2023 Crypto Thesis

06.01.23 03:17 AM By Stormrake

In today's Thunder Trading Update we take a dive deep into some of the trade opportunities and investment theses that are gaining traction amongst crypto insiders. This article will also serve as a fantastic snapshot to reflect on at the end of the year.

Bear Market Continuation

After a brutal 2022 for digital asset investors many are hoping for a turn in market conditions. Whilst we would also like to see a turn to the upside, any strength returning into the markets is likely to be in the form of bear market rallies and not the genesis of a new bull run. The majority of contagion risks have likely been priced in but there is still some room to the downside on Bitcoin and Ethereum. If previous bear market drawdowns from peak to trough are an indicator of how low we can go in this cycle, $12,000 USD - $13,000 USD would be the pico bottom on Bitcoin, whilst the low on Ethereum would come in around $500 USD.

The continued deterioration in market conditions will be driven by the unwinding of FTX positions via the bankruptcy courts and pervasive bad debt cycle through the entirety of the year. Players such as DCG (Barry Silbert) and Justin Sun (Poloniex & Huobi) continue to face liquidity issues and insolvency pressures. Worth keeping in mind is the breach of trust involved in this bankruptcy will significantly set back regulatory progress, investor activity, and consumer confidence.

Ethereum Outperforms Bitcoin

We have seen "Peak Ethereum" supply having hit 121.3 million units of Ether just before the Proof-of-Work removal and transition to Proof-of-Stake. Since the merge was successful, the continued burn and reduction of Ether supply via EIP-1559 will lead to tighter supply side conditions. In contrast, Bitcoin will continue to have a large security budget via block subsidies to miners and as the bear market drags on, the miners will be forced to sell the proceeds of their mining operations to pay their bills. The stark contrast in supply mechanics until the next Bitcoin halvening occurs will continue to see Ethereum hold up against Bitcoin as the bear market drags on, whilst any upside momentum or inflows will cause ETH to outperform due to smaller market cap and high beta correlation.

AI Narrative Catches Fire

Due to the recent success of Open AI and ChatGPT, there has been a resurgence in "AI focused" tokens such as Fetch.ai, SingularityNET and Cortex. They have small market caps when compared to the majors and are thus susceptible to huge swings to the upside followed by crashes in their valuations. Their volatility is not for the faint hearted but as appetite for AI applications grow, these tokens can continue to catch an expected bid as crypto continues to serve as the world's largest free market.

Tokenized Real-World Assets

DeFi needs more sustainable yields on the path towards a more sustainable future. To get to this future the pathway involves tokenising real-world assets. This unlocks cashflow that's not affected by Crypto's inherent volatility without having to introduce a native "governance token" to assist in beefing up yields. This can improve transparency, capital efficiency, and liquidity in assets (think real estate, art, bullion and much more).This will help further accelerate real world adoption and major players such as Blackrock will likely play a role in bringing this forward in 2023.

DeFi Will Outgrow CeFi

This past year exposed many of CeFi’s (Centralised Finance) problems as they were mired with bankruptcies and fraud, whilst DeFi, by and large, functioned flawlessly. In light of 2022’s many CeFi collapses, we expect the industry to consolidate into highly regulated players and cause further centralisation risks.

Following the spectacular FTX collapse, DeFi transactions have spiked, with volumes up 68% (to ~$97B) from October to November. Events like these prove the case for DeFi: governing assets via secure smart contracts enables users to better understand liquidity flows and have a far superior level of transparency on the health and solvency of these protocols.

In 2023, we're likely to see more complex and interesting applications of DeFi grow. A few innovative examples are GMX, a decentralized perpetual exchange, and Gains Network a synthetic trading platform to trade real world assets such as stocks and FX pairs. Next year will also likely bring more traction for use cases like self-custody wallets, synthetic assets, and prediction markets.

Crypto Market Resurgence

Earlier in our article we highlighted an expectation that we anticipate a continuation of the bear market. Whilst this remains our likely view for the first half of the year, as we are yet to see the outcomes of further contagion affecting Gemini Earn, Genesis and DCG. Once the inevitable washout comes from these players being ejected from the markets, we are likely to see an incredibly strong bear market rally. This rally will be driven by developed markets, where investors will come to see Bitcoin act as a store of value over time and a hedge against M2 inflation rather than overt CPI inflation. In emerging markets, the focus is more on remittances and neutral alternatives to dollar hegemony.

We should also not discount a potential economic recession. Should that happen, the Federal Reserve would likely pause raising rates amidst softening inflation, while money printing and government budget deficits continue. Merely a lack of bad crypto-specific news, under the above scenario, could cause the price of Bitcoin to put in a strong bear market rally to retest the $30,000 USD wall again.

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