Will Crypto recover to previous highs or will we see another price drop?

The crypto market has had a surprising start to 2023, with almost all coins in the green in the first two months of the year. But even with many top coins up 30% to 50% for the year, they are still well below all-time highs. Bitcoin (BTC 1.05%)for example, is up 41% for the year, but at a price of $23,432 it is still well below the all-time high of $68,789.63.

If cryptos like Bitcoin are to recover to past highs, a number of things need to happen this year. Here’s a closer look at several key catalysts that could send the crypto market pushing back to all-time highs.

1. The macroeconomic outlook

Arguably, the most important factor for the crypto market right now is the overall macroeconomic outlook, especially for the US economy. As a result, all eyes are on the Federal Reserve right now. Any mention of further Fed rate hikes has the potential to spook the market, and is a big reason why Bitcoin has failed to break through the $25,000 level.

Image source: Getty Images.

The consensus right now is that if the Fed decides to tighten further, the crypto market will have a tough time moving up. However, any signs of easing from the Fed would be good news for cryptos like Bitcoin. So if crypto has any chance of regaining its previous levels, the market will have to see a pause in interest rate hikes.

2. Institutional adoption

Another key factor is institutional adoption of blockchain technology. More use cases emerging for blockchain and Web3 technology will increase the long-term investment value of many cryptos that can provide clear utility.

For example, Visa currently looking at possible use cases for Ethereum (ETH 1.03%) as a way to process certain types of payments faster and cheaper. Simultaneous, Amazon recently collaborated with Avalanche to offer blockchain technology solutions to customers via its Amazon Web Services (AWS) unit.

3. Crypto as an asset class

Institutional adoption can also be thought of from the perspective of large institutional investors, such as endowments and pension funds. If large institutional investors decide to allocate a larger proportion of their investment portfolios to crypto, it will also have a strong positive impact on crypto prices.

A breakthrough event that happened last year was the partnership between Black stone and cryptocurrency exchange Coin base. The partnership will now make it easier for BlackRock clients to invest in crypto via Coinbase. This is a huge development because BlackRock is now the largest asset manager in the world, with almost $10 trillion in assets under management.

4. The regulatory outlook

Finally, there is the issue of cryptocurrency regulation. Right now, no one can decide how crypto should be regulated, or by whom. In the absence of any comprehensive US regulations, the SEC has taken the lead.

While the SEC certainly has a role to play in protecting individual investors from profits from the crypto industry, there are growing concerns that the SEC may be acting too aggressively. By taking enforcement action against crypto intermediaries (such as cryptocurrency exchange Kraken) and by handing out fines and other penalties to market participants for offering crypto betting services, the SEC could be setting up the crypto industry for a much more restrictive growth outlook going forward.

This is not to say that the wild west regulatory approach of recent years is the only way cryptos can regain their previous levels. Some level of clarity and certainty for crypto market players is needed from regulators. The only danger is that some legislators may overreact to events such as the collapse of FTX by calling for increasingly strict regulations that could cut off any rally.

Which cryptos are most likely to succeed?

Based on all this, it is possible to put together a set of criteria for which cryptos provide the best long-term investment plays. Cryptos with proven utility and real use cases, for example, should be at the top of the list. Also, cryptos that are favorite investment targets for large institutional investors should also do well in a rising market.

For that reason, I am bullish on Bitcoin and Ethereum in the long run. These are the two cryptos most likely to recover their previous highs. There are many other interesting crypto plays out there, but if I had to buy and hold only two cryptos this year, they would be Bitcoin and Ethereum.