[2023 Virtual Asset Outlook] Coin Market Swayed by US Interest Rate Hike Steps

Fed Giant Step Causes Sharp Declines in Bitcoin and Others
"Price Will Rise If Speed Is Adjusted"
Restoring Trust Lost from Luna and FTX Crises Is Also Important
Ripple-SEC Lawsuit Over Security Status Draws Attention

[Asia Economy Reporters Jungyoon Lee, Myunghwan Lee] The outlook for the virtual asset market next year is not entirely bright. As a representative risky asset, it is sensitive to changes in the US benchmark interest rate, making a sharp rebound difficult, according to prevailing assessments. Furthermore, investor distrust in the market remains high due to the Luna incident and the bankruptcy filing of the global virtual asset exchange FTX. However, some opinions suggest that if the pace of interest rate hikes slows and efforts to restore market confidence are added, a bottom breakout is possible. Movements to define and regulate virtual assets are also analyzed as positive for the coin market.

Benchmark Interest Rate Hits Coin Prices Hard

According to CoinMarketCap, a global virtual asset market status relay site, the price of the representative virtual asset Bitcoin has fallen more than 60% compared to the beginning of the year and is moving in the $16,000 range this month. Altcoins, including Bitcoin which accounts for about 40% of the coin market capitalization, have sharply declined whenever there were forecasts of an increase in the benchmark interest rate. On June 15 (local time), the Federal Reserve (Fed) implemented a giant step (a 0.75 percentage point increase in the benchmark interest rate), and Bitcoin prices plunged around that time. Until five days before the hike, Bitcoin maintained the $30,000 range, but on June 19, it dropped to over $12,000, recording the $18,000 range. Bitcoin prices also fell around the giant steps taken on September 21 and November 2.

One of the biggest factors affecting virtual asset prices is the benchmark interest rate. Professor Hyungjoong Kim of Korea University Graduate School of Information Security explained, "The virtual asset market accounts for less than 1% of the entire financial market. Even if problems occur within the virtual asset market, the impact on the overall economy is minimal, but when the entire financial market moves, the coin market moves more significantly."

Ethereum, the leading altcoin, also completed the 'Merge Upgrade' on September 15, but its price dropped significantly as the Fed's giant step forecast emerged. The Merge Upgrade mainly involves switching from the proof-of-work (PoW) method, where participants receive coins as rewards for computer computations verifying the blockchain, to the proof-of-stake (PoS) method, where participants stake virtual assets on the blockchain and receive coins as rewards for validation and creation.

However, there are forecasts that virtual asset prices will recover if the Fed adjusts the pace of tightening. Seokmoon Jung, head of the Research Center at Korbit, said, "Currently, the virtual asset market capitalization is about $800 billion, but (next year) it is expected to rebound to between $1 trillion and $1.5 trillion," adding, "This is because the Fed's tightening policy is expected to slow down next year, increasing demand for risky assets."

The fact that institutional investors have begun to enter the coin market is also cited as a positive factor. Kyungpil Jang, research team leader at the virtual asset research platform Zangle, emphasized, "The biggest difference from before and this year is institutional investors. In fact, the proportion of institutional investors in Coinbase's trading volume has risen to over 80%."

Restoring Trust to Win Back Investors

Restoring trust in coins, which have fallen to the ground, is also an important factor for virtual asset price increases. Imsun Lee, head of the Research Center at Bithumb Economic Research Institute, explained, "The benchmark interest rate hike triggered the decrease in virtual asset market capitalization, but the direct causes of the sharp price decline were crypto-specific factors such as the Luna incident and the FTX liquidity crisis," adding, "While the stock market has partially recovered recently, the virtual asset market has been relatively slow to recover." She further evaluated, "Restoring trust is an important factor for price rebounds as it can induce inflows of new funds, including institutional investment funds."

The Luna coin, which once exceeded $100, shrank to $0.00016 after the crash in May. This led to distrust in blockchain and its ecosystem, fiat currency, and pegged stablecoins, and the ripple effect spread throughout the intertwined coin market. Bitcoin prices plunged from the $39,000 range to the $28,000?$30,000 range. After the FTX liquidity crisis, the related coin FTT crashed from $22 to $1.39. Coin lending companies faced consecutive crises, and Bitcoin prices, which had maintained the $20,000 range, fell to the $15,000 range.

Advice has been given that institutional frameworks are necessary to increase trust. Lee said, "Regulation may temporarily suppress liquidity within the virtual asset market," but added, "From a long-term perspective, virtual assets, which were in a gray area, will gain status as formal asset classes and this will be an opportunity to broaden the demand base."

Ripple-SEC Lawsuit Also a Key Event

The lawsuit between Ripple and the US Securities and Exchange Commission (SEC), which has been ongoing for about two years over whether Ripple coin is a security, is also an important factor that could change the coin market landscape next year. Since the proportion of domestic investors holding Ripple is known to be high, the domestic coin market is also on high alert.

The direction of virtual asset regulation in the US is expected to be determined depending on the lawsuit's conclusion. Professor Kihoon Hong of Hongik University's Department of Business Administration said, "The SEC's authority will be determined depending on the lawsuit outcome. If the SEC wins, the whole world will follow, but if it loses, the regulatory momentum being pursued may be lost."

Lee also said, "The lawsuit is expected to conclude before March 2023, but predicting the result is difficult," adding, "If the SEC wins, most existing altcoins are likely to be classified as securities." He continued, "If Ripple wins, various virtual assets will be freed from SEC's securities-related regulations and will later fall under the jurisdiction of the US Commodity Futures Trading Commission (CFTC) according to legislation. If under CFTC jurisdiction, the regulatory intensity felt by the industry is expected to be less than that of the SEC."