Bitcoin and most major altcoins breathed a sigh of relief as 2022, which was a bruising year for crypto markets, came to an end. Last year, Bitcoin prices declined by a whopping 65%, while the total market capitalization of the crypto universe slumped from around $2.3 trillion to slightly below $800 billion. Looking forward, the negative macroeconomic conditions and systemic failures that led to the capitulation of digital coins seem unlikely to abate soon. Thus, are there any signs of optimism in the crypto space?

Cryptos slightly in the green, but no fireworks

The beaten down Bitcoin has started 2023 on a positive note, but there are no significant bullish drivers behind these slight gains. Digital assets experienced a painful drawdown last year, severely impacted by higher interest rates and liquidity draining, with both themes most likely to persist at least in the first half of 2023. Even though Bitcoin’s selloff came in tandem with the significant stock market decline, it seems that this correlation has weakened lately probably due to a range of idiosyncratic risks within the crypto universe, which have further worsened its already gloomy outlook.

A catalyst that probably accelerated declines in cryptocurrency prices is the barrage of systemic failures such as the collapse of the Terra stablecoin, which was followed by a series of bankruptcies, including Three Arrows Capital, BlockFi, Celcious Network and FTX. These recurring blow-ups undermined investor sentiment, which lead to a capital flight towards ‘safer’ risk-sensitive assets such as stocks that are completely regulated and entail intrinsic value. Hence, a potential continuation of the bankruptcy domino within the crypto sphere could open the door for further underperformance going forward into 2023.

Indications of increasing regulatory intervention

Many market participants have argued that the lack of strict regulations is partially responsible for the massacre in crypto markets last year. On Tuesday, the Fed, the Federal Deposit Insurance Corp (FDIC) and the Office of the Comptroller of the Currency (OCC) issued their first joint statement on crypto, prompting banks to increase scrutiny over their transactions with crypto-related firms, which are often susceptible to frauds, legal uncertainty and misleading disclosures. US regulators emphasized that risks associated with cryptos must not spill over to the banking system and financial institutions should improve their risk management procedures to tackle these issues.

On a similar front, the Italian senate approved a 26% tax on capital gains concerning crypto-asset trading activity in its 2023 budget. The new law classifies cryptocurrencies as "digital representations of value or rights that can be transferred and stored electronically, using distributed ledger technology". Framing digital coins in a distinct asset class could be the initial step towards a stricter and more targeted regulatory framework.

Meanwhile, the UK government adopted a tax exemption for foreign investors purchasing digital assets via domestic investment management firms or brokers in its effort to turn the UK into one of the world’s biggest crypto hubs. Could the combination of tighter regulations and increasing adoption lead the crypto market back to some recovery in 2023?

Will the long-lasting consolidation lead to a spike?

BTCUSD has been rangebound for the past two months despite the elevated volatility in both equity and bond markets. Usually, periods of consolidation coupled with low volatility are followed by a significant move when new substantial developments emerge in the markets. In the short term, the king of cryptocurrencies has been battling with the 50-day simple moving average (SMA), where a potential upside violation could result in some gains.

In the positive scenario, should the price jump above its 50-day SMA, initial resistance could be met at the December high of 18,370. Higher, the November peak of 21,470 might prove to be a tough barrier for the bulls to overcome.

On the flipside, should the sideways pattern break to the downside, the recent support of 16,250 could act as the first line of defence, a violation of which could set the stage for the 2022 low of 15,479.