June, July and August were eventful months for cryptocurrencies and, by extension, their prices. The high summer months have contained several bits of news the market reacted positively to.
There’s also been a fairly significant recent drop in cryptocurrency prices. So why the contrast and what does the rest of 2023 hold for the cryptocurrency market?
Summer positives for cryptos – BlackRock makes bitcoin ETF move, PayPal announces stablecoin plans and Ripple Labs fends off the SEC
In June, BlackRock, the world’s biggest asset manager and a hugely influential name in mainstream finance, made a relatively unexpected move into the crypto market with the bid to list a spot bitcoin ETF on the Nasdaq exchange.
The SEC is currently considering a total of 8 applications for spot bitcoin ETFs, including from BlackRock’s asset management rival Fidelity. However, the former’s move is being viewed as a clear sign the biggest players are now taking cryptocurrencies seriously and are convinced bitcoin is here to stay.
The online payments giant PayPal also upped the integration of cryptocurrencies into its products with the announcement of its plans for PayPal USD, a USD-pegged crypto token. PayPal is the first major tech company that is not a crypto company at its core to move to launch its own crypto token since Meta’s aborted Libra project.
While it is still a move that carries risk with the SEC watching the crypto market like a hawk the consensus is that PayPal’s project is much more likely than Meta’s Libra was. Christopher Giancarlo, former chair of the U.S. Commodity Futures Trading Commission, is quoted by Reuters as commenting:
“The world has changed dramatically since Facebook’s Libra project. There was no familiarity with stablecoins whatsoever.”
“Since then the administration, Congress and the Federal Reserve have had time to get their minds around stablecoins and stablecoin regulation and there has been very extensive public relations by the industry, including a lot of lobbying.”
The government transparency researcher OpenSecrets says PayPal spent $1.13 million on federal lobbying last year and records show the company has been lobbying on cryptocurrencies for several years.
PayPal USD will be issued by digital trust company Paxos Trust, backed by dollar deposits and U.S Treasuries, and subject to oversight by the New York State Department of Financial Services. PayPal believes the token to eventually be used for payments of goods and services.
However, the initial expectation is that it will first be mainly utilised to buy and sell other cryptocurrencies on the PayPal platform – which supports several depending on the geography of account holders.
While PayPal’s stablecoin is unlikely to make any huge waves in the near future, it is another step towards the mainstreaming of cryptocurrencies and an overall positive for the market.
The other positive development in August for the cryptocurrency market was the partial victory for Ripple Labs and its XRP token in their ongoing legal tussle with the SEC. The regulator sued Ripple in 2020, alleging that the company’s sale of XRP tokens amounted to the sale of unregistered securities.
However, a landmark ruling by a federal judge in mid-July saw Ripple record at least a partial victory in its case for the defence. While the judge upheld the SEC’s accusation that Ripple Labs’s sale of XRP to institutional investors represented the sale of securities she also ruled that the XRP token itself is not inherently a security.
That ruling has potentially significant repercussions for ongoing SEC cases against the crypto exchanges Coinbase and Binance. If cryptocurrencies themselves are not securities (as XRP was judged not to be) only the sale of them under certain conditions would violate securities laws. That puts the two exchanges in a much stronger position to see off the U.S. regulator when their cases are judged.
Why have cryptocurrency prices plunged in late August after so much good news?
The second half of August has, however, delivered a sting in summer’s tail to cryptocurrency prices, which started to slump from around the middle of the month. The bitcoin price has dropped around 11.5% since August 14 with the rest of the market following suit.
Even XRP has given up all of the gains it won in the aftermath of the reasonably favourable ruling in its case with the SEC.
So what’s gone recently wrong.
Market observers and analysts pinpoint three major catalysts for the recent crypto sell off.
The first is a general risk sell-off in mainstream financial markets. The Nasdaq and S&P 500 indices are both down significantly over the last month, 5.3% and 4.5% respectively.
That risk-off sentiment is informed by data confirming China’s weakening economy, as well as stronger-than-expected economic growth in the U.S. fuelling a rise in bond yields and the risk of new interest rate hikes before the end of the year.
There has recently been a stronger correlation between risk sentiment in mainstream markets and the cryptocurrency market.
Last Thursday, August 17, bitcoin fell 7.2% in its biggest one-day drop since November 2022 when top exchange FTX collapsed. Bitcoin then slipped to a two-month low of $26,172 during Asian trading hours on Friday, its lowest since June 1.
The drop came on reports in the Wall Street Journal that Elon Musk’s SpaceX had sold of its bitcoin holdings after writing down their value by $373 million.
The third factor dragging on crypto prices is seen as falling confidence the SEC will approve any of the spot bitcoin ETFs it is due to rule on in early September. It is thought the most likely outcome is now that the regulator will delay its decisions, pushing them back several months.
Outlook until the end of the year – potential up and downsides
But are crypto prices likely to go on another bull run or at least recover recent losses before the end of the year? Opinions are mixed.
A recent note to investors from JP Morgan analysts indicated the investment bank’s experts believe the worst of the recent crypto sell-off is now behind us and they see little further downside in 2023 from current levels.
The main support for that belief is evidence that the pattern of long positions on CME bitcoin futures being wound down is coming to an end.
However, Katie Stockton, an analyst at research company Fairlead Strategies thinks the price of bitcoin could drop towards $20,000 from its current level of just over $26,000 before the end of the year. She sees $25,200 as the crucial support level that, it breached, bitcoin could tumble to $20,000 from.
She thinks any strong indication from the Fed that interest rates will rise again before the year would hurt bitcoin and potentially lead to the kind of downside JP Morgan’s analysts currently see as unlikely.
What does appear to be missing at the moment is evidence of likely catalysts to a significant upside for bitcoin over the last few months of the year. An unexpected decision by the SEC to approve the first U.S.-listed spot bitcoin ETFs could provide that. But barring that optimistic-looking turn of events, bitcoin looks most likely to be stuck in either a holding pattern or bear market for the rest of 2023.
But the cryptocurrency market has confounded analyst predictions many times before. Perhaps the biggest surprise of all would be if it is starting to behave predictably.