VanEck, the asset management giant, has 11 predictions for the 2023 cryptocurrency market

Original Title: 《11 Crypto Predictions for 2023》

Author: Matthew Sigel, VanEck

Compiled by: Ning, Tuo Luo Finance

Has cryptocurrency really perished? The answer is no. We believe that the financial disruption of cryptocurrency will continue to evolve. Here, we share our predictions for cryptocurrency trends in 2023 and the theoretical basis behind them.

1. BTC will drop to $10,000 to $12,000 in the first quarter of 2023 amid a wave of miner bankruptcies, which may mark the bottom of the crypto bear market.

The median market capitalization of the MVIS® Global Digital Assets Mining Index is currently only $180 million, with almost all constituents consuming cash and trading far below book value. Given rising electricity prices and falling BTC prices, BTC mining is essentially unprofitable. We predict that many miners will undergo bankruptcy restructuring or mergers. Additionally, XRP's potential loss in the SEC lawsuit (possibly in the first quarter, more details below) may coincide with this final downward trend, which will nearly end the BTC halving market that began in 2020.

2. BTC will rise to $30,000 in the second half of 2023. Lower inflation rates, alleviated energy concerns, and a potential ceasefire in Ukraine, along with improvements in M2 supply, will provide momentum for a new market recovery.

BTC and the broader crypto ecosystem experienced a rather brutal winter in 2022, with many companies imploding and market sentiment low. BTC had already been trading as a risk asset in the previous year and showed price sensitivity to interest rate hikes.

One reason BTC has not responded well to high interest rates is that developed markets' political response to inflation has been to attempt to limit energy prices, expand sanctions, and micromanage economic activity to promote "energy transition." Ending the war in Ukraine could at least reverse these policies, making BTC mining politically more acceptable. On the other hand, this war is also creating a more economically integrated Eurasian continent, encouraging new payment methods in cross-border trade, as seen with China's digital yuan and Russia's potential gold-for-oil transactions.

In developed markets, we believe consumers will see BTC as one of the long-term value storage categories and a hedge against M2 inflation. In emerging markets, the focus is more on remittances and neutral alternatives to dollar hegemony.

If our recession expectations materialize, the Federal Reserve will pause interest rate hikes amid weak inflation, while monetary expansion and government budget deficits will persist. In such a scenario, merely the absence of negative news for the crypto sector could lead to BTC's price recovering back to $30K.

3. Financial institutions will tokenize over $10 billion in off-chain assets.

Institutions will adopt blockchain to streamline custody and settlement, reducing costs for clients. KYC/AML will be implemented using identity protocols and permissioned sub-networks/apps. With the help of BlackRock and Coinbase, MakerDAO has already planned to deploy $1 billion into U.S. Treasuries and other government securities, allowing Dai holders to earn higher deposit yields. KKR is collaborating with Avalanche and Securitize to tokenize private funds. The Monetary Authority of Singapore's Project Guardian is also accelerating as an initiative to test the feasibility of asset tokenization and applications in DeFi in collaboration with the financial industry. The Monetary Authority of Singapore recently participated in trades involving liquidity pools, which included tokenized Singapore government securities, Japanese government bonds, yen, and Singapore dollars.

In the open-source blockchain space, we believe Ethereum, Polygon, Avalanche, Polkadot, and Cosmos are in strong competitive positions. VanEck is also expected to map real-world assets onto open-source blockchains in 2023.

4. Brazil will become one of the most crypto-friendly countries in the world and will tokenize part of its sovereign debt issuance on-chain.

Due to ongoing inflation and a youthful demographic, Latin America is experiencing the fastest adoption transformation of cryptocurrencies and stablecoins in the world. Brazilian regulators are actively promoting sandbox initiatives for private companies to foster the sector's development. The country's largest bank, Itau Unibanco (ITUB), plans to launch an asset tokenization platform to convert traditional financial products into tokens and provide custody services, making it likely that the tokenization of sovereign debt will first start in Brazil.

