The crypto bear market this year has so far shown little sign of ending, especially with the collapse of FTX. Does it get worse, or will 2023 bring some green shoots?
On the back of the huge gains seen in 2020 and the rollercoaster volatility we saw in 2021, leading crypto assets such as BTC and ETH have this year been on a firm downward trajectory. For those who took positions betting on the collapse of these coins, it’s been a blockbuster year. However, for the many traders who bought at the start of the year anticipating (or hoping for) more balloon-like upside action, it’s been a tough year. Still as we approach the start of the new year it’s time to start looking ahead and planning for Q1 2023.
With this in mind, the big question many are asking is whether the crypto market can rebound from current lows and recover higher across the year, or whether the crypto market is vulnerable to further losses. In order to assess this let’s consider the factors which have been driving crypto markets recently and how they look likely to develop into next year.
Factors Driving Crypto
Fed & USD
Large positioning shifts
Negative news / investor uncertainty
Fed & USD Impact
Perhaps the biggest driver of downward action in Crypto assets this year has been the upside run in USD. With the Fed embarking on a tightening path over 2022 and turning increasingly hawkish throughout Q1-Q3, the US Dollar enjoyed a solid bull run. The impact of this was that risk assets across the board were knocked lower, crypto included.
Given the bubble-like nature of the final stages of the crypto rally, the sheer volume of retail upside bets which had built up made the market highly vulnerable to a downside move. This was clearly reflected in the price action we saw over the year with several periods of sharp downside action as long positions were squeezed out of the market. The retail washout was exacerbated by negative, high level news stories over the year.
Collapse of FTX
The most recent of these was the collapse of FTX, the second largest crypto broker. The firm was recording huge client withdrawals, leading to liquidity concerns. These concerns ultimately proved to be largely linked to fraud with massive amounts of client money having been syphoned off elsewhere. The firm was reportedly due to be bailed out by Binance. However, after Binance pulled out upon identifying issues with accounting, the company was left to fail with the CEO now facing fraud charges.
The collapse of the firm sent shockwaves through the crypto world leading to further massive client withdrawals from other brokers. Binance reported client outflows of more than $6 billion last week, underscoring the growing fear among investors regarding corruption in the crypto space.
Binance Under Scrutiny
Binance had been using accounting firm Mazars to conduct proof of reserves reports aimed at calming investor unease. However, with Mazars having made the decision to halt its work, reportedly due to concerns that the reports would be used to help bring investors back into a very volatile sector, Binance is now back under pressure, putting the crypto sector as a whole back under pressure. This has been well reflected in the moves lower we’ve seen in leading crypto assets recently but also other leading crypto firms such as coinbase, whose shares are plumbing fresh lows.
Upside Risks for Crypto
So, with so much stacked against crypto, is a further sell off likely, or might we still see a rebound next year? While it’s hard to pinpoint timing, it certainly feels like the better risk:reward is probably found to the upside. Given the depth of the sell off this year and given the many bearish factors which have dragged crypto lower. The bigger shocks are likely to come on a bullish change in narrative. In terms of what might cause such a shift, the two factors to monitor most are the US rate path and a potential reopening of the Chinese economy.
US Rates / Inflation
With the Fed having pivoted on rates the potential for further slowing of its tightening program is promising for crypto. Should we see any big downside moves in inflation in the coming months and quarters, this will likely fuel a sharp uptick in risk sentiment, as traders price in a quicker end to Fed tightening, helping boost risk assets (including crypto).
Risk sentiment will likely also improve strongly if China reopens early next year as many are beginning to speculate will happen. The positive implications on global trade and economic activity should help drive a wave of pro-risk action. In either, or both cases, cryptos look well positioned to enjoy sharp upside given the amount of money which has been taken off the table in crypto over this year, allowing plenty of room for a sharp rally on a sudden uptick in demand.
Source: FlowBank / TradingView
Over the last six months, the decline in BTC has become more laboured with price settling into a falling wedge pattern on the move below 18175. The latest test of the level from below has held as resistance for now, keeping the near-term view skewed towards further losses. Price might fall as low as a test of the 11820 level before we get a bullish reversal. If we are to move higher, bulls need to see a break back above 20385 and the falling wedge top to signal a reversal is underway, putting 28860 in view as an initial target.