This year was a torrid year for the cryptoasset market. Yet, the ‘crypto winter’ could give way to a ‘crypto spring’. Here are the six indicators that could determine when the market will blossom again:
Inflation, interest rates and the Fed
In 2022, we witnessed a correlation between crypto and equities in the way they react to macroeconomic conditions.
Rising inflation and rising interest rates had an impact on the crypto market in 2022, draining liquidity from investment markets across the board.
In the crypto sector, in particular, it has exposed structural weaknesses but also highlighted which businesses have solid foundations and resilience. These businesses are set to benefit from the new landscape.
With inflation now peaking, we could expect a positive tailwind for crypto and a change in sentiment to ‘buy’ again.
A return to a crypto bull market might also be helped by a Fed pivot and interest rate cuts expected from November 2023, and once interest rates start falling, more liquidity will become available to enter investment markets again. This outcome relies on an improving inflation picture.
Regulation
Regulation is most certainly top of mind for 2023 and this is to be welcomed by investors, platforms and users of crypto alike.
Regions such as the EU are already making headway with legislation such as MiCa, while the Financial Services and Markets Bill is going to be a game-changer in the UK. The US is also making big regulatory noises but it remains to be seen what material direction that takes in 2023.
Ensuring best practices are being followed, such as segregation of customer assets, correct collateralisation and reconciliation, plus transparency, will be really important for both regulators and crypto market participants looking for a more sustainable market in the aftermath of events this year. It will also be key to rebuilding trust.
Reaching bottom; looking forward to Bitcoin halving
A popular ‘on-chain metric’ to identify tops and bottoms in the bitcoin price is the MVRV-Z score. At present, the score indicates the current market value of bitcoin is far below its realised or ‘fair’ value and at the lowest levels since December 2018, the bottom of the last bitcoin bear market.
Reaching this point has historically been a good indicator we are near the bottom of a bitcoin price cycle and it suggests we could be closer to a ‘crypto spring’.
Although scheduled for 2024, another thing to watch is the next bitcoin halving that could result in 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 whereby every 210,000 blocks – roughly every four years – the block reward given to miners decreases by 50%.
The halving will influence investor sentiment because of supply and demand considerations. The maximum number of bitcoin that will ever be in existence is 21 million.
This, combined with a decreasing issuance due to the smaller block rewards, creates an element of scarcity for the asset and theoretically will create price increases. If new issuance falls and demand remains firm, then prices go up.
Since its inception, each bitcoin block reward halving has usually been followed by the next crypto bull market, which is why many market watchers could foresee the next bull market starting to take shape in 2024. Anticipation of this could also help boost the price throughout 2023.
Web 3.0 and NFTs
The journey of Web 3.0 has not been without speed bumps in the past year. However, continued upgrades and the roadmap of developments for major networks such as Ethereum and Cardano will keep investors focused on long-term growth and innovation.
There will be renewed efforts to improve scalability like we are seeing with Ethereum’s highly-developed roadmap of changes such as ‘sharding’. Sharding of the Ethereum network is effectively where the network is split into smaller segments or ‘shards’ to spread the load, reduce congestion and increase transactions per second on the chain.
Like The Merge, such upgrades will be greatly anticipated by the market. Although The Merge took place in the context of wider macro issues and hasn’t so far led to positive price changes, fresh innovations in a more conciliatory setting could be well received and supportive of a crypto rally.
Meanwhile, the NFT euphoria might make a comeback as we wait for transformational use cases of the technology such as the tokenization of real-world assets or financial instruments including fixed-income products like mortgages and bonds.
The onboarding of real-world assets and instruments is growing in interest among institutional investors and could see a massive migration of the way the entire financial system handles such products and services.
Energy usage
The hashrate and difficulty continue to climb to all-time highs for bitcoin. Whilst this makes the Bitcoin network more secure, greater computational power is needed by mining operations to stay competitive, which could continue to increase the overall energy consumption of the network.
Energy consumption will therefore continue to be a bone of contention in the crypto sector with bitcoin enthusiasts quick to explain why it’s no bad thing and Ethereum proponents pointing to the big fall in energy intensity. Despite the backdrop of an ongoing energy crisis around the world, the debate will continue to be as intractable as ever.
CBDCs
Central Bank Digital Currencies (CBDCs) have perhaps been a bit ignored in the noise of 2022, but projects and innovations are well underway by central banks and governments.
2023 will see more pilot testing, feasibility studies by central banks into the use cases and potential for the technology, and its possible uses – particularly in the realm of cross-border payments.
We’ve already seen some moves in this direction, particularly from institutions such as the Bank of Japan, and authorities in Singapore, which are making headway on major testing already.
Author Simon Peters is crypto market analyst at eToro.