Newsletter Volume 8
As of Friday, 30th December 2022
Bull & Bear
Article 1 - The Market This Week
As the year 2022 draws to a close; it’s hard to ignore the fact that it’s been a torrid year for investors, and not just those in crypto, with the U.S. bonds experiencing their worst year in centuries and U.S. stocks pulling back nearly 20% since 2022 began. As of November 30, a report noted that a traditional portfolio consisting of 60% stocks and 40% bonds will have seen its worst performance since 1932 when the U.S. was in the midst of the Great Depression. Household tech giants such as Netflix, Meta, Zoom, Spotify, and Tesla also had particularly difficult years, with their share prices falling in the range of 51% and 70%.
These stock and sector declines may help put the current crypto winter into better perspective, noting that the total crypto market cap fell from $2.25 trillion to $829 billion throughout the year, representing a drop of over 63%, and crypto billionaires recorded huge losses. Some of the crypto crises that have occurred throughout 2022 include the bankruptcies of FTX, Celsius and Three Arrows Capital, as well as the collapse of the Terra network, among others. The 10 largest exploits of 2022 also saw $2.1 billion stolen from crypto protocols.
Bitcoin drifted lower this week, albeit not by much, as crypto prices remained largely frozen near levels they've held for a week. Bitcoin’s price has remained resilient over the past two months, despite the widening fallout from the implosion of FTX. Meanwhile, FTX's sad, unsavoury saga continued with documents filed in Caribbean court showing that former CEO Sam Bankman-Fried borrowed hundreds of millions of dollars from Alameda Research to purchase his stake in the trading app Robinhood Markets.
On the positive side, Avraham Eisenberg, the crypto investor whose highly profitable trading strategy drained DeFi trading platform Mango Markets of crypto worth $110 million, was arrested in Puerto Rico. The self-described game theorist admitted his role in draining Mango Markets’ treasury shortly after the incident in October and may now become the first U.S. resident to face charges for his role in a DeFi trading platform.
IC15 index again dipped this week to 23,878 from 24,423 a week ago. While 2023 is likely to be better, it won’t really seem that way for a while. At least not until the great disconnect between central banks and markets over the outlook for inflation is resolved. And at least not until China has acquired enough herd immunity to return to work and play after a wave of COVID-19. The test of strength in Ukraine between Russia and the West is another thing likely to get worse before it gets better.
Key Indicators
Crypto Market Cap: $828 Billion
Bitcoin Market Cap: $319 Billion
Ethereum Market Cap: $144 Billion
Ethereum Gas Price: 15 Gwei
DeFi TVL: $57 Billion
Article 2 - Weekly Review of IC15
The IC15 Index, also known as the Index of Cryptos, is a rule-based broad market index by market capitalisation that tracks the performance of widely traded liquid cryptocurrencies worldwide. Here is a review of the top constituents of the IC15 index.
A rough year for global markets is winding down, but the market’s pain may be far from over, as investors brace for an expected recession in 2023. Without a doubt, the overarching market theme next year will be the battle between central banks and inflation. Recent events - taken at face value - have greatly increased the risk that the Federal Reserve and the European Central Bank will push the world’s two biggest economic blocs into a recession by raising interest rates further. The Fed’s dot-plot showed a clear majority of policymakers in favour of raising the upper bound for the Fed funds target to as much as 5.4% next year, while the ECB’s President Christine Lagarde threatened as much as 150 basis points of tightening from Frankfurt over the next four months. All these factors dragged the already weak crypto markets even lower this week.
The trouble is markets believe that both institutions are either bluffing or have simply not thought such rhetoric through. Short-term interest rate futures imply expectations that the Fed will even start cutting rates in the second half of next year as the weakness already evident in housing and in core goods spreads to the rest of the economy. Futures for one-month euros likewise imply that the ECB is only good for another 50 basis points before it loses its nerve.
That is a disconnect that will have to be ironed out in the first few months of next year. U.S. stocks, in particular, are still priced at 18 times forward earnings and so have little downside protection from valuation if the looming recession materializes. From today’s standpoint, it looks like the key variables will be how far workforces in the U.S. and Europe can claw back some of their inflation losses with big pay increases and how quickly the oil market tightens as Chinese demand returns. Both of those questions remain genuinely open for now.
