The H1 2023 Crypto Recap: Bitcoin Remains Resilient Amid Banking Shakeups and Regulatory Uncertainty

The first half of 2023 was quite eventful for the global financial markets and the crypto industry. Macro factors, particularly inflation, continued to play a major role, and while the US Federal Reserve put a (temporary?) pause on its 10-month aggressive rate hike in June, the rate of inflation is yet to come down to the Fed's 2% desired target.

Nevertheless, both equities and riskier assets such as crypto recorded positive gains in H1, with the S&P 500 up over 14%, while Bitcoin’s price almost doubled from its year opening of $16.5K to more than $30K. That said, there were several noteworthy events that shaped the macro and crypto outlook in H1 2023.

In this special edition, we take a step back to highlight some of the major developments and trends that took place in the first half of 2023. Additionally, we present our views on some of the moving pieces in the crypto industry that will likely take centre stage in the second half of the year.

Banking Industry Turmoil

US Regional Banks were in for a rough ride in H1 as Silicon Valley Bank (SVB) became the largest bank to collapse since the 2008 financial crisis. This sent shockwaves through Silicon Valley and the crypto industry, as most of SVB’s clients fell within these two operational domains.

SVB’s woes began when it announced on March 8 that it had liquidated $21 billion worth of securities portfolio and was looking to sell an additional $2.25 million from its treasury stock. The news did not sit well with the markets, leading to a bank run that saw clients withdraw $42 billion just a day after.

Notably, SVB was not the only US bank that went under; other crypto-oriented banks that also bit the dust include Silvergate Bank and Signature Bank. These two banks were  reeling from the aftermath of the FTX collapse, which saw clients withdraw billions of dollars in Q4 2022, stretching beyond their ability to meet withdrawal demands.

However, on the other hand, the Fed's continued rate hike also played a hand. For instance, in SVB's case, the bank had purchased a huge chunk of US treasuries when rates were highly lucrative in 2020. But with the Fed raising rates throughout the better part of 2022, these treasuries were out of the money (not profitable).

Silicon Valley Bank Collapse Explained

For a better context on how the events at SVB unfolded, check out this in-depth LinkedIn post.

US Regulators on the Heels of Crypto

Regulators, especially in the US, have been cracking down on crypto activity for quite some time. But this year, the momentum has increased, with several crypto companies falling victim to this ongoing purge.

First, it was Kraken Exchange, which agreed to a $30 million settlement with the SEC for offering crypto staking services. Then Paxos was issued a Wells Notice to halt the issuance of the BUSD stablecoin, and as of writing, several other crypto companies, including Binance, are facing charges from the SEC.

According to the court filing documents, Binance is being accused of 13 charges spanning around calculated evasion of the law, lack of disclosure, conflicts of interest, and deception. Notably, this mounting regulatory pressure has led Binance's market share to drop from 60% during Q1 2023 to 52% as of June.

That said, there is a glimmer of hope: a US Judge recently ruled that XRP does not meet the criteria for being an investment contract. This development is a significant milestone for the crypto industry as the debate on whether cryptocurrencies are securities has long dragged on. However, this is not to say that all crypto assets targeted as ‘securities’ by the SEC are off the hook.

Moving away from the US, regulators in Europe finally passed the MiCA bill, which is set to come into enforcement next year. And in the East, Hong Kong is gradually emerging as a potential crypto hub, with the authorities pushing large banks such as HSBC and Standard Chartered to tap into the crypto clientele market.

Bitcoin Beat the Odds to Soar Past $30K

Despite the macro and regulatory uncertainties, BTC managed to close the first half of 2023 above the $30K mark. This resilience has brought renewed optimism in the market, with some analysts leaning towards the possibility of a new bull run. However, there are still a lot of factors at play that could see BTC range in its current level or take a dive during the second half of the year.

But what's interesting to observe are the fundamental and technical trends that have previously been a catalyst for Bitcoin's rally:

• Bitcoin has decoupled from equities, with the correlation dropping to a 17-month low, according to a recent report by K33 Research.
• The number of whole Bitcoiners (holding 1 BTC or more) is at an all-time high.
• Bitcoin's market dominance is slowly climbing back up, now at 46.7%, according to Coingecko.
• Computational power on the Bitcoin network is on the rise.

