Banz Capital’s Mid-Year 2023 Crypto Market Report
As we enter the second half of 2023, the cryptocurrency world is buzzing with exciting changes and innovative advancements from the past six months. In this continually evolving financial landscape, our team at Banz Capital is dedicated to keeping you updated on the most significant developments and emerging trends within the crypto market.
The key insights presented in this report are designed to assist seasoned investors, crypto veterans, and newcomers alike, supporting them in their journey through this intricate digital terrain. By dissecting the pivotal shifts and trends in the 2023 crypto markets to date, our aim is to equip you with valuable knowledge and insights that can be a useful resource as we venture into the latter half of 2023 and beyond.
Let’s dive in.
Zero-Knowledge Rollups and Proofs Transform the Game for Blockchain in 2023
In the world of blockchain, developers are always looking for ways to make blockchains faster and cheaper for people to use. This idea of making a blockchain better and more efficient is known as “scalability.” Arguably the most important topic in 2023’s blockchain improvements is something called Zero-knowledge rollups, or ZK rollups for short.
But what are ZK rollups and why are they a big deal? Think of ZK rollups as extra layers added to a basic blockchain. They work to speed up transactions, allow more of them, and make everything cheaper. What makes them work is a special tool called Zero-knowledge (ZK) proofs, and they’ve taken the first half of the 2023 crypto market by storm.
First, to explain ZK proofs, let’s imagine two rich friends, Bob and Alice. Bob says he’s richer than Alice, but Alice disagrees and thinks she has more money. They both want to prove they’re richer, but without showing each other their bank accounts. This is where a ZK proof comes in. It allows Bob or Alice to prove they’re telling the truth, without giving away any other information. To learn exactly how this works, check out this resource.
ZK rollups bring these kinds of proofs to the digital world, allowing people to prove things on the blockchain without giving away extra information. This is a big deal for improving the way the internet works, especially for things like online finance. In fact, since the start of 2023, the value of digital money (or TVL) in ZK rollups has grown by a whopping 2,700%+.
The world of ZK rollup projects is growing every day, and it doesn’t seem to be slowing down. The most successful and well-known one right now is zkSync Era. ZK developments will continue to increase the number of people using cryptocurrencies for everyday transactions, accelerating their move into the mainstream. So, while it’s still early, the growth and success of ZK rollups in 2023 signals a new era of scalability and efficiency in the crypto market, and is something to keep a very close eye on.
Bitcoin’s Decoupling from the U.S. Stock Market in 2023: Implications for the Crypto Giant’s Future
For quite some time, the price of Bitcoin maintained a high correlation with the U.S. stock market, specifically with the S&P 500 index. For a while, if the price of Bitcoin was up one day, there was a good chance that U.S. stocks would be up on that day as well. However, since the start of 2023 this correlation has declined and in recent weeks the correlation between Bitcoin and the S&P 500 has fallen to zero.
The chart below provided by Pantera Capital shows the correlation between the price of Bitcoin and the S&P 500 index since 2011:
As shown, the correlation between the two assets was the highest it had ever been just over a year ago. Since the start of this year though, that correlation has been wiped out.
What does this shift imply? The decoupling of Bitcoin from the U.S. stock market signifies a turning point. It positions Bitcoin as a compelling addition to legacy portfolios, promising to inject diversification through an independent return stream. Bitcoin’s new detachment from the traditional stock market makes it an enticing proposition for institutional investors, who constantly seek assets that move independently from conventional financial markets.
This shift paints a promising landscape for Bitcoin. With its newfound independence from the stock market, it can offer unique investment opportunities for a massive group of investors who were for a while, turned off to the digital currency. As a result, we anticipate a strong case for Bitcoin as a diversified investment asset to be added to many legacy investment portfolios in the forthcoming months. This period could potentially see heightened interest and significant new investments flowing into Bitcoin, which could drive its price upward, but more importantly further solidifying its position as a standalone asset in the global financial markets.
The Great Migration of 2023: Market Embraces Decentralization Over Centralization
In the first half of 2023, we’ve witnessed an intriguing paradigm shift within the cryptocurrency sphere — a mass migration from centralized exchanges (CEXs), like Coinbase and Kraken, towards their decentralized counterparts, known as decentralized exchanges (DEXs). These decentralized platforms, which allow instantaneous buying and selling of cryptocurrencies without a governing authority, are increasingly favored, illustrating a decisive move towards a more autonomous and inclusive financial system.
Throughout this year, DEXs have been siphoning volume from CEXs at an unprecedented pace. Just last month, the daily trading volumes of centralized exchanges dwindled to levels not seen since 2020. In stark contrast, DEXs have been experiencing a surge in daily trading volumes, seizing the market share left vacant by the receding CEXs.
The Block provides an insightful metric known as the DEX to CEX spot trade volume ratio, which sheds light on the relative popularity of DEXs over CEXs. A higher ratio indicates greater preference for DEXs. Since the onset of 2023, depicted by the red rectangle in the chart below, this ratio has been on a consistent incline, pointing to the increasing dominance of DEXs.
A significant catalyst behind this shift appears to be the U.S. Securities and Exchange Commission’s (SEC) crackdown on centralized exchanges. Recently, both Coinbase and Binance, two industry behemoths, were charged with multiple violations of securities laws.
However, this wave of regulatory actions didn’t deter investors from the crypto market. Instead, data from Glassnode (Depicted below) reveals that these developments nudged a significant volume of funds away from CEXs and towards decentralized finance (DeFi) operations, including staking protocols.
In essence, 2023 marks a year of profound transformation, demonstrating the crypto market’s resilience and adaptability in the face of regulatory scrutiny, and hinting at an evolving preference for a decentralized, more autonomous financial future.
