Cryptocurrency as a whole has seen some serious downsides since its inception. But several catalysts could help the crypto market rise from the ashes this year and kick-start growth in the sector.
The past two years have seen many ups and downs in cryptocurrencies. When China banned crypto mining in May 2021, the crypto market crashed for weeks. There was a recovery when former Twitter CEO Jack Dorsey’s “The B Word” event took most cryptos to all-time highs. Other factors have also played some role directly or indirectly in uplifting the mood.
Nonetheless, the collapse of three major platforms in 2022 saw the crypto market below the trillion-dollar capitalization mark. The largest crypto, Bitcoin, consolidates around the $16,000 level. However, with the year starting near, a similar catalyst could be at work here for a bullish reversal in early 2023.
Could the Fed be a catalyst Crypto Growth?
Cryptocurrencies are off to a great start in 2023 – the total crypto market cap has crossed the $800 billion mark, currently standing at $821 billion. Still, there is a long way to go to recover the lost value. However, there may be some catalysts to look forward to in 2023.
The first potential crypto catalyst relates to the Federal Reserve. The Fed has been aggressively raising interest rates since March to fight inflation. This has resulted in trillions of dollars being drained out of stocks, cryptocurrencies and other assets. Hence, why they are crashing.
If the Fed continues to raise interest rates, this flow of capital out of all assets will continue. It is assumed that the Fed will continue to raise interest rates until either something breaks in the financial system or inflation finally comes down.
Fed Chairman Jerome Powell specified that the institution would only begin lowering interest rates when they are significantly higher than inflation. Investors expect the Fed to hold off on raising rates in 2023. If and when the Fed halts its rate hike earlier this year, it could be very bullish for crypto.
But if the Fed keeps its rates high, it will make assets like US government debt attractive to investors because of the higher interest rates they offer. This can limit money going into riskier assets like crypto. Still, the Fed’s pause should prevent these markets from falling further.
Dollar demand and stablecoins, is there a connection?
The second potential crypto catalyst is also related to the Fed, but a bit differently. As mentioned above, the Fed’s rate hike has taken trillions of dollars out of the markets. The bulk of this money is going to pay off debt or in US dollars. Because the US dollar is the world’s reserve currency, many individuals and institutions around the world have dollar-denominated obligations.
When the Fed raises interest rates, these foreign dollar loans become more expensive. Individuals and institutions must sell their national currencies to buy US dollars to continue paying their US dollar debt. This high demand for dollars causes the value of the dollar to go up against other currencies. This effect is particularly acute in countries facing energy shortages because the US dollar is also used to pay for energy.
When a country is facing energy issues, it will print more of its currency to buy US dollars to buy more expensive energy as winter approaches, so demand for dollars from such countries is likely to increase. Continued rate hikes by the Fed will also increase demand for the dollar. Citizens of foreign governments can start investing in stable currencies to maintain their purchasing power. As a result, smart contract cryptocurrencies will benefit from this.
Bitcoin as legal tender?
An upcoming crypto catalyst has been overlooked, and that country is planning to make bitcoin legal tender. There has been a lot of condemnation since El Salvador did this.
Still, at least one other country plans to follow in El Salvador’s footsteps in 2023: Tonga. The state will adopt bitcoin as legal tender this year.
If Tonga follows through on these plans, one could see other smaller countries taking this trip. Remember, the US dollar is crushing foreign currencies, and countries around the world are launching CBDCs to protect their national currencies from falling. However, not all small countries have the resources to roll out their CBDCs. This raises a choice: for these countries to adopt crypto in one way or another.
keeping it real
Speaking to BeInCrypto, Okcoin CEO Hong Fang voiced support for the catalysts discussed.
“I would suspect that a fundamental need for more solid money in the background, something like El Salvador, but probably of a larger size, will continue to build,” he said.
Another important catalyst that he looked into was the development activity for various projects. Or, in his terms: actual projects.
“Everytime We Have A Bull Market With Bitcoin With DeFi [decentralized finance] and nft [non-fungible tokens], It was because a lot of builders, they built projects in the previous bear market. So I think all projects are being built now, when there’s a little more abstraction that customers can feel they want to serve, [it] Will trigger another bull market.
Where are the regulations?
Another potential crypto catalyst is regulations. The upcoming rules for Europe’s MiCA bill will be finalized in the first half of 2023. Upcoming rules will come in response to the FTX Alameda situation.
Despite the outcry against the regulations, the fact remains that they will make institutions more comfortable investing in crypto. With any luck, the bulk of these rules will be in place by the end of the year, creating the conditions needed for a massive bull run in 2024 and 2025.
However, on the negative spectrum, privacy-enhancing coins could be banned. Nonetheless, 2023 will play a crucial role in making (or breaking) the entire crypto market.
Another important rule related to crypto custody in the United States. The lack of (crypto custody) regulations is one of the main reasons why the Securities and Exchange Commission (SEC) has yet to approve a spot bitcoin exchange-traded fund (ETF). The launch of the spot bitcoin ETF could mark the top of the next crypto market cycle in the same way that the launch of bitcoin futures on the Chicago Mercantile Exchange marked the top in 2017.
Green shoots of recovery?
Nearly all of these catalysts are scheduled for sometime in 2023. Hopefully, at least one of them will come to pass, and it may be all that is needed to prevent the crypto market from bottoming out.
However, currently, there is a high level of uncertainty in all asset classes including crypto which is a kryptonite for investors in any asset class. Until there is some certainty regarding crypto regulations or the energy situation in Europe, the market will continue to decline regardless of asset class.
Perhaps, the market could see another Black Swan event that would lead to another crypto crash, but it could very well be a sharp decline. Despite this, there is no shortage of upcoming crypto catalysts that could dig crypto out of the hole.
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