FiCAS Market House View:
Macroeconomics and Cryptocurrencies

Due to the misconception of transitory inflation and the delayed actions of central banks, including the Federal Reserve, most risky assets tend to fall during recessions, and cryptocurrencies are no exception. The emergence of a correlated environment between equity indices and crypto after the COVID-19 recovery phase and subsequent bull run has overshadowed the notion of Bitcoin being a safe haven asset. New investors who entered the crypto market in mid-2020 view Bitcoin (BTC) and other digital assets as speculative tech stocks. The correlation between cross-market trading is the highest between crypto and the Nasdaq. While many remain in the market, much of the tourist capital has left.

The Federal Funds Rate has risen from zero a year ago to almost 5%, and this trend may indicate the early days of what we perceive as a severe economic reset. The 2008 global financial crisis led to the birth of Bitcoin, and a potential new economic reset may lead to similar milestones. We believe that Bitcoin will showcase its antifragility characteristics as the leader of a decentralized economy and a new alternative paradigm for global finance. This will mark a new era for the Bitcoin and blockchain industry. In the unlikely event of a soft landing, crypto assets may resume outperforming most equity indexes, and new emerging sub-sectors could take the market by storm once again.

Bitcoin stands as the ultimate store of value in the crypto assets universe. Despite the 2022 Downturn, the legitimacy of Bitcoin as a new asset class continues to grow. BTC price cycles are closely linked to halving events, and the network’s macro long-term value proposition lies in its ledger immunity, simplicity, immutably fixed supply, regular halvings, and steady adoption against inflationary fiat currencies.

Cryptos may experience their first actual recession, typically leading to lower asset prices and higher volatility. The last significant US economic contraction, the financial crisis, saw the birth of Bitcoin, and a possible impending economic reset could also represent a similar milestone. Throughout 2022, the broader weakness in digital asset markets reminded investors that bitcoin remains one of the primary reserve currencies of the crypto economy. The future adoption of the Bitcoin network, especially in developing countries, could be driven by its utility as a medium of exchange. Developers are creating several critical Lightning-enabled protocols, such as Taro and Fedimint, that could potentially expand the network’s utility beyond a store of value. They are also exploring methods to issue stablecoins or other non-bitcoin assets via the Lightning Network.

The successful merge update of Ethereum in September 2022 was a crucial milestone for the network, marking its progress along the roadmap. Currently, Ethereum is the de facto computation layer of blockchains, with many alternative Layer-1 chains adopting EVM compatibility.
Furthermore, the staking opportunities and new tokenomics of the Ethereum blockchain signal a move toward the development of a sound money system on the blockchain.

The upcoming Sharding update in late 2023 is expected to address scalability issues, which could pave the way for new blockchain applications. Currently, Ethereum leads the DeFi and NFT sectors in terms of Total Value Locked (TVL), and it aims to maintain this position in the coming year.

• Stablecoins: Stablecoins now account for around 17-18% of the total crypto market capitalization, with approximately US$145 billion currently in circulation. This is a significant increase from the 3.4% ratio seen at the beginning of 2021, despite the market cap being of a similar size. The regulatory framework surrounding stablecoins, including their issuance, transaction, and settlement, will be a critical factor in 2023, particularly in the post FTX and Luna environment.
  In addition, the development of decentralized algorithmic stablecoins through various protocols and innovations will likely be crucial in the coming years.
• Litecoin (LTC): LTC’s third halving is set for July 2023, which will cut every Block Reward from 12.5 LTC to 6.25 LTC. After a volatile LTC price cycle, each Litecoin halving event is followed by a significant price increase, a massive correction, a price bottom, and then recovery to a local top.
• Polygon (MATIC) is the top-ranked Layer-2 Ethereum blockchain and has created more network effects for Ethereum than any other L2. Polygon started as a sidechain but has now pivoted to an aggregator of technologies focusing on zero-knowledge (zk) rollups. With more than 350 active dApps and over US$2 billion value locked on its chain, Polygon has the third-largest decentralized app ecosystem. It is also a preferred blockchain for creating NFT collections due to its string of brand-name partnerships in 2H22, indicating mainstream NFT adoption.
• Cardano (ADA), with a roadmap of five stages, is currently in the fourth stage, Basho, which focuses on scaling the network. Cardano’s L2 scaling solution, Hydra, will be rolled out soon, and it plans to launch the Midnight (17) Sidechain, a privacy-focused sidechain leveraging zk-proofs, and an EVM Sidechain. With solid funding and development teams, we expect to see more developers building on Cardano.
• Polkadot (DOT) is the leader in the interoperability narrative in blockchain and aims to build a web of parachains to achieve this goal. Polkadot’s architecture provides a unique opportunity in terms of the network effect. Kusama (Sidechain) and Acala Network (Parachain) are showing solid developments in their infrastructure. The launch of Parathreads, which can be described as “pay-as-you-go” parachains, will be the high-impact event of Polkadot in 2023.
• Avalanche (AVAX) has upgraded to Banff 5, introducing native communication between all Avalanche subnets, adding a new level of horizontal composability. With over 280 active dApps and the capability of more than 6,500 transactions occurring on a block, Avalanche has gained significant traction in on-chain derivative protocols.
• Solana (SOL) suffered performance issues and multiple outages in 2022, but the team remains committed to development on the blockchain. The increase in the number of validators, performance upgrades, and the launch of Solana Mobile make Solana a fair bargain.
• Stellar (XLM) has taken a more decentralized, open-source model toward its plan for financial inclusion. SDF (Stellar Development Foundation) plans to roll out Soroban, a new, state-of-the-art, smart contracts platform that is developer-friendly, scalable, and deeply integrated with Stellar. Jed McCaleb, as the Chief Architect, gives Stellar high potential for network growth.
• Tron (TRX) has good traction, particularly within the DeFi space, and has over US$ 37 billion worth of stablecoins hosted on its network. With the new proposal to enable the dynamic energy model to be activated, validators’ incentives are now boosted.
• Tezos (XTZ) blockchain has seen the Jakarta upgrade, which brought enshrined transaction optimistic rollups, and the pending Lima upgrade final.
• Ripple (XRP), the long-running court case between Ripple Labs and the US Securities and Exchange Commission (SEC) could soon end after the Ripple/SEC lawsuit entered its third calendar year. The result would be the most influential factor for XRP price and its future.

Disclaimer:

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