2023: An Unpredictable World
"Anytime you have a 50–50 chance of getting something right, there’s a 90 percent probability you’ll get it wrong," said journalist Andy Rooney.
There’s a lot of truth to that because of the lesson from the book The Black Swan. The lesson is that the world is a surprising place; unpredictable events have significant impact on our lives. There’s always information we do not and cannot know. As such, it's often more useful to prepare for the full range of outcomes instead of trying to make a specific prediction - especially when there's a high degree of uncertainty.
That said, predictions are interesting and I read them. Last year's crypto prediction articles overwhelmingly called for increasing crypto prices and unicorn startup valuations. At the time, I said that "it seems to me that folks predict what they want to happen, without enough respect for the turbulent times we live in." Surprisingly to me, I was very right. But now we have a relentless stream of bankruptcies, war, and recession fears. However, if you squint, there are silver linings for crypto.
So I'll repeat my approach last year and, instead of making specific predictions, I'll focus on the major plus-or-minus catalysts that will largely determine industry outcomes.
US Regulation
Historically one of the biggest challenges for crypto companies and investors has been lack of regulatory clarity for operating centralized crypto businesses and launching tokens compliant with securities laws. The question up until last year was if the government cared enough to address these concerns.
Well, good news: crypto regulation is finally a priority for the US government and SEC. Earlier this year, The White House issued its first Comprehensive Framework for Responsible Development of Digital Assets and in December the SEC chair said they are accelerating its crypto actions. Unfortunately it's coming on the heels of the FTX blowup with millions of consumers hurt. But the end result will be better-understood operational risk for crypto business and possibly new government oversight that will lead to higher consumer confidence. The downside, however, is that it will likely add operational costs to remain in compliance, and restrict certain business activities.
The question now is if the government will make it easier or more challenging for companies to succeed in the US. Will it provide the right controls to protect consumers? Will it be too restrictive forcing companies and products to leave the country? Will builders and investors see this as a signal of legitimacy or as a warning to stay away?
US Economy
Crypto is a high-risk asset class. The more money people or investors have and the more positively they view the future, the more they're willing to buy risky assets. And visa versa.
This year did not help. The S&P is down 20%. People's assets are now worth less and there's consensus we'll face a recession in the next 12-18 months. The question is how disruptive of a downturn is this and how long will it last?
Legendary investor Stanley Druckenmiller has been right in predicting the past 18 months and he is not optimistic about next year. He confirms that we were in a bubble inflated by the zero-interest rate environment and years of Fed money printing. The Fed was wrong that inflation would be "transitory," and instead it remained at 40 year highs between 6-9% for the whole year. They then raised rates seven times progressively from about zero to 4.5%. This ignited the recession fears and slower growth expectations which led to asset price decline.
Crypto got hit hard: total market cap decline of 65%. Major layoffs from companies like Coinbase (18%), Opensea (20%), Dapper Labs (22%), and Kraken (30%). Collapses of billion-dollar businesses like TerraLuna, Three Arrows Capital, Voyageur, Celsius , BlockFi and FTX.
But there are signs the Fed policies are starting to work: The CPI inflation rate ticked down in November for the first time since June and the Fed slowed its latest rate increase from 0.75% the past four times to 0.5% in December.
Taiwan and Ukraine
Geopolitical crises are wild cards that cause disruptions and fear. Many investors reduce financial risk for fear something bad will happen.
The Ukraine-Russia war is a tragedy. There are reported 200,000 casualties. It's caused significant global energy disruptions. And Putin has warned of nuclear war which would send the world to a panic. But he also said recently he is willing to negotiate (though unclear if he's serious.) If this resolved, people may re-open their reserved stances.
Taiwan remains the same as I wrote last year: Smart people like Ray Dalio and Balaji believe Taiwan is an escalating battleground for the US and China, who are already engaged in economic and technology warfare. Heightened conflict and physical war could lead to fear and a flight away from new product innovations and high-risk investments like crypto and NFTs.
The conflicts could continue or get worse. But also they could de-escalate.
NFT Products and Adoption
NFTs could be the trojan horse for crypto this year. They may be down in market cap, but they could explode in user adoption. The opportunity is to appeal to consumers instead of investors; to provide art, community, merchandise and status instead of financial returns.
A few trends already in development could drive significant user adoption: 1) Deeper social media integrations from Instagram, Twitter, Reddit, TikTok and Snap 2) Consumer products from Starbucks, Nike, Disney, and all the major sports leagues 3) A breakout NFT-based game 4) Integrations through mobile app stores.
All that said, the regulatory enforcement actions and shaky economy could scare away new product launches.
This all seems 50-50: bad on the surface with some silver linings. My one hard prediction is that there's a 90% chance that I’ve missed the most significant catalyst for the industry.
So I’m preparing for the worst, but hoping for the best. Wishing you good luck as we go through it this year.