As we look towards 2023, there are many exciting developments taking place in the Web3 ecosystem that have the potential to drive significant momentum. It’s clear that innovation has not plateaued, and the crypto asset industry is here to stay. We are likely to see continued growth and adoption in the coming years, despite a short-term deceleration due to the events of 2022. Currently, there are over 200 million people who own Bitcoin, Ethereum, and other crypto assets, and this number is only going to rise as more and more people become interested in the space. This adoption is driven by a variety of sectors, and in this article, we will highlight some key growth areas to keep an eye on, including Bitcoin, CO2 tokenization, Web3, the metaverse, and digital securities. These areas are just a few examples of the many opportunities that lie ahead in the Web3 ecosystem, and we can't wait to see what the future holds
Authors: Maximilian Bruckner, Prof. Dr. Philipp Sandner
2022 was a challenging year for crypto enthusiasts, but there is reason to be optimistic about the possibilities in 2023. One key factor driving this optimism is the growing adoption of crypto assets. While Bitcoin has long been the dominant player in the space, it's clear that the crypto ecosystem has grown to encompass much more than just Bitcoin. Today, there are a wide range of other ecosystems that are thriving, including smart contract platforms, decentralized finance (DeFi), CO2 tokenization, stablecoins, financial inclusion applications, digital securities, and asset tokenization.
The development of these new ecosystems is driven by innovation, and the emergence of a number of projects that are focused on clear missions and values. Those who doubt the innovation and coming disruption of legacy systems should take a closer look. Despite the ongoing recession and geopolitical tensions, we believe that these areas of the crypto ecosystem have the potential to drive further adoption and growth in 2023. However, it's important to remember that growth may not be as rapid as some may hope, especially in the first half of the year. In this article, we will take a closer look at some key areas of the crypto ecosystem that are poised to drive growth in 2023, and explain why we believe they will be so influential
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Web3: From Bitcoin to Metaverse
Web3 is a rapidly evolving field that encompasses a wide range of technologies and ecosystems. “Web3” has recently become a collective term for the next generation of the Internet. It goes beyond the capabilities of Web2, allowing users not only to create and share content but also to digitally represent and transfer value without the need for traditional financial intermediaries. This technology is already a reality, with innovations such as Bitcoin, Ethereum, Stablecoins, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), Metaverse, and Regenerative Finance (ReFi) being some key examples of the Web3 ecosystem. These buzzwords may seem futuristic but they're just the tip of the iceberg of what's possible with Web3, as these ecosystems continue to evolve and grow more substantial.
To provide some context: The evolution of the Web3 ecosystem is best illustrated by the progression of technology in the space. The figure below gives an overview of this progression, which started with the invention of Bitcoin in 2009. It's quickly followed by the emergence of smart contract platforms, most notably Ethereum in 2015. Over the next few years, dozens more platforms would appear, many of them based on the functionalities first seen on Ethereum.
The emergence of tokenization technology through smart contracts also led to the development of stablecoins in 2018. Stablecoins such as Tether and Circle are pegged to the value of the US dollar and allow for instantaneous cross-border transactions. Significant use cases here can be found where other currencies or financial systems have failed, such as in Lebanon. Stablecoins enable the capital and financial markets of the future in the form of DeFi. Protocols have been created to allow for lending, insurance, trading, and derivatives based on these assets.
One of the latest trends to emerge in this space is the rise of Non-Fungible Tokens (NFTs) in 2021. These tokens are unique and cannot be replaced by an identical item, and they enable the representation of unique assets. What started with colorful images is expected to expand to other areas such as the metaverse. These virtual worlds and experiences burst into the public eye in 2022. It's hard to predict exactly what the future holds for the Web3 ecosystem, but with the emergence of new use cases and opportunities, it's exciting to see what's next to come.
Figure 1: The case for crypto sector indices
When examining the Web3 ecosystem, it's important to note that the different sub-ecosystems build upon each other, rather than replacing one another. Each new sub-ecosystem adds to the capabilities and possibilities of the previous ones, creating a growing and interrelated ecosystem. This also means that new sub-ecosystems can be expected to emerge in the future, building upon the existing ones. From the progression of technology illustrated in the figure, it's clear that the entire crypto ecosystem, or Web3, is expanding and growing. It's a complex and ever-evolving field, but by understanding how the different sub-ecosystems build upon each other, we can gain insight into where the industry is headed, and what we can expect in the future.
