This blog presents an overview of our report, entitled ‘Crypto Outlook – Fundamentals vs. Sentiment: Three Scenarios to Watch in 2023’. You’ll find the full report here.
In 2022, we noted that change comes quickly in the crypto industry, with this dynamism forcing a constant reassessment of assumptions. Last year proved this, and 2023 – the first year the sector faces a positive interest rate environment – will be unlike anything we have seen so far.
That, perhaps, is the only safe prediction given the events of the past year. Rather than indulging in pure crystal-ball gazing, we are taking a more measured approach: assessing how matters might play out in 2023, and outlining the likelihood and impact of three scenarios of crucial importance for the industry.
In our ‘Crypto Outlook’ report, we explore what they might mean for investors and offer some recommendations on how to make the most of upcoming developments.
For our time-pressed readers, this blog summarises the hypothesis under each scenario, the factors driving it, and our take on what all of this means.
Scenario One: Risk Appetite Recovers
“As central banks continue to fight inflation, it will lead to a further decline in real economic activity. So, at some point in time, their policy stance will have to be reversed.”
– Stephan Lutz, Acting CEO at BitMEX
Risk assets gain traction as an interest rate pivot fuels a market recovery.
Possible drivers: As record rate hikes begin to push the economies of the US and most other countries around the world to the brink of recession, we expect central bankers to make an about-turn and slow the pace of rate hikes – if not completely halt them – by the second half of this year, and begin cutting rates towards the year-end.
Likelihood: This is our core hypothesis, supported by various economic forecasts as well as rhetoric coming out of the Federal Reserve, and an ongoing moderation of the main driver of monetary tightening: inflation.
Implications: The pivot, when it comes, will help resume the flow of funds back into global capital markets and trigger a rally, including in crypto assets. With the crypto industry having learned the lessons of 2022 (notably those taught by entities including Three Arrows Capital, FTX and Genesis) and ridding itself of badly run businesses and suspect models, we should see a swift and healthy rebound in high-quality assets, such as Bitcoin and ETH.
Scenario Two: Caution Continues
“[Bitcoin] has not experienced such low volatility in at least the past six years. This could be the equilibrium rate, as it appears remarkably robust around this level.”
– Rupertus Rothenhäuser, Chief Commercial Officer at BitMEX
Hypothesis: Risk assets lose ground as fears of stagflation delay the pivot, hurting sentiment and crypto prices.
Possible drivers: One school of thought is that external events will keep inflation high and force monetary policymakers to continue raising rates even if growth falters and countries tip into recession. This would damage sentiment and investor appetite for various asset classes, including crypto, and prolong the industry’s downturn.
Likelihood: This hypothesis seems less likely for a number of reasons. On the macro front, inflation has started to trend down and stock markets are responding positively to China’s long-awaited reopening.
Secondly, Bitcoin’s price has been relatively stable around current levels for the past several months, including during the worst of the crisis. This underlines the fact that a fundamentally strong cryptocurrency can capably withstand crises and post a successful rebound much like other asset classes, which also suffer periodic downturns.
Implications: While a prolonged period of risk-off sentiment is a lower-probability outcome, investors are nevertheless advised to exercise caution and focus on projects driven by legitimate use cases and broad user adoption, which help generate healthy cash flows and are the hallmark of successful business models.
Scenario Three: A Safer Asset Class?
“We expect regulators will continue to embrace the technology and the advantages that it brings in 2023, with discussions occurring at the most senior levels within governments, and crypto receiving more attention from policy makers than at any other time previously.”
– Julian Tehan, Chief Compliance Officer at BitMEX.
Hypothesis: Crypto becomes a less risky asset over time after business models were tested last year, and innovations help to broaden and scale up use cases, while regulations evolve to protect investors.
Possible drivers: Amid introspection brought on by the events of the past few months, fast-paced innovation in the crypto industry has led to a ramp-up in use cases, including in the form of blockchain-based identity and ownership management, stablecoins and central bank digital currencies (CBDCs).
This has led to a growing acceptance and endorsement of crypto assets by institutional investors, prompting policymakers to work on a raft of evolving regulations around the trading, custody and investment of crypto assets.
Likelihood: This is already underway and is likely to accelerate throughout 2023. With the rise in use cases, we see regulators warming up to crypto assets, which are quickly gaining the endorsement of asset managers across Asia, Africa and Europe.
With growing stablecoin regulation and the oversight of virtual asset service providers (VASPs) in developed countries, as well as the range of projects across APAC focused on building non-USD based intercountry payment settlement systems, we expect to see an uptick in the usage of CBDCs and stablecoins on the institutional side.
Implications: Bitcoin and ETH will re-emerge as the dominant virtual currencies, while many retail users will get their first taste of crypto through the rise of next-gen gaming, NFTs, Web3 and the metaverse, making crypto a more comprehensible, immersive experience.
As adoption grows and regulations evolve, blockchain tech will open the door to a range of new use cases until there is a shift away from the perception of crypto technologies as mere financial assets; instead, people will begin to see them as the future of how we create and validate assets, as well as identify and transfer ownership of them.
Read the Full Report
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