To top it up, traditional financial institutions are becoming increasingly bullish on Bitcoin. Standard Chartered recently predicted that Bitcoin's price could eclipse $120K by the end of 2024. This news came against the backdrop of Blackrock's Bitcoin ETF application, which has triggered a new wave of ETF applications.

Looking at the long term charts, one is tempted to conclude that we might be in an accumulation phase before Bitcoin finally makes a move up. However, with the global markets still facing some headwinds, caution is warranted, given that in times like these, markets have a funny way of surprising investors.

Ethereum’s Shapella Upgrade: A Success

The much-awaited Shapella upgrade finally went live in April 2023, marking a huge milestone for the Ethereum blockchain. For context, this upgrade enabled the withdrawal of staked ETH, and the question on most stakeholders' minds was whether this upgrade would impact Ether's price positively or negatively.

As expected, Shapella's success slightly boosted Ether's price, but, most importantly, the number of staked ETH has increased from 18 million to 24 million since the upgrade. The current figure accounts for 20% of the total ETH in circulation, a sign that more and more people are opting to stake their ETH as opposed to leaving the assets idle.

Image Source: Dune Analytics

It is also noteworthy that Ethereum's full transition to a Proof-of-Stake (PoS) network has paved the way for Liquid Staking Derivative platforms, such as Lido and Rocket Pool, both of whose native tokens, LDO and RPL, are up over 80% year-to-date. This is a niche that most savvy crypto investors are currently eyeing closely.

NFTs and The Metaverse Had a Slow Start

NFTs and the Metaverse have not had the best run this year compared to 2021 or early 2022, when they were a particularly hot topic. According to statistics by Dapp Radar, the NFT market trading volume fell by 38% to $2.9 billion in Q2 2023 as liquidity continued to dry up across the entire crypto ecosystem.

While it's quite evident that NFTs are struggling to maintain their 'darling' status, H1 2023 shed light on one emerging trend that could finally provide a breakthrough: the tokenization of Real World Assets (RWAs).

According to an article by Forbes, there are several heavyweights in the traditional finance space who are already thinking of tapping into this area. One of them is Boston Consulting Group (BCG), which estimates that asset tokenization could balloon into a $16 trillion dollar market and could help save as much as $20 billion annually in global clearing and settlement costs.

Time will tell how this trend unfolds, but it just might be the much-needed catalyst for NFT adoption in the financial world.

What Does H2 2023 Hold in Store for Crypto?

The second half of 2023 has started on a high note, with BTC showing continued strength amidst the macroeconomic uncertainties. But besides the price action, some of the fundamental trends that will likely be dominant in this half of the year include CBDC research, the adoption of crypto regulatory frameworks, and a shift in the global landscape of crypto companies and banking.

CBDCs on the Rise

According to a recent survey by the Bank for International Settlements, over 93% of central banks across the world are currently exploring CBDCs. Already, some countries like China are in the advanced stages of rolling out their digital currencies, while the likes of the US and Europe are now paying closer attention to the opportunities and risks of developing their own CBDCs.

Crypto Regulatory Frameworks

Following the stance taken by regulators, it is almost apparent that regulatory frameworks will be another major theme. While Europe and the UK have both recently passed crypto-related bills, the US is currently debating over two stablecoin drafts that will provide a platform for both banks and non-banks to issue stablecoins.

We are also likely to see more regulatory developments on a global level, given the growing interest by the G20 to firmly oversee crypto activity.

A Shifting Landscape (West to East)

Lastly, there is a paradigm shift currently underway: crypto companies are moving away from the US and setting up shops in Asia. Just recently, Circle's CEO, Jeremy Allaire, confirmed in an interview with Bloomberg that the company is eyeing a strategic expansion into Hong Kong. Moreover, Circle was recently granted Singapore's payments institution license.

While it may not happen faster than most people anticipate, it is clear that there are cracks beginning to emerge, and soon most crypto companies will be moving to jurisdictions that are crypto-friendly and have proper guidelines governing crypto operations.