By Matt Hougan, Chief Investment Officer, Bitwise
Compilation: BitpushNews Mary Liu
Dear investors, what will we witness in 2023?
This is the question every cryptocurrency investor wants to know.
With 2022 finally behind us — a year of plunging prices, a string of bankruptcies and epic fraud — investors are asking: Can cryptocurrencies turn around? Will we see a crypto spring, or a crypto ice age?
Over the past few days, the team at Bitwise has gathered to discuss this topic. We present the following findings: Our 10 best predictions (and a big plus) for what's going to happen in 2023!
Please note: As with all forecasts, these are not guarantees and represent our best estimate of what to expect to happen. The future is complex and constantly changing. Whether these futures will be as written will depend on many complex factors. None of the following content constitutes investment advice.
Prediction #1: The crypto market recovery will be "U-shaped" rather than "V-shaped."
Historically, cryptocurrencies have moved in four-year cycles, rising for three years and then falling for one year. 2022 fits the mold perfectly.
Bitcoin 's annual returns since 2011
Source: Bitwise Asset Management. Data from January 1, 2011 to December 31, 2022, information for informational purposes only. Returns reflect returns on Bitcoin itself, not on any fund or account, and do not include any fees. Backward-looking performance cannot predict the future performance of any investment strategy. Future cryptocurrency cycles may not be as long as four years; four-year increments are based on historical data for illustrative purposes only and are not predictions of future outcomes. This material represents an assessment of market conditions at a particular time and is not a prediction of future events, or a guarantee of future results.
In our view, crypto is well-positioned for a recovery as we head into 2023. Improvements in blockchain technology such as Ethereum 's Merge, scaling advances such as the rise of layer 2 solutions, and new applications emerging keep us bullish.
Recovery isn't easy, though. The implosion of rampant FTX fraud and the broader crypto credit crisis cast a long shadow over the space. Regulators are circling, banking relationships are fraying and investors are skeptical. Additionally, new risks — such as the planned release of 127,000 bitcoins from the Mt. Gox settlement later this year and woes in the bitcoin mining sector — loom.
We suspect the market will trade sideways for some time before entering the next bullish phase. There is even a significant risk that another crypto company failure, a token crash, or regulatory action would catalyze another downtrend.
Ultimately, however, we believe that cryptocurrencies will recover. Historically, cryptocurrencies have bounced back from every major pullback. We don't think this time will be different.
In fact, we think the next bull market in the crypto space will be the biggest bull market yet — with all-time highs and a wave of new applications impacting mainstream adoption.
Prediction #2: The (effectively) free and (extremely) fast transactions initially promised by cryptocurrencies will finally become a reality in 2023.
When cryptocurrency burst onto the scene in 2009, it promised a world of extremely fast and largely free transactions.
Crypto says the traditional financial ecosystem is slow and corrupt. We have a better way.
But if we're being honest, the vision didn't quite land.
Yes, you can send $1 billion to anywhere in the world via the Bitcoin network 24/7/365. But it will cost you $1-2 and take 10-60 minutes. That might be better than your local bank, but $1 isn't free, and 10 minutes isn't fast in the digital age.
Things aren’t much better on Ethereum: At the height of the last bull run, a simple transaction on Ethereum cost as much as $200. $200!
No mainstream blockchain has fully delivered on its original core promises. So, you can forgive the skeptics for their derision.
However, the combination of the rise of layer 2 solutions and a planned upgrade to the ethereum blockchain (known as EIP 4844) should cut the average transaction cost on ethereum by more than 1,000% by 2023. The upshot: Transaction costs will be reliably below 1/10th of a cent, and likely well below that.
The impact is huge. Now, micropayments might actually be useful. Now, the encrypted network does have a 10x advantage over Visa. Now, non-financial transactions -- such as games, social networking and other solutions -- come into play.
(What does that last comment mean? Well, here's an example: people have been asking for a decentralized version of Twitter for years. But you're not going to pay $200 per post. You might, however, pay $0.0007 if It means a more secure, fair, and just network that also reduces spam. We’ve already seen this concept take off on platforms like Farcaster and Lens, and will accelerate dramatically in 2023.)
The market failed to appreciate the significance of this development. Hardly anyone is talking about it. But it will reshape cryptocurrencies in 2023, and then the world in the years to come.
Prediction #3: Coinbase 's market capitalization will increase by 100% from its end-2022 level.
Shares of Coinbase are down 86% in 2022, making it one of the worst-performing large-cap stocks in the world. The business lost $47 billion in market value to about $9 billion at the end of the year. For context, the company raised money at an $8 billion valuation in 2018, which means it hasn't really gained any value this past cycle.
