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Can crypto continue to recover?

Key takeaways

  • Major cryptocurrencies saw a bounce in value in the first half of 2023, recovering some of 2022’s drop.
  • One of the most pressing questions for crypto for the rest of 2023 is whether this recent rally can continue.
  • Other important questions include what’s next for the Ethereum network and whether bitcoin may gain greater adoption.

While 2022 brought what some investors called a “crypto winter” with several coins and exchanges failing, this year has some crypto investors wondering if we’re now in spring. Nevertheless, important developments continue to unfold. From the recovery in crypto prices to blockchain upgrades to renewed interest in bitcoin’s potential as an inflation hedge, the industry continues to evolve. Here’s a look at 5 things to watch for in the second half of the year.

1. Recovery or bear-market rally?

The crypto market showed signs of life in the first half of 2023. In April, bitcoin briefly crossed $31,000, a 100% climb from its 2022 low of around $15,500. During the same period, ethereum crossed $2,140, a 143% climb from its 2022 low of around $880. While the market has since pulled back, the bounces of the last few months were a relief for many holders after 2022’s challenging sell-off.

Many crypto bulls believe that the market has bottomed, meaning they expect the price to go up from here. One stat some bulls point to is that in the past few months, there seems to have been an increase in buy-and-hold activity in bitcoin. “We also saw the percentage of 'illiquid coins' increase to a new high for bitcoin,” says Fidelity Digital AssetsSM Research Director Chris Kuiper. “Illiquid coins” are coins that haven’t transferred in over a year. Bulls see this as one sign that bitcoin’s recovery may be sustainable, and could extend.

Skeptics, of course, see this year’s run as merely a bear-market rally and expect the market to make more lows. Those who don’t believe in crypto’s fundamentals and are bearish on the economy believe crypto prices will drop if stocks take a turn for the worse.

Ultimately, no one knows what the future holds. Those thinking about entering the market should understand how crypto works and the risks involved before buying. Crypto may be more susceptible to market manipulation than securities, and crypto holders do not benefit from the same regulatory protections applicable to registered securities. Crypto is also not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, meaning you should only buy crypto with an amount you're willing to lose.

2. What’s next for Ethereum?

The Ethereum network has completed major upgrades in the last several months, but it still has more to go. Last year, it initiated the long-awaited Merge. Then in April earlier this year, it completed the Shapella upgrade, which enabled holders to withdraw staked ethereum and effectively completed its migration from proof of work to proof of stake.

Before its completion, there were concerns that the upgrade could cause a rush to withdraw and sell staked ethereum. Instead, however, it appears more people are currently trying to enter the staking ecosystem rather than leave. “The entry queue is currently backlogged with folks trying to enter staked positions, while the exit queue has cleared,” says Fidelity Digital AssetsSM Research Analyst Jack Neureuter. Proponents see this as a positive for the cryptocurrency.

However, the upgrades aren’t done. “Next on the Ethereum roadmap are upgrades focused on usability and user experience, mainly to make the network easier to use, as well as to enable faster and cheaper transactions,” says Neureuter. “The next Ethereum mainnet upgrade, dubbed the “Cancun upgrade,” is looking to help make transactions even cheaper.” Supporters hope these improvements will drive more adoption for the cryptocurrency.

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3. Will bitcoin become less correlated with stocks?

Historically, bitcoin’s price has often been closely correlated with stocks, meaning it has tended to rise when stocks rise, and fall when stocks fall. One possible explanation for this correlation is that investors see both bitcoin and stocks as “risk-on” assets—meaning assets that investors flock to when they feel confident and bullish but sell when sentiment becomes bearish or defensive. Note that this correlation is limited to price, and that crypto and stocks are fundamentally different assets.

One of the most significant questions for the cryptocurrency is whether it will eventually become less correlated with the stock market. If so, it may be able to better deliver on some of its key value propositions, like the ability to serve as an independent currency and/or asset.

At times throughout the first half of 2023, bitcoin has experienced a negative correlation with the S&P 500® index. But correlations are not static, and this metric continues to fluctuate. “Fidelity Digital AssetsSM believes bitcoin and other digital assets are fundamentally different from stocks, and therefore believe correlation between bitcoin and stocks will continue to decline in the long term,” says Kuiper. “However, if investors or traders don't believe those fundamental differences and continue to treat them all as 'risk-on' assets, then they will trade similarly.”

Kuiper adds that a possible scenario going forward is that bitcoin and stocks continue to experience high correlation in times of stress or volatility in the broader economy, then revert to a relatively uncorrelated relationship when volatility cools.

4. Will bitcoin gain greater adoption?

The recent banking closures reignited discussion on bitcoin’s potential as a store of value. Advocates argue bitcoin may be a safer way to store wealth than traditional currency deposits held at banks, because its decentralized structure protects holders from bank runs and potential manipulation by centralized decision-makers.

“Overall, we continue to point out bitcoin has the ability to be a digital-bearer asset,” says Kuiper. In other words, the wealth stored in bitcoin can be accessed and traded at any time without a third-party intermediary like a bank.

Bitcoin bulls also argue that if inflation rages on, bitcoin could be increasingly attractive as an inflation hedge, thanks to its hard cap on supply. “Historically bitcoin has served as a hedge against monetary inflation (i.e., currency creation),” says Kuiper, “but not necessarily consumer price inflation as measured by the CPI or other similar metrics.”

Skeptics, on the other hand, note that bitcoin's theoretical role as an inflation hedge hasn’t yet been proven, given its substantial volatility and historical performance. Bears also argue that government actions could hinder adoption of bitcoin. For example, if a government makes it illegal for citizens to own bitcoin, its value propositions may be irrelevant.

5. Will there be any new government regulations?

In May, the European Union approved the first comprehensive framework for regulating crypto. The framework establishes licensing requirements for crypto exchanges and wallet providers, and requires crypto platforms to share data regarding their customers’ holdings with tax officials. It also updates tax rules, among other regulations.

In the US, however, the outlook for crypto regulation is still uncertain and evolving. “There are a lot of moving pieces across parts of Washington that we will continue to monitor, but overall we are not expecting a lot of movement until perhaps later in the year,” says Kuiper.

In light of the lack of regulatory certainty, consider only buying crypto with an amount you can afford to lose. As mentioned earlier, one way to think about gaining exposure to crypto is to treat it like any risk asset. Given the substantial volatility, buying with a long-term horizon in mind may help buyers better withstand the ups and downs of the market.

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