Coinbase crypto exchange is singling out two digital assets that will become a favorite with investors looking for quality.
The US crypto exchange says in its 2023 Crypto Market Outlook report that one of the key themes for next year will be institutional investors seeking quality amid a worsening macroeconomic picture.
According to Coinbase, Bitcoin (BTC) and Ethereum (ETH) will be favored by investors based on among other things the fact that they are tried and tested.
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Within crypto, we expect digital asset selection will transition towards higher quality names like bitcoin and ether based on factors like sustainable tokenomics, the maturity of respective ecosystems, and relative market liquidity. Moreover, many traditional risk assets still seem rich, and the investment theses for cryptocurrencies like BTC and ETH have not fundamentally changed in our view, which could eventually open up some key value opportunities.
The US digital asset exchange says that the prices of cryptocurrencies will likely continue to correlate to other risk assets.
We assign a low probability that crypto performance will decouple from traditional risk assets in the first few months of 2023, particularly without a differentiated catalyst.
On the competition among smart contract-enabled blockchains, Coinbase says that Ethereum’s successful transition to a proof-of-stake consensus mechanism has reinforced its ability to continue being a leader among layer-1 blockchains.
Ethereum’s successful Merge of its consensus and execution layers in September 2022 has also strengthened the case for ambitious future upgrades, despite the trend towards long-term core protocol ossification.
In our view, this supports the fundamental narrative for Ethereum as a leader in a multichain world, particularly since nearly all networks are competing for the same pool of users and capital.
Yet, despite the uncertainty surrounding the potential fallout, there are important characteristics that distinguish this market from the previous crypto winter. For one, institutional crypto adoption remains firmly entrenched. Many investors take a long-term perspective and recognize the cyclical nature of these markets. Rather than stepping back, they are using this environment to hone their knowledge and build the infrastructure to prepare for the future.
But no one is arguing that digital assets haven’t faced an important setback. The total market capitalization of cryptocurrencies is currently around US$835 billion, down 62% from $2.2 trillion at the end of 2021, albeit still high relative to most of the asset class’ history. Comparatively, the Nasdaq is down 30% since the end of 2021 and the S&P 500 down 18%.
From a Sharpe ratio perspective however, crypto’s risk-adjusted return actually performed in line with US and global stock indices through 2022 and did much better than US bonds. Prior to the fallout in November, an equally-weighted basket of BTC and ETH offered a negative Sharpe ratio of 1.08 compared to an average negative return of 0.90 for US stocks. This is a significant deviation from the trend observed in the last crypto winter, when digital assets underperformed nearly all traditional risk assets for the duration of 2019 and into early 2020.