The outlook for risk assets appears bright after Tuesday's U.S. inflation report that affirmed the expected slowing of the Federal Reserve's liquidity tightening.
Bitcoin (BTC), however, could remain under pressure because several miners are likely to go bust, overshadowing improving macroeconomic conditions, according to investment giant VanEck.
"Bitcoin will test $10,000-$12,000 in Q1 amid a wave of miner bankruptcies, which will mark the low point of the crypto winter," Matthew Sigel, head of digital assets research at VanEck, said in the 2023 outlook.
This year, bitcoin miners, or those responsible for making coins, have been caught between rising operational costs and falling bitcoin prices.
Miners' profitability is closely tied to bitcoin's price, given they receive the cryptocurrency as a reward for solving complex mathematical puzzles to verify transactions on the blockchain. The rewards received are often liquidated to fund operational costs.
And so, when the price crashes, as it has this year by 61%, it leads to miner capitulation – a situation where weak miners exit the market, selling their reserves and causing the price to drop further. In a worst-case scenario, the capitulation could lead to a death spiral.
Miners have been running down their coin stash to cope with adverse market conditions. Data tracked by blockchain analytics firm Glassnode shows balance held in miner wallets has declined by over 25,000 BTC (US$444 million) since July, hitting a 14-month low of 1.818 million BTC.
The trend could continue as most companies engaged in mining are bleeding cash.
"The MVIS Global Digital Assets Mining Index median market cap is now only $180 [million], with nearly all constituents burning cash and trading well below book value. With bitcoin mining largely unprofitable, given recent higher electricity prices and lower bitcoin prices, we predict many miners will restructure or merge," Sigel wrote.
A drop to $12,000 would mean an 82% drawdown from the record high of $69,000 registered in November 2021. The previous two bear markets ran out of steam at roughly 85% drawdowns from the the-then record highs.
Sigel expects bitcoin to bounce back to $30,000 in the second half of 2023.
"Lower inflation, easing energy concerns, a possible truce in Ukraine, and a turnaround in M2 supply will power the start of a new bull market," Sigel noted, adding that an oil-exporting nation would add the cryptocurrency to its sovereign wealth fund.
Other key forecasts
VanEck also expects financial institutions to tokenize more than $10 billion in off-chain assets and a new decentralized stablecoin to reach the $1 billion market cap.
The investment giant also sees Brazil becoming one of the most crypto-friendly countries of the world and tokenizing a portion of sovereign debt offerings on blockchain, Ripple losing the Securities and Exchange Commission lawsuit in the U.S. and Ethereum enabling withdrawals from the Beacon Chain.
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