May 2023 Crypto Market Forecast - Bwiki

May 2023 Crypto Market Forecast

The price of Bitcoin (BTC) rose above $30,000 in April, igniting a frothy cycle of news claiming that the crypto winter was finally over.

This was the first time since June 2022 that the elder crypto rose above this key psychological level, but BTC lost ground as investors prepared themselves for what promises to be a volatile month of May.

Crypto prices have trended higher in 2023 as the outlook for Federal Reserve policy tightening has evolved. With inflation cooling off, recession looking more likely and the slow-burn U.S. banking crisis lingering, some investors have sought shelter in Bitcoin and other top cryptos.

The bullish late-month trading action in BTC and Ethereum (ETH) was driven in part by a sharp sell-off in shares of First Republic Bank (FRC), which reported a massive drop in customer deposits in the first quarter.

Government officials and financial sector heavies are working overtime to build a rescue plan for First Republic, and renewed concerns about the banking crisis could be the biggest catalyst for crypto prices heading into May.

April Crypto Market Performance

From mid-March to mid-April, Bitcoin traded in a narrow price range between around $26,000 and $28,600.

Bitcoin broke out to the upside on April 10, ultimately trading as high as $31,005 on the strength of encouraging inflation data that could mean the Fed might potentially pause on interest rate hikes and pivot to rate cuts sooner than previously expected.

Ethereum prices also rallied in April as the crypto completed its highly-anticipated Shanghai upgrade on April 12, which ended a two-year lockup period on staked Ethereum.

Following the upgrade, Ethereum prices jumped more than 10% to above $2,000 for the first time in eight months before pulling back to finish April at around $1,890.

Bitcoin and Ethereum were on track to finish the month up 1% and 4%, respectively. Bitcoin prices are now up 70% year-to-date in 2023, while Ethereum prices are up 55%.

The SEC Takes On Coinbase

The U.S. Securities and Exchange Commission (SEC) and other regulators continued their crackdowns on the cryptocurrency industry in April.

The SEC reopened a proposal to amend the definition of “exchange” under Exchange Act Rule 3b-16 to include platforms that trade crypto assets, including decentralized finance (DeFi) platforms. The proposal is the latest evidence that crypto companies will not be given their own set of tailored regulations and instead will be folded into existing securities regulations.

In an April blog post, crypto exchange Coinbase (COIN) said it plans to focus on expanding into international markets, such as Brazil and Singapore, and could consider relocating overseas if regulators do not provide the company with clarity about how to comply with securities laws.

In March, the SEC issued Coinbase a Wells notice, notifying the exchange that the SEC has identified potential U.S. securities law violations by the company. Coinbase responded by filing a petition for a “writ of mandamus,” asking a court to order the SEC to respond to a 2022 plea Coinbase made for the regulator to make a clear set of rules to determine whether or not a token is a security and how issuers can legally register with the SEC.

SEC Chair Gary Gensler testified in front of the House Financial Services Committee (HFSC) in April, where he was grilled by House Republicans accusing the SEC of driving cryptocurrency platforms overseas and threatening the U.S. leadership position in global digital asset innovation. Despite the concerns, Gensler said the SEC is simply committed to enforcing the law.

“All of these companies should come into compliance with the law, and until they do, we will continue to pursue them as the cop on the beat, and investigate and follow the facts and law,” Gensler said.

Robert Donnelly, CFO at Marketplace Fairness, says most investors shouldn’t be concerned about the SEC’s crypto crackdown.

“While the SEC has issued a number of warnings about the risks of investing in cryptocurrencies, it has also said that it does not see them as a threat to the traditional financial system. Furthermore, the SEC has only cracked down on a few exchanges, and it is likely that most investors will not be affected,” Donnely says.

Other Crypto Headlines

While Washington regulators are cracking down on crypto companies, HFSC Republicans proposed a new set of rules for “payment” stablecoins that would limit stablecoin reserves to ultrasafe investments and implement a two-year ban on the creation of stablecoins collateralized by related cryptocurrencies.

Crypto users rely on stablecoins to buy and sell Bitcoin and other popular cryptos, so cryptocurrency proponents say the bill could help eliminate risk in the crypto market and entice more institutional investment.

During an April podcast appearance, billionaire tech investor Chamath Palihapitiya said U.S. authorities have “firmly pointed their guns at crypto,” and he declared “crypto is dead in America” following recent regulatory enforcement actions. In 2021, Palihapitiya said Bitcoin had “effectively replaced gold” and predicted the cryptocurrency would rise to $200,000.

The central bank of Zimbabwe said the nation plans to launch a gold-backed digital currency to serve as a store of value and an alternative medium of exchange. Zimbabwe’s annual consumer price inflation in its local currency has exceeded 75% over the past 10 months.

Is the Banking Crisis Good for Bitcoin?

On April 25, First Republic Bank shares tumbled 50% after the bank reported a 40% drop in deposits in the first quarter. Investors and depositors are growing increasingly concerned First Republic and other U.S. regional banks could soon join March bank failures Silvergate, Silicon Valley Bank and Signature Bank.

Rising interest rates were a primary catalyst for 2022’s crypto winter, but the recent banking crisis has tightened credit markets and completely changed the market outlook for rates. The bond market is currently pricing in a greater than 50% chance interest rates will drop by at least a quarter of a percentage point by the end of the year.

The consumer price index (CPI) was up 5% year-over-year in March, a significant step down from its 6% annual gain in February that suggests U.S. inflation is cooling off. Nevertheless, inflation remains well above the Fed’s 2% target, and the New York Fed’s recession probability model suggests there’s a 57.7% chance of a U.S. recession in the next 12 months.

Institutional investors have become increasingly concerned about the U.S. economic outlook in light of the banking crisis, but Bank of America analyst Alkesh Shah says uncertainty is good news for cryptos.

“Fund manager bearishness is likely pushing investors to increase diversification through non-traditional investments like digital assets, driving 51% [year-to-date] outperformance vs [the S&P 500],” Shah says. “We expect risk assets, including digital assets, to remain volatile as focus on equities shifts to 2H’23 & ‘24 earnings.”

Bitwise CIO Matt Hougan says cryptocurrencies’ correlation to the stock market dropped sharply in recent months, a trend that he expects to continue in May.

“Crypto appears to have entered a new bull market cycle, fitting the historical pattern,” Hougan says. “Historically, these cycles have led to new all-time highs.”

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