A recent institutional report, the 2023 Market Outlook by David Duong and colleagues at Coinbase, discusses key themes and predictions for the cryptocurrency market this year. The report highlights the flight to quality assets like Bitcoin and Ethereum by institutional investors due to the retraction of capital from risk assets. It also discusses the potential for Ethereum to retain its dominant position despite market conditions, thanks to layer 2 scaling solutions. The report touches on the growth of decentralized finance and decentralized exchanges, the potential for permissioned DeFi, and the tokenization of real-world assets. It also addresses the impact of last year’s deleveraging on altcoins and the struggles of marginal Bitcoin miners. Lastly, the report explores the potential for new use cases for NFTs and the importance of regulatory reforms in shaping the next market cycle.
Where is Bitcoin Going This Year?
Will Ethereum Remain the Dominant Layer One?
Could NFTs Make a Comeback?
Will Regulation Strangle All of Crypto?
All of this was recently covered in an Institutional report, a comprehensive and in-depth 2023 Market Outlook that I found incredibly insightful. So in my video today, I’m going to break down this report into the most important sections and explain what they could mean for the crypto market. I also have a few of my own thoughts on these predictions, so be sure to stick around.
The report I’ll be summarizing today is one that was drawn up by David Duong, the head of institutional research at Coinbase, with contributions from several of his colleagues. Now, I’ve covered a number of Coinbase reports from David and Co in the past and have linked to this particular one below, so let’s jump right in.
Chapter One: Key Themes in 2023
Chapter one touches on some of the key themes that we’re likely to see in 2023. These will be expanded on later in the video, but I’ll run through a number of them now.
1. Flight to Quality by Institutional Investors
Quite simply, there was a general retraction of institutional capital from all risk assets in the second half of last year. This wasn’t just a crypto-specific phenomenon either and was based on the fear that we could be heading into a recession, something that many financial participants view as a certainty. This has led to a capital flight to quality assets in the crypto space, that means the likes of Bitcoin and Ethereum.
This is based on the sustainable tokenomics maturity of the respective ecosystems and relative market liquidity. David and Co also show us a chart that is quite encouraging. It’s the long-term holders of Bitcoin and the long-term holder percentage over the years. As you’ll see, there are a number of dips that occur in the bear markets as some hodlers are shaken out. However, over the long term, the number keeps increasing.
2. Ethereum’s Dominant Position
The report goes over the Ethereum narrative more specifically, given that there are a number of alternative layer ones on the market right now. Can Ethereum retain its dominant position despite the prevailing market conditions? 2022 was a big year for Ethereum, and that’s because of its move to proof of stake. Looking forward, though, we can expect developer consolidation to continue as they coalesce around a smaller number of chains in 2023. However, despite the potential for competing chains, the authors think that Ethereum is likely to remain dominant thanks to layer 2 scaling solutions. Indeed, in the case of Polygon, for example, these layer 2 solutions are actively poaching developers from ecosystems like Solana.
3. Growth of Decentralized Finance and Decentralized Exchanges
This is only likely to accelerate in the new year as the industry has become incredibly jaded by centralized exchanges and lending firms that have lost billions of dollars in value. This doesn’t mean that there won’t be challenges for DeFi, of course. Hacks and exploits are still commonplace, and a lot of the DEXes that do operate can’t manage accounts correctly given the extreme volatility of some of these tokens.
4. Permissioned DeFi
The report talks about permissioned DeFi, which some may consider an oxymoron. If it’s permissioned, then it ain’t DeFi. But David and Co argue that as risk-free yields start to pick up and defy, the yield uplift we see in DeFi protocols is no longer that appealing. Hence, the fall in TVL (Total Value Locked). However, they think it could be an opportunity for those dApps adapting to a more permissioned or enhanced version of DeFi that has regulations. Despite how much we may be against the notion of any sort of permissioned DeFi, they do make a fair point. That is, it could allow for the inclusion of tokenized real-world assets within DeFi, as well as solving other problems related to credit scores like under-collateralized lending.
5. Tokenization of Real-World Assets
The authors point out that tokenization can be a relatively risk-free way for institutions to gain crypto exposure in some form. Essentially, tokenize a traditional asset and trade it on a blockchain. Last year did see French bank Societe Generale issued tokens that were based on AAA-rated French home loans. This could be used as collateral to borrow up to 30 million DAI. However, the authors think it will take quite some time before we see tokenization of non-financial assets on the blockchain.
6. Creative Destruction in the Altcoin Space
The authors point out that investors’ willingness to accumulate altcoins this year has been severely impacted by last year’s deleveraging. They say that many of these newer projects may have been hit particularly hard as they loaned out their tokens to market makers who used FTX as a liquidity pool. Hence, it’s going to be a long wait for the bankruptcy process to conclude and for these projects to get their money back. Given how long it could take, I wouldn’t expect many of them to still be standing by the end of it.
7. Sector Flows and Marginal Bitcoin Miners
This interesting chart shows the relative sector flows from different altcoins. As you can see, it’s relatively even in terms of buys and sells, although it looks as if liquid staking projects are seeing large inflows. Speaking of marginal Bitcoin miners, it’s been a rough year for them. Miners have been liquidating coins faster than they can mine them. This is a combination of the lower Bitcoin price and the added costs required to mine, increased difficulty with higher energy prices. The result has been a number of bankruptcies. Should this trend persist, the report foresees more marginal miners eventually throwing in the towel or being acquired by better-capitalized competitors.
8. Potential New Use Cases for NFTs
While demand for NFTs is currently low, the authors believe that we are still in the early stages. There could be a widening of scope to a number of different NFTs that focus on utility, such as digital identity, ticketing, memberships, subscriptions, supply chain management, and the tokenization of real-world assets.
9. Foundational Reforms to the Crypto Space
David and Co think that the next market cycle could be shaped by significant regulatory standards and frameworks. Clear guidance is necessary to avoid driving innovation to regions where regulatory requirements are weaker and customers may be at greater risk. They are particularly optimistic about certain legislation, including the Digital Commodities Consumer Protection Act (DCCPA), which would allow the CFTC to have oversight of digital assets.
Whatever laws are put into place by the regulators, it’s important that they realize that…