2023 is proving to be a pivotal year for the crypto space, with many events converging to shape its future trend and adoption in the near term. While there are many variables at play, here are three key factors that are poised to impact the crypto market throughout 2023.
Rising crypto supply
In terms of supply increases, the following two major events could potentially affect the crypto market.
ETH Shanghai upgrade
In April 2023, Ethereum will undergo a Shanghai upgrade to completely transition into a proof-of-stake (PoS) blockchain, which is expected to significantly improve the network’s performance. The PoS journey started with the launch of the Beacon Chain in December 2020, during which users deposited over 500,000 ETH into the staking smart contract. Presently, over 17.5 million ETH is secured in the contract, effectively reducing the total circulating supply currently locked in the Beacon Chain contract.
Following the upgrade, users will be able to withdraw some of that ETH that has been locked up since launch, sparking concerns about a potential increased supply and subsequent downward pressure on ETH’s price. However, despite concerns, two key factors suggest that such a scenario is unlikely:
- A full 32 ETH withdrawal is impossible — once 18 months have passed since the Shanghai upgrade, withdrawals of the required 32 ETH per validator will become available. It is worth noting that withdrawals will initially enter a queue where staking rewards are prioritized over the principal stake. This will slow the influx of ETH into the circulating supply following the upgrade.
- Most ETH stakers are underwater — the next factor that may affect ETH pricing is that the majority of it was staked during the bull market of 2021. Thus, most stakers are currently not in profit, thereby further discouraging them from selling.
The second supply increase that could impact the market pertains to Bitcoin’s (BTC) upcoming release of coins recovered from the infamous Mt. Gox hack of 2014. At that time, Mt. Gox was a leading Bitcoin exchange, accounting for 70% of the global crypto trading volume. However, in February 2014, a tragic hack resulted in the loss of over 850,000 Bitcoins, causing widespread shock throughout the crypto communities and ultimately leading to the closure of the exchange.
Since the hack, former Mt. Gox holders have been in a prolonged legal battle to retrieve their funds. Fortunately, this drawn-out saga is set to come to a close in September, with the coins being returned to the claimants.
Surprisingly, the largest holders of the recovered Bitcoins are institutional funds that purchased 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 they intend to hold onto their Bitcoin, which has eased concerns of a massive sell-off of trustee Bitcoin. Nevertheless, once claimants receive their Bitcoin, there might still be some fear, uncertainty and doubt that persist and introduce 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 wider economic conditions. Factors including inflation, the Dollar Index, VIX, FOMC meetings and bond yields are some of the major determinants that dictate the price direction of crypto and its 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 bank run due to interest rate hikes as well as deteriorating economic conditions.
Shortly following this event, Circle, the issuer of the USDC stablecoin, confirmed that a portion of the reserves backing USDC — worth $3.3 billion or 7% of the total — were held in the failed bank. This news triggered a wave of panic-selling 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 Stats
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 a stable fiat peg. Currently, USDC still has not managed to regain its $1 peg, and is currently trading at around $0.99 cents, further causing worry and resistance among holders.
If the popularity of fiat-backed stablecoins further declines, the industry may shift toward algorithmic stablecoins that are 100% backed by crypto on-chain. 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 such as Terra Luna could slow down adoption.
The “unbank-ening” of crypto
Undoubtedly, the current regulatory landscape and failing banks are presenting significant obstacles to the movement of capital in and out of the crypto world. This may result in 2023 becoming the year that crypto becomes increasingly unbanked, with regulatory pressures causing uncertainty around the future of stablecoins such as USDC and BUSD.
Banks are making it increasingly challenging for people to purchase crypto, with U.K. high street bank Nationwide announcing in February that it will be imposing daily purchase limits and the banning of purchasing crypto using credit cards. Natwest also updated its limits. Besides that, Binance announced the suspension of GBP deposits and withdrawals via bank transfers and faster payments, as its fiat partner Skrill Limited will stop offering banking services to the exchange.
These restrictions could lead to a poor user experience for those seeking to acquire crypto assets as well as further increasing risk for consumers in the process.
The current macro and regulatory overhang coupled with limited capital inflow suggests that 2023 will likely not see a significant surge in new crypto users for transactional services. Relying on buzzwords such as account abstraction, Layer-2 blockchain wars and ZK-rollups will not be enough to drive immediate adoption. Though, at the end of the day, the responsibility lies in the hands of builders and true believers to rebuild the ecosystem from the ground up, for which these are useful new tools.
The recent eventful weekend of March 11, when SVB collapsed, could be a significant moment that highlights the diminishing trust in not only governments but more importantly, the traditional financial system. This could be the seminal moment that might urge everyday users to look for alternatives, and the crypto industry needs to ensure that it is ready to offer stability and security for its assets.
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