2023 Outlook: Will Crypto Bloom Again?

This year has been a torrid year for the crypto-asset market. Yet, the “crypto winter” could give way to a “crypto spring”. Here are the six indicators that could determine when the market will bloom again:

Inflation, interest rates and the Fed

In 2022, we have witnessed a correlation between crypto and equities in how they react to macroeconomic conditions.

Rising inflation and rising interest rates have impacted the crypto market in 2022, draining liquidity from investment markets across the board.

In the crypto sector, in particular, it revealed structural weaknesses, but also highlighted companies that have strong foundations and resilience. These businesses should benefit from the new landscape.

With an inflation spike, we can expect a tailwind for crypto and a shift in sentiment to “buy” again.

A return to a crypto bull market could also be helped by a Fed pivot and interest rate cuts expected from November 2023, and once interest rates start to fall, more liquidity will be available to re-enter the investment markets. This result is based on an improving picture of inflation.

Regulation

Regulation is most certainly a priority for 2023 and this should be welcomed by crypto investors, platforms and users.

Regions such as the EU are already making progress with legislation such as MiCa, while the Financial Services and Markets Bill will be a game-changer in the UK. The United States is also making big regulatory noises, but it remains to be seen what material direction this will take in 2023.

Ensuring that best practices are followed, such as segregation of client assets, correct collateralization and reconciliation, and transparency, will be very important for regulators and crypto market participants looking to a more sustainable market following the events of this year. This will also be the key to restoring trust.

Reach the bottom; waiting for bitcoin halving

A popular “on-chain metric” for identifying bitcoin price highs and lows is the MVRV-Z score. At present, the score indicates that bitcoin’s current market value is well below its realized or “fair” value and at the lowest levels since December 2018, the bottom of bitcoin’s last bear market.

Reaching this point has always been a good indicator that we are near the bottom of a bitcoin price cycle and it suggests that we may be closer to a “crypto spring”.

Although slated for 2024, another thing to watch out for is the upcoming bitcoin halving which could lead to increased market participation as early as 2023.

Bitcoin block rewards are given to miners for verifying transactions and adding the new block to the Bitcoin blockchain. The block reward halving is an event built into the design of bitcoin in which every 210,000 blocks – roughly every four years – the block reward given to miners decreases by 50%.

The halving will influence investor sentiment due to supply and demand considerations. The maximum number of bitcoins that will ever exist is 21 million.

This, combined with diminishing issuance due to smaller block rewards, creates an element of scarcity for the asset and will theoretically drive price increases. If new issues decline and demand remains firm, prices rise.

Since its inception, each bitcoin block reward halving has typically been followed by the next crypto bull market, which is why many market watchers might predict that the next bull market will begin to take shape in 2024. Anticipation of this could also help drive the price higher throughout 2023.

Web 3.0 and NFT

The Web 3.0 journey has not been without speed bumps over the past year. However, the continuous upgrades and development roadmap for large networks such as Ethereum and Cardano will keep investors focused on long-term growth and innovation.

There will be renewed efforts to improve scalability as we see with Ethereum’s highly developed roadmap of changes such as sharding. Ethereum network sharding is effectively where the network is divided into smaller segments or “shards” to distribute the load, reduce congestion, and increase transactions per second on the chain.

Like The Merge, such updates will be highly anticipated by the market. Although the merger took place against the backdrop of broader macroeconomic issues and has so far not led to positive price changes, new innovations in a more dovish framework could be welcomed and support a crypto rally.

Meanwhile, the NFT euphoria may return as we await transformational use cases for the technology such as the tokenization of real assets or financial instruments, including fixed income products like mortgages and the obligations.

The integration of real-world assets and instruments is attracting growing interest among institutional investors and could lead to a massive migration in the way the entire financial system manages these products and services.

Energy consumption

The hashrate and difficulty continue to climb to all-time highs for bitcoin. While this makes the Bitcoin network more secure, mining operations require more computing power to remain competitive, which could continue to increase the network’s overall power consumption.

Power consumption will therefore continue to be a bone of contention in the crypto industry, with bitcoin enthusiasts quick to explain why it’s not a bad thing and Ethereum proponents pointing the finger at the sharp drop in energy intensity. Despite the backdrop of an ongoing global energy crisis, the debate will continue to be as intractable as ever.

CBDC

Central bank digital currencies (CBDCs) may have been somewhat overlooked in the noise of 2022, but projects and innovations are well advanced by central banks and governments.

2023 will see more pilot testing, feasibility studies by central banks on the use cases and potential of the technology, and its possible uses, particularly in the area of ​​cross-border payments.

We have already seen moves in this direction, particularly from institutions such as the Bank of Japan and Singaporean authorities, which are already making progress in major testing.

Author Simon Peters is a crypto market analyst at eToro.