Crypto vs Currency: 2023 Digital Currency Outlook

Executive summary
The 2020-2021 boom in digital assets came screeching to a halt in 2022 as financial conditions tightened and internal crypto market turbulence tested investor confidence. Cryptocurrencies experienced a rocky start to 2023 as markets digested renewed hawkish messaging from major central banks, but recent turmoil caused by the collapse of a handful of banks has helped propel prices higher. Moving forward, we expect the digital assets narrative to increasingly bifurcate into two separate but related dimensions: (1) investable decentralised assets and (2) deployments of distributed ledger technology.
Our view separates investable token-based assets—or simply "cryptocurrencies" such as Bitcoin, Ether, and others—from applications of the underlying blockchain technology, like tokenisation. We expect cryptocurrencies to trade largely as macro assets, which are tied to broader risk appetite and monetary conditions with few idiosyncratic factors, while deployments of Distributed Ledger Technology (DLT) are likely to develop independently and result in greater value creation, which may or may not be captured by an associated cryptocurrency.
Internal & external turbulences
While 2020 and 2021 were strong years for digital assets, 2022 was a reminder of just how volatile they can be. Over the calendar year 2022, Bitcoin fell 49%, from about $32,500 per coin to $16,500, Non-Fungible Tokens (NFTs) rose and fell in popularity, and the total market capitalisation for cryptocurrencies fell dramatically, starting the year at $2.2T and ending at just under $800B. This was after registering a peak in November 2021 of almost $68,000 per Bitcoin and a total crypto market cap of just under $3.0T1.
We believe drawdowns were driven by 2022’s rapid tightening of financial conditions. The first Fed hike in March was initially met with a continued uptrend in crypto prices, but the April announcement of the Fed's quantitative tightening brought a sea-change in cryptocurrency performance as money supply shifted into contraction (See Figure 1). Indeed, the global environment turned negative for most risk assets as central bankers shifted into tightening mode.
Today, digital assets—including cryptos—are still primarily speculative assets. While visions of decentralised finance and trustless transactions may have a certain allure, crypto markets have failed to escape the gravity of tightening financial conditions. Until digital assets have a realised role in the world economy, they are likely to behave as macro assets—subject to broader financial conditions.