The question that is probably on many investors’ minds is: Is the bottom here or is the crypto winter only just beginning?
The total market cap for all cryptocurrencies had peaked at US$2.97 trillion in November 2021 but had declined nearly 66% to about US$1 trillion as of the time of writing.
Yet signs of economic recovery and expectations for the US Federal Reserve’s (FED) rate hikes to reduce has caused Bitcoin prices to claw back some losses, rising 35% since 1 January 2023.
However, crypto is still not out of the woods yet as regulatory bodies around the world including the US SEC are taking an increasingly hawkish approach towards crypto, signaling greater regulation for the industry and a taming of the crypto “wild west”.
With both bull and bear forces tugging on the market, we will look at five major trends that will shape the crypto world in 2023.
#1 The FED Seems Poised To Hike Rates A Few More Times In 2023
As Crypto Street and Wall Street become increasingly co-related in recent years, moves in the stock market are often magnified in the crypto market due to its nature as a risk-on asset. For much of 2022, the crypto world had been closely watching the actions of the US FED.
Recent data have revealed inflation easing in the US. The inflation rate which reached a high of 9% in June 2022, has since dropped to 6.5% in Dec 2022.
Image Credit: CNBC; US Bureau of Labor Statistics’ consumer price index
However, the FED considers this reduction to be inadequate and is striving to bring inflation back to its target of 2% weighted average.
Below are the tentatively scheduled meetings in 2023, where they will decide on whether to raise interest rates or not. We will just have to watch the FED’s actions in the coming months.
- January 31-February 1 (Concluded. Raised rates by 25 basis point, bringing interest rates to a target range of 4.5%-4.75%)
- March 21-22
- May 2-3
- June 13-14
- July 25-26
- September 19-20
- October 31-November 1
- December 12-13
With a dropping inflation rate as well as a strong labour market, expectations are for the FED’s rate hikes to reduce. Cautious optimism has caused Bitcoin prices to recover in prices since this year.
#2 Ethereum’s Shanghai Hard Fork Could Disrupt Crypto Markets
Ethereum’s price has been up nearly 30% since the start of 2023. Though a key reason was due to the improving economic climate, another main factor was the upcoming Shanghai Hard Fork in March.
So what is the Shanghai Hard Fork (and why was it given that name)?
A crypto Hard Fork is basically a huge update to the blockchain, and historically Ethereum forks had always been named after famous cities (both historical and modern) such as Istanbul, Atlantis, and Constantinople.
Image Credit: Visual Capitalist
The Shanghai Hard Fork will be the biggest Ethereum upgrade since The Merge in September 2022. The Shanghai upgrade will include Ethereum Improvement Proposal (EIP) 4895. This basically allows the withdrawal of staked ETH, which at the time of writing is worth more than US$26 billion, making it the most staked crypto in terms of market cap.
This change raised concern due to the fact that validators could potentially withdraw $26 billion ETH, leading to a wave of selling pressure. However, the opposing view is that with greater liquidity, more validators would be incentivised to stake, soaking up excess liquidity.
In fact, the percentage of staked ETH to total ETH Supply is only around 14%, which is low compared to other major Proof-of-Stake chains such as Cardano, Solana (both about 70%), and BNB (around 97%). With the new liquidity, ETH staking may in fact even increase post-Shanghai to 30-50% according to analysts.
Regardless of whether there will be more or less ETH being staked, the market is betting that some of the biggest winners of Shanghai will be staking services like Lido Finance (LDO) and Rocketpool (RPL). The price of LDO is up ~140% since 1 Jan 2023, while RPL is up ~138%.
#3 Impressive ETH Layer 2 Growth Show No Signs Of Abating
The amount of gas used by Ethereum Layer 2s has increased by nearly 400% in the past seven months, and the percentage of gas used by Layer 2s compared to the rest of the Ethereum Network continues to show an uptrend.
Layer 2 ETH gas units increased from 1 billion in July 2022 to 4 billion in February 2023 / Image Credit: Dune Analytics
In Nov 2022, Ethereum Layer 2 Network Gas Usage hit all-time highs as transactions on Layer 2s increased substantially. Though the amount of gas has since dropped due to the market downturn, the percentage of ETH used for Layer 2s as compared to the rest of the Network continues to grow.
