The dramatic events of 2022 will shape the cryptocurrency landscape for years to come, says Coinbase’s 2023 outlook. Yet, despite the uncertainty surrounding the potential fallout, essential characteristics distinguish this market from the previous crypto winter, adds the Nasdaq-listed crypto exchange.
For one, institutional crypto adoption remains firmly entrenched, says Coinbase. However, whether those investors hold their digital wallets reluctantly is another question.
In the 27 days since the FTX story started to break, a net figure of nearly 200,000 Bitcoins was pulled from exchanges, notes Dan Ashmore, an analyst at Manchester-based crypto news site CoinJournal. “It appears thousands of Bitcoin holders are running for the hills with their Bitcoin, pulling to the safety of cold storage.”
Coinbase also acknowledges the fallout of bankrupt crypto exchange FTX. “No one is arguing that digital assets haven’t faced an important setback. The total market capitalisation of cryptocurrencies is currently around US$835 billion [$1.11 trillion], down 62% from $2.2 trillion at the end of 2021.”
Coinbase, currently trading at nearly a tenth of its US$381 IPO price in April 2021, says crypto’s rout is “albeit still high relative to most in the history of the asset class”.
“Comparatively, the Nasdaq is down 30% since the end of 2021 and the S&P 500 down 18%.”
Has crypto’s future gone into deep freeze? “I believe the next generation for markets, the next generation for securities, will be tokenisation of securities,” says Larry Fink, CEO of BlackRock Inc, the world’s largest asset manager.
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Fink’s comments in early December 2022 would have been unfathomable just five years ago. In 2017, he said Bitcoin was an “index of money laundering”.
Fink did an about-face just last year, changing his stance on crypto through two big moves. In August, BlackRock connected its Aladdin investment platform to Coinbase Prime, giving its institutional investors access to Bitcoin.
John Avery, strategy and product leader for crypto and Web3, capital markets, at New York Stock Exchange-listed FIS, predicts that established administrators, custodians and brokers will all continue building out the pipes connecting digital assets to their services for fund managers and wealth managers.
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This is not limited to crypto but to all digital assets, Avery tells The Edge Singapore.
FTX’s collapse and related fallout will continue to challenge the crypto industry for some time, says Avery. However, he draws a line in the sand between crypto and the underlying tech. “A key point worth making is that the events that have transpired are concentrated in the market structure for crypto as an asset class, and not the broader digital asset technology space. Nearly all of the challenging news over the past six months has been on centralised entities and not on the underlying Web3 technology stack.”
Still, the crypto asset market remains quite volatile due to the overall macroeconomic environment, along with a general move away from risky assets and industry-specific turmoil over the past few months. This is giving pause to newer entrants in the space, says Avery. “We expect this to continue for at least the first half of 2023.”
Avery adds: “Although much of the speculative retail growth in crypto and other asset markets in this latest investment cycle has eroded over the past six months, as with other market downturns in history, trading volumes and asset prices will one day grow again.”
Where is Bitcoin headed from here then? In a Dec 5 note, Standard Chartered says Bitcoin prices could fall another 70% to around US$5,000 in 2023. In the worst-case scenario, Bitcoin “yields plunge along with technology shares,” says Eric Robertsen, the bank’s global head of research. “While the Bitcoin selloff decelerates, the damage has been done … More and more crypto firms and exchanges find themselves with insufficient liquidity, leading to further bankruptcies and a collapse in investor confidence in digital assets.”
The fallout from FTX has ushered in increased regulatory scrutiny on crypto, writes Bank of America analyst Alkesh Shah. This “may enable greater institutional engagement”, he adds.
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Hand-wringing about crypto price declines and bankruptcies have overshadowed the long-term thesis for digital assets and blockchain technology, says Shah. However, the top 100 cryptos are still up more than 2,000% on average since the end of 2016 and developer blockchain activity accelerated in 2022, he argues.
Crypto exchange Bitbank projects Bitcoin prices will recover between US$20,000 and US$50,000 in the latter half of 2023. The only caveat is if the Fed can stop interest rate hikes by mid-2023 and begin cutting rates by early 2024.
Crypto heads eagerly await 2024 for another reason — the ominous “halvening” or “halving” of Bitcoin. Bitcoin is designed such that the reward is halved after every 210,000 blocks. Roughly every four years, the supply of new Bitcoins — and the reward for mining them — is cut in half.
Proponents believe each halving reduces inflation and pushes Bitcoin’s price upwards. The first halving, which occurred on Nov 28, 2012, caused an increase from US$12 to US$1,207 by Nov 28, 2013.
The second halving brought Bitcoin’s price from US$647 on July 9, 2016 to US$18,972 by Dec 17, 2017. Bitcoin’s price then moderated over 2018 to US$3,716 on Dec 17 that year.
Before the most recent halving, Bitcoin’s price was US$8,821 on May 11, 2020. A year later, Bitcoin’s price was US$49,504, up about 461% y-o-y. Bitcoin would reach its all-time high just a few months later, peaking at US$69,045 on Nov 10, 2021.
Through the ups and downs, California-based crypto investment firm Pantera Capital believes it has it down to a science. According to them, Bitcoin typically hits a bottom 477 days before the halving, then reaches a peak in the bull market cycle approximately 480 days after the halving. Hence, Pantera Capital predicts that Bitcoin will rise to US$36,000 ($47,932) by March 2024 before soaring to US$149,000.
Is there merit to Pantera Capital’s bullish forecasts? After a tumultuous few years, Bitcoin’s price is US$22,479 as of Jan 3, a price not seen since December 2020. Pantera Capital believes Bitcoin bottomed out in end-November 2022.
From here on, investors should see a gradual recovery in 2023 and early 2024 before Bitcoin rockets to the moon.