From a fundamental standpoint, however, Coinbase looks like a giant, with revenue growing sevenfold from 2018 to 2022, from $520 million to $3.3 billion, and users growing nearly fivefold, from 22 million Growing to 101 million, platform assets grew nearly 10-fold from $11 billion to $101 billion.
In short, the market just doesn't recognize Coinbase's fundamentals.
Today, Coinbase is the most recognized and trusted name in crypto, with the largest installed base in the United States. It's run by an accomplished and dedicated CEO and has seen multiple bull and bear markets. We think it will not only navigate the space but is well-positioned for a recovery when cryptocurrencies recover.
Don't just take our word for it, though: The 26 sell-side analysts covering the company have an average price target of $71.19 as of Jan. 8, 2023, roughly double its recent trading price.
Prediction 4: After the "Shanghai upgrade" (finally allowing withdrawal of pledged ETH ), the amount of pledged ETH will increase by 50% or more.
Last September, the ethereum blockchain switched its consensus mechanism from proof-of-work to proof-of-stake. As of January 5, 2023, the value of ETH on the network is $21 billion, accounting for approximately 14% of the total supply.
Currently, that ETH cannot be "unstaked"; the transition to proof-of-stake is complicated, and one way the Ethereum network manages risk is by not allowing users to withdraw their staked ETH.
However, sometime in 2023, the ethereum blockchain will undergo the so-called "Shanghai upgrade," which will, among other things, allow the withdrawal of collateralized ETH.
Some market commentators worry that this will trigger a massive sell-off in the market as investors, some of whom ETH back in December 2020, rush to unmortgage and sell. However, this statement misses the point.
In the short term, mass sales are simply not possible: the Shanghai upgrade will limit the amount of ETH that can be unstaked at any given time in order to remove any selling pressure.
More importantly, this pessimistic view misreads market dynamics in the long run. In our opinion, allowing investors to uncollateralize their ETH will result in more ETH being collateralized, not less.
Here's why: Today, many investors who want to invest in ETH and earn yield are sitting on the sidelines. After all, most investment strategies cannot tolerate indefinite lock-ups. Therefore, most investors stay away from the market. But once the indefinite lockup is removed, the percentage of investors willing to commit to ETH will explode.
This is why we expect the total amount of ETH to increase by at least 50% by the end of the year.
Prediction 5: ETH will be deflationary in 2023, and the total circulating supply will decrease by at least 1%.
Ethereum’s move from proof-of-work to proof-of-stake last September has drastically reduced the amount of new ETH the blockchain issues every day. The reason is simple: proof of stake is more efficient than proof of work.
When lower issuance is combined with the fact that ETH is burned (permanently removed from circulation) when people access the network, the net supply of ETH could theoretically drop.
We think 2023 will be like that.
Before the switch to proof-of-stake, ETH 's circulating supply was growing at an annualized rate of roughly 2.5%. But since the switch was made, net issuance has remained nearly flat, with supply growing by just 0.011% per year.
We expect the need to access and use Ethereum applications to increase significantly in 2023 compared to 2022, which will increase the amount of ETH consumed through transactions. As a result, the total amount of ETH in circulation will decrease by 1% or more, with a huge impact on investors.
Prediction 6: The correlation between cryptocurrencies and the stock market will drop sharply, below 0.5 (and possibly to 0.25).
A common criticism of cryptocurrency performance over the past two years is that it is highly correlated with stocks. Cryptocurrencies soared in the post-Covid bull market in March 2020 and peaked at the end of 2021 when the stock market began to retreat.
Critics say, I think cryptocurrencies should be an uncorrelated asset.
They have a point. As the chart below shows, the correlation between Bitcoin and the S&P 500 spiked in early 2020 and never stabilized. (The chart shows the rolling 90-day correlation between the two assets since Bitcoin trading began.)
Bitcoin's Correlation With S&P 500 Nears All-Time Highs
Source: Bitwise Asset Management, data from IEXCloud, as of December 31, 2022. Note: This chart shows a rolling 90-day correlation. The S&P 500 is represented by the SPDR S&P 500 ETF Trust (SPY).
We think the metric will move closer to its historical average in 2023, with the correlation falling below 0.5 (and possibly below 0.25).
Cryptocurrency-equity correlations have soared in 2020 as macro factors emerged as the dominant force driving all capital assets. Stocks, bonds, commodities, cryptocurrencies: what matters is what Fed Chairman Powell does with rates.
