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Cryptocurrency Outlook Picks Up Amid Bank Crisis

After a roller-coaster year filled with arrests, speculation, scams, bankruptcies and billions in value lost, cryptocurrency market experts could hardly wait for boring times. Then Silicon Valley Bank hit the skids, and financial markets were thrown out of whack. Would this be the next blow to the cryptocurrency outlook and bitcoin price?


But for cryptocurrencies, particularly bitcoin and ethereum, the 2023 bank panic has been a net positive.

The bitcoin price, already up strongly to start the year, recently moved to around $28,000. That’s its highest level since June, before Sam Bankman-Fried’s FTX exchange started to melt down. Ethereum is trading above $1,700 and near September highs.

Many crypto analysts see rising opportunities for real growth in prices and digital currency usage  in 2023. But the cryptocurrency outlook is nuanced, and most of the optimism is focused overseas.

In the U.S., the battle to craft meaningful regulations and oversight points to a still-bumpy ride. On March 27, regulators charged Binance, the world’s largest cryptocurrency exchange, with securities violations. That came days after they warned major Binance rival Coinbase (COIN) of possible enforcement action.

The prices of bitcoin and other cryptocurrencies have held recent gains amid ebbing bank fears and the Binance news.

“2023 will be a transition year from the vicious, frigid crypto winter of 2022 into something hopefully a lot hotter in 2024,” said Matthew Sigel, head of digital asset research at ETF and mutual fund manager VanEck.

Cryptocurrency Outlook And The Banking Crisis

The banking industry’s troubles cast a harsh light on crypto players. On March 8, major lender to crypto firms Silvergate Capital announced plans to shut down and liquidate its Silvergate Bank based on “industry and regulatory developments.”  Just five days earlier, Silvergate said it would discontinue its Silvergate Exchange Network (SEN). The platform launched in 2018. It enabled investors and institutions to transfer U.S. dollars from bank accounts to crypto exchanges.

SVB Financial, parent company of Silicon Valley Bank, failed March 10, sparking a liquidity crisis at several other banks and causing regulators to scramble to contain the contagion. Regulators soon seized Signature Bank. Roughly 30% of Signature Bank deposits came from crypto customers, company data shows.

While crypto-related banks were some of the first dominoes to fall, they were not responsible for the widespread banking turmoil.

Mark Connors, head of research at digital asset management firm 3iQ, says blaming crypto for the current bank issues is like blaming U.K.-based Northern Rock for the Lehman Brothers failure in 2007.

The Fed and Treasury increased the U.S. M2 money supply by 38.6% between December 2019 and December 2022 and bank balance sheets unevenly grew in a similar fashion, 3iQ data shows. Some banks invested the funds in Treasuries and other government-backed debt securities, whose market value inevitably fell as interest rates turned upward last year. But the reaction from banks varied, Connors said. Larger firms like Bank of America (BAC) and JPMorgan (JPM) maintained their short to long term debt ratios. But some, like First Republic (FRC), managed the increase differently. One clear difference was their decision to increase short term debt while reducing long term debt, making them among the most vulnerable during the banking panic.

“This was a total own goal,” Connors said. “In every crisis, the weakest lungs collapse first … and those were the ones that had the weakest and most flighty deposit bases.”

Bitcoin Price Jumps, Stablecoins See Outflows

Cryptocurrency prices bolted higher in March as bank crisis fears weighed heavily on financial stocks. Retail and institutional investors dumped fiat-backed stablecoins like USDC in favor of the blue chips bitcoin and ethereum. USDC issuer Circle had $3.3 billion held at Silicon Valley Bank before its collapse.

The bitcoin price spiked 18.9% in March, peaking at $28,889 on March 22 to mark its highest level since June 11. Ethereum climbed 6.9% to $1,858 on March 23 to trade at its highest level since mid-August.

The weekend of March 11, decentralized exchanges Uniswap and Curve recorded their highest-ever daily trade volumes, with more than $21 billion traded, according to Sigel.

“People realize these stablecoins are the on-ramp to crypto from fiat, so it is still bound by the risks of the banking system,” Connors said. “That shift out of Circle and other stablecoins into bitcoin was a perfect flight-to-quality example.”

Sigel called the stablecoin outflows after Silicon Valley Bank failed “unprecedented,” with “all kinds of actors” participating. “Since then, as U.S. bank access has become tighter, it appears U.S. exchanges have some worse liquidity profiles than they used to, relative to offshore (firms),” Sigel said.

The price of bitcoin often moved inversely to Treasury market yields in 2022, but that correlation began breaking down in October when Treasury yield expectations peaked and the U.S. dollar index topped, Todd Groth, head of index research at CoinDesk Indices, told IBD.

“However, we continue to see a moderately negative relationship between bitcoin prices and the yield curve slope (for five-year to 30-year spreads),” Groth said. He says the steepening yield curve accounts for 9% of the 25% bitcoin return during the regional bank crisis.

What Is Cryptocurrency?

