This is the biggest concern for crypto investors heading into the new quarter

Many top cryptos showed resiliency in September, but can that last?

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Key points

  • Interest rates and inflation levels will be major factors determining the crypto market performance in the new quarter
  • Elon Musk’s return to his Twitter deal could fuel greater demand for digital tokens
  • The RBA’s own digital currency trial program commences in December of this quarter

Crypto investors managed to escape much of the pain in the last quarter that afflicted the market in the first six months of the year as markets repriced in the face of fast-rising inflation and interest rates.

Not that most digital tokens shot the lights out.

But many, like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH), did manage to outperform the S&P/ASX 200 Index (ASX: XJO) in Q1 FY23.

Of course, that's all virtual water under the bridge.

The question on cryptocurrency investors' minds now is what to expect in the quarter ahead.

The biggest concern for crypto investors

For some expert insight into that answer, we turned to Josh Gilbert, market analyst at eToro, and Ray Brown, head of marketing at CoinSpot.

Josh Gilbert said that inflation figures out of the United States, the world's biggest economy, will play a critical role in determining the returns from cryptos in Q2.

"The biggest concern for crypto investors moving into this quarter is that inflation continues to stay at stubbornly high levels," he told The Motley Fool.

"If this is the case, the US Federal Reserve will likely hike rates more aggressively in November and December or continue raising rates into 2023."

The pain in crypto and equity markets from the aggressive central bank tightening to bring down inflation, however, comes with a virtual silver lining.

Gilbert said this is "expected to de-risk markets" and "hopefully allow more volatile assets like cryptos to perform better".

However, until the market has some clear indications of an improving macro picture, he expects cryptos will "continue trading in the tight range we have seen in the last month".

Institutional support

Despite a big retrace in digital token prices in the first half of the calendar year, corporate interest in the space remains fairly robust.

According to Gilbert:

Institutional investment into crypto and blockchain technology is still happening, despite market weakness. The bear market may have stopped enterprises from adding crypto to their balance sheets, yet we continue to see names from Blackrock to Gucci and tech behemoths such as Alphabet investing billions into blockchain, Web 3.0 and DeFi innovation.

He added that "the foundations are being laid even during a bear market to help these assets thrive when the market upturn eventually arrives".

Mainstream crypto adoption on the radar

Ray Brown agreed that the outlook for crypto in Q2 will be heavily influenced by rates.

"Factors like high inflation and continued interest hikes could see investors remain conservative," he told us.

"But if practical uses for the new, environmentally-friendly Ethereum blockchain continue to appear – and gain mainstream adoption – investors hope to see movement in the market."

Ethereum, if you're not aware, underwent a major change in September, switching from a proof-of-work to a proof-of-stake protocol. This sees the blockchain using 99% less electricity.

Brown also pointed to the crypto trial program the Reserve Bank of Australia (RBA) is launching in the last month of Q2 as something that could impact the market:

The RBA is in the process of identifying a use case for a central bank digital currency in Australia. A trial program is commencing in December 2022 that will continue through to Q4 of the 2023 financial year.

It's unclear what the precise outcome of this pilot will be. But the growing volume of research into crypto use cases, coupled with inevitable regulatory changes, seems to indicate further adoption of cryptocurrency-based solutions in Australia is on the horizon.

Then there's the world's richest man. Elon Musk, known to have a major influence on crypto prices like Dogecoin (CRYPTO: DOGE) with a single tweet, again looks locked into buying Twitter.

"With Elon Musk also returning to his US$44 billion Twitter deal and his support towards investing in crypto, there is also speculation that he will add tipping and payment functions to Twitter, enabling users to send crypto," Brown said.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin and Ethereum. The Motley Fool Australia has positions in and has recommended Bitcoin and Ethereum. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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