The Crypto Market
Finding Signal within the Noise
Where We Are
As of publishing:
Bitcoin sits 57% below its all-time-high.
Ethereum is 61% below.
The S&P is down nearly 20%.
And the NASDAQ (tech stock proxy) is 30%.
Look at any market news website and you’ll likely see statistics hinting that we could be standing on the edge of an economic crisis. Inflation sits at 8.3 percent year-on-year, and there is an indication of a slow-down coming in the production of goods and services. Supply chains continue to be disrupted globally, from shipments in China to a lack of workers domestically. The war in Ukraine has impacted Europe’s economy more than any other economy and raised the prices of oil and gas around the globe.
These negative macroeconomic factors and risk-off sentiments have overwhelmed the equities markets in the short term and sent a chill through the crypto markets, which have been highly correlated to equities since March 2020.
Recently, the headlines that once would have moved crypto markets upwards now have little to no effect. The digital asset economy has started to undergo its second Fed tightening cycle, which has historically been bad for risk assets.
Some Positivity
The fundamentals of crypto are strong, ie, user adoption, capital and talent flowing into the space, but don’t have the speculative fervor of the last couple years.
For crypto-natives the lack of price performance is frustrating (and can be painful for investors) while the macro landscape overshadows growth. But a look under the hood reveals three promising fundamentals for crypto.
VC Activity
A record $33 billion of venture capital funding flowed into crypto startups last year, which is more that the total raised in the preceding 10 years combined. This year set a record for VC blockchain inflows in a quarter, with nearly $15 billion raised in the first quarter of 2022, according to Cointelegraph. The quarter also saw the most deals and the largest deal value.
VC investors generally take long-term approaches. We can look at this as a long-term indicator of innovation in a rapidly-evolving space that will need to quickly adapt.
Adoption & Regulation
Wallet addresses holding bitcoin and Ethereum continue to rise. The a16z viral State of Crypto 2022 report shows the number of addresses continue to grow in step with the early internet user growth.
And from a financial metrics perspective, DeFi remains resilient, even after the Terra collapse. A lot of money has flowed on-chain. The Total Value Locked (TVL) on protocols sits at $112 billion, still higher than the 2021 low and up 13% year-on-year.
Regulation has been positive, and has trended towards protecting innovation and investors. However, we can expect stablecoin regulation to be a hot topic after Terra’s collapse and an increased focused on punishing bad-actors.
The Bottom Line?
Crypto is a risk asset: it is volatile and priced based on future value and growth expectations, similar to tech companies. Risk assets have seen remarkable selloffs in recent months.
But is the bottom in?
Some scenarios to consider:
We might go lower: bitcoin has seen -80% drawdowns in past crypto bear markets, inflation remains rampant and the Federal Reserve is determined to slow it, and risk assets continue to selloff.
We may go higher: sentiment is at historic lows and can only improve, future rate hikes might already be priced into the market, and risk assets could rebound fastest.
There is no definitive answer for what the near-future holds or whether the bottom is in.
What we can definitively see is that hardship has historically resulted in innovation. Bitcoin itself was born out of the 2008 financial crisis, and crypto has had four “price-innovation” cycles since then. The cycles are seasonal: price optimism drives interest, inspiring new ideas and builders, leading to new projects and innovation. We are closer to the next bitcoin halving than the last one.
We can also be sure there will be volatility, and it may take quarters or years of volatility for the cycle to play out. However, the prices will eventually catch up with the growing fundamentals, and if the past is any indicator the next cycle will bring a wave of adoption and price discovery that we haven’t seen.
The important thing for investors is to think with a longer time horizon. Worldwide crypto users are still under 5% and there are 8B people on the planet. Steadily rising adoption is a natural evolution in our increasingly digital world.
Amidst the global economic noise, the fundamentals of crypto point to long-term growth.
Resources
a16z’s State of Crypto 2022 Report
➡️ 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.
Disclaimer: None of the above is investment advice. This blog is published for entertainment and informational purposes only. The ideas expressed are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. Nothing on this blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product, transaction, or investment strategy is suitable for any specific person. You should not use this blog to make financial decisions. We highly recommended you seek professional advice from someone who is authorized to provide investment advice. You should always do your own research before investing in cryptocurrencies. It is a volatile market.