It’s no secret that the cryptocurrency industry has taken a heavy hit in 2022, both in the form of negative price-action and negative news. However, despite the massive sell-off we experienced throughout this last year, there was no shortage of chances to make money, if you knew where to look. And 2023 will be no different. There will be plenty of chances to trade this market, you just need to know where to look.
Bitcoin was born out of the last financial recession in 2008, and has existed during favorable economic conditions. The equity market has been incredibly strong and quantitative easing from the Fed led to Bitcoin and many other cryptocurrencies accruing massive value. That was until 2022 kicked off and we began to see things reverse.
Although the price-action in both equities and Bitcoin has been overwhelmingly negative during this calendar year, there were many lessons learned, particularly about the relationship between the equity markets and crypto. There is no shortage of financial outlooks for 2023, and by conglomerating some of this data we can make estimates about the price action of Bitcoin and other cryptocurrencies during the next calendar year, 2023.
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Given the ever-increasing mainstream nature of Bitcoin, it is no surprise to see it becoming increasingly correlated with the equity markets. So, to begin our outlook for 2023, let’s start with some equity market predictions with justification.
- Bearish overreaction into Q1 earnings. Negative price action creates new lows in indices and BTC retests FTX lows.
- Equities experience a broad repricing in Q1 2023 as poor earnings reveal the lag effects from excessive quantitative tightening.
- Most coins and alt layer 1s with over $1b fully diluted valuation drop another 70% as capital is consolidated into BTC, ETH, and a few top projects.
- Bitcoin dominance climbs to 48-50% as low-quality tokens are abandoned, remaining capital is consolidated into majors i.e. BTC and ETH.
- A few new projects and applications may emerge during this time, mostly likely on layer 2s such as Arbitrum and Optimism
- Local bottom in equities and Bitcoin occurs sometime in mid-late 2023.
- Equity market echo bubble emerges in late 2023 which creates a macro higher low in SPX and sends Bitcoin above 30k. Legacy markets are range bound for the next few years before inflation is returned to 2%
Macro and Equity Market Performance
Prolonged inflation remains a critical issue for the US economy.
Source: BlackRock
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We expect a continued drop in GDP as the Fed keeps interest rates higher for longer. We believe the market is underestimating the drop in GDP required to return to non-inflationary GDP levels (green line).
Source: BlackRock
Recent CPI releases have been favorable for the market, but inflation remains a critical issue which will persist for longer than most anticipate.
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Forward P/E Plus Inflation
The ideal time to invest for the long-term is when inflation and valuations are low. This was seen throughout the early 1980s and 2010s. Inversely, the ideal time to sell stocks is when inflation is high, and valuations are coming down from elevated levels. The misery index model reflects market conditions like the 2000-2002 era. Therefore, we believe equity valuations will continue to decline in tandem with inflation in Q1.
S&P 500 Forward P/E Ratio & Rule of 20
The rule of 20 model (red) is a projection of where Forward P/E should be. Since the late 1940s, S&P 500 Forward P/E (blue) has typically followed the rule of 20 (red). Based on the current trajectory, S&P 500 forward P/E should decline until it reaches parody with the rule of 20 (red). Overall, we expect this repricing to be most prevalent in Q1 as earnings reports reflect a significant lack of growth.
2023 Equity Strategy in One Sentence:
Remain short tech, puts in QQQ.
How to Trade Crypto 2023 — Strategy in One Sentence:
Short dYdX, CAKE, LUNC, MATIC
How to trade crypto 2023 — Breakdown:
Short tokens with over $1B in fully diluted value. Token emissions and unlocks will be sold into an illiquid market with low demand. Excessive dilution will weigh heavily on projects with poor tokenomics. Demand will be crushed; project leaders and insiders will consistently distribute to fund project expenses.
After Solana’s recent demise, the remaining alternative layer 1 projects are highly vulnerable and unlikely to outperform Bitcoin and Ethereum in 2023.
Bitcoin is highly reflexive and parabolic trends can form very quickly without practical justification. Therefore, we expect a moderate rally to 20,000-30,000 come late ‘23 to early 24 should equities bottom.
We remain bearish on Coinbase and other Bitcoin related equities until a broad repricing of equities occurs sometime in Q1 – Q2.
Case Study on an Alternative Layer 1: Cardano, 2018 Bear Market
Even after losing 90% in 2018, Cardano dropped another 78%. ADA went on to make new all-time highs following a 98% decline. We expect 90% of alternative layer 1s to follow this pattern – except most will never make new all-time highs.
Commodities Supercycle to Continue?
Commodities have potential to be one of the best performing asset classes in 2023. Market participants remain underinvested as interest rates rise while inventories are depleted. We expect returns of 30-40% in 2023 for commodities.
Commodity Strategy
Long Natural Gas, Gold, Copper, and Silver as inventory remains low.
Uranium stocks such as CCJ and UEC could make a comeback as Uranium continues to trend higher.
Current Trajectory Compared With 2000s and 1970s Super Cycles
When rates rise, so does the financing cost of inventories, incentivizing additional selling and a fall in materials prices.
Additionally, underinvestment in production leads to a depletion of inventories, opening the potential for fundamental shocks on prices.
Conclusion
We expect 2023 to be an optimal year for traders but an exceedingly difficult year for the long-term investor. During the first half of 2023, we look to take advantage of falling equity and cryptocurrency prices while also focusing on the bull trend in commodities. Once a significant repricing has occurred, we may look to increase exposure in risk assets. For now, we remain tentatively bearish.
