Recently, I was analyzing exactly why the crypto market exploded in 2023 in that way. And honestly, there are several factors converging that quite well explain the rally. If you're thinking about investing in cryptocurrencies, 2023 was a key year to understand what is happening now.

First, you need to understand how this market works. It’s not just buying and selling; there are many players involved: the projects themselves, institutional investors, whales moving the market, us retail investors, centralized and decentralized exchanges, regulators... all interacting. Each has its incentives, and that’s what ultimately drives prices.

Now, if you want to succeed in investing in cryptocurrencies, you need to analyze each project from four angles: fundamental analysis (the project itself), supply (how many tokens exist), demand (how many people want to buy), and technical analysis (the charts). Many make the mistake of only looking at one of these. That’s dangerous.

What’s interesting is that the crypto market index grew 123% during 2023. Bitcoin and Ethereum dominate with 62% and 20% of the index respectively. The rest is distributed among thousands of projects. But the real question is: why did this happen?

One of the clearest factors is the upcoming Bitcoin halving in April 2024. Bitcoin’s algorithm cuts miners’ rewards in half every 210,000 blocks, roughly every 4 years. This makes the supply of new bitcoins scarcer, and historically, that has driven the price up. Looking at previous halvings, after the first one, the price increased 950% in 6 months. After the second, 38% in 6 months. In 2020’s third halving, 83% in 6 months. That perceived scarcity definitely influences the price. And Bitcoin drags the entire market along with it.

Another important factor is the expectation of a spot Bitcoin ETF. There are already Bitcoin ETFs, but based on futures. The applications that were on hold in 2023 sought something different: allowing institutional investors to buy real Bitcoin, not just speculate with derivatives. If an institution like BlackRock, managing nearly $10 trillion, has to buy physical Bitcoin to back an ETF, that’s massive demand. That would completely change the game.

Then there’s the AI boom. ChatGPT revolutionized everything in 2023, and companies like Nvidia exploded in value. But crypto also benefited. There are projects building AI tools on blockchain, and their tokens rose along with the tech hype. They’re not alternative currencies to money; they’re utility tokens to access services. They function more like digital shares of AI companies.

But probably the most important factor is that a lot of fresh money simply entered the market. The total crypto market capitalization grew 99.2% in 2023, nearly $750 billion in new value. Trading volume far exceeded its historical averages. That doesn’t happen without buyers being convinced that the asset will keep rising. It’s pure psychology. Sellers gave up in the face of the upward price wave or simply took profits. Optimism dominated.

If you look at open interest in Bitcoin and Ethereum futures in 2023, you’ll see it increased significantly since August. This means new participants entered or existing ones increased their positions. Professionals watch this constantly. If there are expectations of higher prices in futures, the spot price will likely rise too.

Now, the million-dollar question: will this continue in 2024? That depends a lot on macro factors. If inflation keeps decreasing and the economy remains stable, central banks might pause or start cutting rates. That would be bullish for tech stocks, but it’s not clear if it benefits crypto. High-growth stocks would become more attractive.

But if inflation rebounds and the economy accelerates, central banks would raise rates again. In that scenario, the stock market would fall, but Bitcoin could shine as an inflation hedge. Its fixed supply theoretically protects it, like gold. Though here’s a nuance: not all cryptocurrencies work that way. Many have unlimited supply.

There’s a third scenario: stagflation. Low growth with high inflation. Central banks would be in a dilemma. Raising rates kills the economy; lowering them fuels inflation. That would be bad for tech and crypto, but persistent inflation could make investors migrate to Bitcoin.

Looking at the numbers from 2023, Bitcoin returned 79.85%, almost 6 times more than the S&P 500. Ethereum 40.45%, more than 3 times the S&P. Smaller projects had triple-digit returns. So yes, investing in cryptocurrencies in 2024 is worth it, but you need a methodology.

My advice: diversify. Keep large positions in Bitcoin and Ethereum for the long term. But also look for smaller projects with exponential growth potential. Some could grow 10x, 50x, 100x or more. But don’t bet everything on that.

The final question is whether you should hold or trade. Historically, the best returns come from long-term holding. Bitcoin and Ethereum prove that. But trading is a tool to grow faster if you know how to manage risk. My personal recommendation: allocate some for holding and some for trading, but only if you have experience.

What happened in 2023 was special. Multiple factors converged: halving looming, ETF expectations, AI boom, massive influx of money. But the crypto market is volatile. Not everything is bullish. You need to understand the risks, do your own research, and not invest more than you can afford to lose. If you do that, 2024 and the following years could be very interesting for investing in cryptocurrencies with a solid strategy.