Expectations for 2023 regarding Web3, Bitcoin and Ethereum
The crypto ecosystem, or Web3 space, is expected to continue growing. Currently, over 200 million people own Bitcoin and other digital assets, and it's estimated that number could reach 300 million by early 2024 and potentially 400 million by 2025. This growth is driven by individuals who see the benefits of using digital assets for themselves – like using US dollar stablecoins in countries like Lebanon.
Bitcoin has several strengths, one of which is its immutability. Its code base can only evolve incrementally, ensuring that it remains true to its original character. Additionally, it has strong brand recognition and is often seen as “digital gold”. Although its image took a hit during the crypto crisis of 2022, its core value as a decentralized and transparent form of money was not affected. Bitcoin's monetary policy is simple and unchanging, there will never be more than 21 million Bitcoins, and as that limit gets closer, the rate of new Bitcoins being distributed will decrease. It's also worth noting that while adoption of Bitcoin may continue, it may be slower due to the crypto crisis, and the price of Bitcoin may fluctuate between $18,000 and $25,000 during 2023. However, those who understand Bitcoin see it as a long-term investment, with a horizon of at least 5-10 years. The fundamental arguments for Bitcoin's potential as digital gold remain strong, and should weather any short-term market fluctuations - even if Bitcoin has lost its luster for the moment.
Ethereum is the leading smart contract platform and is likely to remain so. With a large developer community, strong reputation, and established ERC standards, it has a robust ecosystem. It is expected to perform well compared to other smart contract platforms. For the time being, a correlation to Bitcoin can be expected to remain. Nevertheless, there is potential for Ethereum to surpass Bitcoin and become the top digital asset in terms of market capitalization in the future.
Stablecoins will become increasingly popular. The example from Lebanon was cited above; there are already several similar use cases today. More applications can be expected to arise in 2023, particularly for US dollar stablecoins. This primarily concerns US dollar stablecoins. Other currency stablecoins such as the Euro have yet to gain widespread use. Stablecoins and Central Bank Digital Currencies (CBDCs) are becoming key players in the digital currency landscape.
Decentralized Finance (DeFi) demonstrated its potential during the financial crisis of 2022, with assets being traded without interruption, and positions being liquidated smoothly. DeFi's ability to provide liquidity as an essential element of financial infrastructure was evident. The FTX fraud case highlights why DeFi is becoming increasingly important. In 2023, adoption of DeFi is expected to continue, but primarily from specialized funds and asset managers, rather than regulated financial institutions. While DeFi will continue to function well in 2023, significant growth momentum is unlikely to come from DeFi.
Non-Fungible Tokens (NFTs) gained attention in 2021-2022 as a means to create and sell digital art. However, while some NFTs can be considered digital art, the majority of NFTs produced were not considered scarce - a key attribute of art. Despite this, NFTs have valuable features such as tokenization and trading, making them an interesting technology. While it's unlikely that NFTs alone will drive significant growth, it can be expected that the metaverse will heavily rely on NFT approaches. It's worth noting that consumer goods and luxury goods manufacturers such as Nike, Adidas, and Gucci have shown interest in NFTs and have conducted some experiments and sales.
The metaverse, currently known only from early test environments like Sandbox and Decentraland, is expected to see a significant increase in its user base in the next few years. Adoption will spike massively once dozens of virtual worlds currently in development reach the level of quality found in computer games. This is expected to happen from mid-2023 onwards. While some tech companies like Facebook are working on a single metaverse, others are working on multiple virtual worlds in a decentralized manner.Because virtual worlds are visual in nature, they should expect an over proportionate amount of media representation. This makes them more easily accessible to the masses and could lead to new people being attracted to the Web3 space. Additionally, the metaverse may drive growth for visual sectors like fashion, architecture, and creative industries. The metaverse has the potential to achieve what computer games have accomplished for years: adoption by millions of people.
