In their State of the Network report, Coin Metrics is examining the major developments that shaped the digital assets industry in 2023 through a “data-driven lens.”
After a challenging 2022, this past year “brought a number of positive developments across the ecosystem, from new institutional entrants to key technical upgrades.”
The Coin Metrics team further noted that while the regulatory environment was arguably the most challenging it has ever been, “especially in the US, the new battles should force clarity on a number of outstanding questions.”
With a period of monetary tightening seemingly coming to an end, both crypto and equities surged in 2023, “with many digital assets posting gains above 100%, including bitcoin (BTC), which has risen 150% in 2023.”
As noted in the Coin Metrics report, the start of 2023, still “shadowed by the FTX collapse, saw a swift turnaround in digital asset markets, with BTC climbing from $16K to $23K in January—a rise that would set the pace for the whole year.”
The report added that “a growing sentiment started to emerge that the worst was over, and that FTX‘s downfall, as a centralized entity, did not tarnish the core principles and potential of public blockchain technology.”
However, events early in the year also “introduced a recurring theme for 2023: escalating regulatory pressure in the United States.”
The report also mentioned that “a series of enforcement actions in Q1 demanded the digital assets industry’s attention, including the SEC‘s Wells notice to stablecoin operator Paxos over Binance’s stablecoin BUSD, leading to the halting of BUSD issuance.”
BUSD’s supply plummeted from “a peak of $16B to $1B over the year, dropping $4B in the week after the notice.”
The BUSD enforcement marked “the beginning of a broader effort from US regulators to rein in offshore exchange giant Binance, the largest exchange by spot volume.”
In March, the US Commodities Futures Trading Commission (CFTC) unveiled “a civil enforcement against Binance and its founder Changpeng Zhao (CZ) for numerous alleged regulatory violations.”
Onshore operators were also “subject to new regulatory scrutiny.”
The Coin Metrics report pointed out that many started “to face intensifying pressure in Q1, with bank regulators publishing informal guidance documents singling out cryptocurrency and cryptocurrency customers as a risk to the banking system, leading some in the industry to go as far as dubbing the actions ‘Operation Choke Point 2.0’—an alleged coordinated, government-led campaign to stymie the digital assets industry in the US.”
Zooming out to the macroeconomic environment, banks began “to face a mundane, but troubling situation of devaluing treasury securities amid a rapid increase in interest rates, most notably impacting the tech-friendly Silicon Valley Bank (SVB).”
SVB’s collapse in March, following a bank run, “not only raised concerns about the health of the US banking sector, but also tested the stability of the USDC stablecoin, as Circle had $3.3B of its reserves held at SVB. USDC’s price briefly dipped before recovering back to the $1 peg following federal assurances which guaranteed all deposits.”
The turmoil led to a reshuffling of “the $100B+ stablecoin market, with a notable shift from USDC to offshore-issued Tether (USDT). It also marked a growing divergence between Tether and USDC, a trend that would continue in 2023.”
The banking crisis further “impacted crypto asset liquidity by disrupting real-time payment systems like the Silvergate Exchange Network and Signature Bank’s Signet, after the two crypto-friendly banks were also shuttered.”
Despite the challenges, BTC and ETH “experienced a rally in the immediate aftermath of the SVB crisis.”
The core features of digital bearer assets “like bitcoin—ease of self-custody, lack of intermediation, and on-chain transparency—became more pronounced than ever, resonating with the original sentiment that led the pseudonymous Satoshi Nakamoto to introduce Bitcoin during the Great Financial Crisis in October 2008.”
This momentum would carry over to Q2, “striking a chord with institutions that began to express greater appreciation for Bitcoin’s unique qualities.”
During Q2, Coinbase secured a significant partnership with BlackRock, “becoming a key crypto-native ally as BlackRock’s chosen custodian in the ETF application, the month of June also saw the SEC launch a landmark case against the leading US exchange.”
The SEC also “accused Coinbase of operating as an unregistered securities exchange and labeled various assets, including SOL, MATIC, and ADA, as alleged securities.”
This action brought the long-standing industry debate “about the distinction between crypto securities and commodities into sharp focus.”
In response, Coinbase swiftly moved “to counter the allegations, and the broader industry is now bracing for an outcome that could significantly influence the future trajectory of the digital assets industry in the US.”
Despite a series of external events both positive and negative, the industry “continued to push ahead this year, advancing with key planned upgrades.”
In April, Ethereum completed its ‘Shapella’ hard fork, which activated “withdrawals of staked ether (ETH) and validators’ accumulated staking rewards.”
The success of the upgrade “eliminated previous liquidity risks associated with staking, and immediately enticed a new surge of staking deposits, a trend that would continue throughout most of 2023. Even as the staking APR currently hovers around 4%, staked ETH has hit 28M, or just under one quarter of the entire ETH supply.”
The second half of 2023 brought “a reinforcing shift, with significant legal victories and the re-engagement of institutions providing a counterbalance to the regulatory pressures of earlier months.”
A revitalization in digital asset markets “unfolded in Q4 as BTC surged over 50%, marking a resurgence in market sentiment and valuations.”
This rebound was driven “by heightened institutional interest, as reflected in the near-record levels (over $5 billion) in BTC futures open interest on the Chicago Mercantile Exchange (CME), a venue preferred by institutional participants.”
The report further noted that this “offered clearer evidence of Bitcoin’s evolving market structure, as investors actively positioned themselves in anticipation of a spot bitcoin ETF and the next Bitcoin halving.”
Accompanying this surge in derivatives market activity, spot volumes escalated to yearly highs.
Supply trends also reinforced “a bullish outlook, with free float supply hitting the lowest levels since March 2017, and only 30% of BTC moving in the past year, indicating a strong holder base.”
These developments collectively “closed a chapter of uncertainty that clouded the industry, paving the way for a more mature and optimistic future for the asset class.”
The strength in digital assets is evident “when we look back at returns by major asset classes in the investable universe over 2023.”
The Coin Metrics report concluded that the “outperformance of crypto-related equities and digital assets shines through, with Coinbase (COIN) a major beneficiary of the market rebound.”
As macroeconomic tides potentially undergo “a shift over the coming months, the digital asset industry is primed for a phase of maturation and expansion.”