Watch these crypto market risk factos.
The first month of 2023 is over, and cryptocurrencies have been red all through. The total cryptocurrency market capitalization is currently down by over 15%, and bears are not loosening their grip on the market. While things are pretty tough in the market, it is not as hard as they were in the crash of early 2018.
Besides, optimism in the cryptocurrency markets is at its highest levels ever. Both retail and institutional investors are flocking into the cryptocurrency market at an unprecedented rate. That said, there are fears that the crypto market could crash even further.
Such concerns are not far-fetched, considering that many factors could easily trigger another wave of selloffs in 2023. To help you stay better prepared for the market's opportunities, here are 10 risk factors that could trigger a cryptocurrency selloff in 2023.
10 Risk Factors For A Cryptocurrency Market Crash In 2023:
- Cyclical Market Dips
- Political Issues
- Interest Rates
- Another Lockdown
- The Everything Bubble Burst
- Tether
- Excessive Leverage
- Unfavourable Regulations
- Negative Comments From Influential People
- Exchange Hacks
1. Cyclical Market Dips
While past results are not always indicative of future performance, crypto has been following a predictable cycle for years now. The cycle revolves around the Bitcoin halving.
Immediately after a Bitcoin halving, Bitcoin and the broader cryptocurrency market pump. About a year after the halving, the market peaks and is followed by a crash. The market then goes silent until the next halving.
To contextualize this, one needs to look at the price of Bitcoin since 2012. After the Bitcoin halving of November 2012, Bitcoin and the broader market started gaining upside momentum. This cycle peaked out in November 2013 when Bitcoin made new all-time highs of $1161.84.
A massive crash followed this in 2014, and by the beginning of 2015, the market was pretty much dead (little activity). Things only started to look up again in late 2015, ahead of the Bitcoin halving of July 2016. After this halving, upside momentum started to build up and peaked out in December 2017 when Bitcoin made a new all-time high of $20k. Many other cryptos made new highs.
A massive crash followed the 2017 bull rally in 2018, just like had happened in 2014. A period of inactivity followed in 2019 before the market started gaining momentum in late 2019. Again this was just ahead of the Bitcoin halving of April 2020. After the halving, the market rallied, and many cryptos made new highs at various points in 2021. Bitcoin made new highs in November 2021 when it traded at $69k.
A crash followed, and if previous cycles are anything to go by, then this could be the beginning of a crypto crash that could last until the end of 2023. If nothing changes, the market would then flat-line for most of 2023 and start regaining momentum towards the end of the year before a new bull cycle begins in 2024.
Essentially there is a risk that despite prices looking highly depressed, the cryptocurrency market crash of 2023 is just getting started. The already established cycle since 2012 is a huge risk factor.
2. Political Issues
The cryptocurrency is all about decentralization, but that does not mean that it is immune to country-specific issues. For instance, in the middle of the crypto rally of 2021, China announced that it was putting an end to Bitcoin mining operations. The result was an end to the bull rally and a correction that saw Bitcoin lose over 50% of its value. Altcoins took the biggest hit, with most losing over 70% of their value.
While the Chinese exit from crypto has been factored into the market, two similar risks abound in Russia, the US, and El Salvador. Russia recently made announcements that point to the country no longer being pro-crypto.
The Russian Central Bank issued an alarming report about cryptocurrencies, warning that they are a pyramid scheme and threaten the country's monetary policy. They also took aim at mining which they said hurt Russia's green agenda.
While the country's president seems to have slammed the brakes on a ban, the Central Bank is still a very important entity in any country. As such, there is no telling how its report could play out regarding Russia's cryptocurrency activities.
As for the US, the SEC seems to be taking a tough stance on the market, especially on synthetic tokens. This could slow down the market, especially DeFi, and when combined with other market factors, could trigger an even bigger cryptocurrency market crash in 2023.
Lastly, on political factors, El Salvador, the first country to make Bitcoin legal tender, is under pressure from the IMF to reverse the decision. If it bows to pressure, it would be a huge hit for Bitcoin in terms of adoption and could spiral down into the altcoins market. Such political issues are a risk factor that every cryptocurrency investor needs to consider when investing.
Check Out: One Thing Never To Do When The Crypto Market Goes Down
3. Interest Rates
One of the triggers to the current cryptocurrency market crash is the fear that the US Federal Reserve could be looking to raise interest rates aggressively in 2023. The fears around such rates hikes have affected cryptocurrencies, and for a good reason.
The US is one of the biggest markets for cryptocurrencies. As such, if the Federal Reserve pushes rates higher aggressively, it means the cost of borrowing to invest will go up. This, by extension, means that people will be hesitant to invest in risky asset classes, starving the cryptocurrency market of much-needed investments.