Regenerative Finance (ReFi) - or tokenization of carbon credits - is an emerging field that focuses on using tokenization to track CO2 certificates and finance other ESG-related projects, such as those that reduce carbon emissions, on a token basis. In the past two years, a growing number of companies and projects have emerged in this space, and it is expected to see significant growth in 2023. While this area may not be immediately accessible to a broad audience due to a lack of visual components like the metaverse, it is gaining attention for its environmental impact.
Identity and privacy: Another area that is gaining traction in the Web3 world is the intersection of identity and privacy. As the metaverse expands, there is a growing need to establish and protect identities within virtual environments, while also ensuring that personal information is kept private. These two areas are not mutually exclusive, and both will see continued growth in 2023 and beyond.
The gaming industry has only scratched the surface of web3 so far, and this trend is expected to accelerate massively in 2023. The integration of digital assets, such as non-fungible tokens (NFTs), into gaming worlds is becoming increasingly popular. Gaming is one of the most profitable sectors in the entertainment industry and is particularly appealing to young audiences. This has led to increased interest in the metaverse and NFTs in the gaming world, creating a potential gateway for introducing these technologies to a wider audience.
The use of blockchain technology is starting to gain traction in the financial inclusion sector, which aims to provide financial services to under-banked and unbanked populations. One key enabling factor for this is the use of stablecoins, which are digital assets pegged to the value of a fiat currency, such as the US dollar. This allows people anywhere in the world to send or receive value in a stable currency using simple technologies like QR codes and internet-enabled smartphones. This aligns with the growing trend towards mobile-first financial services, and it has the potential to open up blockchain technology to populations in regions like Africa, Southeast Asia, and South America. As more people in these regions gain access to stablecoins and other blockchain-based financial services, they will also become better equipped to participate in the Web3 economy. IT workers in Africa, for example, can gather skills with using payments in stablecoins and receive an education in web3 technologies, thereby becoming part of a global Web3 job market. While this may sound like some sort of utopia, the signs are already pointing in this direction, and it is expected to become reality from 2023. So, this sector can also contribute to the growth of the Web3 economy.
Expectations for 2023 regarding digital securities and tokenization of assets
Digital securities and the tokenization of tangible assets, such as real estate and commodities, have seen significant growth in 2022 and are expected to continue to gain momentum in 2023. The ability to tokenize shares and make them tradable on liquid markets is a big step forward in the industry. The increasing participation of traditional banks and securities services companies in this sector will also help drive growth. However, it's important to note that the growth of this sector is likely to be slower and more measured compared to other areas of the Web3 economy. The process of “institutional adoption”, or the adoption by major financial institutions, can be slow and is often challenged during times of economic uncertainty. This could impact the rate of growth in this sector. Despite this, tokenizing and trading real-world assets using blockchain technology is seen as a major step forward, and it is expected to gain more widespread acceptance over time.
The need for secure custody solutions will continue to grow as blockchain-based assets, including both crypto assets and tokenized assets, become more prevalent. This is turning into a standalone sector of the industry. Many providers are entering the market. The regulatory clarity on crypto custody in Germany and the EU has given European providers a strong location advantage. It remains to be seen if the first BaFin-licensed custodians in Germany will maintain their early mover advantage in the long run as the market becomes more competitive.
The lack of regulatory clarity surrounding crypto and Web3 assets is currently the biggest risk for new and existing users, as seen with the recent difficulties faced by FTX. This lack of or poor regulation is also a major barrier to further adoption, particularly by institutions. However, it is hoped that policymakers will learn from the disruptions of 2022 and take steps to establish clear and effective regulations in 2023, particularly in the US. Most of the crypto industry is eager for good and clear regulation that allows for innovation to continue. This is important for policymakers to consider as well, as overly restrictive regulation could lead to businesses and innovation moving to more favorable jurisdictions. Nations with too tight of a regulatory framework will miss the opportunities to capitalize on a rapidly growing global industry.
In 2023, investors in the crypto market can expect to see a new trend: passive indices for crypto assets. Due to the technical complexity and regulatory uncertainty surrounding crypto, new investors are increasingly looking for simpler, more regulated ways to invest in this emerging market. Similar to how index-based ETFs have grown in popularity in the equity space, passive indices for crypto assets will provide a more familiar and easy-to-use option for investors. These indices can be made available as ETPs on exchanges such as XETRA, providing a retail-ready and liquid way for investors to gain exposure to the crypto market. In 2023, there will be a variety of offerings, allowing investors to invest in different sectors of the crypto market – just like buying an index-based automotive, chemical, or tech sector ETF. You can read more about the 21e6 Crypto Sector Indices here.
