February Market Outlook
Many people have come to own and embrace crypto because of a powerful sense of mission that includes:
- Fairness and efficiency: a desire to see transferring money more like sending a text message — instantaneous and low cost to all, and not something that often takes days and costs greater than 10% in middleman fees for those who can least afford it.
- Privacy: it seems not a day goes by that yet another privacy destroying cyber exploit or revelation of an abuse of trust is revealed. Blockchain technology can protect individuals from predatory practices and help us take control of our personal data and financial information.
- Open access: over a billion people around the world do not have a bank account, including a significant percentage of citizens in developed countries (over 5% of Americans lack a bank account). To use bitcoin you do not need to first apply and gain approval from a gatekeeper like you do to open a bank account. Anyone with a computer and internet connection can access crypto.
- Democratizing finance: small investors in many countries have traditionally lacked access to financial services and opportunities available to the wealthy (e.g. overly restrictive accredited investor rules). Crypto is helping to level the playing field. In a world of rapidly rising consumer prices and seemingly out of reach home ownership, we believe strongly that crypto can help address the sense of despair many younger people in particular feel around their financial future.
In the US, crypto has always been an “easy sell,” as it were, to the end of the political spectrum that favors a more deregulatory and free market approach, but recent legislation in both the Senate and House had support from both Democrats and Republicans at introduction, a surefire sign that any perceived partisan gaps around crypto are beginning to close.
Even some officials within the Biden Administration (which many perceive as anti-crypto) have begun to draw subtle but important distinctions, with Deputy Secretary of the Treasury Wally Adeyemo saying that his agency’s focus is on “the illicit use of” cryptocurrencies, not debates about the legitimacy cryptocurrencies themselves. He also told a November conference that “digital assets are yet another innovation with the potential to be transformative…they offer the potential to unlock new opportunities,” and that Treasury’s goal is to “…create a regulatory environment that fosters responsible innovation.”
In sum, increased fairness and transparency of our money and financial system is a goal that is shared by more people, and not surprisingly more policymakers across the political spectrum are coming to support crypto.
- Market Movements
- In January crypto sold-off alongside other asset classes, with Bitcoin (BTC) down -17% and Ethereum (ETH) down -27%
- As we are set to publish crypto has rallied strongly to start February, with bitcoin recouping almost all of its January loss
- There is some evidence that the frost that set on crypto markets these past few months is abating
2. On-Chain Insights
- The continuing increase in bitcoin’s estimated hash rate despite another monthly bitcoin price decline speaks to the medium-term price confidence of bitcoin miners and the availability of economically attractive sources of energy
- Overall bitcoin on-chain payments, transaction activity, and fees continued decreasing in the month of January
3. What we’re reading, hearing, and watching
- Bitcoin Magazine, Bloomberg, NY Times, and more
1. Market Movements
In January crypto sold-off alongside other asset classes, with Bitcoin (BTC) down -17% and Ethereum (ETH) down -27% (Table 1). Central bank monetary tightening was largely attributed to the across-the-board market decline.
Table 1: Price Performance: Bitcoin, Ethereum, Gold, US Equities, Long-dated US Treasuries, US dollar
As we are set to publish crypto has rallied strongly to start February, with bitcoin recouping almost all of its January loss. Are there any reasons to suggest this bounce marks the near-term bottom in crypto prices?
We take a smidge of psychological encouragement in the recent price action, where on some recents days crypto prices are diverging from what is happening with the US equities market (tech equities in particular). Our view is crypto possesses unique characteristics, and market participants should observe and trade on crypto’s own fundamentals over time versus simply correlating with what’s happening with tech equities.
More significantly, we continue to see strong fundamentals across a number of dimensions, including significant fundraising by blockchain networks (eg a large Sequoia-led $450m fundraise by Polygon (MATIC)).
The further support we see for bitcoin adoption by certain US states and legislators is also fueling a view that it is only a matter of time before more sovereign entities follow El Salvador in embracing bitcoin in some way.
Past major crypto sell-offs have also typically brought a silver lining: brand new crypto investors that missed the prior run-up. If such new investors are arriving in meaningful numbers this should help support current price levels.
2. On-Chain Activity
In January, the only bitcoin on-chain metric to show a gain across our selected statistics is the estimated mining hash rate, which increased 8.2% for the month (Table 2).
The continuing increase in bitcoin’s estimated hash rate despite another monthly bitcoin price decline speaks to the medium-term price confidence of bitcoin miners and the availability of economically attractive sources of energy.
Table 2: December vs January bitcoin on-chain network activity
The average number of daily transactions (-4.6%) and payments (-3.8%) declined in January. In addition, the average daily active addresses fell -7.3% from December to January.
Reduced bitcoin transaction activity typically results in a decline in average daily fees per transaction, which dropped from $2.42 per transaction in December to $1.80 per transaction in January.
Total BTC transactions and payments made using the Blockchain.com platform in January were down -4.1% and -5.0%, respectively compared to December.
3. What we’re reading, hearing, and watching
- Bitcoin Magazine: Bitcoin Is The Most ESG-Friendly Investment In My Clients’ Portfolios
- Medium: Electric Capital Developer Report (2021)
- Moxie Marlinspike: My First Impressions of Web3
- Newsweek: Bitcoin Mining Is America’s Most Misunderstood Industry
- NY Times: The Rise of the Crypto Mayors
- Richard Gendal Brown: Why All The Web3 Hate?
- Gary Kasparov: Crypto Means Freedom
- The Block: 2 Crypto M&A Shops Are Merging
- Bloomberg: China’s Economic Development Model Shows Some Cracks
- FiveThirtyEight: Why Great Tennis Players Don’t Always Make Great Coaches
- Marta Belcher: How Private is Your Bank Account?
- NY Times: The Battle for the World’s Most Powerful Cyberweapon
- Project Syndicate: China’s Challenges
- Project Syndicate: How the Euro Divided Europe
- Project Syndicate: Inflation Heresies
- ProntonMail: “The Tide is Turning on How The World Sees Internet Shutdowns”
- The Reformed Broker: “Financial Conditions”
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