The Bull & Bear Case for Crypto in 2022
Key long-term indicators and catalysts for crypto in 2022
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This week we dive into the uncertainty crypto markets have been facing. We discuss both sides of the argument, with strong points to be made from bulls and bears alike. We cover positive and negative catalysts for 2022 as well as important trends to keep an eye on.
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- The total amount users paid to use the Ethereum mainnet was 100x greater than they did to transact in Bitcoin over the past week
- Ethereum fees grew as interest in NFTs picked back up
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- BTC recorded $900 million net outflow from exchanges, similar to last week
- ETH on the other hand had a slight net inflow after a few weeks of outflows
After crashing by double digits in early January, crypto markets are attempting a rebound. The recent price action has several crypto traders perplexed as many believe the bull market will continue shortly while others fear the bear market is here to send their portfolios into deeper losses or liquidate their positions.
The mix between hope and distress has crypto markets split about what may come next. By diving into key indicators from a long-term perspective, we examine the merits of the bullish and bearish scenarios.
The Bull Case
Holders Continue to Grow — The number of addresses holding BTC continues to grow, unlike January of 2018.
- Following the mania in December 2017, around 25% of Bitcoin addresses sold their holdings as prices crashed from $20,000 to $6,000
- This time around the number of addresses holding BTC has continued to increase (albeit at a relatively slow rate) despite price crashing 50% in May 2021 and 40% since the most recent high
- The steady growth in holders shows a healthy amount of interest remains for Bitcoin, in contrast to the drop recorded in early 2018
On-Chain Activity Endures — The number of transactions taking place on Ethereum remains near its highs.
- Daily transactions on Ethereum dropped sharply in 2018 as prices dropped and speculation evaporated
- Today the number of transactions sustains at a high level and is less correlated with price action
- Demand to use Ether for transactions creates a floor for the asset as people also use it for its utility, not just for potential price appreciation
- Number of transactions on Ethereum has still dropped since May, but this coincided with the launch of L2 solutions like Arbitrum and Optimism which are not considered in the indicator below
Different dynamics — Crypto has evolved since 2017 and in Ethereum’s case it introduced a major change to the way it handles its supply
- Following the implementation of EIP-1559, the majority of ETH paid in fees gets burnt, effectively decreasing Ether’s supply
- The amount of Ether burned hit a record high of nearly 20k ETH in a day this week, leading to an annualized issuance rate of -1.9% (meaning ETH is deflationary)
- Such reduction in supply makes Ether more scarce, benefiting from the sustained level in transaction activity discussed
While the mechanics behind Ethereum’s supply burn is complex, one of the most simple indicators also bring positive news. Both Bitcoin’s and Ether’s price have recorded higher lows and higher highs, which was not the case in January 2018.
Positive catalysts for 2022 — Price aside, there are several reasons to remain bullish crypto this year:
- NFTs continue to expand — as OpenSea reaches a $13B valuation, the leading marketplace is seeing a surge in demand with over $160M traded per day so far in 2022. Notably, famous Taiwanese singer Jay Chou’s collection PhantaBears has been the most traded collection this year, and showcases the potential for NFTs to continue growing into the mainstream globally
- Increased adoption of DAOs — decentralized autonomous organizations have been gaining momentum. ConstitutionDAO was arguably the first DAO to gain widespread coverage. A few days ago Steph Curry has joined golf-focused LinksDAO. Peter Thiel backed the investment-oriented BitDAO. The wide range of opportunities that can be coordinated through DAOs and growing interest for them make it likely to be a positive driving force for crypto in 2022.
- Gaming onboards new set of users — Play-to-earn mechanics pioneered by Axie Infinity have the potential to attract a broad base of gamers into crypto. There were 3–5 funds raising $100M+ specifically for crypto gaming in 2021. As this capital gets deployed, we are likely to see the onboarding of millions of new users into crypto
- Other potential catalysts: more countries adopt Bitcoin as legal tender, DeFi attracts millions of users as high inflation makes savings accounts irrelevant, stablecoins go mainstream following PayPal’s project or the release of Meta’s Novi (fka Libra) wallet
The Bear Case
2022 started with palpable strength from sellers. Much of this backdrop has come in light of a more hawkish federal reserve. For those unfamiliar with macro lingo, this essentially means that the central bank is likely to increase interest rates more or faster than initially anticipated, and potentially even decrease the monetary supply through quantitative tightening.
While Bitcoin’s price managed to continue growing in 2017 despite three rate hikes, it stumbled in 2018 as the fed introduced quantitative tightening. This is reflected in the money supply (M1) decreasing briefly early in 2018 before proceeding to grow at a slower rate.
Quantitative tightening explained — To fight rising inflation of 7% in the U.S. the federal reserve is discussing “balance sheet normalization” referring to quantitative tightening (QT). What does this mean:
- Just like the federal reserve “prints” money by buying securities and bonds to stimulate the economy (quantitative easing), it can sell these to decrease inflationary pressures (quantitative tightening)
- The graph above shows how Bitcoin grew along with M1 supply during QE in 2016 and 2017 (green line), but dropped as QT began in early 2018 (orange line)
The fed’s 180 turn — Following the covid lockdowns, the federal reserve reintroduced QE in 2021 at a bigger scale, now it is reversing its path.
- The correlation between BTC’s price change and M1 supply change is at a high level of 0.77, pointing to strong statistical relationship between the two
- After the fed minutes were released with discussions of QT, a potential decrease in money supply is becoming more likely
- The high correlation between the two implies a negative outlook for Bitcoin if the fed moves ahead with QT and raises rates aggressively
- These fears have been leading the recent crash in prices across equities and crypto alike as it would mean less potential inflows going into risk assets
Potential negative catalysts for 2022 — aside from the federal reserve, there are a few other potential bearish catalysts:
- The four-year cycle — Many who have been in crypto for long are used to the markets working in a four-year cycle where Bitcoin’s price reaches new highs as was the case with 2013, 2017 and 2021. This theory plays a large emphasis on the Bitcoin halving, however, which is increasingly irrelevant as miners volume represents a minor share of the total volume
- A stronger covid variant — Lockdowns and sick people led to a recession in 2020. Now with the omicron variant less countries are locking down and fewer people are dying. A more severe strain of covid, however, could hinder the economy and find central banks with less room to stimulate the economy
Overall, the macro environment signals risks to be considered by investors. While there are still reasons to believe in crypto’s continued growth in 2022, there is a considerable amount of uncertainty. Ultimately, these market forces are likely to play out in the upcoming months as the market gets more clarity from the federal reserve and activity from NFTs, gaming and DAOs seek to propel crypto to new highs.
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Derivatives markets in crypto continue to grow in popularity, outpacing trading volumes in spot exchanges. This has created opportunities for traders and investors alike along with a new set of tools to assess the state of crypto markets.
In this webinar we will dive into the numbers behind derivatives markets in crypto both in centralized and decentralized venues. Similarly, we will uncover opportunities in each of these markets that can benefit traders and builders alike.