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

Crypto investors managed to avoid much of the pain in the last quarter that hit the market in the first six months of the year as markets repriced amid rapidly rising inflation and interest rates.

Not that most digital tokens have lost their luster.

But many like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPT: ETH), managed to surpass S&P/ASX 200 Index (ASX: XJO) in Q1 FY23.

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

Question on cryptocurrency on investors’ minds now is what to expect next quarter.

The biggest concern of crypto investors

For this expert answer, we reached out to Josh Gilbert, market analyst at eToro, and Ray Brown, head of marketing at CoinSpot.

Josh Gilbert said this inflation figures from the United States, the world’s largest economy, will play a crucial role in determining crypto returns in Q2.

“The biggest concern for crypto investors going into this quarter is that inflation continues to be high,” he told The Motley Fool.

“If that’s the case, the US Federal Reserve is likely to raise rates more aggressively in November and December or continue to raise rates through 2023.”

The pain in crypto and equity markets due to aggressive central bank tightening to reduce inflation, however, is practically a good underlay.

Gilbert said it is “expected to de-risk the markets” and “hopefully allow more flying assets like crypto to perform better.”

However, until the market sees clear signs of an improving macro picture, he expects the crypto to “continue to trade in the narrow range we saw last month.”

Institutional support

Despite ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​first​​​​first​​half​​of​​the​​first​​half​​of​​a​​calendar​​year,​​the​​interest​​of​​corporations​​in​​the​​space​​is​​strong.

According to Gilbert:

Institutional investment in crypto and blockchain technology is still happening despite market weakness. The bear market may have stopped businesses from adding crypto to theirs balancesbut we continue to see names from Blackrock to Gucci and tech giants like Alphabet investing billions in blockchain, Web 3.0 and DeFi innovation.

He added that “the foundations are laid even during a bear market to help these assets thrive when the market eventually rises.”

Mainstream crypto adoption is on the radar

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

“Factors such as high inflation and continued interest rate hikes could force investors to remain conservative,” he told us.

“But if practical applications of Ethereum’s new, green blockchain continue to emerge — and gain mass adoption — investors hope to see movement in the market.”

Ethereum, if you don’t know, underwent a major change in September, switching from a proof-of-work protocol to a proof-of-stake protocol. This shows that the blockchain uses 99% less electricity.

Brown also noted that the crypto test program that the Reserve Bank of Australia (RBA) is launching in the last month of Q2 could impact the market:

The RBA is in the process of identifying a use case for a central bank digital currency in Australia. A pilot program will begin in December 2022 and run through the 4th quarter of fiscal year 2023.

It is not yet clear what the exact results of this pilot will be. But a growing body of research into the use cases of crypto, combined with imminent regulatory changes, seem to point to further cryptocurrency-based decision-making in Australia on the horizon.

Then there is the richest man in the world. Elon Musk, who is known to have a big influence on crypto prices, for example Dogecoin (CRYPTO: DOGE) with one tweet, again looks intent on buying Twitter.

“As Elon Musk also goes back on his $44 billion deal with Twitter and supports investing in crypto, there is also speculation that he will add tipping and payment features to Twitter that will allow users to send crypto,” Brown said.