April 3, 2023 – The first quarter of 2023 was a rollercoaster ride for the crypto market, with Bitcoin and Ethereum experiencing price swings amidst regulatory crackdown and macroeconomic headwinds. Despite the negative news flow, Bitcoin has shown great resilience with a ~70% price increase, leading all performance tables in the market. Moreover, there was a resumption of Bitcoin’s store of value narrative and a “flight to quality” move from altcoins and stablecoins, even from the banking system. In this article, we provide a review of 1Q23, highlighting significant events and trends that shaped the market, and an outlook for 2Q23.
US authorities launched an orchestrated regulatory crackdown, which many have been calling “Operation Choke point 2.0,” aimed at curbing crypto activities. This led to a decline in trading volumes, with Bitcoin’s liquidity dropping below the level it reached when FTX/Alameda collapsed last year, which was called the “Alameda Gap” due to its relevance as a market maker. In March, the SEC announced several measures against crypto exchanges and staking services. Meanwhile, poor risk management in the US banking system led to a bank run, resulting in the shutdown of the crypto-friendly banks Silvergate and Signature, and the startup-friendly bank SVB. Amidst this turmoil, Circle’s dollar stablecoin USDC lost its peg to USD for a few days.
Impact of Macro Headwinds:
The crypto market faced significant headwinds from macroeconomic factors, including the Fed’s monetary policy of interest rate hikes to fight inflation. Initially, market participants expected a hawkish Fed and anticipated a 50bps rate hike in March. However, the banking system problems due to a potential bank run contagion may have changed the Fed’s mind, and it announced a 25bps hike and a steady flow of USD using swap lines with other central banks.
Resumption of Store of Value Narrative:
Bitcoin’s store of value narrative resumed in 1Q23, with investors flocking to Bitcoin amid regulatory crackdown and macroeconomic headwinds. The largest cryptocurrency’s dominance over other crypto assets reached a 9-month high of ~45%, as investors sought safety in Bitcoin. The options market showed stronger demand for calls versus puts, indicating bullish sentiment among investors. Bitcoin’s price resistance levels became new support levels, with the price increasing each month in the quarter.
Outlook for 2Q23:
In 2Q23, we expect regulatory uncertainty to persist, with the SEC seeking new ways to regulate crypto exchanges and stablecoins. This may lead to further declines in trading volumes and liquidity. We also anticipate that macroeconomic headwinds may be reduced, with the Fed relaxing its monetary policy, likely raising interest rates one more time. We expect the resumption of the store of value narrative to continue to support Bitcoin’s price, with increased adoption of cryptocurrencies by institutional investors and corporations entering the market. On-chain metrics and analysis show bullish signals, with increased activity on the Bitcoin network and a growing number of wallets holding it. Overall, we maintain a positive outlook for the crypto market in 2Q23.
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