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The cryptocurrency market has picked up after getting pummeled by scandals, bankruptcies and more in 2022. What lies ahead? (© Dave Cutler)
After a roller-coaster year filled with arrests, speculation, scams, bankruptcies and billions in value lost, cryptocurrency market experts could hardly wait for boring times. Then Silicon Valley Bank hit the skids, and financial markets were thrown out of whack. Would this be the next blow to the cryptocurrency outlook and bitcoin price?
But for cryptocurrencies, particularly bitcoin and ethereum, the 2023 bank panic has been a net positive.
The bitcoin price, already up strongly to start the year, recently moved above $28,000. That’s its highest level since June, before Sam Bankman-Fried’s FTX exchange started to melt down. Ethereum is trading near $1,800 to mark its highest levels since mid-August.
Many crypto analysts see rising opportunities for real growth in prices and digital currency usage in 2023. But the cryptocurrency outlook is nuanced, and most of the optimism is focused overseas.
In the U.S., the battle to craft meaningful regulations and oversight points to a still-bumpy ride. On March 27, regulators charged Binance, the world’s largest cryptocurrency exchange, with securities violations. That came days after they warned major Binance rival Coinbase (COIN) of possible enforcement action.
The prices of bitcoin and other cryptocurrencies have held recent gains amid ebbing bank fears and the Binance news.
“2023 will be a transition year from the vicious, frigid crypto winter of 2022 into something hopefully a lot hotter in 2024,” said Matthew Sigel, head of digital asset research at ETF and mutual fund manager VanEck.
The banking industry’s troubles cast a harsh light on crypto players. On March 8, major lender to crypto firms Silvergate Capital announced plans to shut down and liquidate its Silvergate Bank based on “industry and regulatory developments.” Just five days earlier, Silvergate said it would discontinue its Silvergate Exchange Network (SEN). The platform launched in 2018. It enabled investors and institutions to transfer U.S. dollars from bank accounts to crypto exchanges.
SVB Financial, parent company of Silicon Valley Bank, failed March 10, sparking a liquidity crisis at several other banks and causing regulators to scramble to contain the contagion. Regulators soon seized Signature Bank. Roughly 30% of Signature Bank deposits came from crypto customers, company data shows.
While crypto-related banks were some of the first dominoes to fall, they were not responsible for the widespread banking turmoil.
Mark Connors, head of research at digital asset management firm 3iQ, says blaming crypto for the current bank issues is like blaming U.K.-based Northern Rock for the Lehman Brothers failure in 2007.
The Fed and Treasury increased the U.S. M2 money supply by 38.6% between December 2019 and December 2022 and bank balance sheets unevenly grew in a similar fashion, 3iQ data shows. Some banks invested the funds in Treasuries and other government-backed debt securities, whose market value inevitably fell as interest rates turned upward last year. But the reaction from banks varied, Connors said. Larger firms like Bank of America (BAC) and JPMorgan (JPM) maintained their short to long term debt ratios. But some, like First Republic (FRC), managed the increase differently. One clear difference was their decision to increase short term debt while reducing long term debt, making them among the most vulnerable during the banking panic.
“This was a total own goal,” Connors said. “In every crisis, the weakest lungs collapse first … and those were the ones that had the weakest and most flighty deposit bases.”
Cryptocurrency prices bolted higher in March as bank crisis fears weighed heavily on financial stocks. Retail and institutional investors dumped fiat-backed stablecoins like USDC in favor of the blue chips bitcoin and ethereum. USDC issuer Circle had $3.3 billion held at Silicon Valley Bank before its collapse.
The bitcoin price spiked 21.2% in March, peaking at $29,173 on March 30 to mark its highest level since June 10. Ethereum climbed 10.6% to $1,858 on March 23 to trade at its highest level since mid-August.
The weekend of March 11, decentralized exchanges Uniswap and Curve recorded their highest-ever daily trade volumes, with more than $21 billion traded, according to Sigel.
“People realize these stablecoins are the on-ramp to crypto from fiat, so it is still bound by the risks of the banking system,” Connors said. “That shift out of Circle and other stablecoins into bitcoin was a perfect flight-to-quality example.”