The moves taking place in the US are made worse because other significant economies seem to be following suit. For instance, in the U.K., interest rates have been going up. In December, interest rates went up by 0.25% and another interest rates hike seems to be in the offing.
Recently, Reuters reported that The Bank of England is expected to raise interest rates in February for the second time in less than two months. This move has come as inflation jumped higher than anticipated, and now testing levels last seen three decades ago.
Rising interest rates coupled with major economies like China now out of the cryptocurrency ecosystem pose a risk to Bitcoin and other cryptocurrencies. If more countries take a hawkish monetary policy approach, a further cryptocurrency market crash in 2023 could be possible.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
4. Another Lockdown
One thing that the Covid-19 pandemic has proven is that it is highly unpredictable. In 2021, a huge chunk of the world population has been vaccinated, only for a new variant, the Omicron variant to emerge. Recently, there has been a report that a new version of Omicron, called Omicron BA.2 was starting to spread.
According to the Danish Health Minister, a new subvariant of the Omicron coronavirus variant is more contagious than its predecessor. The B.A. 2 lineage has been detected in people across Europe and North America so far, with cases being reported throughout Denmark.
While scientists have said that the subvariant is not deadly, there is really no telling if a more dangerous variant could come up and take the world back to the lockdowns of 2020. In such a scenario, the financial markets could tank as investors turn to cash and other safe assets for safety. Considering that cryptocurrency is among the riskiest asset classes, the implications would be worse.
The worst part is that such a scenario is not far-fetched. This has a lot to do with the fact that there is high vaccine hesitancy worldwide. The increases the risk of new variants of the virus emerging from such sections of the population, and beating the vaccines available in the market today.
Considering that cryptocurrencies are already in a bear market, a cloud of uncertainty regarding the pandemic could easily trigger an even bigger cryptocurrency market crash in 2023. It is one of the biggest risk factors that the market faces today because it is hard to see it coming, just like no one saw the start of COVID-19 in 2020.
5. The Everything Bubble Burst
Talk of an 'everything bubble' has been rife over the last couple of years, and even books have been written about it. So what is 'the everything bubble', and how does it affect cryptocurrencies?
The 'Everything bubble' is best captured in the book, The Everything Bubble: The Endgame For Central Bank Policy by Graham Summers. In this book, Summers does not just describe the history of one event but instead paints a picture that shows how each era has been connected to our current financial system. He begins with the formation of the Federal Reserve, until today when we are living through serial bubbles: tech in '90s, housing in the early 2000's, and now the sovereign debt bubble.
Since everything in the world economy is connected to bonds, a sovereign bond bubble means that all assets are in a bubble and that a reset could be in the offing. If this bubble pops, it would mean all assets would collapse, essentially resetting the global financial system as we know it today.
The worst part is that the indicators are there of the sovereign bonds bubble popping. Back in 2012, France lost its triple-A debt rating. Since then, more countries have seen the quality of their debt deteriorate, especially in the developing world.
With the COVID-19 pandemic accelerating borrowing and more countries now struggling with debt, it is not unthinkable that a global sovereign debt crisis is a possibility.
If it happens in 2023, then it would be catastrophic for cryptocurrencies. That's because while the value of all assets would drop, risky assets would take the biggest hit. Cryptocurrencies are known to record corrections of up to 90% in normal economic times. A scenario where the markets are reset could trigger a cryptocurrency market correction of epic proportions.
6. Tether
There have been concerns about Tether's 1:1 dollar backing for years now. The issue is becoming even bigger now that Tether has risen to an average volume of $69 billion daily. Essentially this means Tether has $69 billion in cash to represent the $69 billion traded daily. This is drawing the interest of US regulators for a good reason.
Firstly, if Enough dollars do not back tether, then it would make it one of the biggest frauds of all time. However, even if it has enough dollars to back up all the Tether in circulation, it still risks the economy if investors decide to exchange all their Tether for Tether at once, as happens during bank runs.
As it stands, Tether's daily volumes make it equivalent to the top 50 largest banks in the US This means a "bank run" on it would have far-reaching effects on the US financial system.
Towards the end of 2021, Bloomberg ran an article on Tether. It reported that back in July, US Treasury Secretary had summoned the Chairman of the Federal Reserve and other top officials to discuss Tether. This shows how high Tether has risen in terms of the spotlight from US authorities.
Therein also lies the risk for the cryptocurrency market. That's because in the event US authorities decide to scrutinize Tether in-depth, it could create massive panic in the cryptocurrency market. Things would even be worse if it is found that Tether is not backed 1:1 by the dollar. Given how important Tether is to the cryptocurrency market, it could easily trigger a market collapse that could see the cryptocurrency market shrink by unprecedented proportions.
