On the heels of a historic 2021, expectations for the crypto market in 2022 were high. Unfortunately, 2022 turned out to be extremely rough for crypto. A combination of harsh macroeconomic conditions, hacks and exploits, and collapses in prominent industry players like Terra, FTX, 3AC, Celsius, and BlockFi have resulted in the worst bear market since 2018-2019.
Despite these setbacks, the fundamentals of the industry are still sound. Venture Capital interest remains strong, Decentralized Finance (DeFi) protocols showed their resilience throughout the year, and institutions are increasingly entering the space.
The future is bright for crypto and web3, regardless of what happens in 2023.
However, it is still important for investors to prepare for the year ahead. Crypto moves at break-neck speeds, and financial disaster is uncomfortably possible without a good grasp of what’s coming.
To help you stay ahead of the curve, here are the crypto trends to watch for in 2023.
1. The Bear Market Continues
Even though the crypto markets have endured over a full year of bleeding, it unfortunately does not look like the bear market will meaningfully subside in 2023. The conditions for the bull market to resume are currently non-existent.
The overarching driver of the crypto market (and every other U.S. market) is the Federal Reserve (the Fed). The Fed controls the country’s interest rates. In other words, the Fed determines how expensive it is to borrow money.
Because of crippling inflation following the Covid-19 pandemic, the Fed has raised interest rates from near 0 to 4.25% – 4.50% this year.
This has had two different, yet significant, results:
1. Money is now costly, drying up the previously rampant liquidity.
Thus, high-interest rates lead to money that is tough to obtain. This is because high-interest rates mean higher interest payments on loans. In essence, high-interest rates make money more expensive to borrow.
2. The yields for Treasury Bills, or government bonds, have skyrocketed.
For the money that people do have, Treasury Bills, one of the safest investments on the planet, offers more lucrative yields than those found in DeFi.
For context, at the time of writing, the 3 Month Treasury Bill Rate is at 4.34%, compared to 0.05% last year. This is higher than the long term average of 4.17%. Yields found on DeFi outlets, on the other hand, are hovering right around a median APY of 2%.
The result is a brutal bear market that even a technological improvement as significant as Ethereum’s Merge couldn’t overcome.
Unfortunately, it does not appear that relief from the Fed is imminent. All public signs from Fed Chairman Jerome Powell indicate that the Fed will continue to hike interest rates until the fight against inflation is definitively won, even if this battle seeps into 2024.
Crypto is stuck in the mud until the Fed strongly reverses course. Unfortunately, we do not believe a strong course reversal will come in 2023.
2. Ethereum and Layer-2 Rollups Gain Steam
Ethereum’s perch on top of the layer-1 (L1) blockchain market appeared to be in danger entering 2022. Its dominance over the layer-1 space had eroded from 95% at the start of 2021 to 55% at the end, and there was a host of challengers coming for the throne. Solana was extremely popular, Terra appeared to have unstoppable momentum, and Fantom had Dani Sesta, Andre Cronje, and “Frog Nation” behind it.
However, each of these alternative-L1 blockchains struggled in 2022:
- Solana has been hampered by the FTX collapse
- Terra collapsed in May
- Fantom was hurt by the revelation that popular developer 0xSifu was actually notorious fraudster Michael Patryn and the retirement of lead developer Andre Cronje
The result is that Ethereum dominance is up to 60%, and layer-2 rollups Arbitrum and Optimism have largely supplanted the alternative-L1s.
We expect both of these trends to continue in 2023.
Ethereum is in as strong a position as it’s ever been, with most of its competitors vanquished and The Merge now complete.
L2s, meanwhile, are some of the hottest projects on the market. Optimistic rollups Arbitrum and Optimism are home to some of the most innovative projects in DeFi, while zero-knowledge rollups (which many believe are the future) like Scroll and zkSync should be unveiled in 2023.
We would not be surprised to see Ethereum + its L2s reach greater than 75% crypto Total Value Locked (TVL) dominance in 2023.
3. NFTs May Have Another Tough Year
NFTs are among the most fascinating entities in crypto. They are easy to understand, appeal to technical and non-technical people alike, and have played a key role in onboarding people to crypto and web3.
However, concerning price, they are even more vulnerable to Fed-induced boom and bust cycles than regular cryptoassets.
This was evident in NFTs bloody 2022. NFTs are down significantly from their 2021 and early 2022 highs in weekly buyers and sellers, weekly volume, median sale price, number of daily transfers, and weekly transaction count.
Needless to say, 2022 was a bad year for NFTs.
Considering that we do not believe a turnaround in the overall crypto market is likely next year, we also unfortunately do not believe that NFTs are due for a resurgence in 2023.
4. Significant Regulation Doesn’t Happen
Regulation is one of the most important stories to watch not just in 2023, but in any year to come. That’s because regulation could have the single largest impact on prices.
Favorable regulation that makes it more attractive for institutions to invest in crypto would lead to a boom, while harsh regulation that makes it difficult to interact with crypto could lead to a fatal bust.
Regulation is also an especially hot topic right now, with the public and seemingly avoidable collapses of centralized entities FTX, Celsius, and BlockFi putting the industry under the regulatory microscope.
However, regulation in the United States is a very slow-moving process. Getting bills passed in our current ultra-polarized political atmosphere is a small miracle, especially when the Congress and the Senate are split between Republicans and Democrats, as it is currently.
The likeliest outcome is that major crypto legislation will not be possible until one party controls the Congress, the Senate, and the Presidency. The earliest that can happen is 2025. Thus, we do not believe significant crypto regulation is on the horizon in 2023.
5. Decentralized Social Media Happens
Uncertainty at Twitter since Elon Musk took over has led to people seeking alternatives, including Mastodon, which has grown tremendously since Elon’s takeover in November.
We believe people will increasingly look to Decentralized Social Media (DeSoc) in 2023.
Our bull case for DeSoc is as follows:
- Social media has become an increasingly important part of people’s social and professional lives. It is not uncommon these days for people’s livelihoods to depend on social media platforms like Twitter.
- It is uncomfortable to leave the fate of your network and livelihood in the hands of an unstable platform and one that can arbitrarily ban you at any time.
- DeSoc, through its entirely open, decentralized, and composable social graph, returns ownership of an individual’s social media presence to the individual.
- And thus is an attractive alternative to web2 social media platforms.
There are still hurdles to overcome. The UI and UX are not quite yet up to par with web2 standards, and overcoming the cold start problem is especially challenging for social media platforms.
2022 was a challenging year, and 2023 could easily be just as difficult. However, it is crucial to maintain faith in the space. Crypto has come back from the doldrums before, and those who stay involved throughout the bear market will reap the largest rewards in the bull market.