Crypto Sentiment and Investing Environment Shifts During Q4
The fourth quarter of 2021 saw new all-time highs among the leading cryptocurrencies as well as a shedding of $1T of market cap. As always, investors want to know why the sector had such wild swings. We will look at some key storylines surrounding regulation and the macro trends from the rollercoaster that was Q4. Keep your seatbelts on as we continue into 2022!
In our Q3 Market Update our subheading read: “The rise of institutional capital has kept bitcoin floating in the $40k-$50k range, looks to break out.” Break out it did, with bitcoin reaching $68,000+ in November. However, at the close of the year, prices look as they did at the end of September.
Regulation
Piggybacking on Q3’s news surrounding regulation that was mostly finger-waving, there continue to be discussions and proposals for regulation with no clear rules or guidelines. In December there were productive talks between Congress and crypto firm executives regarding stablecoins, maintaining U.S. global monetary dominance, and the need for regulation. Regulators seem aware of the significant implications of any regulation and thus are taking a measured approach.
Five main crypto policy players have taken charge, largely with the backing of corporations. Coin Center, Blockchain Association, and a16z Policy Team, among others, continue to make a push in Washington, DC to educate policy-makers.
We expect stablecoin regulation to be a big part of regulatory talks in 2022.
Product Updates/Announcements
On October 15th, the SEC approved the first Bitcoin futures ETF. On its first day of trading, the BITO ETF proceeded to post the second highest debut trade volume ever, exceeding $1B. The ETF tracks bitcoin prices through futures contracts. Other futures-dealing ETF’s have been approved since, but the SEC continues to reject proposals offering spot bitcoin ETFs.
Mark Zuckerberg’s metaverse was all the rage in Q4. The announcement of Facebook rebranding as Meta lifted metaverse-related tokens. Grayscale’s report sees the metaverse as a $1T opportunity. Morgan Stanley, not to be topped, sees it as an $8T market as games, work, and life grows more digital. VC firms like Paradigm, KuCoin, and Outlier Ventures have made bets on the metaverse’s growth. And the digital real estate market is heating up: firms have made record-setting purchases for more than $2 million.
Macro Environment
Inflation, inflation, inflation. By now, most of us are as tired of hearing the stories of inflation as we are of paying 58% more for gasoline. The Consumer Price Index hit 6.2% in December and this week came in at 7%. The Fed announced they plan to start tapering interest rates. The digital asset economy continues to be affected by inflation-related announcements. Macroeconomic uncertainty led to a loss of conviction as the fourth quarter progressed, causing a sell-off in December.
Companies around the globe continue to announce further blockchain adoption. Perhaps the biggest of these announcements was Jack Dorsey leaving Twitter (which he founded) to go to Square (which he also founded). Square then rebranded as Block.
Eyes around the globe continue to watch El Salvador as they experiment with bitcoin, from running volcano-powered bitcoin mines to offering bitcoin bonds to fund the building of the world’s first Bitcoin City.
In the third quarter, China announced a ban on crypto payments and mining. This quarter, the US took the throne and became the largest bitcoin mining hub in the world.
Asset News
FirstWatch’s Digital Asset Review on Solana before it broke out from $200 to $260 two weeks later. It started 2021 at $1.60. Solana continues to be a favorite choice of investors making bets on the future Layer 1 technology due to its transactions-per-second capacity.
Ethereum developers announced in October that the network can expect an update to proof-of-stake consensus in May or June of 2022.
Polkadot announced the launch of parachains, applications in the network that can communicate with each other. This increases blockchain interoperability, which has become a growing concern.
Both FTX US and Coinbase announced NFT marketplaces.
Bitcoin Performance: Q4
Bitcoin’s performance remained mostly flat overall considering mid-quarter gains were as high as 50%.
Throughout 2021, Bitcoin dominance fell from above 70% of the total crypto market cap to below 40% of the market cap. The most recent quarter followed this trend as investors appeared to allocate away from bitcoin, the original blockchain, to newer technologies and alternative use-cases.
Some key stats:
The quarterly range for bitcoin was between $43,000 and $69,000.
The Bitcoin Fear and Greed Index ended the year in extreme fear, bouncing between a high of 75 (Greed) and 16 (Extreme Fear).
The fourth quarter saw VCs invest $10.5 billion into the crypto/blockchain space, more than all of 2020 combined. Early-stage crypto firms accounted for more than 60% of those investments. This is part of a year that saw $32 billion pour into crypto and blockchain startups.
Here’s a protocol specialist’s take on the most interesting charts in crypto for 2021. These get technical, but one standout note: Proof of State protocols took center stage in 2021.
Resources:
Kraken’s extensive Crypto-in-Review report covering 2021.
Messari Founder Ryan Selkis’ enormous 2022 Crypto Theses.
➡️ About FirstWatch Crypto ⬅️
FirstWatch Crypto was started by Dan McGlinn (@DigitalDanMcG)and John "Blaize" Hrabrick (@blaizebitcoin) who have been investing in the space for a combined 8 years. FirstWatch Crypto is on a mission to simplify the crypto investment landscape.