Of all the risk factors that face cryptocurrencies, uncertainty around Tether is the one most likely to trigger a cryptocurrency market crash in 2023.
7. Excessive Leverage
Leverage has crashed markets in the past, and it can always happen again. For context, the 2008 financial market crash was caused by many factors, but one of the biggest ones was excessive leverage in the US sub-prime housing market.
Even at their worst, the crypto market faces even bigger risks from leverage than the traditional markets. That's because it is an unregulated market, and the levels of leverage available in the crypto market are unheard of in the stock markets. For instance, leverage of up to 100: 1 is quite common on cryptocurrency exchanges.
So how is leverage a risk factor, and how can it trigger a cryptocurrency market crash in 2023? Well, consider that leverage makes it possible for someone to trade cryptocurrencies without staking much of their own money. Due to the profit potential that comes with leverage, many cryptocurrency investors have been overleveraging.
The problem is that once the market starts to go down, the liquidations can trigger a spiral effect that could easily collapse the market. A lot of the flash crashes in crypto have a lot to do with such liquidations. As leverage takes an even bigger central role in the crypto market, the risk of an epic crash following such liquidations is quite high.
To understand how big of risk leverage poses to the cryptocurrency market, you need to look at the figures involved with each liquidation.
In the latest cryptocurrency market crash, the market saw over $1 billion liquidations in a matter of hours on December 5, 2021.
With greed for more gains being a major driver of the cryptocurrency market, it is not hard to envision a cryptocurrency meltdown triggered by mass liquidations.
Read Also: Cryptocurrency Market Crash Checklist: 10 Things to Do
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
8. Unfavourable Regulations
Cryptocurrencies have thrived so far largely because they operate in an unregulated environment. However, regulations are coming up, and there is a risk of being negative. Such risks and fears are grounded on things that have happened in the past. For instance, in 2021, South Korea instituted a raft of regulations that saw a number of cryptocurrency exchanges close shop.
The South Korean regulations were with regards to KYC and AML. They stipulate that anyone operating a cryptocurrency account without a bank account could face up to 5-years in prison, or a fine of up to $43000.
In the US, a number of radical proposals have been made in the past that would have put the cryptocurrency market at risk of losing its relevance. For instance, earlier in 2021, the US government had proposed that anyone holding cryptocurrency in private wallets would be put through an identity check for transactions that exceed $3,000. It would have been similar to how banks do KYC on their clients if implemented. The worst part is that it requires people who have no control over such data, like miners and wallet creators, to do KYC.
Such proposals show that the risks of market-threatening regulations are there, especially in the US, a key crypto market globally.
The worst part is that the US seems keen on cryptocurrency regulations in 2023. The current US administration is already looking into regulating the cryptocurrency market. Recently, Yahoo Finance reported that an upcoming National Security Council (NSC) memorandum will require federal agencies to do a SWOT analysis of crypto while also looking into the possible issuance of a US Central Bank Issued Digital Currency.
If such regulations come out against the market, they could be a huge risk factor for cryptocurrencies in 2023. Their potential to trigger a cryptocurrency market crash in 2023 is pretty high.
9. Negative Comments From Influential People
While the cryptocurrency market has recorded tremendous growth over the past decade, it is still a very small market compared to equities or commodities like gold. As such is it still easy for an influential individual to move the market through their comments.
This is evident in the way a billionaire like Elon Musk has been able to control the market, with tweets. In 2020, Elon Musk was able to up move Dogecoin's price through tweets, and by mid-2021, Dogecoin was up by over 12,000% in just a year. Musk was able to also able to slam the brakes on the Bitcoin Bull Run by raising concerns about its environmental record.
A single person's control of the entire cryptocurrency market is a risk. That's because you can never be too sure of what such powerful individuals will say next. If they make a negative comment, especially now that the market is weak, they could crash it even further. It's a huge risk factor that every cryptocurrency investor should be aware of, before investing in crypto in 2023.
10. Exchange Hacks
Since it became a thing, exchange hacks have been a huge risk for the cryptocurrency market. They trigger bigger selloffs than most of the other risk factors above combined. The most famous of them is probably the Mt.Gox hack that triggered a meltdown of the cryptocurrency market back in 2014. Another hack that triggered a cryptocurrency market meltdown was the CoinCheck hack in 2018.
Today, the amount held in cryptocurrency exchanges is much higher than ever. Most of these volumes are held in a few large exchanges such as Binance, Coinbase, and Kraken. In essence, if any of these exchanges is hacked, the impact on the cryptocurrency market could be catastrophic.
Such a hack could be made worse because the cryptocurrency market started 2023 weak, with most cryptos losing up to 50% of their value.
With hackers getting ever more sophisticated, this is a risk that every cryptocurrency investor should anticipate happening at any given moment.
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Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
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