5. Twitter will enhance its payment products through a national currency license, directly competing with Venmo and Cash App.

Twitter's current payment capabilities are limited to peer-to-peer small transactions, such as BTC via the Lightning Network, but users generally report a poor experience. We expect Musk to implement payment features more akin to WeChat Pay, encouraging consumers to pay service fees to merchants. According to The New York Times, in November, Twitter submitted registration documents to the Treasury Department's Financial Crimes Enforcement Network (FinCEN), laying the groundwork for its payment processing, which will likely include USD, BTC, and possibly other crypto assets like Dogecoin.

6. A certain country, especially an oil-exporting nation, will announce the inclusion of BTC and other digital assets in its sovereign wealth fund.

We have received firsthand information from several crypto companies that Saudi Arabia's sovereign wealth fund is already mining BTC, albeit on a small scale. Additionally, Russian government officials have expressed intentions to address cross-border trade in crypto assets. Russia's largest bank, Sberbank, recently integrated its blockchain platform with MetaMask and the Ethereum blockchain, while several Russian media outlets reported that Russia was actively purchasing BTC mining ASICS in November.

7. The market will see the emergence of new decentralized stablecoins with a market capitalization of $1 billion.

Stablecoins are digital currencies pegged to stable reserve assets like the dollar or gold. Stablecoin projects differ in how they maintain their peg. For example, USDT and USDC are operated by centralized entities that back their tokens with fiat reserves (including cash and government bonds). In contrast, Dai is managed by a decentralized entity, where users deposit ETH into a smart contract to mint dollar-denominated, over-collateralized Dai. As of November 17, 2022, Dai's circulating supply exceeded $5 billion.

Algorithmic stablecoins differ in that they are backed by digital assets, whether under-collateralized or over-collateralized. Typically, algorithmic stablecoins are anchored by another digital asset and/or on-chain algorithms that balance supply and demand. Typical use cases for algorithmic stablecoins include use in trading, running decentralized autonomous organizations (DAOs), and providing staking rewards to holders. We observe that there remains significant demand in the market for censorship-resistant stablecoins that cannot be seized by regulators.

Therefore, despite the collapse of LUNA and the decoupling of its associated algorithmic stablecoin UST, various decentralized stablecoins are expected to thrive in 2023, such as Aave's GHO issuance, which will adopt an over-collateralization strategy and rely on arbitrage and community-driven monetary policy to stabilize the token at $1.

8. Ripple will lose the lawsuit against the SEC.

Since 2020, Ripple Labs has been in a legal battle with the U.S. Securities and Exchange Commission over its token XRP. The SEC's lawsuit claims that XRP is an unregistered security. Given Ripple and XRP's prominent position in the digital asset space, the outcome of this case could have far-reaching implications for the entire industry and set a precedent for future cases.

Ripple has received support from many large companies in the industry, such as Coinbase and the Blockchain Association, and this support is expected to continue to grow, with 12 independent entities currently providing legal support to Ripple. Both the SEC and Ripple have requested a federal judge to make a summary judgment in this case, so a ruling is likely to be made before the end of the first quarter.

Unfortunately for cryptocurrency, the SEC won a lawsuit against the blockchain-based publishing company LBRY (LBC-USD) in November, with a U.S. district judge in New Hampshire stating, "There is nothing in case law that indicates a token that has both consumptive and speculative uses cannot be sold as an investment contract." Using this as a precedent, our prediction of Ripple's chances of winning has been substantially lowered. Ripple's CEO has stated that if they lose, the cryptocurrency company will relocate to another country. Additionally, significant economic penalties are also highly likely.

9. Gary Gensler will leave the SEC due to proposed legislation failing to gain widespread support.

Crypto enthusiasts had hoped that SEC Chairman Gary Gensler would be an advocate for advancing the U.S. digital asset ecosystem. However, the SEC continues to reject or delay decisions on BTC spot ETFs on the grounds of "market manipulation." Strangely, BTC futures ETFs, even inverse BTC futures ETFs, have been approved.

