If you thought Wall Street had a bad year, take a closer look at how the cryptocurrency space has fared. Based on data from CoinMarketCap.com, the aggregate value of more than 22,100 digital currencies has tumbled from nearly $3 trillion in November 2021 to less than $795 billion as of early morning Dec. 29, 2022. That’s about a 74% drawdown in less than 14 months.
But given the well-known volatility always present in the crypto space, not even a 74% decline in a short time frame is enough to sway the resolve of digital currency enthusiasts.
The big question is: What happens next for cryptocurrencies in 2023? What follows are four predictions for the new year.
1. Ethereum will (briefly) surpass Bitcoin in market value
The toughest aspect of this prediction is that Bitcoin and Ethereum tend to be highly correlated. When one rises or falls, the other usually follows. Rarely have digital currencies diverged from Bitcoin and moved on their own merit-based tangible news or data. But with stocks in a bear market and the U.S. economy potentially headed for a recession, we may get our first taste of individualization sprouting up in the cryptocurrency space.
For its part, Bitcoin has always been the king of cryptocurrencies. The perception of scarcity, given its 21 million token cap, has lured investors into supporting a lofty value per token. But when we examine Bitcoin’s utility, it leaves a lot to be desired. The average number of Bitcoin transactions completed daily is effectively unchanged over the past seven years, based on transaction data from BitInfoCharts.com.
Compare that to Ethereum, which averaged 40,000 transactions daily in 2016, around 700,000 transactions daily in 2019, and has consistently been above one million transactions per day for the past two years.
While the Ether token can, in theory, be used for payments, Ethereum’s real utility has been on display as a medium for decentralized application (dApp) development. In terms of dApp protocol revenue, data from TokenTerminal.com shows that Ethereum towers over every other project, with $3.8 billion in revenue over the trailing-12-month period.
In other words, a strong fundamental/tangible case can be made that Ethereum is the more valuable cryptocurrency when compared to Bitcoin.
2. The two most-popular meme coins will lose another 50% of their value
Pardon the blatant pun, but on the other side of the coin, we’re liable to see the so-called “meme tokens” get blasted once again. Specifically, I’m talking about Shiba Inu (SHIB 0.44%) and Dogecoin (DOGE 0.72%).
At one point in 2021, Shiba Inu and Dogecoin were the hottest coins in the crypto space. Dogecoin gained well in excess of 20,000% in a six-month stretch leading up to Elon Musk’s appearance on Saturday Night Live as the “Dogefather.” Meanwhile, Shiba Inu produced a once-in-a-lifetime gain of more than 121,000,000% between the stroke of midnight on Jan. 1, 2021, and its all-time high set on Oct. 27, 2021.
However, both meme coins have lost in the neighborhood of 90% since hitting their respective peaks. That’s a trend I’d expect to extend into 2023 for a few reasons.
To begin with, Shiba Inu and Dogecoin are nothing more than payment coins — and there’s nothing special about payment coins. There are thousands of digital currencies that can be used to pay for goods and services, assuming merchants would allow for that.
More importantly, neither Shiba Inu nor Dogecoin offers anything resembling competitive advantages or differentiation. While they may have powerful social media presences, there’s nothing tangible to allow these tokens to stand out against other projects that offer real-world utility.
Additionally, history has been incredibly unkind to payment coins that skyrocket over a short time frame. With the exception of Bitcoin, pretty much every payment coin that gained 20,000% or more in a short span went on to retrace between 93% and 99%. Without anything to help SHIB and DOGE stand out, both look destined to lose 50% or more of their value in 2023.
3. Another major cryptocurrency exchange will fail
I’m well aware that some of you won’t like this third prediction, but I expect another major cryptocurrency exchange will fail in the new year.
Although the puzzle is still being pieced together, and all parties remain innocent until proven guilty in a court of law, it certainly looks as if FTX founder Sam Bankman-Fried and his associates orchestrated one of the largest financial frauds in history.
FTX, which was one of the largest digital currency exchanges by trading volume, filed for bankruptcy protection in November, which effectively rendered the FTX Token (FTT 6.21%) both worthless and useless. In a matter of 48 hours, FTX went from tweeting about newly leased office space in Miami to seeking $9 billion in funding to stave off bankruptcy. Ultimately, FTX’s liquid assets were insufficient to cover its liabilities.
While I’m not going to name any specific cryptocurrency exchange that could fail in 2023, there are ample warning signs that FTX may not be a one-time thing. For instance, just two weeks ago, accounting firm Mazars announced it would pause working with crypto companies. The list of crypto clients it provided its services to includes Binance, Crypto.com (Cronos is the native token developed by Crypto.com), and KuCoin, which has the native KuCoin Token.
With the exception of Coinbase Global, which is required to have regular auditing completed as a publicly traded company, proving that reserves for digital currency exchanges are adequate has been next to impossible. That’s a major red flag, and all the more reason to believe FTX won’t be an isolated incident.
4. El Salvador will be forced to give up its Bitcoin experiment
We began this list with an off-the-wall prediction, and we’re going to end with an equally long-reach projection: El Salvador will abandon its Bitcoin push before 2023 comes to a close.
September 2021 was supposed to be the shining 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 given the thumbs-up by El Salvador’s enthusiastic President Nayib Bukele, it’s proved to be a complete disaster.
For starters, most El Salvadorians, many of which lack access to traditional financial services, aren’t interested in using Bitcoin to pay for goods and services. A survey of 1,269 El Salvadorians by the Jose Simeon Canas Central American University found that only 24.4% had used Bitcoin to make a payment in 2022. Further, two-thirds of respondents believe the Bitcoin rollout was a failure.
But the bigger issue for Bukele is that El Salvador appears to be teetering on the brink of a debt default within the next couple of years. Thanks to receiving $450 million in recent loans, it’ll likely avoid what seemed like an imminent default in January 2023 on its own sovereign debt as recently as a few months ago. Nevertheless, this doesn’t change that El Salvador’s insistence on using public funds to purchase Bitcoin has effectively cut the country off from obtaining a $1.3 billion loan from the International Monetary Fund and made other lenders apprehensive about giving the country a loan.
To make matters worse, Bitcoin has lost more than 60% of its value since El Salvador began using public funds to make purchases. With the country’s asset reserves dwindling, a prolonged bear market for Bitcoin could coerce El Salvador’s leaders to rethink their strategy if they want financial assistance.
Considering digital currencies haven’t been able to decouple from the stock market in recent years, a potential U.S. or global recession could spell disaster for Bitcoin and, therefore, El Salvador’s financial footing. I don’t expect the country’s Bitcoin experiment to make it through the year.