The threats to crypto have never been greater, but mass adoption is imminent

2023 is proving to be a pivotal year for the crypto space, with many events converging to shape its future trend and adoption in the near term. While there are many variables at play, here are three key factors poised to impact the crypto market through 2023.

Increasing crypto supply

In terms of supply increases, the following two major events could potentially affect the crypto market.

ETH Shanghai upgrade

In April 2023, Ethereum will undergo a Shanghai upgrade to fully transition to a proof-of-stake (PoS) blockchain, which is expected to significantly improve network performance. The PoS journey started with the launch of Beacon Chain in December 2020, where users deposited over 500,000 ETH into the smart stake. Currently, over 17.5 million ETH are secured in the contract, effectively reducing the total circulating supply currently locked in the Beacon Chain contract.

After the upgrade, users will be able to withdraw some of the ETH that has been unlocked since launch, raising concerns about a potential increased supply and subsequent downward pressure on ETH’s price. Despite concerns, two key factors suggest such a scenario is unlikely:

• A full 32 ETH withdrawal is impossible – once 18 months have passed since the Shanghai upgrade, withdrawals of the required 32 ETH per validator will become available. It is worth noting that withdrawals will initially enter a queue where stake rewards are prioritized over the main stake. This will slow the influx of ETH into the circulating supply after the upgrade.
• Most ETH stakers are underwater — the next factor that could affect ETH prices is that the majority of it was staked during the 2021 bull market. Thus, most stakers are currently not in profit, thus discouraging them from selling further.

Source: Dune

Mt.Gox refunds

The other supply increase that could affect the market concerns Bitcoin’s (BTC) upcoming release of coins recovered from the infamous Mt. Gox hack in 2014. At the time, Mt. Gox a leading Bitcoin exchange, accounting for 70% of global crypto trading volume. However, in February 2014, a tragic hack resulted in the loss of over 850,000 Bitcoins, which caused widespread shock in the crypto community and ultimately led to the closure of the exchange.

Since the hack, former Mt. Gox holders have been in a protracted legal battle to get their money back. Fortunately, this protracted saga is set to end in September, with the coins returned to their claimants.

Surprisingly, the largest holders of the recovered Bitcoins are the institutional funds that bought Mt. Gox claims for a fraction of the value from retail investors.

Despite the ongoing legal battle, one of the largest holders has stated that they intend to hold on to their Bitcoin, easing concerns about a massive sell-off of trustee Bitcoin. Nevertheless, when claimants receive their Bitcoin, there may still be some fear, uncertainty and doubt that persists and introduces some volatility in the market.

Challenging global macro environment

Crypto used to exist in its own bubble, independent of macroeconomic events in traditional finance. Over the years, however, the crypto market has become increasingly intertwined with traditional finance and is proving to be significantly influenced by broader economic conditions. Factors including inflation, the dollar index, VIX, FOMC meetings and bond yields are some of the main determinants that dictate the price direction of crypto and its volatility.

A recent example of this would be the failure of Silicon Valley Bank (SVB), whose overexposure to long-term government bonds played a key role in the bank’s downfall, triggering a bank run due to interest rate hikes as well as worsening financial conditions.

Shortly after this event, Circle, the issuer of the USDC stablecoin, confirmed that part of the reserves backing the USDC – worth $3.3 billion or 7% of the total – were held in the failed bank. This news triggered a wave of panic selling among USDC holders, causing the stablecoin to lose its $1 peg and plunge to $0.87 on the morning of March 11. Even Dai, the decentralized algorithmic stablecoin, was affected, as 40% of its reserves are backed by USDC.

Source: Dai Stats

The uncertainty surrounding the future of USDC and other fiat-backed stablecoins could have a detrimental impact on innovation in DeFi and other crypto products that rely on a stable fiat peg. Currently, USDC has still not been able to regain its $1 peg and is currently trading at around 0.99 cents, further causing concern and resistance among holders.

Source: CoinGecko

If the popularity of fiat-backed stablecoins declines further, the industry may shift towards algorithmic stablecoins that are 100% backed by crypto-on-chain. These stablecoins can be designed to be massively over-collateralized, which will help maintain the $1 peg during periods of extreme volatility. However, the earlier collapse of algorithmic stablecoins such as Terra Luna may slow adoption.

“Unbanking” of crypto

Source: Twitter

Undoubtedly, the current regulatory landscape and failing banks present significant obstacles to the movement of capital in and out of the crypto world. This could lead to 2023 being the year when crypto becomes increasingly unbanked, with regulatory pressures causing uncertainty about the future of stablecoins like USDC and BUSD.

Banks are making it increasingly challenging for people to buy crypto, with UK high street bank Nationwide announcing in February that it will introduce daily purchase limits and a ban on buying crypto using credit cards. Natwest also updated its limits. In addition to that, Binance announced suspension of GBP deposits and withdrawals via bank transfers and faster payments, as fiat partner Skrill Limited ceases to provide banking services to the exchange.

These restrictions can lead to a poor user experience for those looking to acquire crypto assets, as well as further increase the risk to consumers in the process.

Final thoughts

The current macro and regulatory overhang combined with limited capital supply suggests that 2023 is unlikely to see a significant increase in new crypto users for transaction services. Relying on buzzwords like account abstraction, Layer-2 blockchain wars and ZK rollups will not be enough to drive immediate adoption. Although the onus is ultimately in the hands of developers and true believers to rebuild the ecosystem from scratch, for which these are useful new tools.

The recent eventful weekend of March 11, when the SVB collapsed, may be a key moment that highlights the waning confidence in not only governments, but more importantly, the traditional financial system. This could be the seminal moment that could encourage everyday users to look for alternatives, and the crypto industry needs to ensure that it is ready to offer stability and security for its assets.