While 2022 has not been kind to the crypto market, 2023 is likely to cure all its maladies.
When China banned crypto mining in May 2021, the market fell into the red for several weeks. Little by little, though, cryptocurrencies began to recover, reaching all-time highs in November of that year.
In 2022, successive bankruptcies of market heavyweights reduced their market capitalization to less than $1 billion. Bitcoin, the world’s largest cryptocurrency, ended the year below $16,000. Such scenario is not even the most pessimistic that analysts would have believed.
Can the Fed Help Make the Crypto Market Green again?
This week, the market capitalization of the crypto market surpassed the $800 billion mark, reaching $852 billion on Friday. There is still a long way to go to recover the lost billions of dollars, but the year 2023 already looks very promising.
If the Fed continues to raise interest rates, the bleeding of financial markets, including the cryptocurrency industry, will continue. However, should the Federal Reserve fail to lower interest rates, investors will lean more toward government bonds, and away from risky assets like cryptocurrencies.
Is There a Connection Between the Rise of the Dollar and Stablecoins?
When the Fed raises interest rates, foreign dollar debt becomes more expensive. Consequently, individuals and institutions must sell their national currencies to buy US dollars and pay off their debts. Such an effect is often seen in countries experiencing an energy crisis, as the US dollar is also used to pay for energy.
When a country experiences energy shortages, it must issue more banknotes and convert them to dollars, in order to buy energy. Thus, the demand for dollars is likely to increase, so that citizens of countries affected by the crisis could start investing in stablecoins to preserve their purchasing power.
Other Countries Will Make Bitcoin Legal Tender
Bitcoin adoption by some countries may also boost the cryptocurrency market. Since El Salvador made Bitcoin legal tender, other countries seek to follow suit.
The US dollar has crushed several foreign currencies, prompting some countries to implement CBDCs to protect their economies. However, smaller countries that lack the resources to create their CBDCs prefer to turn to Bitcoin.
What About Regulations?
Regulatory changes planned for this year could also strengthen the crypto market by encouraging more institutions to invest in digital assets. If all goes well, most of the new laws will be passed by the end of the year, creating all the conditions for a bullish rally in 2024 and 2025.
In conclusion, if everything goes according to plan, the cryptocurrency market will certainly be able to grow again or at least limit its losses. However, if European leaders do not find solutions to the energy crisis and runaway inflation, it will be very difficult for the global economy to recover.
By Audy Castaneda
