The cryptocurrency market has had an explosive start to the new year, with the flagship cryptocurrency, Bitcoin, posting a Year-to-Date (YTD) return of more than 40% at the time of this reporting.
The rally in the price of riskier assets is a result of the slowing of interest rate increases in both developed and emerging markets, which has increased the appeal of riskier assets.
While interest rates remain high, particularly in developed economies, investors are betting that the rise in interest rates will come to an end sooner rather than later.
It is critical to understand what to expect for the rest of the year. Analysis by Matthew Sigel, Head of Digital Assets Research at VanEck, an asset management firm with $68 billion in assets under management, shows what he expects from the cryptocurrency market in 2023.
With the recent market rally, we are already seeing some of his predictions come true.
1. Bitcoin Will Test $10-12K In Q1 Due to Miner Bankruptcies
According to Sigel, the MVIS Global Digital Assets Mining Index has a median market cap of $180 million, with nearly all constituents burning cash and trading well below book value. He predicts that many miners will restructure or merge as Bitcoin mining becomes increasingly unprofitable due to recent higher electricity prices and lower Bitcoin prices.
2. Bitcoin will reach $30,000 in the second half of 2023.
Sigel explained that in 2022, Bitcoin and the broader crypto ecosystem experienced a brutal bear market. Numerous companies in the space have imploded, and sentiment is extremely negative. Over the previous year, Bitcoin traded like a risk asset, with price sensitivity to interest rate hikes.
He went on to say that one of the reasons Bitcoin has underperformed in response to higher rates is that the political response to higher inflation in developed markets has been to try to cap energy prices, broaden sanctions, and micromanage economic activity in order to facilitate the “energy transition.”
Sigel concluded by stating that in developed markets, he believes Bitcoin will serve as a long-term store of value and a hedge against M2 inflation rather than overt CPI inflation. The emphasis in emerging markets is on remittances and neutral alternatives to dollar hegemony.
Another reason for this price prediction, according to him, is the strong possibility of a global recession. Sigel explains that if this is the case, the Federal Reserve will likely pause raising interest rates in the face of softening inflation, while money printing and government budget deficits continue.
3. More than $10 billion in off-chain assets will be tokenized by financial institutions
Sigel predicts that by 2023, institutions will be using blockchains to simplify custody and settlement while lowering customer costs. Identity protocols and permissions sub-networks/applications will be used to enable KYC/AML.
It is important to note that, as of now, MakerDAO intends to invest $1 billion in U.S. T-bills and other government securities with the assistance of BlackRock and Coinbase, allowing DAI holders to earn a higher yield on deposits. Real-world loans on platforms like Goldfinch, TrueFi, Maple, and Clearpool total more than $300 million.
In collaboration with Avalanche and Securitize, KKR tokenized one of its private funds. The Monetary Authority of Singapore’s Project Guardian is a collaborative initiative with the financial industry to test the feasibility of asset tokenization and DeFi applications. MAS recently participated in transactions involving tokenized Singapore Government Securities, Japanese Government Bonds, Japanese Yen, and Singapore Dollar liquidity pools.
Sigel believes that Ethereum, Polygon, Avalanche, Polkadot, and Cosmos are the best-positioned open-source blockchains.
4. Brazil Will Become One of the World’s Most Crypto-Friendly Countries
Sigel explains that, due to persistent inflation and a young population, Latin America is experiencing the world’s fastest crypto and stablecoin adoption. Brazilian regulators have been aggressive in providing a sandbox for private companies to play in this area.
Itau Unibanco, the country’s largest bank, intends to launch an asset tokenization platform to convert traditional financial products into tokens and provide clients with custody services. According to Sigel, the tokenization of sovereign debt may begin in Brazil first.
5. Twitter Will Expand Its Payment Options Through State Money Licenses
Twitter’s current payment capabilities, according to Sigel, are limited to peer-to-peer tipping, including Bitcoin over the Lightning Network, but the user experience is poor. He anticipates Elon Musk will implement payment functionality similar to WeChat Pay, allowing consumers to pay merchants for services.
According to the New York Times, Twitter filed registration paperwork with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in November to allow it to process payments. Dollars, Bitcoin, and possibly other crypto assets like Dogecoin are likely to be involved in such an endeavor.
6. A country, most likely one that relies on oil exports, will announce the addition of Bitcoin and other digital assets to its sovereign wealth fund
Multiple crypto companies have confirmed to us that Saudi Arabia’s sovereign wealth funds are already mining Bitcoin, albeit on a small scale. Furthermore, Russian government officials have made it clear that they intend to settle cross-border trade in crypto assets. Sberbank, Russia’s largest bank, recently integrated MetaMask and the Ethereum blockchain into its blockchain platform. In addition, multiple Russian media outlets reported in November that Russians were aggressively purchasing Bitcoin mining ASICS.
