If you thought Wall Street had a bad year, take a closer look at how the cryptocurrency space is faring. The combined value of more than 22,100 digital currencies fell from nearly $3 trillion in November 2021 to less than $795 billion on the morning of December 29, 2022, according to data from CoinMarketCap.com. 14 months.
But given the known volatility that is always present in the cryptocurrency space, even a 74% drop in a short period of time is not enough to change the mind of digital currency enthusiasts.
The big question is: What’s next for cryptocurrencies in 2023? The following are four predictions for the new year.
Image source: Getty Images.
1. Ethereum will (briefly) overtake Bitcoin in market cap
Here is the first crypto prediction for 2023 Ethereum (ETH 0.32%) it will do the impossible even for a very short period of time and exceed the market value Bitcoin (BTC 0.19%).
The most difficult part of this prediction is that Bitcoin and Ethereum tend to be highly correlated. When one rises or falls, the other usually follows. Rarely do digital currencies diverge from Bitcoin and move on material news or information based on its own merit. But with stocks in a bear market and the U.S. economy potentially headed for recession, we may be getting our first taste of the burgeoning personalization in the cryptocurrency space.
For its part, Bitcoin has always been the king of cryptocurrencies. Given the 21 million token cap, the perception of scarcity has attracted investors to support the high value for the token. But when we examine the utility of Bitcoin, it leaves a lot to be desired. According to transaction data from BitInfoCharts.com, the average number of bitcoin transactions completed each day has been virtually unchanged over the past seven years.
Compare that to Ethereum, which averaged 40,000 transactions per day in 2016, nearly 700,000 in 2019, and over a million transactions per day consistently for the past two years.
While the Ether token can theoretically be used for payments, Ethereum’s real utility has been demonstrated as a tool for decentralized application (dApp) development. In terms of DApp protocol revenue, data from TokenTerminal.com shows that Ethereum has grown over the past 12 months with $3.8 billion in revenue per project.
In other words, a strong fundamental/material case can be made that Ethereum is a more valuable cryptocurrency than Bitcoin.
2. The two most popular meme coins will lose another 50% of their value
Pardon the obvious pun, but on the other side of the coin, we’re going to see another explosion of so-called meme tokens. Specifically, I’m talking Shiba Inu (SHIB 1.34%) and Dogecoin (DOGE 2.37%).
In 2021, Shiba Inu and Dogecoin were the hottest coins in the cryptocurrency space. Dogecoin gained well over 20,000% in the six months leading up to Elon Musk’s appearance. Saturday Night Live Like the “Dogefather”. Meanwhile, the Shiba Inu made a once-in-a-lifetime gain of over 121,000,000% between the stroke of midnight on January 1, 2021, and its all-time high set on October 27, 2021.
However, both meme coins lost in the neighborhood of 90% after reaching their respective peaks. This is a trend that I expect to extend into 2023 for several reasons.
To begin with, Shiba Inu and Dogecoin are nothing more than payment coins – and there is nothing special about payment coins. Assuming merchants will allow it, there are thousands of digital currencies that can be used to pay for goods and services.
More importantly, neither Shiba Inu nor Dogecoin offer anything resembling competitive advantage or differentiation. Although they have a strong social media presence, there is nothing to distinguish these tokens from other projects that offer real-world benefit.
Furthermore, history has been incredibly unkind to short-term spinning payment coins. With the exception of Bitcoin, every payment coin that gained 20,000% or more in the short term continued to pull back between 93% and 99%. With nothing to help elect SHIB and DOGE, both are set to lose 50% or more of their value in 2023.
3. Another major cryptocurrency exchange will fail
I am well aware that some of you will not like this third prediction, but I expect another major cryptocurrency exchange to fail in the new year.
Although the puzzle is still being pieced together and all parties remain innocent until proven guilty in court, it certainly appears that FTX founder Sam Bankman-Fried and his associates orchestrated one of the biggest financial scams in history.
FTX, one of the largest digital currency exchanges by trading volume, filed for bankruptcy protection in November, effectively FTX Token (FTT 0.97%) both worthless and useless. In 48 hours, FTX went from tweeting about newly leased office space in Miami to seeking $9 billion in bankruptcy protection. Finally, FTX’s liquid assets were not enough to cover its liabilities.
While I won’t name any specific cryptocurrency exchange that might fail in 2023, there are plenty of warning signs that FTX may not be a one-off. For example, just two weeks ago, accounting firm Mazars announced that it would stop working with crypto companies. Includes a list of cryptocurrency clients it services BinanceCrypto.com (Cronos which is a local token developed by Crypto.com) and KuCoin which is local KuCoin Token.
With the exception of Coinbase GlobalAs a publicly traded company, regular audits are required to prove that reserves are adequate for a digital currency exchange. This is a huge red flag and all the more reason to believe that FTX will not be an isolated incident.
Image source: Getty Images.
4. El Salvador will be forced to abandon the Bitcoin experiment
We started this list with an off-the-wall prediction, and we’ll end it with an equally long-term prediction: El Salvador will leave the Bitcoin boom before the end of 2023.
September 2021 was supposed to be a bright moment in the existence of cryptocurrency. El Salvador became the first country to legalize Bitcoin as tender and require businesses to accept the token as currency. But less than 16 months after Bitcoin was boosted by El Salvador’s flamboyant president, Nayib Bukele, it proved to be a complete disaster.
For starters, most El Salvadorans, many of whom lack access to traditional financial services, are not interested in using Bitcoin to pay for goods and services. A survey of 1,269 El Salvadorans conducted by Jose Simeon Canas University of Central America found that only 24.4% used Bitcoin to pay in 2022. In addition, two-thirds of respondents believe that the spread of Bitcoin has failed.
But the bigger problem for Bukele is that El Salvador appears to be on the brink of debt default within the next few years. Thanks to $450 million in recent loans, it is likely to avoid what a few months ago looked like an imminent January 2023 default on its sovereign debt. Still, that doesn’t change the fact that El Salvador’s insistence on using public funds to buy Bitcoin has effectively cut the country off from a $1.3 billion loan from the International Monetary Fund, making other lenders wary of lending to the country.
To make matters worse, Bitcoin has lost over 60% of its value since El Salvador began using government funds to make purchases. With the country’s asset reserves dwindling, a prolonged bear market for Bitcoin could force El Salvador’s leaders to rethink their strategy if they seek financial aid.
Given that digital currencies have been unable to get off the market in recent years, a potential US or global recession could spell disaster for Bitcoin and, by extension, El Salvador’s finances. I don’t expect the country’s Bitcoin experience to pass within the year.