Trading Signals 05/02 – 09/02
2023 Crypto Industry: Changes & Trends
As 2023 comes to an end, it also marks the conclusion of the cryptocurrency market’s longest bearish phase in history. Yet, experienced participants have observed that from March 2022 to the present, the sector has been on an active growth trajectory — integrating more closely with traditional finance and moving towards institutionalization.
Throughout the past year, the industry has matured significantly, adeptly handling challenges that might have been devastating just a few years back. Despite reduced market capitalization, regulatory pressures, and a crisis of confidence, the market has seen the emergence of several strong projects like Base, and new trends have started to reshape the industry’s dynamics.
2023 in Numbers: A Bit of Statistics
Let’s start our review with a few key metrics that provide a general understanding of the market dynamics over the past year. Then, we’ll move on to discuss specific events and narratives.
Total Market Capitalization
At the beginning of 2023, the market was still grappling with the fallout from the FTX bankruptcy, compounded by the hawkish policies of the U.S. Federal Reserve (Fed) and macroeconomic instability.
In January, the market capitalization was estimated at $800 billion, more than a threefold decrease from the peak value of $3 trillion recorded in November 2021.
These were the minimum levels from which the industry tried to rebound throughout 2023. However, it was only in October that the market managed to break out of the $1-1.3 trillion range, which most players perceived as a trend reversal.
As of December 25, the total market capitalization stands at $1.7 trillion, still half the peak values. The period of consolidation with sideways movement seems to be behind us. Now, the influx of capital into the industry could significantly accelerate.
Changes in the Top Cryptocurrencies
According to CoinMarketCap, as of January 1, 2023, the list of the top 10 cryptocurrencies by market capitalization looked as follows.
Data from CoinMarketCap.
It differs somewhat from the list of the top 10 cryptocurrencies as of December 25, 2023.
Key shifts to note include:
- The disappearance of the stablecoin BUSD — following a New York Department of Financial Services (NYDFS) probe in February, Paxos halted the issuance of this asset. By December 15, Binance, the project’s main partner, also ended its support for BUSD.
- A decrease in both the capitalization and market share of USDC — this U.S. ‘regulated’ asset seemed unable to recover from the shutdown of its partner banks and failed to regain investor confidence after depegging. The monopoly in this area has now shifted entirely to USDT.
- Solana’s meteoric rise — the value of the SOL cryptocurrency has increased tenfold over the year, and the ecosystem has impressively rebounded from the FTX collapse. We’ll delve deeper into the Solana phenomenon later.
- Avalanche’s re-entry into the top 10 — this was driven by a spike in activity due to Inscriptions and a redefinition of the network as a foundation for GameFi projects.
Meanwhile, stalwarts like Cardano, Ethereum, Tether, XRP, and Dogecoin have consistently maintained their market dominance over several years and show no signs of relinquishing their positions. Yet, as the bull market is just beginning, it’s too early to predict which narratives will resonate with users in this cycle.
DeFi Sector: Key Metrics and Trends
In the DeFi sector, notable trends include:
- A widespread decrease in activity due to declining asset prices and capital withdrawal;
- The introduction of liquid staking as a novel DeFi primitive;
- Ethereum’s continued dominance throughout much of the year.
The Total Value Locked (TVL) in DeFi platforms increased from $35 billion to $53 billion over the year, reflecting the sector’s slower growth compared to the broader market. The anticipated surge in altcoin activity and its impact on decentralized platforms may yet materialize.
Another critical indicator for DeFi and the wider crypto market is the capitalization of stablecoins, vital for liquidity across the industry. After hitting a low in August, capital inflows have been on a gradual uptick, though they remain well below the 2021 peak levels.
Industry Key Events
By tracking the industry’s major milestones, we can understand its evolution and what we may face in the future. We’ve identified events that had the most significant impact on the market in 2023.
Early in 2023, the industry was still reeling from the FTX bankruptcy. Genesis, a division of Barry Silbert’s Digital Currency Group, was among the entities impacted by the exchange’s collapse.
As a major creditor to FTX, Genesis found itself unable to meet $3 billion in obligations following the exchange’s shutdown. Rumors surfaced on January 19, and by the next day, the company confirmed it had filed for Chapter 11 bankruptcy.
Genesis was also involved in the Gemini exchange’s Earn lending program. The brokerage’s bankruptcy led to Gemini losing access to $900 million in assets and subsequently shutting down the product. Later, Gemini sought to recover these funds directly from DCG.
The situation around DCG and Genesis exacerbated investor distrust in the industry post-FTX collapse and drew regulatory scrutiny. Additionally, the incident triggered liquidity issues and insolvency for other industry players.
Do Kwon’s Arrest
In March, Terraform Labs founder and CEO Do Kwon was detained at Podgorica Airport. The hunt for him began following the collapse of the Terra ecosystem and its associated tokens, LUNA and UST.
The Terra collapse in May 2022 triggered a series of bankruptcies, with direct investor losses from the event estimated at $40 billion.
U.S. and South Korean regulators charged Do Kwon with fraud and violations of capital market and securities laws. In September 2022, Interpol issued a warrant for his provisional arrest. Initially, it was reported that the former CEO moved from South Korea to Dubai and then to Serbia, where he was eventually arrested.
Following his arrest in Podgorica, Kwon was found guilty of using a fake passport and sentenced to prison. However, soon after his detention, the U.S. and South Korea requested his extradition, and in November 2023, the court approved the request, although the decision was later revoked.
