The question that is probably on many investors’ minds is: Is the bottom here or is the crypto winter just getting started?
The total market value for all cryptocurrencies had reached a peak of $2.97 trillion in November 2021, but had fallen almost 66% to around $1 trillion at the time of writing.
Still, signs of economic recovery and expectations that the US Federal Reserve’s (FED) interest rate hikes will be reduced have seen Bitcoin prices recover some losses, rising 35% since January 1, 2023.
However, crypto is still not out of the woods just yet as regulators around the world, including the US SEC, are taking an increasingly hawkish approach to crypto, signaling greater regulation of the industry and a taming of the crypto “wild west”.
With both bullish and bearish forces jostling the market, we’ll look at five major trends that will shape the crypto world in 2023.
Also read: Top 10 worst performing cryptocurrencies in 2022 (with at least 1 billion market cap)
#1 The FED looks set to raise rates a few more times in 2023
As Crypto Street and Wall Street become more and more co-related In recent years, movements in the stock market are frequent enlarged in the crypto market due to its nature as a risky asset. For much of 2022, the crypto world had been closely watching the actions of the US FED.
Recent data has revealed inflation in the United States. The inflation rate, which peaked at 9% in June 2022, has since fell to 6.5% in December 2022.
Image credit: CNBC; US Bureau of Labor Statistics’ consumer price index
However, the FED considers this reduction insufficient and strives to bring inflation back to its target of 2% weighted average.
Below is tentatively scheduled meetings in 2023, where they will decide whether to raise interest rates or not. We’ll just have to watch the FED’s actions in the coming months.
- 31 January – 1 February (Concluded. Raised rates by 25 basis points, bringing rates to a target range of 4.5%-4.75%)
- March 21-22
- 2-3 May
- 13-14 June
- 25-26 July
- 19-20 September
- 31 October – 1 November
- 12-13 December
With a falling inflation rate as well as a strong labor market, the expectations are that the FED’s interest rate increases will be reduced. Cautious optimism has seen Bitcoin prices rebound since this year.
#2 Ethereum’s Shanghai Hard Fork Could Disrupt Crypto Markets
Ethereum’s price has been up nearly 30% since the start of 2023. Although a major reason was due to the better economic climate, another major factor was the upcoming Shanghai Hard Fork in March.
So what is the Shanghai Hard Fork (and why was it given that name)?
A crypto Hard Fork is basically a huge update to the blockchain, and historically Ethereum forks had always been named after famous cities (both historical and modern) such as Istanbul, Atlantis and Constantinople.
Image credit: Visual capitalist
The Shanghai Hard Fork will be the biggest Ethereum upgrade since The Merge in September 2022. The Shanghai upgrade will include Ethereum Improvement Proposal (EIP) 4895. This basically allows withdrawal of the staked ETH, which at the time of writing is worth more than US 26 billion dollar, which makes it most bet crypto in terms of market value.
This change caused concern due to the fact that validators could potentially withdraw $26 billion of ETH, leading to a wave of selling pressure. The opposite view, however, is that with greater liquidity, more validators will be incentivized to bet, soaking up excess liquidity.
In fact, the percentage of staked ETH in relation to total ETH supply is only around 14%, which is low compared to other major Proof-of-Stake chains such as Cardano, Solana (both around 70%) and BNB (around 97%). With the new liquidity, ETH stakes may actually even increase post-Shanghai to 30-50% according to analysts.
Regardless of whether there will be more or less ETH staking, the market is betting that some of the biggest winners from Shanghai will be staking services like Lido Finance (LDO) and Rocketpool (RPL). The price of LDO is up ~140% since 1 January 2023, while the RPL is up ~138%.
Also read: [Airdrops, Hard Forks, Play-To-Earn, Staking, Yield Farming] 8 Ways You Can Earn Free Cryptocurrencies and Why They’re Free in the First Place
#3 Impressive ETH layer 2 growth shows no signs of slowing down
The amount of gas used by Ethereum Layer 2s has increased by almost 400% in the last seven months, and the percentage of gas used by Layer 2s compared to the rest of the Ethereum Network continues to show an upward trend.
Layer 2 ETH gas units increased from 1 billion in July 2022 to 4 billion in February 2023 / Image credit: Dune Analytics
In November 2022, Ethereum Layer 2 Network Gas Usage hit all-time highs as layer 2 transactions increased significantly. Although the amount of gas has since dropped due to the market downturn, the percentage of ETH spent for layer 2 compared to the rest of the network continues to grow.
