Crypto Market 2023 Year-End Review

SEC cracks down on crypto sector

During 2023, conversations about decentralized finance were largely focused on regulatory developments.

As the trial of Sam Bankman-Fried approached, the US Securities and Exchange Commission (SEC) stepped up its scrutiny of the crypto industry. The media coverage surrounding the case was intense, with every new detail being widely reported and analyzed. Bankman-Fried was formerly the founder and CEO of the now-bankrupt FTX.

With Bankman-Fried and FTX top of mind, the SEC filed multiple lawsuits in its efforts to prevent further swindling, notably against trading and payment platforms Binance and Ripple. While the cases were controversial and ultimately came to very different conclusions — Binance pled guilty and agreed to pay over US$4 billion, while the charges against Ripple were dropped — they set a precedent for future regulatory actions in the crypto space.

The SEC has been criticized for its hardline approach to cryptocurrencies, but at the same time, its increased governance has attracted institutional interest. Regulatory oversight, something that was severely lacking during the first crypto boom, has begun to transform the industry from the Wild West into a regulatory frontier.

“I don't think you're ever going to get to the end of (that era) … but it's definitely getting more regulated (and) more mainstream,” Taylor commented to INN. “I don't think it's all the way there yet, but the fact that you’re getting some really big US players starting to look at it and work with regulators to get involved — I think it's going a long way to making it a much better, more stable system, and I think that’s probably a very good outcome long term.”

With more clarity and certainty, investors are starting to see digital assets as safer bets than they were a year or two ago.

In correspondence with INN, Matteo Greco, a research analyst at Fineqia International, noted that investor interest has driven the widespread adoption of digital assets across the world and in a variety of sectors.

“The trajectory is evident. We are progressing toward a more regulated environment across various continents. Asia is becoming more receptive to digital asset businesses, and Europe has already embraced financial instruments featuring digital assets as underlying assets," he explained. “In addition, with the approval of the MiCA, Europe established the first comprehensive and regulated framework for digital asset businesses. As the market gains increased recognition from both retail and institutional participants, governments are taking steps to regulate and safeguard customers.”

Spot Bitcoin ETFs gain ground in the US

Another theme this past year has been the potential launch of spot Bitcoin exchange-traded funds (ETFs) in the US. Over a dozen spot Bitcoin ETF applications are awaiting SEC approval, but Gary Gensler, the organization's chair, was against them for most of 2023, citing concerns about potential market manipulation and investor protection.

However, that trajectory changed in August, when a panel of three judges agreed with Grayscale Investments, a digital asset management company that argued that the SEC was acting unfairly by approving Bitcoin futures ETFs, but rejecting spot Bitcoin ETF applications. The partial win was a positive development for the cryptocurrency industry, and the price of Bitcoin rose to nearly US$28,000 as the news sparked renewed interest from investors.

Spot Bitcoin ETFs would open the door to US investors who want to benefit from Bitcoin's price action, but are averse to owning tokens. They differ from Bitcoin futures ETFs, which track the Bitcoin price using futures contracts.

The prospect of spot Bitcoin ETFs becoming available in the US has undoubtedly played a key role in pushing Bitcoin higher over the past few months. On October 16, a tweet by Cointelegraph falsely stated that the SEC had approved BlackRock’s (NYSE:BLK) spot Bitcoin ETF application, causing the price of Bitcoin to rise further to nearly US$30,000. While the news was quickly rebutted, Bitcoin spent the next two months increasing by more than 60 percent as talks between the SEC and ETF applicants continued, and as experts indicated that approval was likely.

“The alteration in the likelihood of spot ETF approval is an element that caught market participants off guard. The outcome of whether these ETFs will receive approval or not will be known in approximately a month … and this sudden shift in outlook has significantly influenced how investors have positioned themselves and adjusted their portfolios in recent months,” Greco noted in a December 7 email to INN.

The bottom line

Institutional interest has certainly had a hand in revving up the crypto market, offering a sense of legitimacy to potential investors who are wary of getting involved due to recent scandals like the FTX fiasco.

“As much as last year was a rough patch to get through for crypto, I think it's probably going to be a good outcome over time,” Taylor said to INN. “The trend this year has been probably increased regulation and just building back confidence in the system, and that should have a lasting, positive outcome.”

Greco concurred, remarking that the level of market activity in the crypto sector has been nothing short of astonishing, far surpassing even his most optimistic predictions. “I believed there was a high likelihood of Bitcoin establishing a cycle bottom when it was trading below US$20,000 in 2022,” he noted. “My expectation was for a sideways uptrend in 2023, aiming to reach around US$30,000, a significant price resistance/support level for multiple times in 2021 and 2022. However, surpassing US$40,000 was not within my anticipated range.”

Overall, the crypto industry looks set to become more regulated moving forward. And if trust continues to be established with larger players, it's likely that the market's stability and size will continue to grow.