Welcome to the first edition of Off the Chain for 2022. Most would be aware of the large drawdown in crypto prices since the November all-time highs, so this week I thought I’d focus on the primary cause of the pull-back and what to expect in 2022.
What’s been driving the price?
Over the last week, bitcoin is trading up 7.32%, but the price is still down 20.3% for the month of January and almost 44.6% from the all-time high in November. Fundamentally there isn’t anything specific to crypto that has changed. The current driver of price has been the hawkish stance of the Federal Reserve and the threat of aggressive interest rate tightening over the course of the year, which will impact U.S. and global economies. The outlook has affected not just the crypto market, but also other risk assets such as high growth equities.
Bitcoin’s market cap is now down to $723B, market dominance is sitting at 41.58%, and the value of the entire crypto market is at $1.74T.
|Price||High||Low||Change from previous week|
|BTC (in US$)||$38,183||$38,825||$33,184||7.32%|
|ETH (in US$)||$2,616||$2,705||$2,172||5.15%|
Source: CoinMarketCap. As at 30 January 2022. Past performance is not indicative of future performance. Performance is shown in U.S. dollars and does not take into account any USD/AUD currency movements.
For those holding crypto equities, a ~50% drawdown is, to say the least, discouraging. However, it’s worth bearing in mind that the primary driver of crypto equities remains the underlying crypto market which historically has been 5-7 times more volatile than the broad equities market. There has been a relatively high correlation between equities in the crypto space and cryptocurrencies themselves, because investors and institutions who may not have direct access to crypto or may not be allowed to invest directly tend to get exposure via crypto equities. Unfortunately, these companies have borne the brunt of the sell-off in both crypto and the wider equities market.
The crypto markets have been accustomed to large drawdowns, and to equally strong rebounds. Taking a look at the ten worst drawdowns for bitcoin since 2011, bitcoin has experienced pull-backs of over 50% six times, and over 40% four times, the worst being -93.7% over a duration of 163 days from peak to trough in 2011. Each time, bitcoin has rallied to eventually make new highs. Crypto markets are likely to remain volatile, reinforcing that an investment in either cryptocurrency or crypto equities should be considered very high risk.
The bitcoin fundamentals
Although still in its infancy, hyperbitcoinization has continued to take place. With more regulated products over bitcoin (such as ETFs) being introduced to the market, adoption by institutions and corporations has continued to grow. A wave of banks around the world already offer, or intend to offer, the ability to access bitcoin straight from client bank accounts. In addition, although only one nation state has adopted bitcoin as legal tender, there are rumours that other South American countries will follow suit, so it would not be surprising to see additional nation state adoption over the next few years. In El Salvador, there already are more people with bitcoin wallets (46%) than with bank accounts (29%).1
Spent Output Age Bands (SOAB) is a metric that bundles spent coins into categories depending on their age, and presents them in colour bands as a proportion of total coins moved. The indicator helps identify whether on-chain transactions are coming from younger or older coins and highlights whether market movements are influenced by long-term HODLers, newer market participants or traders.
Looking at data from on-chain analytics company Glassnode, long-term holders have in general not been selling. Selling has been coming primarily from coins younger than 3 months (93.7%), therefore likely selling below their initial cost base, perhaps out of concern that losses may increase if the market continues to decline.
We can corroborate the above analysis by taking a look at Net Realised Profit/Loss (NRPL) , the net magnitude of profit or loss realised by all holders spending coins. Realised Profit/Loss is assessed relative to the price when a coin last moved. NRPL provides a reflection of aggregate market sentiment, capital inflows or outflows, and trends in network profitability.
Since 27 December, the chart below reflects losses realised on-chain, and outflows increasing into the week of 27 January. The recent plunge around 20 January, and subsequent recovery, could have signalled momentary investor capitulation followed by signs of some upside reversion.
The year ahead
Regulation is still developing in many countries, regulation around stablecoins and decentralised finance is yet to be finalised, and the difference between tokens and securities continues to be scrutinised. However, with regulation comes clarity, and clarity ultimately could propel the asset class forward.
There are many sectors within crypto, but two sectors that are likely to continue to grow and develop are Non Fungible Tokens (NFTs) and the metaverse. So far in 2022, prices in NFTs have not correlated with the recent downturn in the rest of the crypto market, large corporates such as Adidas and Nike have continued to announce their involvement on a regular basis, and OpenSea, one of the largest NFT trading platforms in the world, set a new record in sales volume, having already surpassed $3.5 billion in sales (recorded in the value of ETH) from 1 January to 17 January. The evolution of the internet into web 3.0 should help facilitate the development of the metaverse, an environment in which cryptocurrencies and NFTs are likely to play an important part.
Investing in crypto assets or companies servicing crypto-asset markets should be considered very high risk. Exposure to crypto assets involves substantially higher risk when compared to traditional investments due to their speculative nature and the very high volatility of crypto-asset markets.
Investing in crypto assets or crypto-focused companies is not suitable for all investors and should only be considered by investors who (i) fully understand their features and risks or after consulting a professional financial adviser, and (ii) who have a very high tolerance for risk and the capacity to absorb a rapid loss of some or all of their investment.
Any investment in crypto assets or crypto- focused companies should only be considered as a very small component of an investor’s overall portfolio.
- pg. 46 https://research.ark-invest.com/hubfs/1_Download_Files_ARK-Invest/White_Papers/ARK_BigIdeas2022.pdf?hsCtaTracking=217bbc93-a71a-4c2b-9959-0842b6fe301c%7C2653a4d0-af35-42f0-853a-c5f90f002abb
Off the Chain will be published every Tuesday, and provide the latest news on bitcoin and the rest of the crypto market along with analysis and insights into the world of crypto.
It provides general information only and is not a recommendation to invest in any crypto asset, crypto-focused company or investment product.