2022 Market Turmoil: Cryptocurrency Recovery Amidst Meltdown and FTX Collapse Sets Stage for 2023 Rebound
Following a strong finish to 2023, crypto investors are attentively observing central bank interest rates and eagerly awaiting a US regulatory decision concerning new bitcoin products, crucial factors influencing their investment strategies for the upcoming year.
The crypto market saw a turnaround this year, marking a significant recovery from the tumultuous events of 2022. The previous year was marred by a series of scandals and market upheaval, notably the collapse of FTX and the subsequent fraud charges against its CEO, Sam Bankman-Fried. These incidents deeply impacted the industry’s credibility.
Bitcoin, the leading cryptocurrency and a pivotal indicator of market trends, experienced a notable resurgence, more than doubling its value this year. In November, it surged to a 20-month peak, hitting $42,000 (approximately Rs. 35 lakh) per token. Notably, 2023 emerged as its most profitable year since 2020 in terms of percentage gains, culminating in a favorable market sentiment among investors.
Market sentiment has been lifted by the anticipation of subdued inflation, paving the way for global central banks to potentially pause further rate hikes and initiate easing measures in the forthcoming year. This scenario is expected to render risk assets more appealing to investors. Additionally, the imminent approval of a spot bitcoin exchange-traded fund (ETF) by the US Securities and Exchange Commission (SEC) has contributed significantly to this optimistic outlook.
Analysts predict that these overarching themes, coupled with the anticipated April “halving” of bitcoin—a process that diminishes token supply—will continue to bolster the market in the upcoming year. However, while these factors are seen as favorable catalysts, some experts caution that the market may not be able to replicate its record highs from 2021.
James Butterfill, head of research at CoinShares, highlighted the convergence of various factors poised to influence the market in 2024, especially the culmination of the rate cycle, indicating a potentially transformative year for the cryptocurrency landscape.
While the end of rate hiking is a positive for risk assets, Andrea Filtri, the co-head of research at Italy’s Mediobanca, noted crypto market conditions are still far from where they were in 2021.
Fed officials have signaled rates will not be dropping soon, while strong Friday employment data suggested market expectations of a rate cut early next year were probably premature.
“It was easy at the time to have proliferation with easy money,” said Filtri. “I am not so sure that, as interest rates go down, you will have the mirror trajectory.”
ETF hype
The crypto industry endured more damaging scandals this year. Most notably, Binance and its CEO, Changpeng Zhao, pleaded guilty to breaching US rules on money laundering.
The launch of a bitcoin ETF, however, could help legitimize the industry, some say.
Several major financial firms, including BlackRock, have filed applications with the SEC to launch a spot bitcoin ETF which, if approved, could potentially draw several billions of dollars of institutional money into the cryptocurrency.
Reuters reported this week that industry talks with the SEC have advanced ahead of a key January deadline when the SEC is expected to give some products the green light. That has kept traders bullish, although a sell-off on the news is possible.
“The price could go through a correction immediately after their approvals since the market has been pricing in the event, but in the long run spot bitcoin ETFs could rake in several hundred billion dollars a year to the bitcoin market,” said Yuya Hasegawa, a crypto market analyst at bitbank, a Japanese-based crypto exchange.
Many crypto watchers are also eyeing the next bitcoin “halving,” expected in April. That process is designed to slow the release of bitcoin, whose supply is capped at 21 million tokens – of which 19 million have already been created.
Bitcoin rallied on the previous three halvings, the most recent of which was in 2020. But, given the different market conditions, it’s unclear whether it will cause a rally again this time, said CoinShares’ Butterfill.
“If we combine it with the high demand from an ETF in the United States and reducing new supply coming in, it could have an impact, but I’m not holding my breath.”