the new year

Crypto markets closed the year in December still oozing from the aftermath of the FTX fallout. End-of-year redemption flows culminated in low liquidity with net selling on light trading volumes.

After price implosions, bankruptcies and loss of deposit funds, it is no surprise that crypto entered 2023 under an aura of skepticism and contempt, with the public unable to disentangle the irresponsible players from the assets themselves. Even insiders remained on the sidelines unsure of how many remaining skeletons were yet to surface.

However, underneath all the drama of 2022, the underlying fundamentals of the crypto ecosystem continued to improve throughout the year, despite the price drawdown. The blockchains continued to function and the technology space built and developed throughout.

Crypto adoption improved. The number of unique addresses holding at least 0.01 BTC increased 20% and retail (less than 10 BTC) share is estimated at 17% up from 10% in 2017. Crypto active developer activity increased by 5% over the year and the number of smart contracts deployed on the Ethereum mainnet almost tripled. Hong Kong announced plans to legalize retail crypto trading in a u-turn; Brazil passed regulation that allows the use of crypto as a means of payment; the BIS’ new standards allow central banks to hold crypto reserves up to 2% by 2025 and Ethereum (ETH) underwent a successful merge to Proof of Stake.

Further, we saw the largest ever withdrawal of BTC from exchanges into custodians/wallets which minimize the risk of fund misappropriations and price tampering, while cleaner leverage and light positioning coincided with the beginning of a Fed cycle moderation.

On the back of all these factors, January welcomed crypto with an exuberant rally, exposing the extreme bearish sentiment and positioning at 2022 year-end. The month kicked off with an aggressive short-squeeze on reassuring macroeconomic data and moderating inflation. The generalized disbelief in the recovery rally gave way to catch-up flows from sidelined capital mid-month which sustained the new price range. Overall BTC shot up around 50% in a few weeks.