Market Review & Top Crypto Trends 2023
We lived through a very eventful 2022 and many of these events had an impact on both the crypto and traditional markets. The war in Ukraine had a significant impact on the cryptocurrency markets in the first quarter of 2022. Altcoins in particular, but also bitcoin, have lost tremendously value. This event was accompanied by the possibility of the Fed raising interest rates to combat inflation, as well as numerous questions about how the US government will regulate crypto assets.
During the first half of the year, the situation was further exacerbated by rising interest rates in the United States, sanctions, as well as numerous uncertainties regarding the Corona situation in China and food supply shortages.
Ukranian Officials Report Missile Attack in Kyive
Ukrains’s president denounced Russia in a televised address:
“They say that civilian objects are not a target for them. It is a lie. They do not distinguish in which areas to operate.”
Source: The New York Times
The collapse of Terra’s stablecoin “UST” in May was the first major negative event in the crypto industry in 2022. Attempts to re-establish the exchange rate peg added to the selling pressure on bitcoin and Ethereum, which were already in a down- trend.
In June, investors withdrew from the markets for the time being due to inflation and the threat of recession, as well as the fact that most major economies had to adjust their interest rates. As a result, the leading cryptocurrency bitcoin fell from $30,000 at the beginning of June to around $20,000, where it has stabilized.
Collapsed ‘stablecoin’ terra to be rebooted in attempt to recover losses
Collapsed ‘stablecoin’ terra to be rebooted in attempt to recover losses
Source: The Guardian
In July, the consumer price index increased by 9.4% year on year and showed no signs of slowing. Consequently, the market had already priced in a 75-basis-point rate increase just days before the FOMC meeting. The ECB, on the other hand, had raised rates to 50 basis points. Despite solid employment growth and an upturn in the manufacturing sector in the United States, there is still a risk of recession.
Crypto Crash Drags Lender Celsius Network into Bankruptcy
Source: The Wall Street Journal
Celsius declared bankruptcy on July 13. Collecting client cash and lending them out to others is the traditional business strategy of a bank. However, while traditional banking institutions were still required to charge fees for maintaining client savings in the low-interest period, the American crypto bank Celsius Network enticed customers by offering up to 18% interest on cryptocurrency deposits, but the calculation did not work out for Celsius.
Source: CNBC – FED Chairman Jerome Powell
Equity indices maintained their upward trend that began in mid-July. When the Consumer Price Index for July fell below the projected rate for the first time in 2022 on August 10, the indexes tended to continue what many refer to as a bear market rally over the next few days. That rally did not last and ended with a major setback on Friday, August 26, as investors digested hawkish remarks by Federal Reserve Chairman Jerome Powell at the central bank’s annual symposium in Jackson Hole, Wyoming. Powell made it clear in his 8-minute speech that fighting inflation is the Fed’s top priority, even if it means some “pain.”
The Ethereum Merge Is Done, Opening a New Era for the Second Biggest Blockchain
The historic upgrade casts aside the miners who had previously driven the blockchain, with promises of massive environmental benefits.
With its merger in September, Ethereum reached a major milestone by switching from a proof-of-work mechanism to a proof-of-stake mechanism, sending an important signal in the direction of more sustainable investment solutions. However, the event had only a minor impact on Ethereum’s price develop- ment, but it reduced energy consumption by 99%.
Following September’s close on lower levels, October began with an upward momentum. It was followed by a recovery rally that lasted all of October. The headline consumer price index stood at 8.2% as of October 13th. Both equity indices and major crypto assets dropped to new lows.
In November 2022, one of the historical events that entered the history of the cryptocurrency market occurred. In the middle of 2019, the Alameda Research team launched FTX Exchange. It quickly rose to the No. 2 cryptocurrency trading platform in less than two years before failing in just two weeks. The fallout from this incident has put many FTX counterparties such as BlockFi in jeopardy. The cryptocurrency lender BlockFi declares bankruptcy at the end of November.