Bankruptcies in Crypto-Friendly Banks
Key banks serving the crypto industry, including Silvergate, Signature, and Silicon Valley Bank (SVB), ceased operations amid the Fed’s rate hikes. The collapse of these banks, initially linked to their crypto associations, later revealed broader systemic issues in the U.S. banking sector.
The fall of Silvergate and Signature notably reduced liquidity in the crypto market. Firms like Paxos and Coinbase had insured deposits in these banks, which were secured post-closure by the FDIC.
Another impact was the USD Coin (USDC) losing its dollar parity, primarily due to SVB’s collapse, a major partner of USDC co-issuer Circle. Panic selling ensued, leading to USDC’s depegging. However, Circle’s recovery of funds and securing a new banking partner helped USDC regain its stability, though its capitalization shrank by $10 billion in the aftermath.
EU Council’s MiCA Regulation Adoption
On May 16, the EU Council approved the MiCA regulation, setting a legal framework for digital asset operations in the EU. MiCA, distinct from other jurisdictions, considers blockchain’s specifics and includes:
- Token classification
- Crypto company disclosure requirements
- Digital asset issuance and exchange regulations
While DeFi isn’t covered yet, it’s expected to be in future amendments. MiCA’s influence extends beyond the EU, impacting legislation like Ukraine’s “On Virtual Assets” bill, though national market nuances pose implementation risks.
Key MiCA provisions are set to be enforced in 2024, marking a significant step towards a regulated crypto environment in the EU.
Ripple’s Partial Win Against the SEC
Ripple notched a notable partial win against the SEC on July 13. The case, initiated in 2020, challenged the SEC’s attempt to classify XRP as a security. The court ruled that only XRP sales to institutional investors might be considered investment contracts.
A pivotal point in Ripple’s defense was the “Hinman notes,” which suggested certain cryptocurrencies might not be securities. Despite the SEC’s appeal and initial resistance, the court dismissed further arguments due to a lack of substantial issues.
While charges against Ripple’s founders were dropped and the SEC expressed disappointment, the case concerning XRP’s institutional offerings will proceed in April 2024, leaving Ripple’s full victory still undecided.
Spot Cryptocurrency ETF Efforts in 2023
In late 2023, the push for spot Bitcoin and Ethereum ETFs became a key focus, with analysts suggesting their approval could significantly open up the market. Grayscale led the charge among 13 firms, including ArkInvest, BlackRock, and Fidelity, seeking to offer such products.
The SEC’s response has been cautious, labeling initial applications as “inadequate” but engaging in ongoing discussions and revisions with applicants. Despite past failures and concerns over market manipulation and custody services, the industry remains hopeful, with the next review set for January 2024.
While the U.S. market is a primary target, similar ETFs in the EU and Brazil indicate a growing global interest. The U.S. already has indirect exposure through Bitcoin and Ethereum futures ETFs, but direct spot ETFs could have a more substantial impact.
Trial of Sam Bankman-Fried
On November 3, a jury found FTX founder and Alameda Research associate Sam Bankman-Fried (SBF) guilty of fraud, financial manipulation, embezzlement, conspiracy, and money laundering. However, the sentencing is scheduled for spring 2024.
SBF’s lawyer, David Mills, later stated that winning the FTX case was impossible, branding SBF as the “worst person” he had ever seen during testimony.
Former Alameda Research CEO Caroline Ellison, ex-FTX CTO Nishad Singh, and exchange co-founder Gary Wang pleaded guilty and testified against SBF.
In addition to criminal charges, Bankman-Fried also faces lawsuits from the U.S. Commodity Futures Trading Commission (CFTC) and the SEC, set to be addressed post-criminal trial.
Binance’s Settlement with the DOJ
On November 21, Binance settled with the U.S. Department of Justice, resolving charges of unlicensed money transfers and other violations. The agreement includes Binance exiting the U.S. market (except for Binance.US), CEO Changpeng Zhao stepping down, comprehensive government oversight, and a $4.3 billion fine.
Richard Teng succeeded Zhao, emphasizing regulatory compliance. While the settlement is seen as a positive step for industry trust and clarity, Binance’s future dominance is uncertain. Despite this resolution, Binance still faces ongoing legal challenges with the SEC.
End of the Longest Bear Trend
The crypto market, based on Bitcoin’s price movements, experienced its longest bear trend in history during 2022-2023. The negative sentiment began when Bitcoin left its $60,000 peak in October 2021, but the real bear phase started with Terra’s collapse in May 2022, causing a drop from $40,000 to $20,000 and halving the market’s total capitalization.
This downward trend lasted nearly one and a half years until Bitcoin broke through to $30,000 in October 2023 after previous failed attempts.
The trend reversal was supported by other metrics:
- TVL in DeFi began to rise in late October after a prolonged decline;
- The total market capitalization also surged by $500 billion in two months;
- The fear and greed index reached 66 points for the first time since spring, indicating a shift to “greed” at 74 points.
The definitive end of the bear trend and Bitcoin’s rapid rise marked a key industry event. Assuming no adverse factors and favorable scenarios in 2024, this could evolve into a full bull run.
That concludes our current discussion. As we wrap up a year distinguished by the conclusion of the most extended bearish period ever recorded in the cryptocurrency market, we eagerly anticipate the onset of a bullish phase, the emergence of fresh trends, opportunities for profit, and a host of thrilling developments. Keep following Incrypted for the most up-to-date news and insights.