While 2022 has not been kind to the cryptocurrency market, 2023 is likely to cure all of its woes.
When China banned cryptocurrency mining in May 2021, the market plunged into the red for several weeks. But gradually cryptocurrencies started to recover, reaching all-time highs in November. An increase that was driven by various positive events, such as the summit “The B-word” hosted by former Twitter CEO Jack Dorsey.
In 2022, successive bankruptcies of the market heavyweights reduced its market capitalization to less than $1 trillion. Similarly, Bitcoin, the world’s largest cryptocurrency, finished the year below $16,000. A scenario that not even the most pessimistic analysts would have believed.
Sure, the cryptocurrency market has been ravaged by the bear market, but could it rise from the ashes in 2023?
Can the Fed Help the Cryptocurrency Market Go Green?
This week, the market cap of the cryptocurrency market crossed the $800 billion mark, hitting $852 billion on Friday. Yes, we still have a long way to go to recover the billions of dollars we lost, but the year 2023 already looks very promising.
In March, the US Federal Reserve (Fed) went on a frantic run against inflation by raising interest rates to record lows. The Fed’s aggressive policy helped slow inflation, but caused heavy losses to the stock market and cryptocurrencies.
If the Fed continues to raise interest rates, the hemorrhaging of financial markets, including the cryptocurrency industry, will continue. According to Scott Minerd, the Fed will continue to raise interest rates until it wins its battle against inflation and “something is breaking in the financial system”.
For his part, Fed Chairman Jerome Powell said the institution “It will only start lowering interest rates when they are significantly above the inflation rate”. However, the central bank is expected to abandon its quantitative tightening policy as early as this year, which would be very beneficial for the cryptocurrency market.
However, in the event the Fed does not lower interest rates, investors will gravitate more towards government bonds and away from risky assets such as cryptocurrencies.
Is there a connection between the dollar’s rise and stablecoins?
The second factor that could help the cryptocurrency market is also related to the Federal Reserve. As explained earlier, the Fed’s quantitative tightening policy has siphoned off billions of dollars from the market. Most of this money was spent on debt repayments or the US dollar. Because the greenback is considered a global reserve currency, many retail and institutional investors own dollar-denominated bonds.
When the Fed raises interest rates, dollar-denominated foreign debt becomes more expensive. Individuals and institutions then have to sell their national currencies to buy US dollars and pay off their debts. This high demand drives up the value of the dollar against other currencies. This effect is often seen in countries experiencing an energy crisis, as the US dollar is also used to pay for energy.
When a country suffers from an energy shortage, it must issue more banknotes and convert them into dollars to buy energy. Therefore, the demand for dollars is likely to increase this winter. Therefore, citizens of crisis-hit countries could start investing in stablecoins to preserve their purchasing power.
Other countries will make Bitcoin legal tender
The adoption of bitcoin by some countries can also boost the cryptocurrency market. Since El Salvador made Bitcoin legal tender, other countries are trying to follow in its footsteps.
For example, the Kingdom of Tonga, a small country located in Polynesia, plans to adopt Bitcoin as its official currency this year. If the Kingdom keeps its promises, other countries could join the adventure.
Let’s not forget that the US dollar has crushed several foreign currencies, prompting some countries to use CBDCs to protect their economies. However, smaller countries that lack the resources to create their own CBDCs prefer to turn to Bitcoin.
What about the regulations?
Regulatory changes planned for this year could also strengthen the cryptocurrency market. For example, the first milestones of the MiCA bill are expected to be set in the first half of 2023. Similarly, the FTX scandal has prompted the US to accelerate its regulatory efforts.
In any case, the regulation of the cryptocurrency market will encourage more institutions to invest in digital assets. Hopefully, most of the new laws will be passed by the end of the year, which will create all the conditions for a bullish rally in 2024 and 2025.
Of course, regulation also comes with its share of downsides. For example, classified cryptocurrencies like Monero or Zcash are unlikely to slip under the radar of lawmakers. However, the year 2023 will undoubtedly be decisive for the future of the cryptocurrency market.
It should also be noted that legal uncertainty is one of the main reasons why the Securities and Exchange Commission (SEC) has not yet approved a Spot Bitcoin ETF. The approval of a spot Bitcoin ETF could trigger a bullish rally similar to the one following the launch of BTC futures market. Chicago Merchant Exchange (ECM) in 2017.
A glimmer of hope on the horizon?
All the changes and events mentioned above are expected in 2023. If everything goes according to plan, the cryptocurrency market can undoubtedly grow again or at least limit losses.
However, at the moment, uncertainty continues to plague all financial markets, including the cryptocurrency market. Therefore, unless European leaders find solutions to the energy crisis and rising inflation, the global economy will find it very difficult to recover.
Likewise, other negative events could exacerbate the crisis in the cryptocurrency market. That said, everything suggests that the worst is already behind us, so let’s cross our fingers and hope that 2023 will be the year of healing and good news.
Finally, remember that whatever the market conditions, you can always generate gains by adopting a good investment strategy.
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