March 6, 2023

Bitcoin On-Chain Use Cases Grow

Weekly Market Review

For educational and illustrative purposes only. This is not a solicitation to buy or offer cryptocurrency or securities. Investments may be speculative, illiquid and there is a total risk of loss of principal. There is no guarantee that any specific outcome will be achieved. Past performance is not indicative of future results.

ON-CHAIN COMMENTARY

• Markets continue to price in an increasingly hawkish Fed into 2023
• Bitcoin and Ethereum continue to maintain a rangebound price posture
• Bitcoin on-chain activity has begun to heat up thanks to a burgeoning use case

Over the past few weeks, rate expectations have continued to progressively increase following a series of strong economic data and hotter than expected inflation. Markets finally began to price in the higher for longer mantra the Fed has been touting for several months. An upside surprise on rates has largely been negated. Now, the market would be surprised by anything remotely signaling a lower terminal Fed funds rate than 5.75%. Weaker economic data would likely be good news for risk assets, because it would signal a more dovish tone from the Fed. This week, a slew of employment numbers are set to be released along with Fed Chairman Powell speaking in both the Senate and the House. Additionally, liquidity estimations have continued decline as the S&P 500 appears to be fighting the Fed with any near term bullish momentum.

Meanwhile, Bitcoin, Ethereum, and other digital assets continue to hold within tight price ranges despite hawkish expectations from the Fed. Despite the slow February following a strong January, not much has changed on technicals. For Bitcoin, overhead resistance remains at the 200-weekly moving average and yearly pivot, $25,000 and $26,500, respectively. Price support sits near the middle of the multi-month range around $20,000. For Ethereum, overhead resistance remains at the range high of $1,900 with support at the range low of $1,000. Moves above resistance levels for Bitcoin would likely take a pause in the $30,000 range based on the Fibonacci extension and measured move of the current range. For Ethereum, using similar rationale, the $2,500 zone is a potential area of confluence for any move higher.

Although prices remain range bound, Bitcoin’s on-chain activity has continued to increase since the beginning of the year thanks to a new NFT use case via Ordinals. Since the beginning of the year, transactions have increased 30% and active addresses have increased 20%, once again nearing one million daily. The Ordinals protocol, which uses Taproot scripting technology implemented in November 2021, allows for the viewing, creating, and transferring inscriptions. These NFTs are fully on-chain and do not require a sidechain or separate token. This flurry of activity, as silly or innocuous as it may seem, has brought increasing attention to the Bitcoin blockchain during a lull in a market cycle. Beyond the on-chain activity bump, full nodes for the Bitcoin protocol have also reached a new all-time high. There is no economic incentive to run a Bitcoin node, but users do need a node to mint NFTs via the Ordinals protocol.

On-Chain Commentary: Source: Valkyrie Investments, Inc.

Chart 1: Rates Approaching YoY Inflation Projections : Source: Valkyrie Investments, Inc., FRED, Truflation.com, CME

Chart 2: Total Fed Liquidity Continues to Decline: Source: Valkyrie Investments, Inc., TradingView

Chart 3: Bitcoin Moving Average Compression: Source: Valkyrie Investments, Inc., TradingView

Chart 4: Stablecoin Dominance Continues to Fall: Valkyrie Investments, Inc., Blockworks Research

Coin Prices, Market Capitalizations, and Returns: Source: Valkyrie Investments, Inc., TradingView, Messari. All returns represent total return for stated period. Coin Logos: Source: cryptologos.cc

Annualized Issuance and Staking Yield: Source: Valkyrie Investments, Inc., StakingRewards.com. ETH staking rewards values are representative of the network post-Proof-of-Stake transition.

“Indicies” prices and returns: Source: Valkyrie Investments, Inc., MarketWatch. “S&P 500” provided by Standard & Poor’s and is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States, “Nasdaq 100” provided by NASDAQ OMX Group and includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. “Russell 2000” provided by FTSE Russell and is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. “Dow Jones Ind.” provided by S&P Dow Jones Indices and is a price-weighted measurement stock market index of 30 prominent companies listed on stock exchanges in the United States. “Gold” provided by NYMEX — CME Group and is a continuous futures product. All returns represent total return for stated period.

“Commodities” prices and returns: Source: Valkyrie Investments, Inc., Wall Street Journal. Bloomberg Commodity Index provided by Bloomberg and tracks prices of futures contracts on physical commodities on the commodity markets. All returns represent total return for stated period.

Valkyrie’s Alternative Layer 1 Index: Source: Valkyrie Investments, Inc., CoinGecko. Includes Layer 1 protocols

traded on at least 2 of the following 4 U.S. exchanges: Coinbase, Gemini, Kraken, or Binance US. Excludes BTC, ETH, stablecoins, and exchange tokens. Weightings using year 2050 MCAP (FDV), value struck at 8PM EST daily, rebalanced quarterly.

Past performance is not indicative of future results. Investments may be speculative, illiquid and there is a risk of total loss. There is no guarantee that any specific outcome will be achieved.There is no guarantee that any specific outcome will be achieved. This is not an offer to buy or sell securities. We do not offer legal, tax or financial advice. Information is purported to be as of the time period provided therein. Charts/graphs are for illustrative purposes only.

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Authors:

Steven McClurg, CIO

Bill Cannon, Portfolio Manager

Sean Rooney, VP Research and Trading

Josh Olszewicz, Head of Research