Crypto 2023 Review: Q1 

Q1 2023 has just ended, and it’s been a real whirlwind – even for the crypto world, which lives life at a notoriously fast pace. So here are the highlights and lowlights of the first three months of the year: CGU’s Q1 Crypto Review.

Off To A Strong Start

The beginning of the year saw confirmation of the end of the bear market, with bitcoin pumping from its bear market lows below $17,000 as 2022 ended and 2023 began. Almost like clockwork, as the first full week of the new year rolled around, BTC put in a $4,000 candle – making a strong case for the end of crypto winter.

There were plenty of sceptics, as there always are at the end of a lengthy bear market. In this instance, much like previous downtrends, the bear market lasted almost exactly a year – from its $69,000 peak in November 2021 to its $15,000 low in November 2022. But despite all the bad news of 2022, the bottom was in and a new year meant a fresh start for bitcoin and the crypto sector.

Scandals New And Old

Not to say that it’s all been good news for 2023 – far from it. The first three months of the year have seen plenty of new scandals and shocks, in addition to all the old ones from 2022 continuing to play out. 

One of the big stories was the arrest of Do Kwon, founder of the infamous “stablecoin” ecosystem Terra (LUNA), which collapsed in May 2022 and destroyed $60 billion in value. The contagion from Terra’s implosion directly and indirectly brought down several major hedge funds and crypto exchanges, including Alameda and FTX. Kwon was arrested in Montenegro on 23 March while trying to board a flight to Dubai using falsified travel documents. He has been charged with eight counts, including securities and wire fraud.

Sam Bankman-Fried (SBF), the founder of Alameda and FTX, was arrested in December last year in the Bahamas and extradited to the US on fraud charges shortly afterwards. He was released to his parents’ house on $250 million bail. In recent weeks he has angered judges and law enforcement officials by using VPNs and encrypted messaging apps, raising concerns he was trying to contact others involved in the case – and almost landing him back in jail. His internet use is now restricted to a handful of approved sites.

Blockchain Advances

Bear markets are great for BUIDLers, who are able to create, refine and launch new software while there is less attention on them. Following Ethereum’s successful Merge in September 2022, the network has proven robust, paving the way for further Ethereum updates.

The Ethereum Foundation has announced the release of the long-awaited Shanghai and Capella upgrades (together known as Shapella) for 12 April. Shapella will allow users to withdraw ETH from Ethereum 2.0 staking contracts. Since December 2020, over 18 million ETH have been deposited, but until Shapella it has not been possible to remove it. There is keen speculation over the impact this will have on the price of ETH, which has performed strongly in recent weeks, almost doubling from its November lows of $1,065. It’s possible stakers might unlock and take profits en masse. Conversely, however, more people might lock ETH if they know they can remove it any time they want.

Away from Ethereum mainnet, platforms have continued to innovate. Polygon recently launched its full zk-EVM in beta – a huge step forwards for zero-knowledge protocols and Ethereum scaling efforts.

Crypto Exchanges Come Under Scrutiny

It has not been all sunlight and roses for the big exchanges. The fall of FTX was both a wake-up call and a huge embarrassment for US regulators, who were not only blind to the problems there but had actively been discussing industry regulation with SBF. They hit back in Q1, taking a far-reaching and heavy-handed approach that has seen numerous protocols and exchanges hit with lawsuits and other enforcement action. Just some of these include:

• The SEC issued Coinbase with a Wells Notice (which is typically followed by action) warning them of potential securities violations concerning their staking products.

• Kraken settled a suit with the SEC, pulling all its staking products and paying a $30 million fine. 

• The SEC opposed the $1 billion offer from Binance.US to buy bankrupt crypto platform Voyager.

• In the biggest enforcement action yet, the CFTC hit Changpeng Zhao (CZ) and Binance with a major lawsuit, alleging insider trading, market manipulation, facilitating terrorist financing and other illegal activity, and more. Unlike the SEC, the CFTC picks its battles more carefully, and its enforcement often leads to the end of those organisations it is taken against – meaning this could ultimately be terminal for Binance.US.
  

