After the bull run in 2021 that saw increased crypto adoption, the crypto industry was impacted by numerous setbacks. The initial correction in 2022 started with a drop of around 20% and 31% in January alone.
By November, it had declined by more than 70% from its previous peak in November 2021.
Several factors contributed to this volatility, including the US Federal Reserve’s interest rate hikes and rising inflation. In this article, we will dive into what the crypto market will look like in 2023 as we cover the top predictions.
Bitcoin will lead a bull market
2022 has been rough for crypto after its value dropped more than 50% over the past year.
Among the main factors that led to this was the Fed raising the interest rates. In 2023, entrepreneur Neil Patel predicts that the Fed may slow down the pace of its rate hikes, which could be a bullish sign for the future of risky assets. He thinks bitcoin will be the big winner if cryptos recover next year.
Bitcoin has a market cap of around $995.43 billion at the time of writing. Institutional and individual investors will likely enter the asset class for the first time next year. That is because many of the funds withdrawn from the market await recovery. In addition, bitcoin is incredibly easy to buy right now.
Factors such as the Fed’s policy moves and the macroeconomic outlook will determine the future direction of digital assets this year. However, Patel predicts that bitcoin will be one of the first to gain as the markets start to recover.
CeFi will consolidate as DeFi grows
The year ended with the emergence of various problems with centralized finance, such as the failure of FTX. Paul Veradittakit, the general partner of Pantera Capital, anticipates that the industry will consolidate into a few highly regulated companies, such as Bitstamp and Coinbase.
The collapse of FTX has led to a spike in the number of decentralized finance (DeFi) transactions in the market. These transactions, which amounted to almost $100 billion from October to November, demonstrate the utility of decentralized finance.
In 2023, Veradittakit expects the number of complex DeFi applications to increase. These include GMX, a decentralized exchange, and 1inch Pro, a platform that connects traditional finance to DeFi. 2023 will also see the emergence of more innovative use cases, such as self-custody wallets and prediction markets.
Despite the current market conditions, the DeFi sector is still expected to grow. Its core infrastructure will allow it to perform efficiently and effectively. That will be especially beneficial in light of CeFi’s struggles this year.
Tremendous ZK adoption and use cases
Due to the rise of the privacy issue in the crypto industry, this year has seen a significant increase in ZK technology use. This technology uses a verifier, a proof algorithm and a prover to prove something.
The technology benefits the industry as it allows for more private transactions on-chain. Due to their lightweight nature, ZK proofs are ideal for on-chain transactions. With the emergence of multiple projects such as Risczero, Succinct Labs, and Espresso Systems, there has been a significant increase in the use cases for ZK technology.
Identity is one of the most important applications of ZK technology. With the ability to prove one’s identity on-chain, users avoid revealing their sensitive data. However, according to ethereum (ETH) co-founder Vitalik Buterin, the technology is still in its infancy.
In addition to identity, users can also use ZK technology for bridges, which allows them to send and receive messages.
Asset tokenization will increase among institutions
The rise of real-world assets (RWAs) created a huge amount of utility and liquidity in the digital financial sector. In 2023, more assets will be represented on-chain through this category, according to Paul Veradittakit, the general partner of Pantera Capital.
Today, stablecoins are one of the market’s most popular applications of an RWA. They are also some of the market’s top assets. Circle’s USDC and DAI have experienced relatively low volatility during the bear market, as they are tied to the value of the US dollar.
Many companies have started investing in real-world assets with the increasing demand for them. For instance, in 2022, MakerDAO decided to invest $500 million in DAI into the US treasury and corporate bonds. Goldfinch also provides loans that are backed by real-world assets.
In 2023, the growth of various applications of real-world assets will continue. Some of these include real estate and flash loans. In line with the crypto trend, Veradittakit expects more startups to focus on bringing regulated financial institutions into the market.
Bitcoin to reach $30,000 in the second half of 2023
The crypto ecosystem and bitcoin have suffered through a bear market that started in 2022. Many companies have collapsed, and market sentiment is poor. During the previous year, bitcoin traded like a risk asset. It has also shown price sensitivity to changes in interest rates.
According to VanEck, a global investment manager, one of the main reasons why bitcoin has struggled to move higher is that policymakers in developed markets have been trying to limit the impact of rising energy prices with higher interest rates.
The war in Ukraine has also created a more integrated Eurasia, which means that countries such as China and Russia are looking for new payment methods for cross-border transactions. Bitcoin mining might become more acceptable if the war in Ukraine is resolved.
VanEck believes bitcoin will eventually become a store of value and a hedge against inflation in developed markets. Emerging markets are also starting to focus on alternative currencies.
If the US goes into recession, the Federal Reserve might stop raising interest rates due to softening inflation. That could cause bitcoin to rise as high as $30K. In addition, the lack of bad crypto-related news may cause the price to spike even higher.
Financial institutions will tokenize more than $10 billion in off-chain assets
Financial institutions can reduce costs and improve the efficiency of their settlement and custody processes with blockchain technology. They can also improve Know Your Customer (KYC) and Anti-Money Laundering (AML) systems.
MakerDAO is currently working with Coinbase and Blackrock to deploy over $1 billion into US Treasury securities. With this partnership, investors can earn a yield on their deposit. In addition, real-world loans on platforms such as Clearpool, Goldfinch, TrueFi, and Maple may add up to as much as $300 million.
