Where is Crypto Headed in 2023?

Recap of crypto market in 2022

If we rewind the tape back to November 2021, many crypto fanatics were riding an unprecedented wave of outperformance for crypto assets. The one-year return from Bitcoin’s peak, on November 12th  2021, was an astounding 282%; Ethereum was up an eye-popping ~862%, and various “meme”-worthy cryptocurrencies (such as Dogecoin) were popping up left and right. 

This tweet sums up the exuberance at the time: 

Source: Twitter

Now as we all know, this enthusiasm did not continue. Following the November peak, both Bitcoin and Ethereum proceeded to decline by ~72% towards the end of 2022, and the “meme”-worth cryptocurrencies all but died out. 

Confidence in crypto assets deteriorated significantly in 2022 due to a number of macro-factors and specific incidents, two of which we highlight below:

1. FTX Implosion. Crypto-exchange FTX was hit with massive withdrawals from customers in November 2022 which the platform could not sustain. As it turns out, there were allegations that founder and CEO Sam Bankman-Fried was using customer deposits to lend to his hedge fund, Alameda Research. FTX has since collapsed, and its associated FTT token has plunged in value. This event was a stark reminder that the lack of regulatory oversight in the crypto space creates room for fraudulent behavior. 
2. Fall of Terra (LUNA). Terra’s LUNA cryptocurrency became one of the top cryptocurrencies in 2022. However, instability and sell-offs in May ended up with full-blown panic selling. LUNA traded at $120 at one point in April and became worth less than $1 within a few days. Clearly, this showed many investors that cryptocurrencies are extremely volatile, no matter how much they are worth at one point in time.

Strength in crypto ETFs to start the year

Despite the weakness in 2022, there has been a significant pivot in the fortunes of cryptocurrencies so far in 2023. Various crypto-ETFs have rallied, with the top three performing ETFs in the US all sitting within the crypto space. This includes: 

Valkyrie Bitcoin Miners ETF (WGMI)

• AUM: $4 million
• Expense Ratio: 0.75%
• YTD Performance: +100%

VanEck Digital Assets Mining ETF (DAM)

• AUM: $1 million
• Expense Ratio: 0.5%
• YTD Performance: +79%

Global X Blockchain ETF (BKCH)

• AUM: $61 million
• Expense Ratio: 0.5%
• YTD Performance: +64%

These are clearly very strong returns for the span of a month pointing to broad-based “risk-on” behavior from investors.

Why are crypto assets rallying?

To be clear, it is not only crypto having a strong start to the year. The S&P 500 index is up ~7% YTD, and the NASDAQ index is up ~12% YTD—led by the tech sector (one of the biggest laggards of 2022). However, crypto has currently been a standout for the following reasons:

Short Squeeze – Short-selling behavior was highly prevalent at the end of 2022 with confidence shaken in crypto assets. Shorting essentially means betting that an asset will decrease in price. However, if the price goes up these short-sellers must cover their positions or face massive losses. In order to cover, these short-sellers must buy the asset; which drives up prices even more.

Macro Factors – Last year, macro uncertainty was greater than we’ve seen since the 2008 Great Financial Crisis. Accordingly, investors funnelled their capital towards safe investments, and away from risky investments. To start 2023, macro uncertainty is far less as inflation looks to be trending in the right direction and the rate hiking cycle appears to be coming to an end, opening the door for investors to put their capital to work in the riskier pockets of the market that were completely avoided in 2022.

Words of caution

Returns have been very strong so far in 2023, however, we must caution that cryptocurrencies remain exceptionally volatile. Will this rally continue? It could, however, the road will likely be incredibly bumpy. Investors in this space must be comfortable with the reality that they could lose more than 50% of their investments in a very short amount of time.

In a year of persisting uncertainty, we would recommend sticking to investments with a strong track record and fundamental investment potential (i.e. investments that generate cash flow).

Data as of January 26, 2023.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.