Macro factors remain important in 2023 as we battle an impending recession and ongoing geopolitical instability. But the market has now digested the Fed's rate hike mechanism, and the relative strength of the macro signal will weaken year by year.
This means that returns in crypto will be driven more by factors native to crypto — what’s happening in technology, regulation, and otherwise — that typically have nothing to do with the stock market.
The high correlation between cryptocurrencies and stocks is an anomaly. We expect things to start returning to normal in 2023.
Prediction 7: At least one significant piece of encryption legislation will pass the US Congress in 2023.
The aftermath of FTX has put cryptocurrencies front and center on Washington’s agenda. But even before the FTX debacle, Congress was preparing for several legislative initiatives, including a push for stablecoin regulation and steps to determine which agency should regulate cryptocurrencies (CFTC vs. SEC).
With crypto-friendly Congressman Pat McHenry (R-NC) chairing the House Financial Services Committee, expect Washington to pass at least one major piece of crypto regulation in 2023.
For what it's worth, our guess is that the legislation will be a mixed bag, with some parts the industry likes and others it fears. Overall, however, increased regulatory transparency will benefit the sector.
Prediction 8: USDC will surpass USDT (Tether) to become the largest stable currency in the world.
Stablecoins are one of the killer apps of cryptocurrencies, with over $130 billion in stablecoin assets under management. However, the vast majority of it is concentrated in two names: Tether (USDT), worth $66 billion, and USD Coin (USDC), worth $44 billion.
These two assets represent two different facets of the crypto community.
Tether is a largely unregulated stablecoin that relies on covert proofs and a long track record to convince investors it holds enough collateral to back the asset. It is primarily used by offshore exchanges and entities outside of the United States.
In contrast, USDC is a US-registered entity created by Circle and Coinbase. It positions itself as the most regulated, transparent and secure stablecoin.
We think a defining theme in 2023 will be that investors choose transparency and sound regulation over alternatives. This means more money flowing into USDC. It will end the year at the top.
Prediction 9: A cryptocurrency unicorn – a company previously raised at a $100M+ valuation – will fail this year.
FTX, BlockFi, Voyager, Celsius… In 2022, many former unicorns are forced into bankruptcy, swallowed by scandal, mismanagement, and the credit crunch of cryptocurrencies.
We don’t think it’s over yet — 2023 will see at least one crypto unicorn go bust (and possibly more).
Prediction 10: Uniswap will surpass Coinbase in Q4 2023.
The market share of decentralized exchanges will grow in 2022 as investors lose confidence in centralized exchanges and become familiar with decentralized alternatives. We expect this trend to accelerate in 2023. In fact, we think Uniswap will overtake Coinbase (the largest exchange in the US) by Q4 2023 in total volume.
Don’t be so surprised: In November 2022, Uniswap will actually surpass Coinbase in settlement volume as investors flee centralized exchanges after FTX. But that ratio fell back in December as the market stabilized.
We see it flipping more sustainably in Q4 2023, when Uniswap overtakes Coinbase and may never look back.
The future is decentralized. Uniswap has already achieved it.
Additional Prediction: A major new narrative for cryptocurrencies in 2023 will be: "Crypto is a solution for tech giants"
Tech giants are out of favor right now.
Meta/Twitter/Apple: These are some of the most hated companies in the world today, too big, too profitable, and with too many reach.
On top of that, they actually have monopoly power, and the network effects of what they do are so strong that users are “captured” by them. If you have 50,000 followers on Twitter, you can't leave it for another social platform, and if you talk to all your friends and relatives on Facebook, you can't leave it for another app.
This absolute control encourages private monopolies to abuse users. Their decisions are for corporate profits, not for users and the public good. Users have no choice but to accept. Switching costs are too high.
good news? Encryption solves this problem.
Blockchain technology allows for the creation of public networks that benefit users rather than companies.
For example, Ethereum can be thought of as the first public computer: an operating system accessible to all but controlled by no one. No individual, company, or even country can change the way this computer works. But everyone can build applications on top of it, and users and their data won't be held captive by any individual company-owned entity.
This is more like how the underlying internet works than how Facebook works, the open and reliable architecture of the internet allows a million entrepreneurs to build new applications knowing that the underlying foundation will not change, cryptocurrencies and Blockchains can also restore openness to other networks.
Crypto evangelists will push this narrative in Washington and the media, and it needs a new story, a reason for skeptics to back it up, instead of just calling it a hoax or conspiracy.
It will resonate, and there will be op-eds, congressional testimony and generous support from leaders of the left and right.
As good as it sounds, blockchain is the tech giant's solution, and what's even better, it also happens to be true.
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