State of the Industry:
Buyside Environment in a Bear Market, Macro Correlations, and Themes for the Future
FalconX Hosts Matt Hougan (Bitwise), Jeff Park (Bitwise), Max Williams (Runa Digital Assets), and Alex Botte (Runa Digital Assets) To Discuss Where We Are Now
David Lawant, Head of Research
Coming off a dramatic 2022, crypto is off to a great start in 2023, with BTC up 85% and ETH up 58% YTD. However, investors remain apprehensive, leading to two contrasting views of crypto. In the inaugural episode of FalconX’s Client Roundtable series, Where We Are Now: Buyside Environment in a Bear Market; Crypto and Macro Correlations; Themes for the Future, we brought together some of the brightest minds in institutional digital assets investing to discuss the state of the market today and what factors will drive us forward as crypto winter begins to thaw.
Even though BTC emerged as the top-performing asset class in Q1 of 2023, many believe we’re still deep in a bear market. The specter of last year hangs heavy over mindsets, Hougan explains, overshadowing that BTC and ETH have improved during 2023.
At the same time, investors have maintained a strong interest in crypto and continued doing their due diligence. While crypto recoveries are nonlinear, there’s reason to believe we’re approaching crypto spring. Now that we’re halfway through the year, it’s a good time to examine some of the current trends impacting the market and where we go from here.
Continued Focus on Majors
Asset prices, especially for majors, have done exceptionally well this year, but there is still a long way to go until the next bull run. The last bull run was led by DeFi Summer in 2020 and the increased interest in NFTs. Liquidity dried up in the alt space post FTX, causing investors to rotate out of alts. However, projects like MemeCraze have still popped up, attracting retail back into the market.
This paved the way for positive developments including:
- The ETH ecosystem is less attackable today than it was two years ago thanks to new scalability solutions
- Larger, more macro investors are using BTC as a carry or hedge for risk
- More crypto natives are choosing ETH over BTC
- A recent industry development: after reports that the SEC found flaws in its initial filing, BackRock submitted a fresh application for a Bitcoin spot market ETF. If successful, it would be the first Bitcoin spot ETF to win approval
Crypto and Macro Correlations
This has been quite the year for macro trends. Inflation issues and economic turbulence carrying over from 2022, the mid-sized banking crisis and the debt ceiling uncertainty have all led to interesting implications for crypto.
Focusing on where we’ve been with macro, Botte explains that if BTC was put through a traditional risk factor model from 2015-2021, most of BTC’s risk was unexplained (over 90%). That changed in 2022: The correlations between crypto and equities was steadily rising, while VIXS and USD started to decline. Crypto was impacted by some of the same things impacting TradFi, including rate hikes to combat rising inflation. However in 2023, we’ve seen a reversal of those correlations, with BTC acting resilient amidst U.S. turmoil regarding the banking crisis, regulation targeting the crypto industry and spot BTC filings.
Moving forward, two opposing forces are dictating the future of crypto and macro. If the banking crisis is extended and regulation by enforcement intensifies, correlations will be lower. If there’s a recession or higher for longer rates, correlations will be higher.
Emerging Crypto Trends
Looking into the second half of the year, three new trends and use cases are expected to emerge.
- Staking ETH, burning ETH and making ETH profitable
The last few months have seen ETH executing on its roadmap with the Shanghai-Capella upgrades, enabling staked ETH to be withdrawn. But where does it move to next? When will the Cancun 4844 upgrade arrive and how will it ease L2 fees and help facilitate an ecosystem-wide move to rollups?
- Liquid staking
This is an area for growth that has occasionally been underestimated by the market. While liquid staking derivatives haven’t seen as much adoption as ETH, it is an emerging blue-chip property in DeFi with potential to benefit investors.
- The future of ETH and what’s to come
What happens when you have free and instantaneous transaction activity on a secure L2 and can scale to the real world? We expect to see an explosion of real-world use cases, including nonfinancial applications in a blockchain architecture and micro payments. Within the next few years, everyone will be using crypto applications without knowing it.
Potential for Spring
Moving into the back half of 2023, there’s a lot to be excited about from an investor perspective. Even with an uncertain macroeconomic environment, investors who implement sound risk management practices will be well positioned come crypto spring.
If you'd like to explore this discussion in greater depth, listen to our recent webinar:
Where We Are Now: Buyside Environment in a Bear Market; Crypto and Macro Correlations; Themes for the Future.