Sigel called the stablecoin outflows after Silicon Valley Bank failed “unprecedented,” with “all kinds of actors” participating. “Since then, as U.S. bank access has become tighter, it appears U.S. exchanges have some worse liquidity profiles than they used to, relative to offshore (firms),” Sigel said.
The price of bitcoin often moved inversely to Treasury market yields in 2022, but that correlation began breaking down in October when Treasury yield expectations peaked and the U.S. dollar index topped, Todd Groth, head of index research at CoinDesk Indices, told IBD.
“However, we continue to see a moderately negative relationship between bitcoin prices and the yield curve slope (for five-year to 30-year spreads),” Groth said. He says the steepening yield curve accounts for 9% of the 25% bitcoin return during the regional bank crisis.
What Is Cryptocurrency?
“Bitcoin generally performs well when it decorrelates from risk assets, and so far in 2023, it appears to be bucking the 2022 narrative of being lumped together with growth-oriented equities,” Groth said.
Bitcoin’s strengthening correlation with gold and expansion of the Fed balance sheet are encouraging developments for the cryptocurrency outlook, Groth says. Yet concerns linger about liquidity in the broader crypto market following the FTX failure. And liquidity is unlikely to improve in the near future with the closure of crypto-related banks and regulators clamping down on exchanges, according to Groth.
“Fewer Fed hikes and rate cuts are pretty much priced into the market now and are reflected in the yield curve steepening … which has benefited bitcoin and gold at the expense of the U.S. dollar,” Groth said.
David Brickell, director of institutional sales at crypto investment firm Paradigm, believes the bitcoin price’s run is just getting started. “Now we’ve seen rates start to fall sharply, with the market pricing in rate cuts in the second half of the year. The Fed and ECB balance sheets are also back in expansion mode. This is the bullish thesis, but on steroids,” Brickell wrote in a March 27 research note.
Connors expects “a bit more integrity” in the cryptocurrency market in 2023. “The majority of bad actors have been taken out, and what that did was put, from a technical standpoint, the price and market structure of bitcoin in a very solid place with all the weak hands gone,” he said.
Plenty of bad actors and weak hands washed away in 2022. Last year saw a wave of bankruptcies from crypto firms as prices plummeted from all-time highs in late 2021. The spring collapse of Terraform Labs’ Luna token and sister stablecoin TerraUSD were the first crypto dominoes to fall. Together, they wiped out $60 billion in market value. That led to the bankruptcies of crypto firms including Three Arrows Capital, Voyager Digital and Celsius Network.
November’s FTX Group implosion rounded out the year. The second-largest exchange by volume, FTX filed for bankruptcy after overleveraging and mishandling billions in customer funds in concert with its sister firm Alameda Research. Crypto lender BlockFi filed for bankruptcy shortly after. The price of Bitcoin and cryptocurrencies traded near two-year lows in the months following those meltdowns.
“2022 was our default cycle. That’s the major theme and dynamic that ran through the entire industry,” said Connors. “And the implications of that are clarity for 2023. So that’s the launching point between 2022 and 2023.”
Connors says the collapse of FTX, Celsius and Terraform Labs helped differentiate unregulated, centralized players that ran faulty or fraudulent businesses. It also signaled maturation of the industry, he says, which will only develop as more regulation is implemented.
After the year’s major losses and the FTX collapse, Binance, Coinbase, Kraken and KuCoin lead the industry as the top crypto exchanges, CoinMarketCap data shows.
Despite the harsh climate, nearly 6,000 new cryptocurrencies launched in 2022, according to data from crypto research platform Bitstacker.com. There were 22,709 cryptocurrencies listed on CoinMarketCap.com as of Feb. 28, leaping from 16,238 listed on Jan. 1 last year. Meanwhile, the global crypto market cap roughly halved, falling to $1.07 trillion on Feb. 28 from $2.215 trillion on Jan. 1, 2022.
Worldwide, roughly 3.2 billion people use digital wallets, according to ARK Investment Management data, representing 40% of the global population. And ARK research suggests the number of users of digital wallets, which can be used to hold crypto tokens, will increase at an 8% clip annually, reaching 65% of the global population by 2030.
