The year 2022 was a real trial by fire for cryptocurrencies, which resulted in a sell-off and declines for the entire market indicating that cryptocurrency gains were at least partly due to low interest rates. Growing correlation with the global stock market made cryptocurrencies vulnerable to macroeconomic factors like slowing economic activity, geopolitical uncertainty and, above all, a turnaround in central banks' monetary policies. The popularity of cryptocurrency-related decentralized finance technologies (De-Fi), NFT tokens and smart contracts has slowed, and the daily volumes of transactions processed by the network of the two largest cryptocurrencies Bitcoin and Ethereum have not shown significant growth since the previous bull market of 2018, putting a question mark over the further digital assets adoption.
With speculation still alive and possible catalysts for renewed interest in the cryptocurrency industry, below we list the factors that could affect cryptocurrency valuations in 2023.
What could drive a resurgence?
Internal factors
Oversold - The cryptocurrency market uses the concept of cyclicality to refer to Bitcoin's bull and bull market periods. Each of the previous cycles was characterized by negative events that were driven by, among other things, sell-offs from unprofitable miners, capitulation of long-term investors and growing doubt in the potential of the entire industry. In 2022, we have seen all of these factors with the bankruptcy of the largest mining company Core Scientific and a record supply of long-term investors included. We can expect that all the negative information that affected the industry in 2022 is already reflected in prices by which deeper declines of similar magnitude may be perceived as less likely. This, in turn, influence the reduction of short positions perceived as increasingly risky and encourage investors to risk 'hunting for a bottom;
Halving cycles - Cryptocurrency investors also use so-called 'halving' as one of the factors influencing Bitcoin's price by reducing its limited supply. Halving is a programmed event in the BTC code that cyclically every 4 years (after each 210 000 BTC blocks or so halves the supply of BTC and the reward for miners. Analyzing previous 'halving cycles', Bitcoin's price started rising roughly 1 year and 3 months before halving, which, considering April/May next year as a realistic date for the next bull run. We will se how Q1 2023 will favor interest in Bitcoin.
External factors
Central banks monetary easing - 28 of the 31 central banks tracked by JP Morgan analysts have raised interest rates in 2022. The most important and largest of these, the U.S. Fed has radically raised rates, which are likely to reach 5% in Q1 next year. With declining economic activity, falling inflation and the prospect of an expected recession in the U.S., the Federal Reserve's appetite for further rate hikes or maintaining rates at restrictive levels may successively decline leading Wall Street to 'pivot' and the associated rebound in risky assets like cryptocurrencies and tech stocks. In 2022, both of these asset groups came under pressure and performed by far the weakest;
Declining geopolitical risk - The biggest war in Europe since World War II, caused by Russia's attack on Ukraine, slowed the pace of globalization and worsened investor sentiment in 2022. It has also caused an apparent polarization of Western countries again with Russia and indirectly China. With a weakening commodity-based Russian economy, further burdened by lower commodity prices in 2022 (oil, natural gas), continued U.S. and NATO involvement, and the success of Ukraine's counter-offensive army, there will again be a chance for a diplomatic resolution of the war in 2023. In addition, U.S. diplomats are still continuing talks with China over the Taiwan Strait crisis and U.S.-imposed technology sanctions on the Middle Kingdom. This shows that the two countries are still seeking a diplomatic way out of the deep crisis in relations.
What could exacerbate further declines?
Internal factors
Bankruptcies and crypto exchanges collapse - In 2022 we saw the collapse of the Luna/Terra blockchain, the bankruptcies of cryptocurrency funds and decentralized lending protocols, and one of the largest crypto exchanges, FTX, among others. If we witness a further domino effect next year, we can expect Bitcoin's depreciation to continue - with a mass exodus of investors from cryptocurrency exchanges, avalanche sell-offs and rising volumes of so-called 'stablecoins.' In 2023, investors' eyes will be on the largest cryptocurrency exchange, Binance, whose Mazars 'audit' failed to satisfy investors' curiosity despite seamlessly processed withdrawals and stablecoins, most notably Tether and Binance USD. The problem of rising energy prices may in turn keep the supply of Bitcoin miners high, with the risk of further mining company bankruptcies;
Adoption problems - While cryptocurrency adoption accelerated during the bull market of 2020 and 2021, along with the euphoria around NFT tokens and decentralized finance, today we see that in the face of the bull market, the use of Bitcoin and other cryptocurrencies in transactions is declining (although the potential for adoption in India and Nigeria is still evident). The average daily volume of transactions on the BTC and Ether blockchain is about 1 million versus 350 million for Mastercard and 150 million for Visa. Historically, there has been a significant correlation between Bitcoin's valuation and transaction activity because, similar to the case of listed companies like Visa, Mastercard and PayPal, Bitcoin's use in transactions can be seen as one of the cornerstones of the valuation of the 'king of cryptocurrencies'. Although the number of investors owning or trading cryptocurrencies has definitely increased over the past few years, it is difficult to see this as a fundamental indicator of practical adoption. The above may be due to, among other things, low central bank interest rates and fiscal policy, short-term trends, the popularity of cryptocurrencies as highly speculative assets, and the fact that over the past 12 years, investors accepting high investment risk have been particularly 'rewarded', naturally directing investors' attention toward risk. Today, in the face of a crisis of confidence in the industry, it makes further real adoption still questionable.
External factors
- Fed resistant to pivot - There are a number of factors that could make the Federal Reserve reluctant to cut interest rates decisively or eventually slow the cycle of hikes. The primary risk in this arena is stubborn inflation remaining well above the inflation target (2%), which could prompt the Fed to keep interest rates in restrictive territory or at least firmly above the vicinity of 0%, where they have been held for nearly 12 years stimulating demand for risky assets. A number of investment funds including BlackRock point to inflationary risks, which, combined with a weakening economy and the Fed failing to rescue financial markets with cuts, could lead investors to give up. Factors that could have a pro-inflationary impact include a strong economy and spiraling wages, demand-supply imbalances (supply chains), rising energy prices and deglobalization.
- Slowing institutional interest - As we have seen very significant market changes in 2022, with changes in monetary policy and the global political crisis included, we can expect investment funds to take a more defensive stance and not consider interest in the cryptocurrency industry through the increase in macroeconomic risk in 2023. In an environment of high interest rates and less risky instruments favored by investors, in 2023 we may witness a decline in investment in the industry by venture capital and private equity funds, which, in addition to the sheer increase in valuations, also stimulated the development of technologies inherent in the cryptocurrency industry. An important role may also be played by the further development of the concept of virtual worlds, the so-called Metaverse, which is considered by a number of analysts to be correlated with digital assets. In 2022, its development has definitely slowed down due to deteriorating conditions in the advertising sector, and a further threat could come from weaker consumers less willing to spend on technological innovations like VR headsets and AR glasses.
Bitcoin chart, W1 interval. Looking at the chart on the weekly interval, we can see that the AT-relevant event on the chart was the crossing of the SMA100 average (black) below the SMA200 (red) called the 'death cross' - This occurred about 10 days before the start of the war in Ukraine. Now we see that the distance between the SMA200 and the SMA100 is starting to narrow, indicating a possible crossing of the SMA200 from below, called a 'golden cross' formation. Potentially, this could be an event that, if it occurs - will illustrate an increase in the probability of the cyclical change. Source: xStation5
