Coming into the end of the year Bitcoin’s price has hovered between $46,000 and $51,000 providing no real clear directional bias in price action over the short term.
This price action can be attributed to several factors, the predominant theories being institutional rebalancing for year end, tax-related selling, and reduced activity from retail investors. With inflation globally at its highest point in the last few decades, many investors’ wages are not tracking rising inflation rates, reducing their ability to invest. This lack of activity is seen on-chain with lower transfer volumes from smaller investors (between $0-$1,000 dollars). Transfer volume is currently dominated by the $10 million+ bracket, indicating that institutions and larger investors are currently in control of market activity.
The estimated leverage ratio is a fraction which is calculated by gathering the open interest on Bitcoin derivatives for each exchange, then dividing this by the amount of Bitcoin in exchange reserves. This has grown significantly since the pullback in December whilst price has remained relatively stable. This build up in pressure could lead to a volatile movement in the price of Bitcoin, however it remains to be seen whether this will cause an increase or decrease in price. Funding rates during this period also remained very flat with no clear direction on sentiment from leverage traders.
Further, a simple look at the ‘fear and greed’ sentiment shows the market is currently in fear of downward price movements. However, it must be said that historically market sentiment can change within hours to extreme greed due to positive news influencing the market. It should be viewed only as a very simple perspective on the current market conditions. This perspective is heavily influenced by retail investors and rarely takes into account the sentiment of institutional investors.
In major news, Iran has sought to bring a halt to Bitcoin mining within the country until March 6th in order to reduce the energy demands on its national grid. This is a large blow to the country financially as Bitcoin has proven to be a great source of revenue amid tough economic sanctions imposed by other nations. In contrast, Marathon Digital (a publicly listed stock on the Nasdaq) announced on the 29th that it was investing in 78,000 Antminer S19 XP Bitcoin mining rigs, representing the largest singular purchase of mines historically. This shows the interesting dynamic whereby lost mining capacity easily finds a new home elsewhere due to the strong financial incentives within the mining industry. With many Bitcoin mining companies now being publicly traded, they have better access to capital markets, allowing for longer term infrastructure investments along with the ability to hold onto their coins instead of selling them to cover expenditures. Increased hash power going into 2022 will only further strengthen the network and hence make it more of an attractive place to store wealth.
****Despite Ethereum being up over 400% in 2021, December 2021 was its worst performing month since March 2020. Ethereum started the month of December in the region of $4,700. However, by the end of the month, it had proceeded to drop by approximately 20% to a price in the region of $3,700.
Some major mainstream events, along with Bitcoin’s price decline could have impacted the price trajectory of Ethereum and thus contributed to its own decline in price. One of these events was Bitmart—one of the most trusted platforms for cryptocurrency trading—falling victim to a large scale security breach (hack). The hacker managed to steal approximately $196m worth of cryptocurrency assets. Despite the majority of these assets being ‘meme coins’, this event most definitely amplified fear and uncertainty for investors which in turn could have caused many cryptocurrency investors to sell their short-term holdings. Additionally, one could also argue that bearish sentiment is tied to the rapid spread of the omicron COVID variant.
However, price is not always a clear indication of progression for a cryptocurrency project. For example, this month Ethereum released a new network upgrade called Arrow Glacier. The aim of this upgrade is to delay the network’s difficulty bomb until June 2022. This holds significance as the difficulty bomb, due to its nature, makes Ethereum mining increasingly difficult. This new feature should excite long term ETH holders due to its connection to the development of Ethereum 2.0 and the consequent switch to the new Proof of Stake (PoS) blockchain.
Throughout 2021, Ethereum has significantly outperformed Bitcoin with the ratio increasing from the region of 0.025 all the way to 0.078. When zooming out from December and accounting for the whole of 2021, Ethereum holders should be satisfied when accounting for the long-term prospects for Ethereum.
Moreover, if the hype around Ethereum-based NFTs continues to spread as it did throughout 2021, more VC companies could potentially fund even more Ethereum-based projects. Ultimately, it is difficult to predict how ETH will perform in the future. However, based on past data and new technological innovations, 2022 could prove to be a big year for Ethereum.
****Looking at how the altcoin market finished off December (after the mid-month sell off), there were two clear sectors that outperformed the market. The DeFi sector bounced strongly from its December 20th bottom with Aave moving up 80% in under week after SEBA, a fully-regulated Swiss-based digital bank, sought to become the first regulated bank bringing DeFi directly to their customers. The top performer in the DeFi sector was Sushi, rising over 95% from its December 20th bottom following their team’s decision to solve internal conflicts that had caused the price to fall originally.
Layer 1 protocols also had strong finishes to the month. Fantom ($FTM) and Terra ($LUNA) both rose over 95%, along with Avalanche ($AVAX) which rose over 60% showing strong support from its December 15th bottom. The reason behind these increases in prices could be due to the influx in deposits to Defi protocols that are built on these Layer 1 networks. Terra Luna, specifically, passed through its previous all-time high of $76, peaking at over $103 to set a new all-time high. This is incredible as just under six months ago Terra was priced below $5 (comprising a gain of close to 2000%).
Focusing on Terra’s Total Value Locked (TVL)—which represents the total amount of deposits (equivalent in USD) locked into DeFi Applications operating on Terra’s blockchain—it’s apparent that the massive inflows follow very closely with $LUNA’s price movements. In fact, Terra now ranks second out of Layer 1 protocols in TVL (currently $18 billion) further showing the market’s confidence in the network and its DeFi applications.
The cheapest available Bored Ape Yacht Club NFT has flipped the cheapest available CryptoPunk NFT for the first time ever. At the time of the Flippening, the lowest priced CryptoPunk was listed at 52.69 ETH, while the cheapest Bored Ape Yacht Club NFT was listed at 53.9 ETH. The flip itself occurred due to an overall increase in the floor price of BAYC and a large decrease in the floor price of CryptoPunks (the floor price had previously sat well above 100 ETH or ~$380,000 USD). The positive market sentiment towards BAYC comes after a number of large partnerships, including a merchandise deal with Adidas and the adoption of the asset by an increasing number of high profile celebrities such as Post Malone and Jimmy Fallon.
****Dubai may soon be one of the largest crypto hubs in the world after the largest centralised cryptocurrency exchange, Binance, signed an agreement with the Dubai Authority. Binance signed a memorandum of understanding with the Dubai World Trade Centre Authority (DWTCA), signifying the start of negotiations between the two parties which could see Binance licensed to operate in Dubai.
In the U.S., the SEC has rejected two more spot (physically backed) Bitcoin ETFs proposed by Valkyrie and Kryptoin. The SEC based these decision on its previous rejections of spot BTC ETFs, stating that the ETFs ‘failed to demonstrate that their proposals are consistent with the requirements of Exchange Act Section 6(b)(5)’. The SEC also stated the Exchange Act is ‘designed to prevent fraudulent and manipulative acts and practices’, thereby protecting investors. There are still a few more opportunities for Bitcoin spot ETFs to be approved in early 2022, however we will not be seeing a U.S.-based Bitcoin spot ETF before the end of the 2021.
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