall fragmentation of the market. While users have more choices in faster and cheaper new chains, the problem they now face is a general lack of compatibility. Not all chains can communicate with each other, and many chains are incompatible when simply transferring assets back and forth. The increase in bridging vulnerabilities illustrates the weaknesses in this area and the demand for technology that does not rely on pegged assets.

Imagine if you could only send emails between two Yahoo Mail users or two Gmail users. Or imagine if you could only play video games between people using the same console or phone. This does not work, and it does not work in the blockchain world either. End users should not have to choose their chain to use blockchain applications.

For institutions entering this space, what they need is seamless and secure technology. So far, a major focus for institutions has been issuing their own assets that can be compatible in many different environments, including existing public blockchains and private enterprise versions (like JPMorgan's blockchain, Figure's Provenance blockchain).

While the ultimate solution may not be immediately obvious, one or more solutions must become the norm to enable more widespread use.

Prediction 5: User experience will eventually improve, leading to the launch of killer applications in gaming, AI, and DePIN.

In the early days of the internet, users relied on IP addresses to connect to different websites. For the average user, these strings of numbers were meaningless. At the end of 1987, the U.S. Advanced Research Projects Agency Network proposed two requests for comments, RFC 1034 and RFC 1035. This marked the beginning of domain name services. Domain name services (DNS) transformed these strings of numbers into names like amazon.com. This shift greatly enhanced the usability and searchability of the internet, which now has billions of users.

In 2023, with the introduction of ERC-4337, digital assets have a similar proposal to create "smart accounts." These accounts are designed to fundamentally simplify the user experience in Web3. With smart accounts, users do not need seed phrases, do not need to download browser extensions, and in many cases, do not need to pay gas fees to facilitate faster transactions.

We need such solutions before most new users can easily go on-chain. But the question remains: will "killer" applications emerge before user experience and infrastructure improve, or will better user experience and infrastructure lead to "killer" applications? The following is an excerpt from "Myth of the Infrastructure Phase":

"A common view in the web3 community is that we are in an infrastructure phase, and what we should be doing now is building infrastructure: better base layers, better inter-chain interoperability, better clients, wallets, and browsers. The reasoning behind this is that first, we need tools that allow people to easily build and use applications running on the blockchain, and once we have those tools, we can start building those applications. However, when we talk to founders building infrastructure, we continuously hear that their biggest challenge is how to get developers to build applications on top of it."

It is widely believed that the early stages of a new computing platform are a standalone infrastructure phase, followed by an application ecosystem. However, the reality is that new computing platforms start with killer applications that inform the type of infrastructure that needs to be built. This opens up the "application <-> infrastructure cycle."

The digital asset market has been building infrastructure for years, much of which has been battle-tested and can support the development of real consumer applications. So far, the most successful application of blockchain technology has been dollar stablecoins. We saw early traction with NFTs and DeFi in 2020 and 2021, but more user growth is needed before they become "mainstream." In 2024, similar early growth trajectories are expected for AI, gaming, and DePIN (Decentralized Physical Infrastructure Networks). While this may drive up the token prices of individual projects, the entire digital asset market will not grow until several of these projects become "hot."

• Gaming ------ Perhaps Web3 gaming is the most likely to bring in the next million-plus users. A few years ago, Axie Infinity paved the way for blockchain-based gaming, peaking at a record of one million active users, but the game ultimately faded due to design flaws and overhype. Many companies have been working to address the flaws in the first iteration of web3 gaming. Therefore, we expect several commercial games to launch in 2024, some of which have gone through alpha and beta testing phases in 2022 and 2023. We predict that mobile gaming will become a major focus, with Asia leading the way in introducing a new wave of users. These games may be listed on the Apple App Store and Google Play Store, with stablecoins used for in-game purchases. Major players in the online gaming industry, such as Ubisoft, EA, and Zynga, have begun to embrace web gaming and are collaborating with traditional companies to bring these games to the masses. Additionally, blockchain technology gives gaming communities a greater voice in the direction and development of games, which will help create more loyal users who become advocates for the games.
• DePIN ------ This is a field that can significantly benefit from blockchain and tokenization, although projects are still in their early stages. The concept is to decentralize access to resources that were previously unavailable—computing, wireless, storage. Blockchain provides a way for users to access these resources, pay for them, and be rewarded for providing them. Current versions of DePIN projects show promise in design but have yet to gain real traction. However, the next generation of projects is focusing more on creating healthy demand rather than just incentivizing supply. The growth of AI-related technologies is driving use cases for DePIN projects (such as demand for computing).
• Artificial Intelligence ------ The intersection of blockchain and artificial intelligence is a match made in heaven. Any data trader knows that "garbage in = garbage out." While a few companies (Microsoft, Google, OpenAI) that train today's AI models do not provide garbage data, their inputs are naturally biased. A 2016 AI experiment by Microsoft on Twitter highlighted the pitfalls of poorly trained AI models. The incentivization model created by blockchain can help address this issue. By decentralizing and rewarding trainers and validators in the network, these models will organically reduce bias and ultimately produce better models.

Prediction 6: Ethereum will re-emerge as the universal asset for "long blockchain."

In 2023, Bitcoin soared, and newer, faster first-layer protocols (SOL, AVAX) saw even greater increases, but Ethereum (ETH) lagged behind. However, the wind is about to change. Driven by the anticipated EIP-4844 upgrade, Ethereum's performance is likely to surpass Bitcoin in 2024, as this upgrade will enhance Ethereum's network efficiency and benefit second-layer solutions, potentially reducing fees by 90%.

More importantly, after the Bitcoin ETF listing, ETH is likely to become the next asset of interest on Wall Street. While Bitcoin is a great asset, it does not give you exposure to much of the growth of blockchain. If you want to go long on DeFi, NFTs, stablecoins, DePIN, AI, and RWA, you need to own a wide variety of different assets, which essentially means you need to be an accredited investor and invest in funds, or you need to quit your day job and immerse yourself in the world of digital assets full-time.

Or— you can own ETH. In 2024, ETH will no longer be described as "hard currency" or a decentralized technology with hundreds of developer upgrades. Instead, it will be described as the first app store for all blockchain applications. Who wouldn’t want to invest in "the Apple App Store of blockchain"?

If you just want to go long on "blockchain" … you can embrace ETH and benefit from every application built on or adjacent to ETH.

Conclusion

The greatest benefit of Arca managing multiple fund strategies is that we have the ability to invest in almost all types of blockchain innovations within at least one fund strategy. But more importantly, the liquidity of tokens allows us to change our minds and pivot to investments when we are wrong or see something more correct.

Inevitably, many of these predictions will prove to be wrong. However, by challenging these assertions and seeking where we went wrong, we will inevitably discover new themes and narratives that will be more interesting for us as investors and blockchain enthusiasts.