It’s been a wild year so far: an active war, elections and coordinated central bank rate hikes and bankruptcies have made 2022 one of the most difficult years for investors to navigate. And while no one could have predicted what happened in 2022, we wanted to have some fun with some predictions for 2023, based on what we know today.  

1) The market cap of the 4 major stablecoins will surpass that of Ethereum and will become more than 50% of BTC’s market capitalization.

Stablecoins are solving a problem, and it shows. It is the sector within crypto that has best withstood the recent market downturn. As the market capitalization of other crypto assets have plummeted, stablecoin balances have remained strong. So much so, that the market capitalization of stablecoins briefly surpassed that of Ethereum for a few days in 2022. We expect stablecoin market capitalization to surpass that of Ethereum in Q1 of next year and continue growing to become over 50% of Bitcoin’s market capitalization. 

2) Stablecoins will get regulated by the U.S. - which will create a divergence in the market between stablecoins that comply with U.S. regulations, and those which do not.

While it takes time to create a legal framework, a lot can be expedited when you add a little public pressure. While the collapse of 3AC and other international platforms did not inject that urgency into U.S. lawmakers earlier this year, the collapse of FTX did. This is because FTX had a great deal of U.S. clients, investors and promoters. U.S. politicians and regulators have been publicly affiliated with SBF and received millions in donations from him. They will do whatever they can to save face. 

In other words, too many Americans were impacted by the collapse of FTX, and American media is all over the bankruptcy case. U.S. regulators will likely jump into action, and the cleanest - and arguably most beneficial area for the U.S. to regulate, is U.S. dollar-pegged stablecoins. It furthers the reach of the U.S. dollar under their oversight, and creates a natural buyer of U.S. treasury bonds for their reserves (both of which benefit the U.S. over the long term).

3) There will be more mergers and acquisitions in the crypto industry. 

As Central Banks continue to engineer an economic winter to cool down inflation, all sectors of the economy will continue to feel the pressure. Crypto markets will also feel the chill with a reduction in trading volumes and overall activity. The macroeconomic environment and recent events in crypto create opportunities for companies to realize economies of scale by consolidating or merging efforts. Layering on top the fact that regulatory costs are likely to increase, this sets the stage for potential mergers and acquisitions in the industry. Likely, it will be focused around centralized entities with complimentary products and/or market focus, but it could also spill into the DeFi ecosystem as projects look to consolidate and reduce costs further.

4) Regulation in the U.S. will cause changes in product availability for U.S. clients as companies take time to adjust. However, the same regulations will pave the way for banks to start getting more involved with crypto.

Regulatory changes are typically done either in a proactive fashion, with ample time and consideration for all aspects of the law (as was the general path for the first 6 months of the year), or in a reactive fashion, opportunistically using public pressure to rush laws into existence to “protect consumers” and appease the masses. Unfortunately, recent events suggest that the lawmaking we will see in 2023 will be more of the latter. 

This could cause difficulties as companies look to adapt their product offerings to a fast changing regulatory landscape, and as such - some product offerings may become limited in the U.S. and other highly regulated markets. While this may be an inconvenience to clients, the same regulation should pave the way for more traditional financial institutions to enter the space, which should ultimately result in more options for consumers in the long term. Conversely, if the regulations are too restrictive in their approach, it could drive some consumers to riskier alternatives, offshore or in DeFi - playing a game of whack-a-mole with local regulators.

5) Books will be released highlighting all the scams and losses that crypto caused throughout 2022. Counterintuitively, these books will draw newcomers to the space as some look to learn more and others try to repeat the fortunes created in 2021.

Last year felt like a movie - and who better to write the script than Michael Lewis? As it is known to many, Mr. Lewis, author of Moneyball and The Big Short, had been spending 6 months with Sam Bankman-Fried prior to the collapse of FTX and he was writing a book about it. There are rumours that Apple is in talks to buy the rights of the book. While these are all rumours for now, this looks like too big of an opportunity for Mr. Lewis or any financial writer to pass up on. It will likely make its way to print sometime in 2023, and it would not be surprising to see a TV series or documentary hit the media in 2023. 

Yes, the story is about fraud and deception. No, it is not a good look for the crypto industry. However, this won’t stop a mainstream audience from wanting to learn more about the world of crypto. While many will dismiss the space during an economic downturn, others will look to understand it better - and be drawn by its potential. There will also be a group that will be inspired by the fortunes that were amassed, and will undoubtedly take a stab at speculating and tinkering. Overall, any big media piece or cult classic should provide a boost for awareness and even trading volumes during the year.

