Is the crypto winter thawing?

Bitcoin has been on a tear so far this year, but is this a sign of a crypto recovery more broadly or is there more pain up ahead?

Theo Andrew


Last year proved a bleak one for cryptocurrencies following a series of scandals and deteriorating markets plunged digital assets into the now widely known phenomenon of a ‘crypto winter’.

The collapse of crypto token Terra in May, the bankruptcy of lender in Celsius in July and the dramatic downfall of Sam Bankman-Fried’s crypto exchange FTX in November sent prices south, with bitcoin falling over 71% in the 12 months since its November 2021 peak.

Fast forward just three months and the tides appear to be turning.

Bitcoin has been on a tear since the turn of the year, up 35.8% as of 3 March, as signs that easing inflation has whet investor appetite for riskier assets in all forms. Meanwhile, the second largest coin by market cap ethereum is up 31.7% year to date.

However, recent events around crypto bank Silvergate show just how precarious the asset class remains, with bitcoin and ethereum prices both falling 5% within one hour of trading on the news the bank has delayed financial report filing.

Will Rhind, founder and CEO of GranitShares, said: “Price predictions for bitcoin in the year ahead are more optimistic and while it may not reach its previous all-time high of more than $68,000 in 2023 there is scope for considerable growth from current levels of around $23,000.

“There is a growing consensus that the price will recover strongly this year and there is similar optimism about ethereum.”

The green shoots of spring have been felt across the ecosystem too. Cryptocurrency exchange Coinbase lost 90% of its value in the crypto winter but is 95.2% up since its December lows.

Regulation is also moving quickly. After last year’s bloodbath, conversations around the shape and level of oversight have shifted in recent weeks, with the Securities and Exchange Commission (SEC) cracking down on multiple areas of the industry, with some welcoming the tighter scrutiny.  

The idea of the ‘crypto winter’ in itself suggests that at some point a new season will emerge with a promise of better times ahead, and whether you decide to label it crypto winter or not, the question on many people’s lips is what’s in store for 2023?

The early signs of spring?

With sentiment changing in the market, there are a few important indicators that show it will be more than short-lived.

Charlie Morris, chief investment officer and founder of ByteTree, said network demand for crypto at the asset manager has turned bullish again, following a year of contraction and points to the strong correlation with the stock market so far in 2023.

“You also have a strong performing stock market,” Morris said. “It could go horribly wrong at any time because the correction last year was pretty shallow compared to what we deserved, but if the stock market is ok, then crypto is ok.”

With equity markets and crypto performing strongly so far this year it is tempting to think that should market sentiment change cryptocurrencies will follow suit.

However, James Butterfill, head of research at CoinShares, said it is important to understand the difference between risk on sentiment for stocks and the end of the crypto winter, eyeing a possible divergence between the two asset classes this year.

Explaining the correlation between digital assets and equities, Butterfill said both equities and crypto were highly sensitive to rising interest rates, differing fundamentals mean they could diverge significantly this year with equities likely to decline on an incoming recession.

“Equities are interest rate sensitive margins get squeezed, while bitcoin is interest rate sensitive because it is priced in dollars of fixed supply, so their correlation has been a coincidence,” he said.  

“It is quite probable we see a situation a more dovish Federal Reserve this year because the US economy is deteriorating quite rapidly and that will be quite bad for equities and actually quite good for bitcoin.”

Morris added he does not see crypto and equities diverging that soon but there will be a point when bitcoin starts to behave more like gold in the future.

Despite this, JP Morgan recently noted crypto as a “segment at risk” due to a potential $1trn equity sell-off driven by overfunded defined benefit pension plans looking to reallocate capital.

“The large overfunding and market developments could cause an increase in the reallocation,” Marko Kolanovic, at JP Morgan said.

“Market crises tend to evolve in a non-linear fashion, informally known as ‘gradually then suddenly’. Currently, several potential segments are at risk for example commercial real estate, venture capital, private equity, cryptos, and stock holdings popular with retail.”

The legacy of FTX

A lot has happened since the FTX debacle sent crypto markets into a spin last November, but there are signs too that the devastation left in the aftermath is clearing.

Since then, regulators have been turning up the heat on the crypto market. In the last few weeks, the SEC has implemented a series of enforcement actions against digital asset companies and placing laying fresh scrutiny on banks that offer custody services to crypto firms.

“Investors were spooked by the quite aggressive approach that the SEC has been taking,” Butterfill said. “Since the SEC crackdown bitcoin has performed pretty well and that is encouraging.

“We have noticed a big increase in concerns over government over regulation, but a big decrease in concerns over a ban and that is a positive thing.”

“Speaking to clients, even after FTX, the majority are quite constructive and understand that you did not stop buying equities because of Bernie Madoff. It is the same with crypto assets and FTX, so institutional investors genuinely have quite a constructive view.”

In the past week, bitcoin-focused exchange-traded products (ETPs) recorded outflows of $7m, according to CoinShares, as investors were left feeling uneasy by macro data that beat expectations on the upside, leading to fears of additional rate hikes.

Conversely, retail investors took this as a buying signal with bitcoin rising by 10.2% in the five days to 17 February, highlighting how the different investor types approach the asset class and why it is not as simple as stating the “crypto winter is over”.

“If you look at prices this year, we are definitely out of the crypto winter, if you want to call it that,” Butterfill added.

“Year-to-date crypto ETP fund flows are $170m. Even last year, we saw $509m inflows and yet it was an extreme bear market. It is just encouraging to see that flow in such a bear market with institutional investors buying the weakness.”

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.


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