It boasted that users could earn interest on their cryptocurrencies and borrow money by putting them up as collateral. Because BlockFi having invested substantial quanti- ties of money in FTX, the firm was forced to declare bankruptcy when FTX failed.
The panic caused by the FTX collapse had a significant impact on crypto assets. Bitcoin (BTC) hit a new low for the year, dropping 16% to $15.4k. Ethereum (ETH) has also lost 17% of its value. Because FTX invested directly in these initiatives and protocols, Solana’s ecosystem performed the worst of all its assets (-59.11%).
At least $1 billion of client funds missing at failed crypto firm FTX
The incident reminded the cryptocurrency industry of the importance of strict risk manage- ment in order to protect against counterparty, credit, and custodian risks. FiCAS adjusts its flagship Exchange-Traded Product BTCA and clients’ investment products using Bitcoin Capital AG’s platform based on cryptocurrency price movements and has always held at least three custodians, favoring regulated players.
Bitcoin to USD Chart
The mainstream has embraced crypto
In 2022, we saw an increased adaptation towards crypto despite the market developments. The adaptation extends across various industries. From football clubs to airlines and luxury watch manufacturers. However, companies from the fashion sector in particular are at the forefront and grace the headlines of the media. Among them were well-known companies and institutions along with others that made the following headlines in 2022:
Can we expect a wave of regulations in 2023?
In terms of risks, 2022 was one of the worst years in cryptocurrency history. Record-breaking smart contracts hacks, the collapse of Terra Luna and its stablecoin UST, the bankruptcy of 3AC, the insolvency of crypto lending platforms like Voyager and Celcius, and most importantly, the FTX contagion were events that hit the crypto sphere hard last year. Overall, in the wake of this year’s events, we are already seeing calls for greater regulation of the crypto industry, with tighter restrictions in the US and globally. In this paragraph, we would like to highlight the various aspects of the crypto market and blockchain industry that have a high potential for strict regulation in the coming year.
“It is important for sound regulation of the crypto financial system to be established now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.”
– Lael Brainard, Federal Reserve Vice Chair
In the wake of the FTX incident, regulation of exchanges and how exchanges manage and protect customer funds are top priorities. Transparency, legitimacy checks, and higher standards of due diligence are essential for regulatory inclusion. Many crypto exchanges offer unregulated derivative products for trading cryptocurrencies. Leverage of over 125x is offered on some trading venues, while a wide range of low-cap assets are accepted as collateral! Given the volatility of cryptocurrencies, retail investors are at great risk.
Custodial services are an essential pillar of risk management in today’s financial world. Unlike traditional finance, exchanges in the crypto world primarily act as self-proclaimed custodians. Mtgox, Bitfinex, FTX, and many other events in the past have shown why keeping the fate of customer funds in the hands of the exchange is a terrifying idea.
Digital Asset Classification
With the broad spectrum of digital assets continuing to grow, the question is how to categorize this vast and ever-evolving landscape. A clear structure for classifying digital assets will be the cornerstone of crypto regulation. Whether these assets are a commodity, security, utility, or currency will provide a clear answer to the question: Which regulator should regulate each asset class? How can these assets be properly taxed, and what should be considered before issuing a digital asset?
Stablecoins have long been in the sights of regulators in many major economies, but the collapse of UST acted as a catalyst this year. U.S. regulators are using the incident as an opportunity to push for stricter rules for stablecoins and their issuers. Lawmakers will use the unregulated issuance of stablecoins and the collapse of the UST to push for central bank digital currencies (CBDCs). Regulators could require “stablecoins to be issued by state-regulated banks or to be regu- lated as securities, which would require them to be overseen by the SEC (Securities and Exchange Commission).”
Crypto Structured Products
Crypto ETPs are exchange-traded products that track the value of Bitcoin or other crypto assets and can be traded on traditional market exchanges rather than cryptocurrency exchanges. They allow investors to invest in bitcoin without the hassle of a cryptocurrency exchange, while there are clear rules and structures for all participants. With all the crisis and contagion for the crypto market and blockchain industry in 2022, ETFs and ETPs that have been waiting for approval for several years could perhaps be among the winners.
