Will Crypto recover in 2023? Analysts offer a cautious bull case

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The past year has been terrible for the reputation of crypto, especially with the fall of FTX. Bernstein analysts explained why they are still bullish on the crypto space. Crypto is more than currencies, they said, and there is a lot of hope for its future. LoadingSomething is being loaded.

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Crypto did not have the best year in 2022. While the rest of the economy was down, crypto was in freefall.

The average value of bitcoin, the largest and most well-known cryptocurrency, has fallen by 64% based on figures from Google Finance. And then came the implosion of FTX, a company that had plastered ads across America for most of 2022. Wall Street banks that previously sought partnerships with crypto firms to offer customers access are now skeptical about the space. And FTX co-founder Sam Bankman-Fried, pleading not guilty to the federal charges, promises the fallen crypto sibling will remain in the public eye.

So, yes, there are plenty of reasons to be pessimistic about crypto in 2023. But Bernstein analysts Gautam Chhugani and Manas Agarwal offer true crypto believers a few reasons to keep the faith.

In a note published on January 3, they wrote that despite a disastrous 2022, the largest crypto ecosystem still has potential. Its decentralized nature allows it to bounce back even from debacles like FTX, it has a strong footing in Ethereum, and the crypto will likely benefit from regulation it cannot avoid.

In their own words, crypto has a “survival instinct”.

Crypto continues to rebound

The past year has not been the first “crypto winter”. Bitcoin saw major price declines in 2014, when annual returns fell 58%, and prices remained depressed until 2017. In 2018, Bitcoin plunged in value for nearly 18 months. But he managed to rally both times.

Ethereum, the other big crypto token, followed much the same pattern of steep declines followed by a strong rally from 2018 to 2020.

As Ross Gerber said during a 2021 appearance on Yahoo Finance Live: “Bitcoin and Ethereum are like cockroaches. They’re just not going to die.”

One of the reasons cyrpto is a cockroach is that it is a largely decentralized system. Chhugani and Agarwal point out that the contagion impact of FTX has not spread widely.

“FTX has been terrible for the reputation of the industry and has affected the confidence of institutional investors, who have invested in FTX,” the analysts said. “But FTX accounted for 10% of the global trading volume and was mainly used by wholesalers such as brokers, trading companies and large traders.”

Much of the crypto space remains decentralized. Take decentralized finance, or DeFi, which uses the same distributed network of computers to provide financial services to people.

Chhugani and Agarwal said the collapse of FTX has accelerated DeFi adoption, making DeFi a bright spot in crypto investing, according to crypto-VCs.

The rise of DeFi

With DeFi projects largely isolated from the impact of FTX, analysts at Bernstein noted that investor interest could shift to Ethereum and its primarily app-based ecosystem.

Ethereum forms the basis of many crypto applications such as NFT-based games, decentralized social media, and some commerce. These tend to either use the Ethereum blockchain to build or use the Ethereum currency to power transactions. Chhugani and Agarwal said that crypto only reaches 5% of total internet users, and the main way to grow the space is through apps.

“We believe value within crypto will migrate from speculative crypto assets to more utility and application-focused ecosystems such as Ethereum,” they said.

The Benefits of Regulating the Wild West of Finance

Agarwal and Chhugani believe that regulation is coming for the crypto space and see it benefiting the market.

Crypto enthusiasts usually scoff at moves to regulate their space. Blockchain and bitcoin began as a reaction to the 2008 financial crisis, and its early adopters had a vision to leave behind the tightly controlled world of traditional finance.

But as crypto began to go mainstream, investors demanded regulation. And after the fall of FTX, these calls have only increased.

Analysts have said that while regulation is driving adjustments in the crypto market, policies are bringing in a more sustainable ecosystem and attracting more institutional investors. According to them, regulated onshore exchange companies will survive the current cycle.

For Agarwal and Chhugani, crypto still has great potential for growth, especially as people stop thinking of it as a fast speculative asset and instead focus on its ability to be part of the infrastructure of the next decade of Internet development.

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