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The cryptocurrency industry had to deal with extremely challenging conditions in 2022. Cryptocurrency prices started 2022 performing in line with stocks and bonds, as the overwhelming majority of financial assets lost value in the face of rising inflation and interest rates. As the year wore on, cryptocurrency investors had to deal with one curveball after another. The first was the collapse of Luna in May 2022, followed by a number of cryptocurrency market participants being caught out mismanaging client funds, with the largest and most recent culprit being FTX.
All told, the cryptocurrency market lost nearly USD 2 trillion in market capitalisation during 2022.
State of the market heading into 2023
January has seen a positive start to the year, indicating a clear change in market sentiment. Over the past month, Bitcoin is up 44%, Ether has gained 37%, and Jaltech’s cryptocurrency baskets are up between 38% and 44% respectively.
As experienced in the past, cryptocurrencies are moving in line with risk assets, which have experienced a significant rebound in the last month. The strong performance is due to several factors including:
- positive economic data and China’s reopening,
- reduced inflation in the US and Europe,
- and a possible easing of the pace of interest rate hikes (thanks to point 2).
Factors at play in 2023
The macroeconomic picture is likely the determining factor as to where cryptocurrencies go in 2023. The current macro base case, and a key driver of the recent rally, have been expectations of a slowdown in the pace of interest rate hikes as inflation continues to ease. This is the so-called soft landing. The flip side of this scenario is that if we see a resurgence or stubbornness in inflation, interest rate hikes will continue. In this case, more downside volatility can be expected as recession risks mount.
In fact, US recession calls – as evidenced by the severe inversion of the US yield curve – appear to be a key leg of dovish expectations, with the generally-optimistic World bank projecting the global economy to grow by only 1.7% in 2023. The depth of the incoming recession, should it materialise, will be key to the path forward for asset prices.
Key to watch are developments in the Russia-Ukraine war, and whether they raise energy prices, as well as the health of the US labour market, which up to now has remained strong and risks seeing inflationary pressures become entrenched. Either would contribute to deteriorating valuations through a contraction of profit margins, an increase in interest rates, or both.
We expect interest rate hikes to slow over the next six months as economic conditions gradually deteriorate and inflation trends towards the 2% target range in the US, which may lead to cryptocurrency prices establishing a new platform over the year from which to launch the next bull market.
Chris McCormick & Jason Welz – Jaltech Fund Managers
Jaltech offers investors exposure to a diversified basket of cryptocurrencies and a basket of blockchain technology-related cryptocurrencies, which are selected and managed by a team of cryptocurrency experts.
For information about Jaltech’s Cryptocurrency Basket, click here.
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