Percentage of gas used by Layer 2s hovered between 1-2% for much of 2021 and 2022. It is now 4%. / Image Credit: Dune Analytics
With the growth of Web 3 and decentralised applications, ETH Layer 2’s demand increases. Some of the most popular Layer 2 crypto solutions include Polygon, Loopring, Arbitrum, and Optimism.
Most of the popular Layer 2s are built upon Ethereum, and despite the ongoing updates to the Ethereum blockchain, Layer 2s remain a key factor in scaling. The Ethereum Foundation has stated: “The Ethereum ecosystem is firmly aligned that Layer 2 scaling is the only way to solve the scalability trilemma while remaining decentralised and secure.”
Layer 2 solutions on other blockchains such as Bitcoin Lightning Network also showed explosive growth last year. 2022 was the year that saw a 300% increase in Bitcoin locked within the network as compared to mid 2021, spurred by factors such as growth of Bitcoin peer-to-peer payments. The Lightning Network is currently in use in El Salvador, and is one of the most popular Layer 2 solutions for Bitcoin.
#4 Increased Regulations Will Shape The Crypto Market
For years, governments around the world have been looking to subject crypto markets to greater financial regulations, but with the recent crypto contagion, these efforts have only heightened.
2022 was the biggest year ever for crypto hacking, with $3.8 billion stolen from cryptocurrency businesses, according to a Chainalysis report.
Image Credit: Chainalysis
The US Securities and Exchange Commission (SEC) is leading the push to subject the crypto market to greater regulation, increasing scrutiny on Initial Coin Offerings and new tokens, calling for greater scrutiny on exchanges, and ramping up probes into Wall Street firms’ dealings with crypto, amongst other measures.
China has famously banned crypto mining in May 2021, followed by an outright ban in September 2021. Last year, it rolled out its own Central Bank Digital Currency officially in August.
The EU has launched various Anti Money Laundering (AML) directives in recent years, tightening Know Your Customer (KYC) and standard reporting requirements. In September 2020, the EU also proposed the Markets in Crypto-Assets Regulation (MiCA) framework aimed at protecting consumers, which was passed into law in 2022.
Firms themselves have also started to release Proof-of-Reserve in order to regain customer trust in the wake of the FTX collapse. These firms include Binance, Bitfinex, OKX, Huobi, Gate.io, and Kraken.
The recent years also saw an increase in the number of crypto custody providers due to firms’ need to navigate complex crypto regulations in their respective jurisdictions as well as increasing crypto security risks.
Image Credit: Blockdata
#5 Institutional Investors Back Away From Crypto and DeFi (For Now)
Following the rapid collapse of FTX, institutional investors have slowed down their pace of investing in the crypto markets. Global institutional investments dropped from over $5 billion in Q1 2022 to under $1 billion in Q4 2022.
Image Credit: S&P Global
Image Credit: S&P Global
Major institutional investors from Blackrock to Ontario Teacher’s Pension Plan fund have written off their tens of millions invested into FTX. After institutional investors backed out, the ProShares Bitcoin ETF, once a popular vehicle with moneyed financial companies, quickly became the sixth-worst-performing ETF of all time, and crypto shorting intensified.
As recently as Dec 2022, JP Morgan’s head of institutional portfolio strategy Jared Gross said that “crypto is effectively non-existent for most large institutional investors.”
A Silver Lining
It is important to note that these data were obtained given the recent economic climate and crypto contagion. Once the economy starts to turn for the better, institutional investing may yet again return to crypto. And whilst institutional interest in crypto waxes and wanes, longterm crypto plans for many Wall Street firms continue to stand, signaling that institutions believe that crypto is here to stay and are willing to invest in it.
Finance giants Blackrock, Nasdaq, BNY Mellon, JPMorgan and Citadel are all launching various crypto services or investing in partners, and unveiled plans in Q3 and Q4 last year.
These institutions have signaled that they are primarily tapping digital assets as an alternative investment to stocks and bonds. There is also a growing sense among institutions that digital assets are here to stay, according to co-founder and CEO of Digital Asset Capital Management Richard Galvin.
The crypto market looks set to recover in the not-too-distant future (though that may take months, or at worst years). While some of these trends may cool the markets in the short term, for the long term interest and market fundamentals are only going to improve as a result.
Whilst prices are low, investors may even consider Dollar Cost Averaging into crypto. As long as we are willing to hunker down and ride out the winter, the spring will eventually come.
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