Emerging Trends: The Rising Appeal of Privacy Coins
In recent months, a discernible trend, yet relatively less known, is piquing interests: the increasing prominence and value of “privacy coins”. These are distinctive cryptocurrencies, designed to furnish users with an unrivaled degree of anonymity during digital transactions. The unique methodology each of these privacy-oriented cryptocurrencies adopts to achieve this can vary significantly.
The most eminent among these privacy coins are Monero (XMR), Zcash (ZEC), and Verge (XVG). These coins are not just cryptographic tokens; they embody a shift towards a more private, secure digital economy.
Historical data paints an intriguing pattern. Regardless of other market trends, privacy coins’ popularity and trade volume consistently experience a surge during stagnant and bear markets. This phenomenon is largely attributed to the extreme volatility of the crypto market, which tends to jettison mainstream participants, primarily driven by Fear of Missing Out (FOMO). Such turbulent periods effectively spotlight cryptocurrencies offering enduring utility beyond mere speculative investment.
Even amidst the shadows of a bear market, privacy and anonymity persist as a fundamental value proposition for crypto adoption. This highlights that even in a downturn, the core functionality of privacy coins — their guarantee of anonymity — remains a compelling selling point, underscoring their significance in the evolving digital currency landscape.
Bitcoin Ordinals (Bitcoin NFTs) Unleash a New Era for NFTs
This year gave rise to the emergence of “ordinals,” an innovative application for Bitcoin, redefining its utility by allowing perpetual data storage on the Bitcoin blockchain. Upon “inscription” — the term coined for data uploading — the blockchain becomes an immutable repository of that data, resistant to modification or removal by any entity.
For the very first time, this capability has paved the way for the introduction of Non-Fungible Tokens (NFTs) on the Bitcoin blockchain. According to recent data from CryptoSlam, Bitcoin has triumphantly risen to the top spot as the preferred blockchain for NFTs, outshining both Ethereum and Solana.
For those intrigued by the potential of ordinals and who wish to explore creating their own Bitcoin ordinal, Decrypt has provided a comprehensive guide to walk you through the process.
Traditionally, Bitcoin found itself at a competitive disadvantage in a direct head-to-head with other cryptocurrencies and blockchain platforms, primarily due to its lack of support for functionalities like NFTs. While it’s true that ordinals may not yet possess the sophistication of NFTs found on platforms like Ethereum, they are undeniably a momentous leap forward in the ongoing evolution of Bitcoin — a stepping stone towards a new era that teems with promise. But this brings us to our subsequent point…
Bitcoin Reigns Supreme: Unpacking the Significance of BTC’s Escalating Dominance in 2023
“Bitcoin dominance” shows us how much of the total value of all cryptocurrencies comes from Bitcoin. This is a key number to watch as it helps us understand the overall health of the cryptocurrency market, especially in relation to altcoins (Cryptocurrencies other than Bitcoin). In recent weeks, something out of the ordinary happened — Bitcoin’s dominance rate rose above 50% for the first time in over two years.
Bitcoin dominance has been steadily increasing since the start of 2023. Historically this has been bearish for altcoins and bullish for Bitcoin, as increasing dominance has suggested larger gains for Bitcoin versus altcoins. Given similarities from the current cycle to past ones, it would not be surprising if it took Bitcoin prices another 18–32 months before returning to its previously acquired all-time-high.
I’m a strong believer that in order for most altcoins to succeed, Bitcoin must succeed first. Bitcoin is the entry point for most crypto users, necessary for exchanging most altcoins anyways. Bitcoin attaining this recent level of dominance rate, especially given the influx of countless new cryptocurrencies/altcoins since the last-time this level of BTC dominance was present, seems to support the notion that Bitcoin will see further prominence as the majority market focus prior to any altseason bull runs.
Closing Thoughts: The 2023 Crypto Landscape — A Defining Chapter in Market Evolution
In the dynamic landscape of cryptocurrencies, 2023 stands as a hallmark year of transformation and innovation. Yet, these shifts represent more than just a technological evolution; they mirror a societal shift in how we perceive and interact with financial systems.
The emergence of Bitcoin ordinals and the ascendance of privacy-focused cryptocurrencies signal a growing recognition of the crypto market’s potential beyond mere speculation. These movements echo a deeper, shared vision of decentralized control and financial privacy. The development and adoption of Zero-Knowledge proofs and rollups don’t just address scalability issues. They embody the unyielding spirit of innovation, propelling us toward a faster, cheaper, and more effective digital future. The divergence of Bitcoin from the U.S. stock market and the transition from centralized to decentralized exchanges reflect a shifting mindset, an embracing of decentralization in pursuit of broader financial autonomy.
Above all, 2023 serves as a testament to the resilience and adaptability of the crypto community. Despite regulatory headwinds and market volatility, we continue to move forward, spurred by a shared conviction in the promise of blockchain technology.
As we close out the first half of 2023 and look ahead, we at Banz Capital are not only excited for the opportunities to come but are also immensely proud to be part of this revolutionary journey. Together, we will continue to shape a future where technology and finance intersect to empower individuals like never before.
Disclaimers
John Iadeluca is the Managing Partner and Founder of Banz Capital. Banz Capital is a multi-strategy hedge fund. This post and the information contained herein is for informational purposes only. This post and the information contained herein is for informational purposes only. Under no circumstances does any of the information posted represent a recommendation or solicitation to buy or sell any securities or interests. Any such offer or solicitation can and will only be by means of the appropriate offering materials, only in jurisdictions in which such an offer would be lawful, and only to individuals who meet the investor suitability and sophistication requirements in such materials — which should be read in the entirety before considering such investment.
