What a difference 12 months can make, throw in a couple of rate hikes, bankruptcies and increased regulatory scrutiny and what do you get? A prolonged ‘Crypto Winter’ that has seen Bitcoin prices plummet from January highs around the $48k mark all the way down to a yearly low of $15.4k. Is the low in already or will we see a further push lower in Q1 of 2023?
A Fed Pivot to Provide Bitcoin a Much-Needed Boost…
A year of unprecedented rate hikes and runaway inflation affected Bitcoin no different than most markets as excess liquidity was sucked out of the economy and market participants prioritized spending on essentials. The most recent batch of data and comments from the US Federal Reserve hint at a slower pace of hikes heading into 2023 which could provide risk assets and Bitcoin some respite and spur a potential recovery. December’s US inflation print resulted in a positive rally for risk assets with inflation showing signs of a slowdown which is expected to continue into 2023. The post US CPI rally adds credence to the idea that easing inflation and falling rates may be a saving grace for Bitcoin prices in Q1 2023.
Contagion From FTX’s Bankruptcy May Continue…
The FTX bankruptcy as well as the recent arrest of Sam Bankman-Fried have added further concerns to the Crypto space already reeling from the fall of Luna, Three Arrows Capital, Celsius and more recently BlockFi. We have seen the Binance Exchange face some challenges regarding their proof of reserves declaration in early December as client withdrawals increased and deposits declined, with clients opting for cold storage in a growing trend toward the end of 2022.
Outflow from Crypto Exchanges to Cold Storage
Source: Blockware Solutions with Data from Glassnode
There remains fear that should contagion continue to spread, we could see Bitcoin fall even further toward the $10k mark. Cathie Wood, the CEO of Ark Invest and a well-known Bitcoin advocate, not long ago stated that these recent developments may result in large institutions taking a step back from the crypto space in the near-term. Crypto has taken a significant hit to its reputation following the spate of bankruptcies post FTX which may prompt institutional investors to await more regulatory certainty before moving in.
Rise of Regulation May Lead to Potential Inflow of Institutional Investors…
2023 promises to be a year where regulation of the crypto space really comes into focus. December brought an inquiry into the demise of FTX by the US authorities who have long believed the space needs regulation. Governments around the world have accepted that crypto and Bitcoin are here to stay, and the need for a solid policy framework will be key. CFTC Chairman Rostin Behnam argues that his agency needs more power to oversee crypto operations and trading and he enjoys the backing of many prominent crypto executives. Should regulation come into play we could see a decline in crypto prices in the short term as evidenced by China banning crypto transaction in September 2021. Markets initially declined, however over the long-term regulation could stabilize the market which should lead to an increase in institutional demand and thus prop up the price.