6) The race to transact stablecoins on bitcoin rails will heat up. 

As we mentioned above, we are bullish on the future of stablecoins. A big driver of more adoption will be eliminating the friction to transact in them. Currently, there is a big arms race between protocols to enable stablecoin transactions as fast and cheap as possible. 

At the moment, Lightning Labs is leading the charge through its Taro protocol - but they will be joined by others attempting to bring stablecoins to the most secure blockchain around. 

Outside of Bitcoin, it would not be surprising to see L1 or L2 blockchains subsidize the use of stablecoins to gain traction. For context, in Iran, where crypto adoption is in the top 10 worldwide, the most used stablecoin is Tether on the Tron blockchain. This is because Tether is the most widely used stablecoin, and Tron offers the cheapest  and fastest blockchain to move it on. 

7) Gold will top $2,000/oz as Central Banks and sovereign funds start allocating more of their reserves

Gold has been slowly gaining momentum in the investment community as voices like Nouriel Roubini endorse it for a “doomsday protection” portfolio. While it came under tremendous pressure for most of 2022 as Central Banks raised rates and inflation subdued, it has embarked on a solid rally since late October and is currently trading north of $1,800/oz. 

As we’ve covered here, gold is inversely correlated with the real return of the U.S. dollar (interest rate minus inflation). As the Fed raised rates and inflation dropped, the real yield improved during most of the year, and gold dropped from over $2,000/oz to a low of $1,660 in September. However, as the Federal reserve approaches their terminal interest rate (meaning they won’t raise more), and inflation stabilizes, gold should stand to benefit in 2023. Additionally, Central Banks wanting to replace foreign bonds from their reserves, and a potential reopening in China, should both act as tailwinds for gold in 2023.

8) After the Shanghai update is live, that will allow users to unstake their Ethereum, Ethereum price will move north of 0.09 BTC.

In bitcoin terms, ethereum has been trading in a very tight range for the last 18 months (since May 2021). While it looked like it was about to break the range during the summer, there was a sudden and violent rush of interest when the Merge was announced. Prices rallied until the date of the Merge, and eventually it sold off. The “buy the rumour, sell the news” adage turned out to be true in this case. 

However, the Merge was only one of the upgrades necessary to enable the full functionality of proof-of-stake. For those who don’t know, as it stands today, users that have more than 32 ETH can stake their ethereum and earn interest, but they cannot unstake it. 

The ability to unstake ETH will start after the Shanghai upgrade. It is tentatively scheduled for March 2023, but it has still not made big headlines given the current news context. This narrative should pick up early in the new year, and the thirst for staking yield should drive in a new wave of investors, causing ethereum prices in bitcoin terms to surpass 0.09 BTC at some point in the new year.

The Week Ahead  

It’s the last week of the year and there’s not much economic data relevant to bitcoin on tap. The most meaningful economic data point for the week came out Tuesday with the S&P Case Shiller U.S. home price index. The index, which tracks the top 20 real estate markets in the U.S., saw its fourth consecutive month-over-month drop. This was the first time every single city in the index showed a reduction in average real estate prices. The average drop for October was -0.5%. While the index is still up 8.6% from October of last year, the deterioration in average home prices across the U.S. is evident - high interest rates are doing what they’re supposed to.

What is happening to U.S. real estate will soon happen to all other economies where Central Banks have done similar rate hikes (which is a lot of the western world). As a reminder, real estate is - by far, the largest asset class in the world.

While home prices are dropping, high interest rates have effectively negated the effect of the lower prices when it comes to affordability. 

In summary, as real estate, equities, bonds, and crypto prices drop, this will impact most portfolios, and when people feel like their wealth has been impaired, they are most likely to change their spending habits. This is happening, fast. So much so that the risks of the U.S. entering an economic recession next year are high and rising.

As always, here’s a summary of the events and data that could move markets in the week ahead:

Thursday

08.30 AM EST - U.S. Jobless Claims. Expectation is for 220,000 jobless claims, which is higher than last month’s 216,000. However, the number is still too low to be worrisome for the Fed. The U.S. labour market remains very tight as we’ve covered here recently. 

It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.

Notice for U.S. Residents: Effective April 4, 2022, U.S. clients will no longer be able to earn interest on any newly deposited funds in their BTC and/or USDC Savings Accounts, where available; however, they will continue to earn interest on their pre-existing balances in their BTC and/or USDC Legacy Savings Accounts.

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