With the introduction of remote working and enforced isolation bringing about an increase in digital payments, combined with the proliferation of easy fiat money, cryptocurrencies were supposed to be entering a golden age of growth post-pandemic. But will the Crypto market bounce back in 2023?
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After rebounding strongly in the early stages of the pandemic era, with Bitcoin nearing the $50,000 mark in 2021, the reversal of low-interest rates and the tightening of the US Dollar money supply, cryptocurrencies have suffered a marked reversal in fortunes.
Finding a floor more than 50% higher than the pre-pandemic level of around $10,000, Bitcoin most recently settled at around $13,000 – a strong three-year return, but the market is now awakened to a fintech platform that is seeing less and less investment and readily available venture capital.
Whether the cryptocurrency market is able to rebound in 2023 is dependent on a number of factors. These factors include economic conditions, regulatory developments, technological innovations, investor sentiment, and global events, among others.
In this article, AskTraders will explore the following topics:
Table of contents
Economic conditions and monetary policy
If the overall economy is strong and growing, it could potentially lead to increased demand for cryptocurrencies. A growing money supply and highly productive global economies will lead to an increased demand for savings, investments, and spending options.
A strong and growing economy is typically characterised by low unemployment, high consumer confidence, and increasing demand for goods and services. When the economy is performing well, people may be more likely to take on risky investments, such as cryptocurrencies, as they may be more confident in their financial prospects and feel that they have more disposable income to invest.
Additionally, a strong economy may lead to an increase in foreign investment as investors seek out opportunities to take advantage of favourable economic conditions. This could potentially lead to an increase in demand for cryptocurrencies, as they may be seen as a desirable investment option.
On the other hand, a weak or contracting economy may lead to reduced demand for cryptocurrencies, as people may be more risk-averse and less likely to invest in risky assets.
Monetary policy: Central banks around the world have a significant influence on the value of currencies, including cryptocurrencies. If central banks adopt more accommodative monetary policies, it could potentially boost the value of cryptocurrencies.
Monetary policy refers to the actions taken by central banks to influence the supply and demand of money in an economy. Central banks use a variety of tools to implement monetary policy, including setting interest rates, adjusting reserve requirements, and engaging in open market operations.
Monetary policy can have a significant impact on the value of currencies, including both fiat currencies (such as the US dollar or the euro) and cryptocurrencies. If a central bank adopts more accommodative monetary policies, it can lead to an increase in the money supply, which can potentially boost the value of cryptocurrencies. For example, if a central bank lowers interest rates, it can make borrowing cheaper, which can lead to an increase in spending and economic activity. This increased economic activity could potentially lead to an increase in demand for cryptocurrencies.
On the other hand, if a central bank adopts more restrictive monetary policies, it can lead to a decrease in the money supply and potentially put downward pressure on the value of cryptocurrencies.
The recent developments surrounding FTX, BlockFi, Terraform Labs, and many others point to big developments in the legislative space of cryptocurrencies. For better or worse, a big change is coming to the crypto regulatory landscape.
The regulatory environment surrounding cryptocurrencies can have a significant impact on their value. In general, a more favourable regulatory environment can increase the adoption and use of cryptocurrencies, which can potentially lead to an increase in their value. For example, if regulators adopt policies that make it easier for businesses to accept cryptocurrencies as a form of payment, it could increase the demand for cryptocurrencies.
On the other hand, a less favourable regulatory environment could potentially discourage the use of cryptocurrencies and put downward pressure on their value. For example, if regulators adopt policies that make it difficult for businesses to accept cryptocurrencies or that impose strict requirements on cryptocurrency exchanges, it could reduce the demand for cryptocurrencies.
Some steps that governments might take to improve the footing of cryptocurrencies could include the following:
- Clarify the legal status of cryptocurrencies: One of the main barriers to cryptocurrency adoption is the lack of clarity surrounding their legal status. By clarifying the legal status of cryptocurrencies, governments can help to reduce uncertainty and encourage adoption.
- Develop regulatory frameworks: Developing clear and consistent regulatory frameworks for cryptocurrencies can help to reduce uncertainty and increase confidence in the market. This could include establishing rules for exchanges, requiring compliance with anti-money laundering and know-your-customer regulations, and setting standards for cybersecurity.
- Promote education and awareness: Many people still need to become familiar with cryptocurrencies and how they work. Governments can help to promote education and awareness about cryptocurrencies through public campaigns and partnerships with industry groups.
- Foster innovation: Governments can also help to foster innovation in the cryptocurrency space by supporting research and development, providing grants or funding to start-ups, and establishing regulatory sandboxes where companies can test new technologies and business models.