Bitcoin, Cryptocurrency Outlook Post-Banking Crisis

“Bitcoin generally performs well when it decorrelates from risk assets, and so far in 2023, it appears to be bucking the 2022 narrative of being lumped together with growth-oriented equities,” Groth said.

Bitcoin’s strengthening correlation with gold and expansion of the Fed balance sheet are encouraging developments for the cryptocurrency outlook, Groth says. Yet concerns linger about liquidity in the broader crypto market following the FTX failure. And liquidity is unlikely to improve in the near future with the closure of crypto-related banks and regulators clamping down on exchanges, according to Groth.

“Fewer Fed hikes and rate cuts are pretty much priced into the market now and are reflected in the yield curve steepening … which has benefited bitcoin and gold at the expense of the U.S. dollar,” Groth said.

David Brickell, director of institutional sales at crypto investment firm Paradigm, believes the bitcoin price’s run is just getting started. “Now we’ve seen rates start to fall sharply, with the market pricing in rate cuts in the second half of the year. The Fed and ECB balance sheets are also back in expansion mode. This is the bullish thesis, but on steroids,” Brickell wrote in a March 27 research note.

‘More Integrity’ In The Cryptocurrency Market

Connors expects “a bit more integrity” in the cryptocurrency market in 2023. “The majority of bad actors have been taken out, and what that did was put, from a technical standpoint, the price and market structure of bitcoin in a very solid place with all the weak hands gone,” he said.

Plenty of bad actors and weak hands washed away in 2022. Last year saw a wave of bankruptcies from crypto firms as prices plummeted from all-time highs in late 2021. The spring collapse of Terraform Labs’ Luna token and sister stablecoin TerraUSD were the first crypto dominoes to fall. Together, they wiped out $60 billion in market value. That led to the bankruptcies of crypto firms including Three Arrows Capital, Voyager Digital and Celsius Network.

November’s FTX Group implosion rounded out the year. The second-largest exchange by volume, FTX filed for bankruptcy after overleveraging and mishandling billions in customer funds in concert with its sister firm Alameda Research. Crypto lender BlockFi filed for bankruptcy shortly after. The price of Bitcoin and cryptocurrencies traded near two-year lows in the months following those meltdowns.

“2022 was our default cycle. That’s the major theme and dynamic that ran through the entire industry,” said Connors. “And the implications of that are clarity for 2023. So that’s the launching point between 2022 and 2023.”

Connors says the collapse of FTX, Celsius and Terraform Labs helped differentiate unregulated, centralized players that ran faulty or fraudulent businesses. It also signaled maturation of the industry, he says, which will only develop as more regulation is implemented.

Crypto Growth Beyond The Noise

After the year’s major losses and the FTX collapse, Binance, Coinbase, Kraken and KuCoin lead the industry as the top crypto exchanges, CoinMarketCap data shows.

Despite the harsh climate, nearly 6,000 new cryptocurrencies launched in 2022, according to data from crypto research platform Bitstacker.com. There were 22,709 cryptocurrencies listed on CoinMarketCap.com as of Feb. 28, leaping from 16,238 listed on Jan. 1 last year. Meanwhile, the global crypto market cap roughly halved, falling to $1.07 trillion on Feb. 28 from $2.215 trillion on Jan. 1, 2022.

Worldwide, roughly 3.2 billion people use digital wallets, according to ARK Investment Management data, representing 40% of the global population. And ARK research suggests the number of users of digital wallets, which can be used to hold crypto tokens, will increase at an 8% clip annually, reaching 65% of the global population by 2030.

Cryptocurrency Prices and News

Assets On The Blockchain

Tokenization also figures into the cryptocurrency outlook. Sigel predicts that globally, financial institutions will tokenize more than $10 billion dollars in off-chain assets this year, including U.S. Treasury bills and other government securities.

Tokenization in crypto refers to converting off-chain, or real world, assets or asset ownership rights to tokens on the blockchain. Most assets can be tokenized on-chain. Experts believe everything from Treasury bills and government securities to housing deeds and concert tickets will eventually be tokenized.

Currently, $1.15 billion in off-chain financial assets are tokenized on the blockchain, with the value of those assets up 21% this year, VanEck data shows. That growth is “more or less” in line with the growth of the crypto market, according to Sigel.

“My $10 billion estimate is an order of magnitude higher and it requires some Big Bang developments,” Sigel told Investor’s Business Daily.

In January, El Salvador approved a law to sell $1 billion in bitcoin-backed bonds to pay sovereign debt and fund construction of its proposed Bitcoin City. Meanwhile, MakerDAO plans to deploy $1 billion in U.S. Treasury bills and securities this year with BlackRock and Coinbase.

Institutional Role In Cryptocurrency Outlook

The cryptocurrency outlook in 2023 will be more focused on institutional adoption, while 2020 and 2021 were more about retail investors and the fear of missing out, Connors says.

“Generally in bear markets, assets move from weak hands to strong hands,” Sigel said. “And…

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