Cryptocurrencies: what to expect in 2023

Arguably, the broader crypto market hit rock bottom in 2022, with high-profile collapses and a historic bear run. And while 2023 is up to a rather great start, how the year ahead will unfold is anyone’s guess, really. That’s why we’ve grounded our expectations on factual reality as possible as we could.  Let’s discuss what to expect in 2023 for cryptocurrencies.

More crypto market crashes, possibly

Just before the collapse of LUNA and UST in May 2022, Do Kwon, the co-founder of Terraform Labs, was quoted in an interview saying, “…95% [of cryptocurrencies] are going to die, but there’s also entertainment in watching companies die too”. And after the events of 2022, we really shouldn’t be surprised by crypto market crashes. 

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LUNA and FTX were giants in the crypto market, and no one saw their collapse coming. The bottom line? Be better prepared for any eventuality. You should be diversified enough across major crypto sectors to survive if any, possible crypto crashes in 2023. So far in January 2023, the crypto lender Genesis has filed for bankruptcy. Maybe we’ll have more high-profile market crashes leading to another crypto winter, or maybe not. 

But we’re smart enough at this point to know that anything is possible – there’s no such thing as “too big to fail” in crypto. And we now know the consequences of such collapses; so, we should be better prepared for them.

Possible regulation around centralized exchanges

Nothing spurs legislation like a crisis. And 2022 was no short of crises – the precipitous collapse of FTX and LUNA and their aftermath are well documented. The majority consensus is that they could have probably been avoided if they were operating in a transparent and regulated environment. That has led to a renewed push to regulate centralized crypto exchanges. 

It remains to be seen whether legislators and financial regulators will respond with strict regulations or new laws surrounding the crypto industry. However, we expect to see some clarification on the legal “gray zone” that cryptocurrencies have been operating under.

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Over the past couple of years, attempts to produce any significant laws to establish oversight of the crypto industry fizzled out. And we shouldn’t expect everything to happen everywhere all at once at a lightning-fast pace. If anything, 2023 will serve to lay the groundwork for future regulation around crypto. Of keen interest should be the Stablecoin Transparency Act, a bill by the US Congress seeking, among other things, to establish reporting requirements for issuers of fiat currency-backed stablecoins.

Expect broader crypto market recovery

2022 was a bloodbath for the crypto market. The market capitalization dropped almost 70% in the full year 2022. While the 2018 – 2019 market crash was bigger in comparison, almost 90%, 2022 was the worst in crypto history in terms of the dollar amount wiped from the market – the market capitalization dropped by approximately $1.5 trillion. 

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January 2023 kicked off with a swift recovery. Likely the shocks from the FTX fallout are dissipating – the bank run on Binance seems to have ended, and even with the bankruptcy filing of Genesis, some semblance of normalcy returning to the markets. In the first three weeks of 2023, the total market capitalization is up almost 30%. That’s an impressive gain of about $225.63 billion.

Remember that the crypto market is largely driven by market sentiment, and this can be fickle at best. However, given that most cryptocurrencies hit multiyear lows, most investors see an opportunity to buy low. Increased volume traded driven by improved market sentiment and optimism primarily pushed the recovery. As always, remember to conduct thorough due diligence before investing in any crypto.

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Impact of Ethereum’s Shanghai update (EIP-4895)

Ethereum’s Shanghai update is the next most anticipated update after September’s 2022 Ethereum Merge. Scheduled for March 2023, the Shanghai Upgrade is expected to allow ETH stakers to withdraw their staked funds as validators. 

Data shows that about 14.05% of the total ETH in circulation is staked. The Shanghai upgrade is set to release most of these, increasing ETH liquidity. How this will impact ETH’s price is anyone’s guess. 

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However, we reckon that staking directly on Ethereum will be preferable to staking with third-party protocols (liquid staking protocols). And that means lower demand for the native tokens of liquid stacking platforms, and a possible impact on their prices. The logic here is that Ethereum’s Shanghai update removes the unique functionality of these third-party staking protocols.

The bottom line

The crypto market survived what is possibly its biggest stress test yet – 2022 had no short of surprises and systemic shocks for the broader market. And that’s why there’s a huge possibility of regulations around centralized crypto exchanges. What else should we expect in 2023? 

So far, the crypto market is already in a recovery mode, which we expect will continue throughout the year. But that doesn’t mean that all will be rosy – more crypto market crashes are still possible. Ethereum’s Shanghai update is the next most anticipated update for the blockchain, which could have repercussions for most staking protocols.

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