7. A new decentralized stablecoin will reach a market cap of $1 billion
Stablecoins are digital currencies that are linked to a “stable” reserve asset, such as the US dollar or gold. The methods used by stablecoin projects to maintain their peg differ. USDT and USDC, for example, are both run by centralized entities that back up their tokens with fiat reserves such as cash and government treasuries. DAI, on the other hand, is managed by a decentralized entity in which users deposit ETH into smart contracts in order to create the dollar-denominated, over-collateralized DAI.
According to Sigel, algorithmic stablecoins differ in that they are collateralized with digital assets and can be under or over-collateralized. Typically, algorithmic stablecoins are supported by another digital asset and/or an on-chain algorithm that balances supply and demand.
Despite the failure of LUNA and its associated algorithmic stablecoin UST, Sigel believes that various decentralized stablecoins will continue to launch in 2023, including AAVE’s GHO offering, which will use an over-collateralization strategy and rely on arbitrage and community-led monetary policy to stabilize the token at $1.
8. Ripple Will Fail in its SEC Lawsuit
Since 2020, Ripple Labs has been involved in a legal battle with the SEC over their token, XRP. According to the SEC lawsuit, XRP is an unregistered security. Given the prominence of Ripple and XRP in the digital asset space, the outcome of this case could have far-reaching implications across the industry and set a precedent for future cases.
According to Single, Ripple has the backing of many major industry players, including Coinbase and the Blockchain Association. This support has only grown, with 12 independent entities now providing Ripple with legal counsel. Both the SEC and Ripple have requested a summary judgment from a federal judge in the case, so a decision by the end of the first quarter is likely.
Unfortunately for crypto bulls, the SEC was successful in its lawsuit against blockchain-based publishing company LBRY in November, with a U.S. district judge in New Hampshire writing that “nothing in the case law suggests that a token with both consumptive and speculative use cases cannot be sold as an investment contract.” Using this case as precedent, he explained that a Ripple victory is now materially unlikely.
9. Gary Gensler Will Resign From The Securities and Exchange Commission After Proposed Legislation Fails to Gain Wide Support
Crypto enthusiasts had hoped that SEC Chairman Gary Gensler would support the advancement of the digital assets ecosystem in the United States. However, the SEC has continued to deny or postpone decisions on Bitcoin spot ETFs on grounds of “market manipulation”. Surprisingly, Bitcoin futures and inverse Bitcoin futures ETFs have been approved.
Chairman Gensler has stated on several occasions that Bitcoin is a commodity, but most other digital assets are securities. Still, there is considerable uncertainty about which agency will regulate the industry, as the SEC and CFTC compete for the right to do so.
Sigel predicts that Chairman Gensler will be replaced, particularly now that the 2022 midterm elections are over, because he is under increasing scrutiny and may become a political liability for the White House. On November 8, four US lawmakers wrote him a letter criticizing the SEC’s double standard on transparency.
In December, New York Democratic Rep. Ritchie Torres wrote to the U.S. Comptroller, requesting that the federal legislative watchdog investigate the SEC’s failure to protect the public from “FTX’s egregious mismanagement and malfeasance.” The strongly worded letter also criticized Chairman Gensler’s overall leadership.
Even the SEC’s union of 3,500 employees is at odds with the Chairman over pensions, returning to work, and an overworked workforce. Sigel also stated that the average tenure of an SEC chair since 1934 is 2.75 years; the median is 2, implying that the SEC Chairman’s time may be up.
10. Total Web3 Monthly Gamers Will Rise From 2M To 20M As Multiple Triple-A Games Come to Market
Traditional gaming has a massive total addressable market (TAM) of $300 billion and 3.2 billion people worldwide.
Gaming is a digital-native activity, and in-game items (also known as digital assets) are already purchased and used by hundreds of millions of gamers worldwide. Nonetheless, Sigel believes that there are category gaps between traditional and crypto games, creating a large space for growth. Blockchain-enabled games, in particular, enable the transfer of in-game assets between games, which is currently not possible.
However, early play-to-earn and play-to-own games lacked high-quality production values and large enough budgets to appeal to mass-market users. Some traditional “triple-A” games are attempting to fill that void with tentpole releases in 2023, and Sigel believes one of them will go viral.
11. Ethereum Will Allow Beacon Chain Withdrawals
The pre-Merge, proof-of-stake Ethereum blockchain is known as the Beacon Chain. Before enabling proof-of-stake consensus logic on the Ethereum Mainnet, it was created to ensure that it was sound and sustainable.
The Merge occurred in September 2022, resulting in the merging of the Ethereum Mainnet and the Beacon Chain and the transition to a single blockchain with a proof-of-stake consensus mechanism. Stakers are currently earning 5% annual interest in exchange for committing ETH.
However, withdrawals have not been enabled, which may impede adoption. Allowing Beacon Chain withdrawals would increase stakeholder confidence in committing capital to the protocol. The percentage of ETH staked could rise from 13% to more than 25%.
