There are several narratives and key events likely to drive crypto’s path throughout 2023. In this week’s newsletter we dive into the main factors to consider when looking at the forecast for Bitcoin, Ethereum and the broader landscape. Next week we’ll continue this trend, covering insightful projections for DeFi and NFTs, so if you haven’t yet, make sure to subscribe and share the newsletter with anyone who might find it relevant.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin surprisingly recorded lower fees this week than during the holidays, with activity remaining near yearly lows
- Ethereum fees did spike nearly a third higher than during holidays, with on-chain activity being driven mostly by Uniswap and OpenSea, leading to a small decline in ETH’s supply
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation under regular circumstances
- Exchange outflows continue just as they finished the year: Bitcoin and Ether saw withdrawals of $90M between the two this week, on top of nearly $450M throughout the last week
2023 Outlook — Bitcoin, Ethereum and Macro
Bitcoin — The original cryptocurrency struggled in 2022, disappointing those who believed it could act as an inflation hedge. Throughout 2023, Bitcoin may face additional headwinds both from the macro environment and its internal dynamics, particularly regarding miners.
Miner capitulation? In previous bear markets, miners did decrease their hash rate until a few months near the bottom.
- In 2022 Bitcoin’s hash rate set new highs, just as it did throughout the first three quarters of 2018
- However, the increasing hash rate, along with rising energy costs, have diminished miners’ margins, leading to established miners such as Core Scientific — a publicly traded company that was worth over $5B — filing for bankruptcy
- This suggests Bitcoin hash rate is likely to decrease in 2023 as many miners shut down operations, potentially even selling some of the 1.92 million Bitcoin reserves that they hold (worth $32.3B)
Dark clouds — in addition to miner pressure, Genesis’s increasingly likely bankruptcy has been acting as a dark cloud to Bitcoin and the crypto market, even though that seems to be mostly priced in based on the market’s lack of reaction to recent news. Mt Gox repayment claims for 141,000 BTC hacked back in 2013 also adds uncertainty, though it’s unclear how many of these clients would be willing to sell given Bitcoin’s performance since then and last year’s decline.
Halving hopium — on the positive side, Bitcoin’s reduction in issuance is set to occur in Q2 2024. While this is still over 400 days away, the fact that it has arguably been a bullish catalyst historically and the four-year cycle pattern crypto has followed, it could lead many to buy in anticipation as occurred in 2019. Miner rewards currently make up for approximately 0.1% of Bitcoin’s daily volume, suggesting the halving itself could have a lesser role determining the path ahead than the narrative surrounding it.
Ethereum — Following Ethereum’s transition to proof of stake, its next upgrade, the Shanghai fork, will progressively allow those staking to unlock their locked ETH if they opt to. This has potentially large second order effects for ETH as well as for entities staking ETH.
Bullish or Bearish Unlock? While Ethereum’s Shanghai fork will allow those who had locked their ETH for years to withdraw, it could lead many more to stake
- ETH withdrawals will be processed through a queue with a maximum of approximately 43,000 staked ETH allowed to exit per day (source: ethereum.org)
- Based on this, it would take over a year for the 15.91 million ETH staked to be withdrawn, preventing mass withdrawals and mitigating selling pressure
- The fact that people staking may now be able to withdraw, even if they have to form part of a queue, could in turn encourage more people to stake
- Out of proof of stake networks, Ethereum has the lowest percentage of circulating supply staked, per stakingrewards.com; this could change if people become more comfortable staking ETH after these upgrades have taken place
- Finally, if an increase in the amount of ETH staked does materialize, liquid staking services such as Lido are expected to record increasing revenues, which likely explains LDO’s 35% rise over the past week
EIP-4844 & L2s — After the Shanghai fork, Etheruem is set to implement the so-called “proto-danksharding” proposal
- Vitalik co-authored the EIP-4844 paper, where he introduces a new type of transactions, blobs, which carry transaction data significantly more efficiently than current calldata transactions
- This is expected to result in a reduction of 10 to 100 times lower gas fees for rollups such as Arbitrum and Optimism
- With activity on layer 2s already climbing, proto-danksharding is expected to further accelerate this trend
On-chain Activity Forecast — While these upgrades could drive interest in using Ethereum, bear markets typically result in decreasing blockspace usage
- With a high portion of activity on top of Ethereum still being speculative (e.g. buying an NFT or sh*tcoin with expectations of price increases), there is a natural drop in fees as prices drop
- This was the case in 2018 and has been thus far for 2022/23
- Moreover, migration of activity to L2s also means less ETH will be spent to use the network, potentially decreasing its demand
- It’s unclear whether the shift to L2s would be bullish for attracting greater total activity to Ethereum, or bearish for decreasing the amount of ETH spent (and therefore burned) to use the network
- How ETH reacts to this foreseeable trend should shed light on whether investors see it more as a utility infrastructure, a digital nation-like ecosystem or a potential store of value
Macro — As much as crypto people may be tired of macroeconomic trends driving the industry’s outlook, it’s likely to still have influence over the space. Based on IntoTheBlock’s capital markets data, in 2022 we saw a record high yearly-average correlation coefficient of 0.55 between Bitcoin’s and the S&P500’s prices.
Will macro continue to set the tempo for crypto? This is the question thousands of market participants ask themselves following the highly-correlated regime of 2022
- On one hand, correlations between crypto and stocks have noticeable dropped in Q4 as the FTX collapse weighed down solely on the former; does this mean that crypto is back to operating under its own rules?
- On the other hand, there is reason to believe that if stocks continue to drop to new lows, that it would also lead to selling pressure on crypto from correlation-driven bots, as well as any remaining forced seller with exposure to both asset classes
- With 81% of Bloomberg survey respondents expecting a recession in 2023, and the federal reserve continuing their hawkish remarks despite this, it seems to be market consensus that stocks will reach new lows this year
Though it’s still early in 2023, we should get a better idea for the relationship between macro figures and crypto as more economic data such as CPI and unemployment come to light. Analyzing these closely, along with major narratives and milestones expected for Bitcoin and Ethereum are likely to be the key for those looking to outperform the market. Ultimately, with a myriad of perspectives and factors affecting crypto both positively and negatively, 2023 should be a challenging, yet captivating year.
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