Former IC15 constituent SOL the native token of Solana Network, erased most of Thursday’s 15% fall after Vitalik Buterin tweeted support for the blockchain most battered by FTX’s implosion. SOL rebounded from Thursday’s low of $8.19 and retook the $9.50 range. But the token is still 96% below all-time highs near $260, in part because of sellers dumping SOL after the downfall of Sam Bankman-Fried, once the largest cheerleader of SOL.
We are going through a tough time globally, especially in crypto markets, but as we always say, zooming out, Bitcoin and Ethereum are up more than 1000 times since they entered the scene despite the recent drawdown. So, it’s all about staying in the game for longer without getting knocked out.
Article 3 - Battle of Bull and Bear
This week saw the markets moving downward, with a slew of negative news coming in, especially on the economic front, with inflation turning out to be more sticky than what many expected. It has now become an open secret that crypto miners are struggling, and more casualties are expected next year. Core Scientific filed for bankruptcy last week after saying in October it would skip upcoming payments on several loans. The Texas-based miner’s filing came after data centre operator Compute North lodged its own bankruptcy in September. Bitcoin is down about 75% from its all-time high reached in Nov. 2021, making mining less lucrative for companies that took on debt to accelerate growth operations during the bull market.
In addition to the struggles of Core Scientific and Compute North, London-based Argo Blockchain said earlier this month it was looking to avoid bankruptcy despite holding insufficient cash to sustain operations for much longer. Iris Energy is also seeking to stay afloat. Fred Thiel, CEO of Marathon Digital, declined to speculate on how many more miners could go bankrupt in the coming months. But, he said, those that used equipment financing to fund growth are likely to continue facing headwinds.
While the near-term outlook remains grim, on the positive side, only the biggest believers remain in the space with the frauds and over-leveraged players washed out. Many teams are building innovative products across app-specific chains, Ethereum and its L2s, and other L1s. These dApps spans far and wide from derivatives products, DEXs, borrowing and lending protocols, stablecoins, NFT infrastructure, liquid staking derivatives, and more. Undeterred by the decrease in personnel, companies, investments, prices, and TVL, builders continue to trailblaze in this nascent industry, with the quality of the underlying technology constantly improving. That’s how crypto is known now; crashes and exploits keep happening on the one end while innovation and breakthroughs keep happening on another end. With each successive cycle, crypto becomes more resilient and mainstream, leading to bigger bull markets in the next cycle.
Market Sentiments
Article 1 - Weekly Spotlight
In a sea of red since FTX’s bankruptcy, the native cryptocurrency of The Open Network (TON) has been a standout. Up around 50% since just November 10, the layer-1 proof-of-stake blockchain progeny of Telegram — the messaging app wildly popular among industry participants — sits ahead of the more-familiar names of Chainlink and Cosmos in terms of market capitalization. That’s even after accounting for a 30% retracement from its recent peak notched on December 19. TON’s latest bullish indicator is a fresh $10 million injection earmarked for building out the blockchain’s infrastructure from Cypher Capital, a multi-strategy crypto investment firm.
The funding builds upon an earlier $126 million rescue fund debuting last month to support TON development. Newly committed funds are set to focus on applications in the Middle East, Africa, Asia, Turkey, and India, according to Bill Qian, chairman of Cypher Capital and a board member of the TON Foundation, who, in a statement called the network a game changer in the Web3 space.
Entering 2023, many folks are down on crypto, but there are many developments to be excited about. It is when the hype dies down that builders build, non-speculative use cases accelerate, and great investments are made. It’s also when the industry refocuses on how the fundamental web3 innovations of digital ownership and open-network value transfer can positively impact the world. In 2023, web3 will likely impact some of the largest markets in the world, including payments, branded goods, and gaming. There are also likely to be substantial advances in the underlying blockchain and market infrastructure that will enable the technology to scale and reach its full potential.
When you zoom out and see the bigger picture, you’d understand that the current bearish year is normal. From a market cap of $250 Billion in 2020 to a current market cap of $828 billion, the crypto market is definitely in good shape over the long term. Further, this time the innovation continues to happen despite the bear market. The question remains, when will the crypto market go back to its uptrend? Well, the short answer, as we say often, is not likely next week.
