Cryptocurrencies Forecast 2023 – Headwinds Signal a Fall to 2020 Levels

2022 was a year for the crypto market to learn from and for investors to forget. After hitting an all-time high of $3,009 billion on November 10, the crypto market cap hit reverse in the final weeks of 2021 and 2022.

The bearish year sent the crypto market cap to a 2022 low of $727.58 billion on November 21.

From peak to trough, the crypto market cap tumbled 75.8%. For the calendar year of 2022, the crypto market cap ended the year down by $1,429 billion (65.4%) to $756.15 billion.

Defaults and bankruptcies sent the crypto market cap back to levels seen at the start of 2021. In 2021, the crypto market cap surged by $1,426 billion (188%) to end the year at $2,185 billion.

The collapses of Terra Lab and FTX sent the crypto market into the deep red, with fraudulent activity and loss of assets wiping out investor confidence while drawing lawmaker and regulatory scrutiny.

While there was plenty of doom and gloom, several winners stood out. GMX (GMX) and trust wallet token (TWT) surged by 90% and 100%, respectively, to enter the top 100 cryptos by market cap. Binance coin (BNB) fared better than its top ten peers, falling by 52%, with tron (TRX) declining by 28%.

However, there were some heavy losses across the crypto market. Solana (SOL) tumbled by 94% to exit the crypto top ten, with Cardano (ADA) sliding by 81%. Web 3 woes and tumbling NFT trading volumes added to the bearish mood.

Decentraland (MANA) fell by 91%, with the sandbox (SAND) ending the year down by 90%.

Crypto exchange tokens also felt the wrath of investors, with cronos (CRO) sliding by 90% and Coinbase (COIN) seeing its share price fall by 86%.

Crypto front-runners bitcoin (BTC) and ethereum (ETH) ended the year with losses of 64% and 68%, respectively, while XRP slid down the top ten rankings with a 12-month fall of 59%.

With crypto platforms looking to put 2022 behind them, restoring investor confidence will be the key throughout 2023.

NFT Activity, Terra Labs and FTX, the Fed, and Regulators Weigh

In late 2021 and throughout 2022, regulatory risk weighed on investor sentiment. Calls for a global regulatory framework sent the crypto market into reverse from November 2021. The collapse of Terra Labs in H1 2022 added to the market angst, leading the crypto market into a state of panic.

The investor reaction to the collapse of Terra Labs wiped out close to $800 billion, sending the market cap to just $1,000 billion. Market conditions steadied over the summer before news of FTX filing for bankruptcy sent the crypto market cap to a year low of $727.6 billion.

US lawmakers and regulator uproar over the collapse of FTX, a $32 billion exchange, left the crypto market under pressure until the end of the year. The FTX collapse left investors grappling with FTX contagion and regulatory risk. Some US lawmakers went as far as to suggest that there should be a ban on cryptos in the US.

However, the Federal Reserve and the NASDAQ Index added to the bearish mood. The war in Ukraine and supply chain disruption led to a surge in inflation, forcing central banks to take action. The Fed’s hawkish interest rate hikes and the likelihood of more interest rate hikes left the NASDAQ Index down 33.5% in 2022, the worst outing since 2008.

Web 3 activity and NFT-trading volumes also failed to impress. Ethereum-based NFT trading volumes tanked. According to Dune Analytics, Ethereum-based NFT trading volumes peaked at $4,857.4 million in January 2022 before tumbling to just $283.5 million in December.

With heightened regulatory scrutiny, the ongoing SEC v Ripple case remained another area of focus. An SEC victory could leave the broader crypto market under the purview of the SEC. Significantly, a win would likely lead to draconian regulatory measures to curb illicit activity but slow innovation.

2023 Outlook Marred by Economic and Regulatory Uncertainty

As investors look for a fresh start in 2023, crypto headwinds will continue to test investor sentiment. A hawkish Fed, the threat of a global economic recession, a regulatory overhaul, and FTX contagion remain the key risks.

In December, US lawmakers called for a ban on cryptocurrencies, responding to the collapse of FTX. While a US ban is unlikely, regulatory reforms are likely, and could ultimately dictate investor appetite in 2023.

Following the collapse of Terra Labs and FTX, crypto-related firms need to restore investor confidence. However, an SEC regulating the digital asset space by enforcement could hinder such efforts.

The ever-present threat of other crypto exchanges succumbing to liquidity crunches and ‘bank runs’ will also be a factor in H1 2023.

However, more realistic market participants will view regulatory reforms as a much-needed step in the evolution of the digital asset space. A robust regulatory environment should restore investor confidence.

A pickup in NFT trading volumes and activity in the metaverse would also be crypto market positive.

For the broader crypto market and the digital asset space, the outcome of the SEC v Ripple case could be the key driver in Q1 2023. A Ripple victory could see US lawmakers mandate the CFTC to regulate the broader digital asset space, a favored option among crypto market participants.

2023 Forecasts

In 2023, the crypto market could take one of several paths when considering the crypto market headwinds.

Worst Case

• A hawkish Fed responding to further spikes in inflation.
• US economic hard landing.
• Regulatory reforms that stifle innovation and sector growth.
• An SEC victory in the case against Ripple.
• More crypto exchanges succumbing to liquidity crunches.

A combination of the above scenarios could see the crypto market cap return to pre-2021 levels. In 2020, the crypto market fell to a March low of $108.14 billion before the extended bull run to the November 2021 high of $3,009 billion.

Base Case

• Fed takes its foot off the gas as inflationary pressures soften.
• US economy experiences a soft landing.
• US lawmakers mandate the SEC and the CFTC to regulate the digital asset space.
• The SEC settles its case against Ripple.
• The fallout from the collapse of FTX sees a few minor players collapse but no leading crypto exchanges.

In a base-case scenario, the crypto market cap will likely return to $1,000 billion but fall well short of levels seen in early 2022.

Best Case

• Fed ends interest rate hikes and plans to cut rates in late 2023.
• The US economy avoids a recession.
• Regulatory reforms address crypto exchange security and operational deficiencies while looking to support innovation.
• Ripple wins the case against the SEC, giving more regulatory oversight powers to the CFTC.
• No further fallout from the collapse of FTX, allowing crypto players to restore investor confidence.

In a best-case scenario, the crypto market cap could return to $1,500 billion but fall short of a 2022 high of $2,287 billion.