Chairman Gensler has stated on multiple occasions that he believes BTC is a commodity, while most other digital assets are securities. Nevertheless, there remains considerable uncertainty about which agency will regulate the industry, as the SEC and the Commodity Futures Trading Commission are vying for regulatory authority in this space. Given that appropriate guidance and regulation are crucial to avoiding the explosive events that occurred in the cryptocurrency industry in 2022, it is unfortunate that the BTC spot ETF has become a product embroiled in controversy. Specifically, the Grayscale-led OTC:GBTC BTC trust fund is trading at about a 48% discount to its net asset value, while also involving questionable loans from several major market participants that faced collapse.

As a result, we see an increasing probability of Chairman Gensler being replaced. With the 2022 midterm elections now behind us, he faces growing scrutiny, which could become a political liability for the White House. Four U.S. lawmakers publicly wrote to him on November 8, mocking his double standards on transparency at the SEC. New York Democratic Congressman Ritchie Torres wrote to the U.S. auditor in December, requesting that federal legislative oversight bodies investigate the SEC's failure to protect the public from the "poor management and misconduct" of FTX (FTT-USD). This strongly worded letter also severely criticized Chairman Gensler's leadership, and even the union representing the SEC's 3,500 staff members is fighting with the chairman over pensions, return-to-work policies, and an overburdened workforce.

Since 1934, the average tenure of an SEC chairman has been 2.75 years, with a median of 2 years. We predict that a victory for the SEC against Ripple could provide a decent exit for him.

10. As multiple AAA games enter the market, the monthly player count for Web3 will rise from 2 million to 20 million.

The total addressable market (TAM) for traditional gaming is astonishing, with 3.2 billion people globally potentially participating, and a market size reaching $300 billion. As a digital native activity, in-game items (also known as digital assets) have been purchased and used by hundreds of millions of gamers worldwide. Nevertheless, we believe there is a categorical gap between traditional gaming and crypto gaming, creating whitespace for growth. Specifically, blockchain-supported games open up the possibility of transferring game assets between games, which was nearly impossible before.

Early play-to-earn and play-to-own games lacked high production value and sufficient budgets to attract mainstream users. However, some traditional AAA games aim to fill this gap by launching in 2023, and we believe new games will emerge to drive mass adoption.

In tracing this prediction, we observe that the traditional gaming industry is increasingly recognizing the future potential of Web3. EA CEO Andrew Wilson recently called Web3 "the future of our industry." Ubisoft CEO Yves Guillemot echoed this sentiment, stating that blockchain gaming is a "revolution" and announcing plans to develop blockchain games. Microsoft (MSFT), whose acquisition of Activision is now at risk due to a lawsuit from the Federal Trade Commission, has also been investing in Web3 startups as a significant part of their exploration in this space.

Across the industry, gaming companies are continuously hiring blockchain, NFT, and crypto experts, dedicated to finding the next development direction for gaming. With blockchain gaming and metaverse platforms expected to attract $9 billion in venture capital this year, the likelihood of breakthrough progress in 2023 is greater than ever.

11. Ethereum will enable withdrawals from the Beacon Chain.

The Beacon Chain is the name of the pre-merge POS Ethereum blockchain, created to ensure that the consensus logic of POS is sound and sustainable before the Ethereum mainnet is enabled. In September 2022, the Ethereum mainnet merged with the Beacon Chain, transitioning to a single blockchain with POS. Stakers currently earn about a 5% annual yield as a return on their invested ETH. However, withdrawals have not yet been enabled, which may hinder subsequent adoption. Enabling the withdrawal feature on the Beacon Chain will instill greater confidence in investors to commit funds to the protocol, potentially increasing the percentage of ETH staked from 13% to over 25%.