2023 will be a pivotal year before regulation arrives in Europe, the UK and the US. It should be recognised that the digital asset industry is not yet stabilised, the situation at DCG is a perfect example ; how many more players are in trouble without us knowing? With this in mind, we can consider that 2023 will be a year of industry consolidation with mergers and acquisitions by crypto players (exchanges, protocols, lenders, institutional crypto).
We can even imagine operations of this type by more traditional players who prefer to play their part by snapping up the crown jewels at a knock-down price: what about a takeover of DCG by Fidelity or BlackRock, or a hostile takeover of Coinbase by JP Morgan? All this is possible, it's not 'finance fiction'. At the same time, we can assume that all the 'accidents' of 2022 and the desire to be bought out by the big players in the industry will push many centralised players to self-regulate, to play the game of transparency via public financial audits and regular financial communications to the community.
From a macroeconomic point of view, we can assume that central banks will continue to raise rates during the first half of the year even if it means causing economic recessions just about everywhere. However, I believe that political pressure, and even pressure from the street, and the fact that central banks are over-indebted, will lead them to accept lower inflation (4/6%), but still higher than what we have seen over the last decade, in order to reduce debt and support the economy - investment in infrastructure in developed countries is necessary (energy, mobility, defence, health, etc.). Consequently, I am convinced that Bitcoin, as digital gold, will emerge quite naturally as a relevant asset class for this decade of "financial repression" (cf. financial historian Russell Napier).
In this respect, in 2022, Bitcoin comes out the big winner. Indeed, as our Head of Research James Butterfill mentioned, although Bitcoin lost 63% of its value in 2022, "inflows" on Bitcoin ETPs products were $287 million while Ethereum suffered $407 million in outflows.However, the success of Merge and the arrival of the "Shanghai update" will establish Ethereum's dominance by popularising the use of staking, which will make it difficult for other PoS blockchains to exist.
Will Solana rise from the ashes? What about Cosmos 2.0? Moreover, with regard to the crypto ETPs-type investment vehicles mentioned above, we can predict that some long-term investors will prefer to gain exposure to digital assets through this familiar type of product (ETFs being part of the ETPs family) which on the one hand avoid the management of private keys by the user, are highly regulated and on the other hand are available on all traditional brokerage platforms amid stocks, bonds, ETFs and commodities.Coming back to Bitcoin, if we refer to the MVRV Z-Score, we can estimate that we are in a phase of accumulation, however, this accumulation remains an accumulation of retail investors, the lack of regulation does not yet lead institutional investors to venture into an industry that is still too immature. Nevertheless, institutional investors are perceiving a growing appetite for this new asset class among their investors, as demonstrated by the Vanguard study , which shows a growing interest in a form of volatility on the part of the younger generations. We can imagine that by the end of 2023, the major wealth managers will once again be questioning the relevance of offering crypto products to their clients, the question is in what form.
As for DeFi, Uniswap and Aave are in the process of establishing their superiority as the industry's essential protocols. On the other hand, decentralised players offering derivatives such as dYdX or GMX are on a roll, this can certainly be explained by the implosion of FTX and lingering doubts about Binance's reserves; all the same, I wonder about the scalability challenges of such projects.
Finally, another interesting point is that traditional finance now offers more attractive returns than decentralised finance, so many DeFi protocols, like MakerDAO are going to turn to what they call RWAs (Real World Assets) , i.e. traditional bonds or even equities. So these protocols are no longer collateralised solely by crypto, but by assets from the traditional industry. This is a hybridisation that will be interesting to observe in 2023.
Finally, after all the "accidents" experienced this year we can assume that the industry will equip itself with the same tools as the traditional financial industry to minimise risk, i.e. credit scoring tools, insurance, even CDS. The question is how an industry that claims to be completely decentralised will be able to equip itself with such tools without a control intermediary.
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