Cryptocurrency Prices and News
Tokenization also figures into the cryptocurrency outlook. Sigel predicts that globally, financial institutions will tokenize more than $10 billion dollars in off-chain assets this year, including U.S. Treasury bills and other government securities.
Tokenization in crypto refers to converting off-chain, or real world, assets or asset ownership rights to tokens on the blockchain. Most assets can be tokenized on-chain. Experts believe everything from Treasury bills and government securities to housing deeds and concert tickets will eventually be tokenized.
Currently, $1.15 billion in off-chain financial assets are tokenized on the blockchain, with the value of those assets up 21% this year, VanEck data shows. That growth is “more or less” in line with the growth of the crypto market, according to Sigel.
“My $10 billion estimate is an order of magnitude higher and it requires some Big Bang developments,” Sigel told Investor’s Business Daily.
In January, El Salvador approved a law to sell $1 billion in bitcoin-backed bonds to pay sovereign debt and fund construction of its proposed Bitcoin City. Meanwhile, MakerDAO plans to deploy $1 billion in U.S. Treasury bills and securities this year with BlackRock and Coinbase.
The cryptocurrency outlook in 2023 will be more focused on institutional adoption, while 2020 and 2021 were more about retail investors and the fear of missing out, Connors says.
“Generally in bear markets, assets move from weak hands to strong hands,” Sigel said. “And that often means that retail takes losses, while institutional investors, who can often afford to be more patient, will pick up assets at a bargain.”
Much of that growth is occurring abroad, and that will only increase as the latest banking developments and regulatory crackdowns force crypto firms overseas.
In February, Kraken paid a $30 million settlement to the Securities and Exchange Commission for selling tokens that were considered unregistered securities.
And on March 22, Coinbase announced it received a Wells Notice from the SEC, a warning the regulator may take action for potential securities violations. COIN stock tumbled.
“I think that at first blush, the reaction by U.S. companies looking to build out is that, ‘this is not a crypto-friendly regulator,’” Connors said.
U.S. institutional investors will also need to find a replacement for Silvergate and Signature Bank’s exchange platforms.
“Not having that is a temporary setback for digital asset growth in the U.S.,” Connors said. “It creates a pinhole for folks to do transactions.”
On March 27, the Commodities Futures Trading Commission sued Binance, the world’s largest crypto exchange, along with CEO Changpeng Zhao, alleging they intentionally violated trading and derivatives rules. The charges include claims that Binance was helping institutional investors get around U.S. restrictions.
On March 28, federal prosecutors filed new charges against FTX founder Bankman-Fried for conspiring to bribe Chinese government officials to restore his access to over $1 billion in cryptocurrency.
“Regulation by enforcement is not a sustainable path forward and increases the risk of losing more talented blockchain and financial professionals to other countries and regulatory environments that are more friendly to digital assets and blockchain technology,” Groth said.
“The environment for regulated institutions to get exposure to cryptocurrencies has been limited, rather materially,” Sigel said. “So for the bull case, that means a greater reliance on what’s happening outside the U.S., where we’ve been encouraged by recent developments, especially in Latin America, Asia and the Middle East.”
Much of crypto’s international usage growth has been driven by emerging markets. And experts say remittances have been one of the best use case examples for digital currencies. But going forward, for at least the short-term cryptocurrency outlook, most of the overseas growth will come from government initiatives that facilitate big jumps in adoption.
“In order to generate the same amount of revenue, income or yield … something has to be optimized,” Connors said. “So I think it is a technology arms race. Today, that technology option is blockchain, which only advanced the promise of more for less.”
Banking is one of the last industries to evolve its tech stacks (end-to-end technology infrastructure), Connors says. And catching up to Google and Amazon isn’t enough because their “creaking settlement rails” can’t accommodate T+0, or same-day settlements.
“Only blockchain can,” said Connors. “Which blockchain that will be is the question being asked and fought for right now.”
As of 2022, 31.3 million people in the Philippines, or 29% of the population, used or owned cryptocurrency, according to data from Trading Browser. Remittances in the Philippines rose 3.6% to a record $36.1 billion last year, the central bank Bangko Sentral ng Philipinas reported.
