The growing correlation with the global stock market has made cryptocurrencies vulnerable to macroeconomic factors such as a slowdown in economic activity, geopolitical uncertainty, and most importantly, a change in central bank monetary policy.
The popularity of decentralized finance technologies related to cryptocurrencies (De-Fi), NFT tokens and smart contracts has slowed, and the daily transaction volumes processed on the network of the two largest cryptocurrencies, Bitcoin and Ethereum, have risen since the last bull in the year did not show significant growth in 2018, calling into question the continued adoption of digital assets.
With speculation still alive and potential catalysts for renewed interest in the cryptocurrency industry, here are the factors that could affect cryptocurrency valuations in 2023.
What could lead to a resurgence in the crypto market?
Oversold – The cryptocurrency market uses the concept of cyclicality to refer to the bull and bull market phases of Bitcoin. Each of the previous cycles has been marked by negative events caused by, among other things, the sale of unprofitable miners, the capitulation of long-term investors and growing doubts about the potential of the entire industry.
In 2022, we saw all of these factors, including the bankruptcy of the largest miner, Core Scientific, and a record supply of long-term investors. We can assume that all of the negative news that weighed on the industry in 2022 is already being reflected in prices, so deeper declines of a similar magnitude are seen as less likely.
This, in turn, influences the unwinding of short positions, which are perceived as increasingly risky, and encourages investors who “Looking for a Floor” risk;
Half Cycles – Cryptocurrency investors also use the so-called “halving” as one of the factors affecting Bitcoin price by reducing the limited supply. The halving is an event programmed into the BTC code that cyclically every 4 years (approximately every 210,000 BTC blocks) halves the BTC supply and miner reward.
Analysis of previous “halving cycles” revealed that bitcoin’s price started to rise around 1 year and 3 months before the halving, making April/May next year a realistic date for the next bull run. We will see how the first quarter of 2023 fuels interest in Bitcoin.
Monetary easing by central banks – 28 of the 31 central banks tracked by JP Morgan analysts have raised interest rates in 2022. The largest and most important of these, the US Federal Reserve, has dramatically raised interest rates, which are expected to reach 5% in the first quarter of next year.
With economic activity slowing, inflation falling and the prospect of an expected recession in the United States, the Federal Reserve’s appetite for further rate hikes or maintaining interest rate levels Tight interest could gradually fade, leading to a “pivot” on Wall Street and all that goes with it. resurgence of risky assets such as cryptocurrencies and technology stocks.
In 2022, these two investment groups were under pressure and were by far the worst performers.
Decreasing geopolitical risk – The biggest war in Europe since World War II, triggered by Russia’s attack on Ukraine, has slowed the pace of globalization and worsened investor sentiment in 2022. It has also led to an apparent polarization of Western countries to Russia and indirectly to Rightly Guided China.
With Russia’s commodity-based economy still weighed down by falling commodity prices (oil, natural gas) in 2022, continued US and NATO engagement and successful counter -Ukrainian offensive, there will be another chance for a diplomatic solution to the war in 2023.
Additionally, US diplomats are continuing talks with China on the Taiwan Strait crisis and US-imposed technology sanctions on China.
This shows that the two countries are still seeking a diplomatic way out of the deep crisis in relations.
What could be fueling the continued decline of cryptocurrencies?
Bankruptcies and Collapse of Crypto Exchanges – 2022 has seen the collapse of the Luna/Terra blockchain, bankruptcies of cryptocurrency funds and decentralized lending protocols, and one of the largest crypto exchanges, among others. FTX. If we see another domino effect over the next year, we can expect Bitcoin’s depreciation to continue – with a massive exodus of investors from cryptocurrency exchanges, snowball sales and soaring volumes of so-called “stablecoins”.
In 2023, investors’ eyes will be on the largest cryptocurrency exchange binance whose Mazars “audit” did not satisfy investor curiosity, although withdrawals and stablecoins including Tether and Binance USD were handled transparently. The problem of rising energy prices could, in turn, keep the supply of Bitcoin miners high, posing the risk of further mining company bankruptcies.
Adoption issues – As cryptocurrency adoption accelerated during the bull market of 2020 and 2021 as well as the euphoria surrounding 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 is still evident in India and Nigeria).
The average daily transaction volume on the BTC and Ether blockchain is around 1 million compared to 350 million on Mastercard and 150 million on Visa. Historically, there has been a significant correlation between Bitcoin’s valuation and transaction activity, because – like publicly traded companies like Visa, Mastercard, and PayPal – the use of Bitcoin in transactions is considered as one of the cornerstones of the evaluation of the “king of cryptocurrencies”. perhaps.
Although the number of investors owning or trading cryptocurrencies has increased significantly in recent years, it is difficult to see this as a basic indicator of practical application.
This could be due to, among other things, low interest rates and central bank fiscal policies, short-term trends, the popularity of cryptocurrencies as highly speculative investments, and the fact that over the of the past 12 years, investors who have taken high investment risks have been particularly “rewarded”, which naturally draws investors’ attention to risk.
Today, with a crisis of confidence in the industry, another real launch is still in doubt.
Fed hesitates – A number of factors could make the Federal Reserve reluctant to cut interest rates decisively or slow the cycle of hikes. The main risk in this area is stubborn inflation, well above the inflation target (2%), which could prompt the Fed to keep interest rates in restrictive territory, or at least firmly near 0. %, where they have been for nearly 12 months. and stimulate demand for risky assets.
A number of mutual funds, including black rockpoint to inflationary risks which, combined with a weakening economy and the Fed’s inability to bail out financial markets with rate cuts, could cause investors to give up.
Factors that could contribute to inflation include a strong economy and rising wages, imbalances between supply and demand (supply chains), rising energy prices and de-globalization.
Falling institutional interest – As we have seen very significant market shifts in 2022, including monetary policy shifts and the global political crisis, we can expect mutual funds to take a more defensive stance and disregard the global political crisis. interest in the cryptocurrency industry due to rising macroeconomic risk in 2023.
In an environment of high interest rates and less risky instruments favored by investors, in 2023 we could see a decline in investment in the industry by venture capital and private equity funds, which, along with rising valuations, will also drive the development of technologies in the cryptocurrency industry.
An important role could also be played by the evolution of the concept of virtual worlds, the so-called metaverse, which several analysts consider to be correlated with digital assets.
In 2022, its development has definitely slowed due to deteriorating conditions in the advertising industry, and another threat could come from weaker consumers who are less willing to spend on technological innovations like VR headsets and AR glasses.
Bitcoin chart, W1-
Looking at the weekly interval chart we can see that the relevant AT event on the chart was the crossing of the moving average SMA100 (black) below the SMA200 (red) called the “death cross” – this happened produced 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 decrease, indicating a possible crossover of the SMA200 from below, called the “golden cross”.
It can be an event that, if it occurs, increases the likelihood of a cyclical change.