2022 was a terrible year for cryptocurrencies, with the loss of $2 trillion in market value. We could now see the handover of crypto technology and blockchain infrastructure to more regulated and established institutions. Cryptography and blockchains will continue to be integral parts of the modern economic toolkit. fintechview sat down with Loukas Lagoudis, Strategic Advisor at D-Core, and with over 13 years in investment management and financial service, to discuss the blockchain technology upcoming trends and crypto market movers.
What are the catalysts that could push crypto prices higher in 2023?
Despite the recent events in the crypto world that damaged one of the core foundations of blockchain technology’s promise of trust, there are some market specific and fundamental factors that can push crypto prices and adoption higher. There are some market drivers that lead me to believe that the worst is behind us, as there is not much leverage in the market and most of the forced selling is over as any funds that needed to unwind before year end have largely done so. Nevertheless, the fundamental factors are the determining force that can push crypto into a bullish regime. From a fundamental perspective, regulatory clarity will shape the next market cycle. Policy makers recognize that the problems faced last year were driven by human behavior, not any unique aspect of crypto or blockchain technology. Authorities will cooperate and coordinate with each other, domestically and internationally to overcome the structural vulnerabilities and encourage increasing interconnectedness with the traditional financial system. This element will be a critical factor to improve and strengthen trust in the ecosystem as well as
drive retail and institutional adoption further. In this sense, 2023 seems positioned to become a turning point for the blockchain ecosystem.
Fed policy on interest rate is a “matter for all markets”. A similar pace of higher rates, along with recession fears, will continue to put pressure on the markets and this uncertainty itself drives volatility in the markets for longer. Tighter financial conditions are no friend of markets, especially risk assets so we have to keep an eye on changes in liquidity. The problem is that an expansion in global liquidity tends to loosen financial conditions which favour risk assets, which is the opposite of what the Fed wants right now. If the US and China move towards a more expansionary liquidity environment, (pause rate hikes and
if/when they’ll start signalling a new wave of rate cuts) this would give us stronger conviction that a bottom has truly formed.
Furthermore, a number of idiosyncratic opportunities that could improve crypto adoption during 2023 include but not limited to; a wider adoption of stable coins by regulated institutions, a shift from web2 toward web3, countries taking significant steps towards piloting Central Banks Digital Currencies, rumors that Twitter will become a “Killer App” that would allow crypto payments, the first spot Bitcoin ETF could get approved and finally the Bitcoin “halving”. While these are all realities that influence the state of crypto, there are plenty more good stories that have taken place in the blockchain industry. It is the conjunction of both fundamental circumstances and market drivers of the industry, that together, will force the market direction. Each has accountability.
Will crypto decouple from traditional markets?
From an investing standpoint, the second half of 2022 has changed the outlook on correlations. Whilst central banks’ responses to rising inflation drove negative returns and high correlations in the first half of 2022, the second half of 2022 was defined by digital idiosyncratic events. From the drama of Terra Luna/UST collapse to the Ethereum merge, the endless string of high profile crypto bankruptcies to the FTX fraud, digital assets decoupled from traditional assets. A divergence of digital assets from TradFi took place when investor sentiment shifted away due to distrust and diminished confidence. No one can doubt that the current correlation among digital assets and equities has increase significantly under the current economic regime, however, we expect the majority of digital assets to stop mirroring equities as the interconnectedness between them declines. If you look at the adoption rates, revenues and transaction fees of the likes of Ethereum, Solana and Polygon, or any other tokens that have real revenues, there is certainly a financial component to their value. If those financial values improve, then those tokens will
soar irrespective of TradFi. Also historically, BTC has not been highly correlated with the stock market, so it is always possible that the current strong correlation will start to turn back towards normality.
Will TradFi lose market share to DeFi?
I am a strong believer that DeFi would complement traditional finance (TradFi) and will not replace it. While many are currently discussing 2022 and its failures, they are also recognizing the successful stress test of DeFi during the same period. We didn’t have any collapse of DeFi protocols, none created bad debt in excess of their assets, and none completely wiped out their investors. DeFi is a very young concept but its successful robustness under stress testing increases the likelihood of further usage and adoption. A major theme during 2023 is the inevitable convergence of TradFi and the DeFi industry.
There is a desire for integration on both sides as there are many common goals, like making financial markets faster, cheaper and safer, and a determination to utilise new technologies to solve old problems. The benefits that each side can provide to the other are too compelling to refuse. For example, on-chain foreign exchange is a new model of global value transfer that offers a faster, cheaper, and more efficient alternative for cross-border payments, as indicated by jointly published Circle and Uniswap researchers.
A growing number of well established traditional finance player deepen their involvement in different areas within decentralized finance (DeFi), including lending, custody and derivatives trading. Having access to institutional custodians such as Northern Trust and BNY Mellon, larger players can access the crypto ecosystem, as it lends more trust to push the sector to converge.
What is needed for crypto to achieve widespread adoption?
Blockchain technology is a fundamentally new way to manage data. It changes how people communicate and transact in way that would be difficult to imagine before. Decentralization returns content rights to the author, enhances security, and in general, facilitates a creator economy. Companies that have been around for years have started to appreciate the use of this new technology and it is a fact that better technology is why no one today is listening to music played on CDs. The vast majority of the world’s businesses, applications and services, are established within Web2 and some industries have started to embrace the decentralization offering of Web3. We have seen tokenization of real world assets from financial companies like KKR and Apollo. We have seen some of the big banking players like Goldman, JPMorgan and BNP starting to get involved in some DeFi transactions. On the NFT side, we have seen Fortune 500 companies like Nike, Starbucks and Amazon starting to adopt NFTs. If you look at the total digital asset market, there is only an estimated 300 million people who have ever really interact ed with blockchain. There are individual businesses such as the aforementioned, with more users than the entire digital asset industry. To put this into perspective, Amazon, alone, has 300 million active users. Shifting some of these users into Web3 would be a massive upside of crypto adoption, certainly for layer 1s and layer 2s, but ultimately for DeFi, NFTs and other projects. When Web 2.0 companies start to utilize NFTs
to strengthen customer relationships, a layer-1 protocol can onboard more user, in a single day, than it has done in its lifetime organically. I also need to emphasize that the adoption of digital assets will most likely be correlated with regulation. As regulatory uncertainty influences people’s trust and engagement, a
balanced regulation will likely ensure that the industry protects users and not stall innovation. Large economic regions, like the EU and the US, are making strides to provide initial guidance. Japan and Switzerland have one of the most advanced regulatory environments, as they have already recognized digital assets as legitimate forms of currency. On the other hand, China and India, have taken a more cautious approach and have restricted their use. This creates the need for international coordination, in order to form a more consistent global regulatory framework, that considers the cross-border nature
of crypto assets and minimizes regulatory arbitrage. Developing a comprehensive regulatory framework, to ensure consumer protection and financial stability, is needed for a mass adoption to take place.
Who is Who
Mr. Lagoudis has more than 13 years of experience in investment management and financial services. He has previously worked for various investment banks in London(e.g. Credit Suisse, Standard Chartered, HSBC) and asset management companies as a Risk and Portfolio Manager. More importantly, he has extensive experience in governance and management positions at authorised investment firms. For instance, he has been assessed and approved by the Cyprus Securities and Exchange Commission and the UK Financial Conduct Authority (FCA) to hold positions of Executive Director/Head of Portfolio Management.
He has a BA in Physics, an MA in Risk Management, a diploma in Blockchain Strategy and is also a holder of the CySEC Advanced Certificate and the UK Investment Management Certificate.