US crypto businesses have found it harder and harder to operate, as a result not only of the regulatory uncertainty, but because banks have been closing their accounts without explanation. This all points to a coordinated campaign by regulators and bankers to make life difficult for the blockchain industry, though without congressional approval. This has been given the name ‘Operation Choke Point 2.0’ in the crypto world, and prompted widespread anger about the lack of due process. 

NFTs Remain Popular

Although the peak of NFT mania might be behind us, non-fungible tokens are still enormously popular. Blur, a new NFT marketplace, was launched in October 2022 but quickly became the biggest NFT trading platform, taking market share from OpenSea thanks to its token airdrops and trader-friendly UX. Magic Eden, which was originally developed for Solana, has also made inroads into the Ethereum-based NFT space, after adding support for Ethereum mainnet and Polygon NFTs.

Possibly the biggest story for NFTs has been the launch and hype around Ordinals: NFTs on the Bitcoin blockchain. Ordinals work in a different way to NFTs on other chains. Data can be attached to an individual Satoshi (each of which are uniquely numbered), and a file of up to 4 MB stored on the blockchain. This has been controversial, because it results in considerable chain bloat and associated costs for miners. Nonetheless, Ordinals have proven extremely popular for Bitcoin maximalists. 

Finally, France’s Centre Pompidou, the leading modern art museum, announced a permanent display of NFTs, including CryptoPunks and Autoglyphs – indicating that the NFT market is still strong and the technology is far more than a passing phase.

A New Banking Crisis?

As central banks have raised interest rates to combat inflation, a new crisis has emerged in the traditional banking sector. Banks bought long-dated government bonds with the trillions of dollars of money printed in the previous financial crisis and during Covid. Rising interest rates have devalued these, meaning that hundreds of banks are now insolvent. Several have already gone bankrupt, including Silvergate, Signature, and Silicon Valley Bank. Credit Suisse was the latest victim, and was bought out by Swiss banking giant UBS.

The Federal Reserve (and other central banks) is now stuck between keeping interest rates high to control inflation, or lowering them and saving the banks. There is no easy path forward.

Spring Thaw

The fragility of the banking system has helped drive the narrative of bitcoin as an insurance policy and a hedge against hyperinflation. Crypto winter’s thaw has been helped by customers seeking an alternative to the traditional banking system, as they realise that their money is not safe after all. If it is not eroded by inflation, it may be lost if they hold uninsured deposits over the maximum covered by the FDIC ($250,000).

Bitcoin has broken out of its downtrend and has passed numerous technical milestones, including the 200-week moving average and key resistance levels. At the time of writing, the $30,000 level remains the critical line in the sand. 

Looking Ahead

Overall, the future is still looking bright for blockchain. An increasing number of Web2 companies are transitioning to Web3, as crypto and traditional industries link up in new partnerships.

Spearheading the Web3 transition are a variety of forward-thinking organisations, who have linked up with crypto businesses, including:

• Kraken-Formula 1. The Tier-1 crypto exchange has sponsored a car belonging to Williams Racing. The Kraken logo is actually made up of lines of text from the Bitcoin white paper. This follows Crypto.com and Bybit’s sponsorship of F1 teams and events in 2021 and 2022.

• Bitget-Juventus. Another well-known crypto exchange has signed a sponsorship deal with Juventus’ women’s team. 

• CGU-BBB. P2E gaming guild and NFT lending platform Crypto Global United has established a partnership with Big Baller Brand (BBB). The launch of the Big Ballerverse NFT Store allows fans to buy digital collectibles that give them access to exclusive membership events and merchandise, and unlock future benefits.

The first three months of 2023 saw muted but growing optimism for Web3, as the industry tried to put the bad news of 2022 behind it and move on to brighter things. Looking ahead, Q2 seems set to consolidate those early gains as confidence returns – and with it, renewed excitement around digital assets and technologies.