The digital euro, which can take the form of either Euro stablecoins or ECB-based digital currencies, is still in early stages of development. In 2023, it's unlikely that there will be significant progress made on either variant. Currently, stablecoins are primarily dominated by the US dollar, and this trend is expected to continue. MiCA regulations make it difficult for European competitors to bring a Euro stablecoin to market. A digital euro issued by the ECB is also still some time away, with the ECB planning to formally decide on its development in the summer of 2023. As a result, EU-based crypto investors will likely have to continue to use the US dollar as their primary fiat currency for the time being.
Conclusions & Outlook
2022 is over, and that's a good thing. The crypto industry is beginning 2023 during a tough market phase, commonly known as the "crypto winter”: The fundamentals of the crypto world remain unchanged, though: DeFi is working as expected, Bitcoin and Ethereum appear to be stable in the long term, US dollar stablecoins are gaining traction, educational initiatives from reputable universities are increasing, and job opportunities in the crypto field are expanding.
It's important to remember that the prices of Bitcoin and Ethereum are determined by supply and demand. A decrease in demand during a global crisis and due to increased interest rate is not unexpected. Therefore, it's not accurate to declare an entire industry dead based on a price fluctuation. The topics and trends discussed in this article have the potential for significant innovation and disruption - some of which we'll see more of in 2023.
In 2023, we don't anticipate growth and adoption from large corporations or institutions. Instead, it will be driven by the same group that has propelled the crypto industry thus far. One of the main reasons for this is the lack of regulatory clarity, as well as corporate politics, lack of understanding about Web3, and fear of reputational harm. But this is nothing new. Ryan Selkis said it best back in 2021: "[The crypto industry] built a $2 trillion financial market from scratch in less than a decade with absolutely no institutional help and active encumbrances from the government.” This foundation remains solid in January 2023 and is the launchpad for continued growth of the industry as a whole..
21e6 Capital is a Swiss investment advisor, connecting professional investors with tailor-made crypto investment products. We focus on risk management of crypto and digital asset exposure for family offices and institutional investors. Our expertise in crypto asset management stems from a team combining decades of experience in traditional financial services with native and in-depth knowledge in digital assets.
21e6 Capital has analyzed over 1,000 crypto hedge funds across the world and condensed them into a selection that can yield crypto-exposure with minimized downside risk. Our risk management solution, provided by OpenMetrics Solutions, is also trusted by the largest Swiss pension funds.
The 21e6 Capital team builds upon strong academic roots with a track record of leading crypto asset and decentralized finance (DeFi) publications and research, ensuring state-of-the-art crypto investment solutions for professional investors, family offices and asset managers.
Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was ranked among the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. He has been a member of the FinTech Council and the Digital Finance Forum of the Federal Ministry of Finance in Germany. He is also on the Board of Directors of FiveT Fintech Fund, 21e6 Capital and Blockchain Founders Group - companies active in venture capital financing for blockchain startups and crypto asset investment management.
Maximilian Bruckner is Head of Marketing & Sales at 21e6 Capital AG. Prior to this, he was engaged as Executive Director of the International Token Standardization Association (ITSA) where he focused on research and classification of crypto assets according to the International Token Classification (ITC) framework. He was heavily involved in the creation of the world’s largest token database for classification and identification data on tokens (TOKENBASE). Maximilian did academic research in close consultation with Prof. Dr. Philipp Sandner. You can contact Maximilian via e-mail at email@example.com to request more information on 21e6 Capital AG or ask any questions regarding this article. You can also follow Maximilian on LinkedIn (https://www.linkedin.com/in/max-bruckner/) to stay up to date.
This article is an informational document and does not constitute an investment recommendation, investment advice, legal, tax or accounting advice or an offer to sell or a solicitation to purchase any securities and therefore may not be relied upon in connection with any offer or sale of securities. The views expressed in this letter are the subjective views of 21e6 Capital personnel, based on information which is believed to be reliable. Any expression of opinion (which may be subject to change without notice) is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.
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