“Doom Cycle Of Default, Fraud, And Contagion” Could Give Way To Crypto Spring

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Cryp­to endured a major hang­over year in 2022 after a 2020–21 boom dur­ing the cen­tral banks’ Covid liq­uid­i­ty par­ty. The emerg­ing blockchain space was bat­tered by cen­tral banks remov­ing the punch bowl, harsh macro­eco­nom­ic envi­ron­ment, bank­rupt­cies, exchange blowups, sta­ble­coin implo­sions, and even crim­i­nal charges against top cryp­to executives. 

“Con­sis­tent inter­est rate hikes and quan­ti­ta­tive tight­en­ing in 2022 grant­ed us a dev­as­tat­ing hang­over. For­tune did not favor the brave, and we entered a con­sis­tent doom cycle of default, fraud, and con­ta­gion. A finan­cial cri­sis with seem­ing­ly no end that still rav­ages our indus­try. In 2022, the naked swim­mers were exposed and bad apples got elim­i­nat­ed. This is promis­ing through long-term lens­es, while ever so painful in the short term,” Vetle Lunde, research ana­lyst at Arcane, wrote. 

Lunde wrote if 2022 had one key les­son for the cryp­to indus­try, it would be the fol­low­ing: “your funds in some­one else’s cus­tody is some­one else’s lia­bil­i­ty, and their inten­tions could be harm­ful. While there are good argu­ments for stor­ing funds at exchanges, traders should strive to avoid con­cen­trat­ing risks on one venue.”

Arcane’s ana­lyst put togeth­er the top head­lines that defined the cryp­to indus­try in 2022 — much of the head­lines were doom and gloom. 

Lunde point­ed out Bit­coin record­ed the sec­ond worst year-to-date returns in exis­tence. He called the down move in cryp­to “a painful ride.” 

Lunde con­tin­ued with an out­look for 2023, expect­ing a calmer mar­ket due to declin­ing volatility. 

We expect the mar­ket to calm down in 2023, with declin­ing vol­umes and falling volatil­i­ty. Over­all, we expect inter­est and head­lines relat­ed to cryp­to to be few­er and the mar­ket to be less hec­tic in gen­er­al. This will be a year to accu­mu­late and build expo­sure. It will be a year for the patient, and we do not antic­i­pate prices near­ing for­mer all-time highs in 2023. We believe BTC and ETH will increase their rel­a­tive strength in the mar­ket and that alt­coin returns will be sub­dued for most of the year.

And he revealed fur­ther the cur­rent draw­down in Bit­coin appears to fol­low sim­i­lar bear mar­ket pat­terns in pre­vi­ous cycles. 

The 2018 bear mar­ket saw a 364-day long dura­tion from peak to through, while the 2014–15 bear mar­ket last­ed for 407 days. For now, BTC has bot­tomed 376 days after peak­ing, right in between the dura­tion of ear­li­er cycle peak to through peri­ods. If a new bot­tom is reached in 2023, this will be the longest-last­ing BTC draw­down ever.

And one sil­ver lin­ing the ana­lyst said about the FTX deba­cle is that it might increase “more rapid progress with reg­u­la­tions, and we view both pos­i­tive sig­nals relat­ed to U.S. spot BTC ETF launch­es and more coher­ent clas­si­fi­ca­tions of tokens as a plau­si­ble out­come by the end of the year, with exchange tokens being par­tic­u­lar­ly exposed for poten­tial secu­ri­ty classifications.”

Here is Lun­de’s core 2023 fore­cast for crypto:

While the tight­en­ing macro land­scape and BTC’s cor­re­lat­ed rela­tion­ship to macro com­pli­cate analo­gies to pre­vi­ous bear mar­kets, we firm­ly believe that this is an excel­lent area to build grad­ual BTC expo­sure. How­ev­er, we expect low activ­i­ty to be the key trend through­out most of 2023, with dimin­ish­ing trad­ing vol­umes and volatil­i­ty in a sig­nif­i­cant­ly more bor­ing mar­ket than the pre­vi­ous three years. As we advance into the next year, patience and long-term posi­tion­ing will be key. 

Much of the cryp­to down cycle has come since the Fed­er­al Reserve embarked on its most aggres­sive tight­en­ing scheme in decades. 

And rate traders are already pric­ing in the pos­si­bil­i­ty the Fed might have to begin cut­ting late in the sec­ond half of 2023. 

He also not­ed Bit­coin liq­uid­i­ty is dry­ing up as the coins are being pulled off the markets. 

This has direct impli­ca­tions for BTC liq­uid­i­ty and, in par­tic­u­lar, expe­ri­enced BTC scarci­ty. With few­er BTC avail­able to trade, the impact of the net buy­er or net sell­er will be more sig­nif­i­cant, and we believe the mar­ket is slow­ly head­ed towards a sce­nario where the net buy­er will once again make a difference.

The back­ward-look­ing review and for­ward out­look might sug­gest cryp­to win­ter has peaked, while oth­ers, such as David Mar­cus, CEO and founder of Lightspark, recent­ly warned cryp­to will need until at least 2024 to “recov­er from the abuse of unscrupu­lous players.” 

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