2023 Outlook Marred by Economic and Regulatory Uncertainty
As investors look for a fresh start in 2023, crypto headwinds will continue to test investor sentiment. A hawkish Fed, the threat of a global economic recession, a regulatory overhaul, and FTX contagion remain the key risks.
In December, US lawmakers called for a ban on cryptocurrencies, responding to the collapse of FTX. While a US ban is unlikely, regulatory reforms are likely, and could ultimately dictate investor appetite in 2023.
Following the collapse of Terra Labs and FTX, crypto-related firms need to restore investor confidence. However, an SEC regulating the digital asset space by enforcement could hinder such efforts.
The ever-present threat of other crypto exchanges succumbing to liquidity crunches and ‘bank runs’ will also be a factor in H1 2023.
However, more realistic market participants will view regulatory reforms as a much-needed step in the evolution of the digital asset space. A robust regulatory environment should restore investor confidence.
A pickup in NFT trading volumes and activity in the metaverse would also be crypto market positive.
For the broader crypto market and the digital asset space, the outcome of the SEC v Ripple case could be the key driver in Q1 2023. A Ripple victory could see US lawmakers mandate the CFTC to regulate the broader digital asset space, a favored option among crypto market participants.
2023 Forecasts
In 2023, the crypto market could take one of several paths when considering the crypto market headwinds.
Worst Case
- A hawkish Fed responding to further spikes in inflation.
- US economic hard landing.
- Regulatory reforms that stifle innovation and sector growth.
- An SEC victory in the case against Ripple.
- More crypto exchanges succumbing to liquidity crunches.
A combination of the above scenarios could see the crypto market cap return to pre-2021 levels. In 2020, the crypto market fell to a March low of $108.14 billion before the extended bull run to the November 2021 high of $3,009 billion.
Base Case
- Fed takes its foot off the gas as inflationary pressures soften.
- US economy experiences a soft landing.
- US lawmakers mandate the SEC and the CFTC to regulate the digital asset space.
- The SEC settles its case against Ripple.
- The fallout from the collapse of FTX sees a few minor players collapse but no leading crypto exchanges.
In a base-case scenario, the crypto market cap will likely return to $1,000 billion but fall well short of levels seen in early 2022.
Best Case
- Fed ends interest rate hikes and plans to cut rates in late 2023.
- The US economy avoids a recession.
- Regulatory reforms address crypto exchange security and operational deficiencies while looking to support innovation.
- Ripple wins the case against the SEC, giving more regulatory oversight powers to the CFTC.
- No further fallout from the collapse of FTX, allowing crypto players to restore investor confidence.
In a best-case scenario, the crypto market cap could return to $1,500 billion but fall short of a 2022 high of $2,287 billion.
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