From the Shanghai upgrade to U.S. regulation: Watch these 5 events to see where crypto markets are heading in 2023

The crypto market is in a lull as the industry dusts itself off from the FTX collapse and investors wait for the Federal Reserve to signal it may be time to jump back to risk assets. Bitcoin, which leads the crypto market, is up 5% already this month but has a long way to go to recover the more than 60% it lost in 2022 and the roughly 70% it needs to meet its all-time high, according to Coin Metrics. Unlike in previous crypto winters, however, macro forces outside the crypto industry are the biggest drivers of the market. Many believe it was the Fed, with its inflation-fighting rate hiking plans, that pushed crypto into the well and that it'll take a reversal by the Fed to turn the market around. BTC.CM= 1Y mountain Bitcoin, 1 year Investors aren't entirely put off by crypto, however, despite the big plunge in prices and the allegations of wrongdoing across exchanges and lenders. While they wait on the Fed, there are several themes and developments they're closely monitoring for c lues about what to expect when things, they hope, aren't so bad anymore. Remember, things aren't straightforward for stocks either. And that will impact crypto prices. Many investors and analysts on Wall Street are anticipating risk assets won't be out of the woods until the second half of the year, and even then, they see flat to modest growth in the S & P 500. Meanwhile, Tom Lee, Fundstrat's head of research, said this week that he expects a 20% gain in the S & P . Mike Wilson, chief U.S. equity strategist at Morgan Stanley, on the other hand, is calling a more than 20% drop . Here are five stories to watch in 2023: 1. The Shanghai upgrade Ethereum developers are gearing up for the network's next big upgrade, the "Shanghai" upgrade, which has a target release of March 2023. The fork follows the Ethereum Merge , the September transition of the network from proof-of-work to proof-of-stake. The Shanghai upgrade would allow withdrawals of staked ether. Ahead of the Merger this was increased volatility. That likely will occur again, Oppenheimer analyst Owen Lau said. "The problem right now is if you stake ether into the network, your ether will be locked until the Shanghai upgrade," Lau said. "The upgrade is important because at minimum, the whole system will free up the locked, or staked, ether so you can use it for something else. "There will be more liquidity of ether after the Shanghai upgrade," he added. "People may trade more, people can speculate, and the network will be faster. Theoretically speaking, that should help drive more use cases going forward." 2. Ethereum as a deflationary asset Over the past week, Ethereum has flipped "deflationary," meaning the supply is declining as opposed to increasing, as it historically has. That's a psychological threshold for the crypto space. If it persists, it could have a bigger impact on order books, which most people expect will elevate prices, according to Michael Rinko, venture associate at AscendEX. Pos t-Merge, Ethereum's new model incentivizes people to stake their coins, which does not involve expensive hardware computing. "It's cheaper to stake than it is to mine," Rinko said. "Because of that, Ethereum's emissions dropped off substantially post-merge and now what everyone's been watching is whether or not the usage of the Ethereum network will reach a level where the fees that are being burned exceed the amount of ether that's being created." 3. Bitcoin recovered from Mt. Gox It's been almost a decade since the collapse of Mt. Gox but the expected distribution of the bitcoin recovered from the exchange's 2014 implosion could be a near-term headwind for bitcoin investors. Approximately 141,600 BTC and 142,800 BCH are due to be sent to claimants or sold in the market. "This is good news in that it hopefully gives those that wish to sell a chance to potentially get more for their bitcoin," said Noelle Acheson, economist and author of newsletter Crypto is Macro Now. "It could also mitigate any sell pressure should more choose to wait for the next cycle upswing before offloading." 4. The DCG empire Most participants and observers of the crypto market agree it will take time for the industry to bounce back from the implosion of FTX. But there was another big collapse earlier in the year and the market is still monitoring how far and wide the contagion from the demise of Terra could spread. Genesis Capital, a crypto-lending subsidiary of Digital Currency Group and the sister company of Grayscale, was a large counterparty to Three Arrows Capital, which went down with Terra , as well as FTX and other large lending and trading desks. In an open letter Tuesday, Gemini President Cameron Winklevoss accused DCG CEO Barry Silbert of engaging in "bad faith stalling tactics" and comingling funds. Gemini has been attempting to recoup $900 million of client funds, which it lent to Genesis to generate yields for its interest-bearing accounts. DCG is "now one of the most sys temically important companies in the crypto ecosystem," according to Messari CEO Ryan Selkis. "Until we see a bit more color around the DCG-Genesis resolution, it's tough to say the credit crisis has fully resolved." 5. U.S. regulation Many in the crypto industry have longed for clear guidelines from U.S. regulators on how to operate, but as the industry evolves to include more and more diverse products and services, Washington has not kept up. With so many investors getting hurt in 2022 from the mistakes of centralized crypto companies, the drumbeat for regulatory clarity is getting louder. Investors as well as entrepreneurs in the space are eagerly waiting for Congress or the Securities and Exchange Commission, or both to issue laws and guidance on how crypto assets will be regulated. If that were to happen, it'd be a positive catalyst for the market, according to Lisa Ellis, senior analyst at MoffettNathanson. "It is increasingly evident, especially in the wake of the FTX collaps e, that regulatory clarity in the U.S. – which agencies are regulating crypto assets, and in what way – is likely a gating event for the industry to regain momentum," Ellis said. Still, the details will matter. There is a fear that Washington could over regulate in a harmful way. Cryptocurrencies were originally designed as alternatives to the traditional financial system. It's difficult to apply the rules of official system to it, and also hard to foresee the potential consequences of made-to-fit regulations. Another real possibility is that Washington continues to delay any concrete updates, which will keep the industry in limbo. "With a split Congress and a SEC that has so far focused primarily on enforcement actions, the timeline for attaining regulatory clarity is uncertain," Ellis added.