Structured crypto products such as 15 FiCAS Active Crypto ETP can bring the transparency and security of the traditional regulated market structure to this new class of assets, which is now experiencing increasing demand from institutional investors.
*Anti-Money Laundering / Counter-Terrorist Financing in this report, the term combating combating the Financing of Terrorism (CFT) is also used.
Source: PwC – Global Crypto Regulations Report 2023
A look forward at the crypto industry in 2023
The crypto market has generally maintained a correlation between price movements and stock indices (primarily SPX, NDX, and RUSSEL2000) and the dollar index (DXY) over the past year. There is also a solid intra-correlation factor between crypto assets. Since bitcoin (BTC) has always been the dominant crypto asset, other digital assets tend to follow the price movement of BTC in general. This tends to determine the importance of the macroeconomic environment for crypto assets in general.
Since November 22, when FTX contagion sent the bitcoin price to its lowest level of the year, a decrease in the correlation coefficient has been observed. Nevertheless, historical data and our research show that there is a tendency for correlations to converge again.
The latest FED plot shows that the target rate for the next FOMC meeting is estimated to be around 25 basis points. So, there is room for further pain in the markets until Q1 2023.
In the case of recession risk, this would be the first time that BTC and crypto assets experience a reces- sion. Bitcoin was launched at the height of the aftermath of the 2008 financial crisis, and now there is a chance of another financial crisis more than a decade later. Bitcoin was tested during the pandemic crash with a six-sigma event and then rallied to new highs, but this time we are far from a FED with QE policies on the table.
If the crypto market passes this stress test, a new era begins for BTC and digital assets! A new wave of adoption could emerge, and a decentralized currency system could develop in the coming years. On the other hand, many crypto projects born out of speculation and greed, with no innovative value in them, are doomed to fail. Who remembers the namecoin now? Every crypto winter is accompanied by a fundamental reshuffling of digital assets, with many projects failing to survive this bear market.
Based on the historical patterns of the last decade in the crypto economy, it is not unusual to see 2023 as the final stage of the capitulation phase for digital assets and the beginning of the accumulation phase. The key question here is: what digital assets are worth accumulating? The answer lies in a wide range of reasons, to name just a few:
• Defacto store of value assets in the crypto sphere: bitcoin and Ethereum
• Projects with solid governance, ﬁscal policy, strong community, and innovation
• Top DeFi projects in DEX, derivative, stablecoin, and lending sectors
• Emerging protocols: layer one and layer two
• Interoperability chains
What is not to be accumulated?
• Meme coins created around 2020
• Copycat projects and hard-forked chains
• Old Proof-of-Work chains
• Yield farming, Algo stablecoins (Luna Type)
• Crypto assets with a high risk of falling into the security classification, including exchange tokens, centralized lending protocols
Although 2022 was a year when the overall drawdown in crypto markets was high, there were opportu- nities such as bear market rallies, event-driven pumps such as the ETH 2.0 migration, and new projects coming to the market with good returns. This can be seen as a seasonal rally again in 2023!
Active management of crypto assets will continue to be crucial. As with any other investment, crypto assets can be volatile and unpredictable. Our trading and research team closely monitors the markets in order to respond appropriately to price fluctuations and to manage the risk associated with digital assets.
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The information contained in this article is provided for information purposes only. It does not constitute any offer, recommendation, solicitation, or advice to any person to enter into any transaction or adopt any investment, trading, or hedging strategy, nor does it constitute any prediction of likely future movement in prices or any representation that any such future development will not occur or not. Users of this document should seek advice regarding the appropriateness of investing in any cryptocurrency, crypto asset, financial instrument, or investment strategy referred to on this document and should understand that statements regarding future prospects may not be realized. Projections, estimates, and opinions are subject to change without notice. Bitcoin Capital AG and/or FiCAS AG accept no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy contained in this document, its contents or associated services, or due to any unavailability of the document or any part thereof or due to any contents or associated services.
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© Copyright 2023 – FiCAS AG