- Encourage the use of cryptocurrencies: Governments can also encourage the use of cryptocurrencies by accepting them as a form of payment for goods and services or by offering tax incentives for companies that accept cryptocurrencies.
The alternative and negative approach for cryptocurrencies might include the following steps:
- Impose strict regulations: Governments can impose strict regulations on cryptocurrencies, such as requiring exchanges to register with regulatory authorities or imposing strict reporting requirements. These regulations can increase the cost and complexity of using cryptocurrencies, which can discourage adoption.
- Ban or restrict the use of cryptocurrencies: In some cases, governments may choose to ban or restrict the use of cryptocurrencies altogether. This can be done through legislation or through the use of technical measures, such as blocking access to cryptocurrency exchanges or websites.
- Impose taxes on cryptocurrency transactions: Governments can also impose taxes on cryptocurrency transactions, which can make it less attractive for people to use cryptocurrencies.
- Crackdown on illegal activities: Governments can also take steps to crack down on illegal activities involving cryptocurrencies, such as money laundering or financing terrorism. While these activities are already illegal, the anonymity of cryptocurrencies can make them more attractive for these purposes, and governments may choose to take additional measures to prevent their use for illegal purposes.
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Technological advancements can have a significant impact on the value of cryptocurrencies. The development of new technologies and platforms related to cryptocurrencies can create new opportunities for their use and increase their adoption, which can potentially lead to an increase in their value.
One example of a technological advancement that could impact the value of cryptocurrencies is the development of decentralised finance (DeFi) platforms. DeFi platforms are decentralised networks that allow users to access financial services such as lending, borrowing, and trading without the need for intermediaries. These platforms often rely on cryptocurrencies as a means of exchange and can potentially increase the demand for certain cryptocurrencies.
Other technological advancements that could potentially impact the value of cryptocurrencies include the development of new payment technologies that make it easier for businesses to accept cryptocurrencies, the integration of cryptocurrencies into existing financial systems, and the development of new protocols or standards that improve the security and scalability of cryptocurrencies.
One reason DeFi platforms may increase the adoption and value of cryptocurrencies is that they offer an alternative to traditional financial systems. Many people around the world do not have access to traditional financial services or face high fees and barriers to entry when using these services. DeFi platforms can provide an alternative that is more accessible, transparent, and equitable, which can potentially lead to increased adoption of cryptocurrencies.
Another reason DeFi platforms may impact the adoption and value of cryptocurrencies is that they offer a new way to earn a yield on cryptocurrency assets. DeFi platforms often offer high returns on cryptocurrency investments, which can make them an attractive option for investors looking to earn a passive income. This increased demand for cryptocurrency assets could potentially lead to an increase in their value.
Furthermore, new payment technologies could make it easier for businesses to accept cryptocurrencies can increase their adoption and use as a form of payment. This increased demand for cryptocurrencies as a means of exchange could potentially lead to an increase in their value.
The integration of cryptocurrencies into existing financial systems, such as banks and payment networks, can also make it easier for people to use cryptocurrencies and may increase their adoption. This increased demand for cryptocurrencies could potentially lead to an increase in their value.
In addition, the development of new protocols or standards that improve the security and scalability of cryptocurrencies have the possibility to increase confidence in the market and make cryptocurrencies more attractive to investors and users. This increased demand for cryptocurrencies could potentially lead to an increase in their value.
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Investor sentiment is the most esoteric element and with the potential to be the most impactful element influencing cryptocurrency valuations in 2023.
If investor sentiment is positive, it can lead to increased demand for cryptocurrencies, which can drive up their price. For example, if investors believe that the value of a cryptocurrency will increase in the future, they may be more likely to buy it, which can push up its price. Positive investor sentiment can be driven by a variety of factors, including the overall performance of the cryptocurrency market, positive news or developments related to a particular cryptocurrency, or general optimism about the future of cryptocurrencies.
On the other hand, if investor sentiment is negative, it can lead to reduced demand for cryptocurrencies, which can drive down their price. Negative investor sentiment can be driven by a variety of factors, including negative news or developments related to a particular cryptocurrency, concerns about the stability or security of the cryptocurrency market, or general pessimism about the future of cryptocurrencies.
The above are just a few of the parameters and components that will go into valuing cryptocurrencies in 2023.
It is important to exercise caution when investing in cryptocurrency or any other asset. It is a good idea to do your own research and understand clearly the risks involved, and only invest what you can afford to lose. It is also advisable to diversify your investments and not rely on any one asset or investment strategy.
Always conduct your own due diligence and consult with the experts where you can. Asktraders’ learning resources have a wealth of data and information for you – ensure you read up and understand what you’re getting into before you make any investment decision.