This is the biggest concern for crypto investors heading into the new quarter

Crypto investors managed to escape much of the pain in the last quarter that hit the market in the first six months of the year, as markets rebounded in the face of rapidly rising inflation and interest rates.

Not that most digital tokens shot the lights out.

But many like it Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH), managed to outperform S&P/ASX 200 Index (ASX: XJO) in Q1 FY23.

Of course, there is virtual water under the bridge.

The question for cryptocurrency investors now is what to expect in the quarter ahead.

The biggest concern for crypto investors

For some expert insight into that answer, we turned to Josh Gilbert, Market Analyst at eToro, and Ray Brown, Market Manager at CoinSpot.

Josh Gilbert said inflation numbers from the US, the world’s largest economy, will play a crucial role in determining crypto returns in Q2.

“The biggest concern for crypto investors moving into this quarter is that inflation will continue to remain at stubbornly high levels,” he told The Motley Fool.

“If this is the case, the US Federal Reserve is likely to raise rates more aggressively in November and December or continue to raise rates into 2023.”

However, the pain in crypto and equity markets from aggressive central bank tightening to bring down inflation comes with a virtual silver lining.

Gilbert said this is “expected to de-risk markets” and “hopefully allow more volatile assets like cryptos to outperform”.

But until the market has some clear indications of an improving macro picture, he expects cryptos to “continue to trade in the tight range we’ve seen over the last month”.

Institutional support

Despite a major setback in digital token prices in the first half of the calendar year, corporate interest in the space remains fairly robust.

According to Gilbert:

Institutional investment in crypto and blockchain technology is still happening, despite market weakness. The bear market may have stopped companies from adding crypto to their balance sheets, but we continue to see names from Blackrock to Gucci and tech giants like Alphabet investing billions in blockchain, Web 3.0 and DeFi innovation.

He added that “the foundations are being laid even during a bear market to help these assets thrive when the market recovery eventually comes”.

Mainstream crypto adoption on the radar

Ray Brown agreed that the outlook for crypto in Q2 will be heavily influenced by rates.

“Factors such as high inflation and continued rate hikes could cause investors to remain conservative,” he told us.

“But if practical uses for the new, eco-friendly Ethereum blockchain continue to emerge — and gain mainstream adoption — investors hope to see movement in the market.”

Ethereum, if you’re not aware, underwent a major change in September, switching from a proof-of-work to a proof-of-stake protocol. This sees the blockchain use 99% less power.

Brown also pointed to the crypto trial program the Reserve Bank of Australia (RBA) is launching in the last month of Q2 as something that could impact the market:

The RBA is in the process of identifying a use case for a digital central bank currency in Australia. A trial program will begin in December 2022 that will continue through the fourth quarter of fiscal year 2023.

It is unclear what the exact outcome of this pilot will be. But the growing volume of research into crypto use cases, combined with inevitable regulatory changes, seems to indicate that further adoption of cryptocurrency-based solutions in Australia is on the way.

Then there is the world’s richest man. Elon Musk, known to have a large influence on crypto prices such as Dogecoin (CRYPTO: DOGE) with a single tweet, again looks locked into buying Twitter.

“With Elon Musk also returning to his $44 billion Twitter deal and his support for investing in crypto, there is also speculation that he will add tip and payment features to Twitter, allowing users to send crypto,” said Brown.