2023 is proving to be a pivotal year for the crypto space, with many events converging to determine its future trends and adoption in the short term. While there are many variables at play, here are three key factors that will shape the cryptocurrency market throughout 2023.
Increased supply of cryptocurrencies
In terms of increased supply, the following two major events could affect the crypto market.
ETH Shanghai upgrade
In April 2023, Ethereum will undergo a Shanghai upgrade, fully transitioning to a proof-of-stake (PoS) blockchain, which is expected to significantly improve network performance. The PoS journey began with the launch of the Beacon Chain in December 2020, during which time users deposited over 500,000 ETH into staking smart contracts. Currently, more than 17.5 million ETH are secured in the contract, effectively reducing the total circulating supply currently locked in the beacon chain contract.
After the upgrade, users will be able to withdraw some of the ETH that has been locked since launch, raising concerns about a potential increase in supply and subsequent downward pressure on ETH prices. However, despite concerns, two key factors make this unlikely:
Withdrawing the full 32 ETH is not possible - once 18 months have elapsed since the Shanghai upgrade, each validator will be able to withdraw the required 32 ETH. It's worth noting that withdrawals will initially go into a queue where staking rewards take precedence over principal. This will slow down the flow of upgraded ETH into the circulating supply.
Most ETH stakers are underwater - the next factor that could affect ETH pricing is that most of them staked during the 2021 bull run. As a result, most stakers are currently unprofitable, further preventing them from selling.
Mt.Gox Repayment
The second supply increase that could affect the market is related to Bitcoin Tokens recovered from the infamous Mt. Gox hack of 2014 will be released soon. At the time, Mt. Gox was the leading bitcoin exchange, accounting for 70% of global cryptocurrency trading volume. However, in February 2014, a tragic hack resulted in the loss of more than 850,000 bitcoins, sent shockwaves through the entire crypto community, and eventually led to the closure of the exchange. Since the hack, former holders of Mt. Gox have been engaged in a protracted legal battle to get their funds back. Fortunately, the long-running saga will come to an end in September as the coins are returned to claimants.
Despite the ongoing legal battle, one of the largest holders has said they intend to hold their bitcoins, easing fears of a massive sell-off by fiduciaries. However, once claimants receive their bitcoins, there may still be some fear, uncertainty and doubt to persist and create some volatility in the market.
Surprisingly, the largest holders of recovered Bitcoin were institutional funds that bought Mt. Gox claims from retail investors for a fraction of their value.
Challenging global macro environment
Cryptocurrencies used to exist in their own bubbles, independent of macroeconomic events in traditional finance. Over the years, however, the cryptocurrency market has grown more closely related to traditional finance and is significantly influenced by broader economic conditions. Factors including inflation, the U.S. dollar index, VIX, FOMC meetings, and bond yields are some of the major determinants of the direction of cryptocurrency prices and their volatility. A recent example is the collapse of Silicon Valley Bank (SVB), whose overexposure to long-term government bonds played a key role in its collapse, as rising interest rates and deteriorating economic conditions triggered a bank run.
Shortly after the incident, Circle, the issuer of the USDC stablecoin, confirmed that some of the reserves backing USDC worth $3.3 billion, or 7% of the total were held by failed banks. The news sparked a wave of panic selling from USDC holders, causing the stablecoin to lose its $1 peg and plummet to $0.87 on the morning of March 11. Even the decentralized algorithmic stablecoin Dai has been affected as 40% of its reserves are backed by USDC.
Uncertainty surrounding the future of USDC and other fiat-backed stablecoins could adversely affect the innovation of DeFi and other crypto products that rely on stable fiat-backed crypto products. For now, USDC has still not managed to regain its $1 peg and is currently trading at around 0.99 cents, further fueling concerns and resistance among holders. If the popularity of fiat-backed stablecoins declines further, the industry may move to algorithmic stablecoins that are 100% backed by on-chain cryptocurrencies. These stablecoins can be designed to be massively over-collateralized, which would help maintain the $1 peg during times of extreme volatility. However, past debacles of algorithmic stablecoins such as Terra Luna may slow adoption.
The “Debanking” of Cryptocurrencies
There is no doubt that the current regulatory environment and failing banks pose a significant barrier to capital moving in and out of the crypto world. This could lead to 2023 being the year cryptocurrencies become increasingly unbanked, with regulatory pressure creating uncertainty about the future of stablecoins like USDC and BUSD.
Banks are making it increasingly difficult for people to buy cryptocurrencies, with UK high street bank Nationwide announcing in February that it would impose daily purchase limits and ban the use of credit cards to buy cryptocurrencies. Natwest also updated its limits. In addition to this, Binance announced the suspension of GBP deposits and withdrawals via bank transfers and faster payment methods, as its fiat partner Skrill Limited will stop providing banking services to the exchange.
These restrictions may result in a poor user experience for those seeking to acquire crypto assets and further increase the risk for consumers in the process. Current macro and regulatory hangovers coupled with limited capital inflows suggest that 2023 may not see a significant surge in new cryptocurrency users for trading services. Relying on buzzwords like account abstraction, layer 2 blockchain wars, and ZK-rollups will not be enough to drive immediate adoption. Still, at the end of the day, the onus is on the builders and true believers to rebuild the ecosystem from the ground up with useful new tools.
The collapse of SVB over the eventful weekend of March 11th could have been an important moment in highlighting the waning trust not only in the government, but more importantly in the traditional financial system. This could be a seminal moment that could prompt everyday users to look for alternatives, and the crypto industry needs to make sure it is ready to provide stability and security to its assets.
