2023 is proving to be a pivotal year for the crypto space, with many events converging to shape its future trend and near-term adoption. While there are many variables in play, here are three key factors that are poised to impact the crypto market throughout 2023.
Increased supply of cryptocurrencies
In terms of supply increases, the following two major events could potentially affect the cryptocurrency market.
ETH Shanghai Update
In April 2023, Ethereum will undergo a Shanghai upgrade to fully transition 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 users deposited more than 500,000 ETH into the staking smart contract. Currently, more than 17.5 million ETH is guaranteed in the contract, effectively reducing the total circulating supply currently locked in the Beacon Chain contract.
After the update, users will be able to withdraw some of that ETH that has been locked up since launch, raising concerns about a possible supply increase and consequent downward pressure on the ETH price. However, despite the concerns, two key factors suggest that such a scenario is unlikely:
- A full withdrawal of 32 ETH is impossible: once 18 months have passed since the Shanghai update, withdrawals of the 32 ETH required by validator will be available. It’s worth noting that withdrawals will initially go into a queue where staking rewards take precedence over leading staking. This will slow down the entry of ETH into the circulating supply after the upgrade.
- Most ETH Participants Are Under Water – The next factor that may affect the ETH price is that most of it was staked during the 2021 bull market. Therefore, most participants are currently not making a profit, which further discourages them from selling.
Source: dune
Mt.Gox Refunds
The second supply surge that could impact the market relates to the upcoming release of Bitcoin (BTC) coins recovered from the infamous 2014 Mt. Gox hack. At the time, Mt. Gox was a leading Bitcoin exchange, representing 70% of the world market. crypto trading volume. However, in February 2014, a tragic attack resulted in the loss of over 850,000 Bitcoins, causing widespread shock in the crypto communities and ultimately leading to the shutdown of the exchange.
Since the hack, the former holders of Mt. Gox have been in a protracted legal battle to get their funds back. Fortunately, this long saga will come to an end in September, with the return of the coins to the claimants.
Surprisingly, the biggest holders of the recovered Bitcoins are institutional funds that bought Mt. Gox claims for a fraction of their value from retail investors.
Despite the ongoing legal battle, one of the largest holders has stated that he intends to keep his Bitcoin, which has eased concerns of a Bitcoin trustee sell-off. However, once claimants receive their Bitcoin, there may still be some fear, uncertainty, and doubt that lingers and introduces some volatility into the market.
Challenging global macro environment
Crypto used to exist in its own bubble, independent of macroeconomic events in traditional finance. However, over the years, the crypto market has become increasingly intertwined with traditional finance and is proving to be significantly influenced by broader economic conditions. Factors including inflation, the dollar index, the VIX, FOMC meetings, and bond yields are some of the major determinants that dictate the direction of cryptocurrency prices and volatility.
A recent example of this would be the failure of Silicon Valley Bank (SVB), whose overexposure to long-term government bonds played a key role in its downfall, triggering a run on banks due to interest rate hikes and deterioration of economic conditions.
Shortly after this event, Circle, the issuer of the USDC stablecoin, confirmed that a portion of the reserves supporting USDC, worth $3.3 billion or 7% of the total, were held at the failed bank. This news triggered a panic selling spree among USDC holders, causing the stablecoin to lose its $1 peg and plummet to $0.87 on the morning of March 11. Even Dai, the decentralized algorithmic stablecoin, was affected, as 40% of its reserves are backed by USDC.
Source: Dai Statistics
The uncertainty surrounding the future of USDC and other fiat-backed stablecoins may have a detrimental impact on innovation in DeFi and other crypto products that rely on stable fiat peg. Currently, the USDC has not yet managed to regain its $1 peg, and is currently trading around $0.99 cents, leading to further concern and resistance among holders.
Source: CoinGecko
If the popularity of fiat-backed stablecoins declines further, the industry may shift towards algorithmic stablecoins that are 100% backed by on-chain cryptography. These stablecoins can be designed to be massively overcollateralized, which would help maintain the $1 peg during periods of extreme volatility. However, the past collapse of algorithmic stablecoins like Terra Luna could slow down adoption.
The “unbanking” of cryptocurrencies
Fountain: Twitter
To be sure, the current regulatory landscape and failing banks present significant obstacles to the movement of capital in and out of the world of cryptocurrencies. This may result in 2023 becoming the year that cryptocurrencies become increasingly unbanked, with regulatory pressures causing uncertainty about the future of stablecoins like USDC and BUSD.
Banks are making it increasingly difficult for people to buy cryptocurrency, and Nationwide, the UK’s main bank, announced in February that it will impose daily purchase limits and ban credit card purchases of cryptocurrency. Natwest also updated its limits. On top of that, Binance Announced the suspension of deposits and withdrawals in sterling via bank transfers and faster payments, as its trust partner Skrill Limited will stop offering banking services to the exchange.
These restrictions could lead to a poor user experience for those looking to acquire crypto assets, further increasing the risk for consumers in the process.
final thoughts
The current macro and regulatory surplus, coupled with limited capital inflow, suggests that 2023 will likely not see a significant increase in new crypto users for transactional services. Relying on buzzwords like account abstraction, layer 2 blockchain wars, and ZK accumulations will not be enough to drive immediate adoption. Although, at the end of the day, the onus falls on the hands of the builders and true believers to rebuild the ecosystem from scratch, which these new tools are useful for.
The recent eventful weekend of March 11, when SVB collapsed, could be a significant moment highlighting the decline in trust not only in governments but, more importantly, in the traditional financial system. This could be the seminal moment that could prompt everyday users to look for alternatives, and the crypto industry needs to ensure that it is ready to offer stability and security to its assets.
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