The cryptocurrency industry has been rapidly evolving in the past decade. It has been consistently growing in terms of size and the number of its components.
Cryptocurrencies constituted the primary element of the industry during its initial development stage.
The next evolutionary step was the introduction of crypto-assets built on blockchain, including non-fungible tokens (NFTs).
At the same time, blockchain technology itself has been finding its way into the business world through smart contracts and the Internet of Things. These attributes continue to define its future development path.
When preparing a forecast for the crypto industry in 2023, it is necessary to focus on several aspects: the regulatory, the technological, and the market.
Let me share with you our expectations, which Kyrrex`s team is awaiting in the new year.
Regulations
Regulators were tightening their grip on the crypto markets in an attempt to make it less of an uncharted territory. Such attention was partially stemming from the growing scale of the crypto markets.
It became a necessity to introduce regulatory measures aimed at the prevention of criminal activities, such as fraud and money laundering.
The anti-money laundering (AML) and know-your-customer (KYC) protocols became a requirement for cryptocurrency exchanges.
The regulatory supervision will strengthen in 2023, especially in the EU.
Specifically, Europe is planning to enforce the Markets in Crypto-Assets (MICA) regulation memo. It will include new categories of crypto assets that were outside of the existing rules.
The case of FTX shows how one market player failing to meet its obligations can negatively affect the entire industry.
Sam Bankman-Fried, the founder and CEO of FTX, used the money of FTX traders to fund risky trades of his other trading firm, Alameda Research.
The misappropriation of assets is a clear violation of regulatory guidelines
and principles, yet it became publicly available only after FTX failed to cover
major outflows from the exchange.
and principles, yet it became publicly available only after FTX failed to cover
major outflows from the exchange.
This calls for tighter regulatory compliance on the entire industry, which will come shortly.
The legislative context will also include more crypto litigation. The case in point is Toronto Cash, a cryptocurrency exchange accused of money laundering activities.
The exchange failed to follow the compliance guidance protocol introduced by the U.S. Office of Foreign Assets Control.
Since Hong Kong, Seychelles, Panama, and others are planning to mirror the regulatory controls of the leading economies, it will be possible to observe a rise in the number of such cases in 2023.
The introduction of the Central Bank Digital Currency (CBDC) may also limit the anonymity of the users of all crypto markets with the updated regulatory base.
Technology
The changes in technology will have a direct effect on the crypto market. The most recent technology upgrade of Ethereum has shown the necessity to eliminate the mining component.
The replacement of the proof-of-work concept with the proof-of-stake concept is a matter of time.
Since Ethereum went through its upgrade via the merger with another blockchain, it is possible to foresee further consolidation in the crypto markets.
Metaverse offers another development level that will include the appearance of the new DeFi apps and blockchain-based instruments.
Similarly, the expansion of Web3 should offer a broad range of opportunities by introducing new levels of interaction and communication.
Layer 2 technologies will contribute to the scalability of cryptocurrencies, potentially expanding their outreach.
Market
Cryptocurrencies remained highly volatile since their inception. They also remained relatively independent from the stock markets and the global economy.
Partially because of their smaller scale in the past and partially because of their image as a “safe haven” during the recessions, crypto assets were enjoying gains during the bearish markets.
This trend seemed to have reversed in 2022.
Cryptocurrencies moved in tandem with the stock and futures markets, essentially mirroring or even preempting the decline periods.
In addition, the volatility of cryptocurrencies fell below the volatility of the stock markets.
For instance, Bitcoin was less volatile than the S&P 500 and NASDAQ over certain periods of 2022. These tendencies signal the maturity of cryptocurrencies and the resulting higher attractiveness for investors.
However, S&P 500 has been losing on average 0.09% per day in 2022 versus a 0.31% daily loss of Bitcoin.
It is impossible to discount the external pressures on the crypto markets. The stagnation of the global economy, the war waged by Russia against Ukraine, as well as the tensions between the U.S. and China, contribute to the overall volatility of the markets.
The global inflationary pressures combined with the slowing economy add to future uncertainty.
Crypto markets should not expect an easy 2023. The combination of regulatory, market, and economic pressures suggest another year of volatility and potential decline.
The case of FTX and its rapid bankruptcy will speed up the process. These new obstacles may prolong the recovery period for the crypto industry.
At the same time, the fundamentals look highly positive for the crypto industry.
The proof-of-stake protocol completely eradicates the environmental concern by reducing energy consumption from mining.
Institutional investors and large corporations are actively investing in crypto assets, which supports a growing level of demand.
Banks are adding the option to process transactions and accumulate savings in cryptocurrencies.
Stronger regulation is pushing out the players seeking short-term gains or engaging in fraud. These positive elements outweigh the negative ones and add optimism for the long term.