The Philippines ranks sixth in terms of cryptocurrency usage. Nigeria, Thailand and Turkey lead the world in digital asset ownership. More than 638.4 million people use crypto in the top 10 countries alone, Trading Browser data shows. And 363.9 million of those people began using digital currencies in the last three years.
“This is not a fringe asset … roughly one-fifth of Americans, it’s estimated, use or hold crypto,” according to Maude Wilson, policy counsel for decentralized-finance firm Uniswap Labs. “For people that live in places where there’s less trust in their government, less trust in their financial institutions, those numbers are even higher,” she said at the “Making America #1 in Blockchain and Financial Innovation” panel at CES 2023 in Las Vegas.
Argentines are embracing cryptocurrencies as the country’s inflation approaches 100% and its currency evaporates. El Salvador embraced bitcoin as domestic legal tender in September 2021. It began buying one bitcoin per month in November, after the FTX-triggered crash. In January, the country’s legislature made legal the use of bonds backed by cryptocurrency.
Sigel forecasts Brazil will become one of world’s most friendly cryptocurrency markets by leaning hard into blockchain solutions and tokenizing at least a portion of its sovereign debt offerings.
“With persistent inflation and a young population, Latin America is seeing the fastest crypto and stablecoin adoption in the world,” Sigel wrote. “Brazilian regulators have been aggressive in giving private companies a sandbox to play in this area.”
Brazil’s largest bank, Itau Unibanco (ITUB) plans to launch an asset tokenization platform. This will turn traditional financial products into tokens, as well as offer client custody services, according to Sigel. And Brazil may be the first to tokenize foreign debt.
Mainland China banned all crypto-related transactions in late September 2021. But on Feb. 20, Hong Kong proposed allowing retail investors to trade large-cap tokens, like bitcoin and ethereum, on licensed exchanges in an effort to turn the city into a crypto hub.
Meanwhile, China’s state-owned banks began directly courting crypto businesses over the past few months, Bloomberg reported March 26. Hong Kong arms of Bank of Communications Co., Bank of China and Shanghai Pudong Development Bank started offering banking services to local crypto firms or began inquiring into industry players in the field, according to reports.
Against these backdrops, the cryptocurrency market outlook is positive, analysts generally say.
Global macro fundamentals factored into the early 2023 bitcoin price run, according to Joel Kruger, market strategist at LMAX Group. These include views for a Federal Reserve interest rate pivot, China’s reopening and an upgraded outlook for the Eurozone economy. London-based financial services provider LMAX specializes in foreign exchange markets and cryptocurrency.
“On the crypto side, we believe longer-term players have been looking to build exposure at perceived discounted prices,” Kruger said. “These players are betting that most of the downside from the crypto implosions of 2022 are now fully priced in.”
Additional bitcoin price setbacks below the $10,000 level “should be limited” ahead of the next big topside run, he believes. This could lead to a strong bitcoin recovery in the second half of the year, where it recovers above $50,000 and is “in a position to retest and break the record high,” Kruger said.
“We are more optimistic that the bottom is in,” Sigel said after a better-than-expected January. “But if there is another major exchange bankruptcy, then we can make new lows.”
Meanwhile, in the event of a recession and Federal Reserve rate pauses, the bitcoin price could recover to $30,000 in the second half of the year, barring any bad crypto news, according to Sigel. VanEck forecasts the price of bitcoin will reach $250,000 by 2028. But if it fails to hit an all-time high by 2026, that thesis would be considered broken.
Connors believes recent events could double 3iQ’s year-end bitcoin price target of $30,000 to $60,000 laid out in January, putting it between $60,000 and $120,000.
In February, ARK Invest and its CEO Cathie Wood raised their guidance for the bitcoin price to hit $1.48 million by 2030, up from $1 million forecast in December.
“Bitcoin is still scarce, the network is still running, the miners are still here, and everything is still operating on the original core code,” Fidelity Digital Assets Research Director Chris Kuiper wrote in the firm’s 2023 crypto outlook. Kuiper, a bitcoin bull, said “not much has changed in terms of (bitcoin advocates’) core investment thesis.”
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
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