One of the private funds of Kohlberg & Co., a global investment firm, has partnered with two partners, Aspen and Securitize, to tokenize assets. The Singapore Monetary Authority is a part of Project Guardian, which aims to explore the feasibility of financial industry applications for asset tokenization and digital asset financing.
Recently, Project Guardian participated in multiple transactions involving various liquidity pools.
VanEck predicts, “Among open-source blockchains, we think Ethereum, Polygon, Avalanche, Polkadot, and Cosmos are best positioned. We can also confidently predict that industry pioneer VanEck will originate real-world assets on open-source blockchains in 2023.”
Bitcoin will test $10,000-12,000 in Q1
Almost all MVIS Global Digital Assets Mining Index’s constituents are trading below book value, and bitcoin mining is unprofitable in most cases at the moment. Due to the falling prices and rising electricity costs, many miners are expected to merge or restructure.
The possible loss of the Securities and Exchange Commission lawsuit brought against a blockchain technology company, Ripple, may coincide with the final downward trend, which could take the entire post-2020 bull market apart, as VanEck states.
The 2023 ethereum delays are coming
Ethereum had a big 2022, despite market failures in other areas. One major event was the network upgrade to proof-of-stake, also called the Merge. This event marked the end of the proof-of-work system, and it allowed for a 99.95% reduction in energy consumption.
The upgrade was long overdue, as most developers had been waiting for it since the blockchain was first launched in 2015. Notably, the next step in ethereum’s development is introducing a sharding feature, allowing the network to distribute its load across the blockchain to increase transaction throughput.
However, as Patel predicts, this feature will be delayed due to technological changes. According to the official website of ethereum, the feature will be released sometime in 2023.
In addition to the merging of the network, which was regarded as the most significant event in ethereum’s development history, Vitalik Buterin also introduced the Scourge, a further step into the development space.
With the Scourge, ethereum has six development stages until completion to be fully operational by the end of 2023.
Web3 will grow from 2 million to 20 million monthly gamers
The total addressable market for traditional gaming is around $300 billion, with 3.2 billion gamers globally. While billions of people globally are already buying and using in-game items, there still needs to be more between traditional and crypto games. With the advent of blockchain-based games, it is possible to transfer in-game assets between them.
Early play-to-own and play-to-earn games have yet to attract mass-market users due to low production value and lack of budget. In 2023, several traditional triple-A games are expected to hit the market.
Despite the decline in mainstream interest in blockchain-based games, the gaming industry is starting to embrace the potential of web3. For instance, Andrew Wilson, the CEO of EA, said that the industry’s future is in web3. Also, Yves Guillemot, the CEO of Ubisoft, a French gaming company, stated that the industry is in the midst of a revolution and plans to launch blockchain games.
Meanwhile, there is an ongoing FTC lawsuit regarding Microsoft’s acquisition of video game publisher Activision as it explores the potential of web3.
As the gaming industry continues to explore the potential of blockchain technology, many companies are hiring NFT, blockchain, and crypto experts. With the increasing number of venture capital investments in the gaming industry, there might be chances of a breakthrough in 2023.
Stricter regulation on the horizon
Following the recent high-profile failures of companies such as Celsius, Voyager, and FTX, it is clear that the need for more thorough regulations in the financial industry is now more urgent than ever, as Patel notes. These events have highlighted the complexity of the industry’s many operations. Lawmakers should also increase transparency and protect investors.
In addition, one of the most important factors that policymakers can consider when regulating the financial industry is establishing a domestic base of operations for companies such as Coinbase. That will allow them to operate within the US and avoid foreign regulations. That is very beneficial for Coinbase, as it will enable them to maintain their operations and reputation as a leading exchange and brokerage. Unlike FTX, which had to establish a foreign base of operations to operate in the US, Coinbase is already following the same regulations as other securities firms.
Despite the various regulations, every country’s regulator has a part to play in establishing a unified framework for the industry.
With developer tooling, engineers can focus on building on-chain protocols instead of repetitive tasks. That eliminates the need to spend time on mundane tasks and allows them to experiment with new ideas. Some of the prominent companies that have been working in this space include Tenderly and Alchemy.
Despite the current market environment, developers are still experimenting with on-chain applications. According to a report by Alchemy, the number of engineers using their platform has grown exponentially since the year started. In September 2022, the monthly verified smart contracts had increased by 2.6 times. And throughout the entire year, 36% of all smart contracts had been verified.
As the number of Web3 developers increases, they must have the necessary tools to build their projects. One of the most important factors they should consider is the availability of cross-chain tooling, which is composable software that they can use to launch multiple projects. In 2023, developer tooling Veradittakit expects it to grow as more people enter the industry and more use cases for crypto projects are created.
“The ongoing crypto winter could last longer this time,” says David Kemmerer, CEO of CoinLedger. “That’s because of macroeconomic factors: 40-year highs in inflation, rising borrowing costs, and political instability after Russia invaded Ukraine.”
Since bitcoin was only around for a short time following the Great Recession of 2008, the various market downturns in the past few years have not coincided with bear markets in the broader financial sector.
When it comes to answering the question of how long this crypto winter will last, one has to understand how long the US and Bank of China (BoC) will continue to raise rates and how inflation will continue to rise. Easing these factors are the only things that can help crypto in 2023.