The percentage of gas used by layer 2 fluctuated between 1-2% for much of 2021 and 2022. It is now 4%. / Image credit: Dune Analytics
With the growth of Web 3 and decentralized applications, ETH Layer 2’s demand is increasing. Some of most popular Layer 2 crypto solutions include Polygon, Loopring, Arbitrum and Optimism.
Most of the popular Layer 2s are built on Ethereum, and despite the ongoing updates to the Ethereum blockchain, Layer 2s are still a key factor in scaling. The Ethereum Foundation has tired: “The Ethereum ecosystem is well aligned that Layer 2 scaling is the only way to solve the scalability trilemma while remaining decentralized and secure.”
Layer 2 solutions on other blockchains such as the Bitcoin Lightning Network also showed explosive growth last year. 2022 was the year that saw one 300% increase in Bitcoin locked in the network compared to mid-2021, spurred by factors such as the growth of Bitcoin peer-to-peer payments. The Lightning Network is currently in use in El Salvador, and is one of the most popular Layer 2 solutions for Bitcoin.
#4 Increased regulations will shape the crypto market
For years, governments around the world have been looking to subject crypto markets to greater financial regulation, but with the recent crypto contagion, these efforts have only increased.
2022 was biggest year ever for crypto hacking, with $3.8 billion stolen from cryptocurrency businesses, according to a Chainalysis report.
Image credit: Chain analysis
The US Securities and Exchange Commission (SEC) is leading the push to subject the crypto market to greater regulation, increasing scrutiny of initial coin offerings and new tokens, which requires greater scrutiny of exchangesand increases probes into Wall Street firms’ dealings with crypto, among other measures.
China has known banned crypto mining in May 2021, followed by an outright ban in September 2021. Last year, it officially launched its own Digital Bank currency in August.
The EU has launched various anti-money laundering (AML) directives in recent years, and tightened Know Your Customer (KYC) and standard reporting requirements. In September 2020, the EU also proposed Markets in Crypto-Assets Regulation (MiCA) framework aimed at protecting consumers, which was passed into law in 2022.
Companies themselves have also started issuing Proof-of-Reserve to regain customer confidence in the wake of the FTX collapse. These companies include Binance, Bitfinex, OKX, Huobi, Gate.io and Kraken.
The last few years also saw one increase in the number of crypto custody providers due to firms’ need to navigate complex crypto regulations in their respective jurisdictions, as well as increasing crypto security risks. 
Image credit: Block data
Also read: Insights: Key lessons from the recent FTX fallout for crypto investors
#5 institutional investors back from crypto and def (for now)
After the rapid collapse of FTX, institutional investors have slowed down their pace of investing in the crypto markets. Global institutional investment fell from over $5 billion in Q1 2022 to below $1 billion in Q4 2022.
Image credit: S&P Global
Image credit: S&P Global
Large institutional investors from Black stone to Ontario Teachers’ Pension Plan the fund has written off its tens of millions invested in FTX. After institutional investors pulled back, the ProShares Bitcoin ETF, once a popular vehicle with deep-pocketed financial companies, quickly sixth worst performer ETF through the ages, and crypto-carding intensified.
As recently as December 2022, JP Morgan’s head of institutional portfolio strategy Jared Gross said that “crypto is effectively non-existent for most large institutional investors.”
Also read: The difference between a market cap and a fully diluted market cap in the crypto world
A silver lining
It is important to note that this data was obtained given the recent economic climate and crypto contagion. As the economy begins to turn for the better, institutional investments may once again return to crypto. And while institutional interest in crypto waxes and wanes, long-term crypto plans for many Wall Street firms continue to stand, signaling that institutions believe crypto is here to stay and are willing to invest in it.
Financial giants Blackrock, Nasdaq, BNY Mellon, JPMorgan and Citadel are all launching various crypto services or investing in partners, and unveiled plans in Q3 and Q4 last year.
These institutions have signaled that they primarily use digital assets as an alternative investment to shares and bonds. There is also a growing sense among institutions that digital assets are here to stay, according to co-founder and CEO of Digital Asset Capital Management Richard Galvin.
The crypto market looks set to recover in the not-too-distant future (although it may take months, or at worst years). While some of these trends may cool the markets in the short term, long term interest and market fundamentals will only improve as a result.
Although prices are low, investors may even consider Dollar Cost Averaging into crypto. As long as we are willing to buck and ride out winter, spring will eventually come.
Also read: 6 Cryptocurrency Exchanges for Singaporeans Looking to Buy Bitcoin, Ethereum and DogeCoins
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