ETC Group Crypto Minutes Week #4

Markets shed $500bn: institutions return to buy the dip

It’s been something of a white-knuckle ride for cryptoasset holders in the past two weeks. The total crypto market shed $500bn and dipped to its lowest level since August 2021 — $1.5trn — with assets seeing swift falls across the board.

Inflows of $14m" into institutional investment products, such as ETC Group’s physically-backed and centrally-cleared Bitcoin ETC (BTCE), Polkadot ETC (PLKA) and Cardano ETC (RDAN), indicate that investors are zooming out beyond the recent short-term pain and taking advantage of price dips where they can.

2021 was a record year for institutional inflows to investment products with $9bn in total flooding into cryptoasset structured products trading on regulated exchanges. The turning point was mid-December last year, where outflows were recorded for the first time after 17 consecutive weeks of net inflows to ETCs and ETPs. Data via CoinShares now suggests the worst of the fall may be over as institutions turn inflows positive, after five solid weeks of outflows totalling $532m".

RSI flashes oversold

We don’t tend to set a huge amount of store in technical analysis indicators, as a rule. Anyone can draw lines on a chart to ‘prove’ a particular thesis.

However, there is one traditional momentum" metric that remains exceedingly popular just because it’s easy to understand: Relative Strength Index or RSI. This shows whether markets are overbought — that euphoria is at its peak — or on the opposite side, they are oversold. Presently, crypto markets are flashing heavily oversold indicators, suggesting that selling exuberance is overdone.

Anything at 70 or above (the green line) on the RSI indicator is considered overbought and a ‘sell’ indicator. Anything 30 or below (the red line) is considered oversold and hence a ‘buy’ indicator. By these readings Bitcoin is at historically oversold levels and in fact RSI at its lowest point since the days around ‘Black Thursday’ in March 2020.

On the second Thursday in March 2020, Bitcoin holders experienced some tense moments when the price of the world’s first cryptocurrency crashed 40%, dropping from" $8k to $4.7k overnight.

Leveraged long/short liquidations hit $880m". Critics emerged from all sides to declare the crypto experiment over. Six weeks later, Bitcoin had regained all of its losses, and in the year that followed ran up gains of over 1,000% more. With 20/20 hindsight, it was a great time to buy. As always. those that could withstand volatility came out on top.

There is now markedly more capital involved in day-trading cryptomarkets than there was in 2020. On 5 January where the Bitcoin price dipped from" $45.8k to $43.4k there were $637.68m of long/short trading positions liquidated across the top 10 cryptoassets. Leveraged liquidations then hit nearly $1bn overnight on 21 January as Bitcoin blew through support and fell from $40.6k to $36.4k.

Our point being: investors who are in for the long haul need to have (or develop) tolerance for short-term" pain, and screen out the retail noise as far as they possibly can.

By all our best technical indicators, the sun will rise tomorrow. Institutional investors certainly seem" to think that the worst may be over.

South America doubles down on crypto as inflation hits double digits

Rio de Janeiro is the second-largest city in Brazil, and the third-largest in South America. As such it has quite considerable purchasing power and political influence in the region. With a GDP of $169.1bn it is also the fourth-richest city in Latin America, behind Mexico City, Sao Paolo and Buenos Aires.

So it was no surprise to see headlines globally when mayor Eduardo Paes announced on 14 January 2022 that the city’s municipal treasury would move 1% of its assets into Bitcoin and other cryptoassets.

According to the country’s central bank, the total amount of cryptoassets held by Brazilians reached $50bn in 2021, compared to $16bn held in US stocks and shares.

Ray Dalio, a billionaire crypto early adopter, said recently that a 1% to 2% allocation to the asset class is ‘reasonable’, and the message appears to be spreading. The Bridgewater Associates founder is famous for his global macro style and his firm — with $150bn AUM — manages assets for the most conservative of conservative investors: central banks, foreign governments and pension funds alike.

As Bloomberg writes, Paes’ move is part of a wider scheme to locate Rio de Janeiro as Brazil’s ‘crypto capital’, attracting wealthy businesses to its shores. Recent reports quoting insiders suggest that Brazil’s only national stock exchange B3 is planning to enter crypto markets in 2022, potentially launching a crypto ETF.

Embracing crypto in every country

South America as a whole is embracing cryptoassets like never before. In the last few months Mexico’s national stock exchange said it was considering listing Bitcoin futures, Paraguay’s Senate approved legislation to take advantage of the country’s energy surplus and to regulate crypto mining and trading, Argentina has said it will levy a 0.6% tax on cryptoexchange operations and Hong Kong’s institutionally-focused exchange OSL announced in October it was expanding into Latin America.

On the retail side, just this week we saw Binance ink a five-year deal to sponsor the Argentinian national football team" and professional football league.

More of Paes’ initiatives under ‘Cripto Rio’ include tax breaks for bitcoin-based businesses operating in the city, and a promise that any regulation will not impede the growth of the industry. As recently as October 2021, the Brazilian Congress was considering legislation to regulate cryptoexchanges, enacting industry-standard KYC procedures and strengthening local powers to prosecute crypto-related crimes.

At the same time, Brazil — like most economic powerhouses worldwide — is struggling to keep inflation in check. Recent data via the government statistics authority IBRE pegs 2021 annual inflation at 10.06%, more than double its 2020 figure of 4.5% and the highest the country has seen in six years.

Bitcoin’s investment status as an inflation hedge has come under question as, since the back end of 2021 and turn of 2022, it has appeared to move more in tune with equities and behave more like a risk-on asset. But there is no doubt that inflation-hit countries see the thesis playing out long-term".

Google follows Twitter, Microsoft, Meta and Reddit into blockchains

One of the earlier criticisms industry insiders faced was that Big Tech appeared to be ignoring blockchains. If this was such a disruptive, world-changing technology, why was Silicon Valley swerving it?

IBM" was one of the first to cross the Rubicon as a founding member of the Hyperledger consortium in 2015, developing private and permissioned enterprise-level blockchains and notably working with the Bank of Thailand to issue bonds in two days rather than the 15-day industry standard.

Big Tech has been remarkably slow to enter the space, but this is changing. Meta (Facebook) is the obvious comparator, but has struggled to make regulators see the benefits of its Diem" (formerly Libra) cryptocurrency. Both Twitter and Reddit are experimenting with the largely Ethereum-based NFT markets, but the biggest social/gaming news in years is the 18 January announcement that Microsoft was to purchase Call of Duty, World of Warcraft and Overwatch publisher Activision Blizzard in a $68.7bn deal. That makes Microsoft the world’s third-largest gaming studio after Sony and China’s Tencent.

Satya Nadella, CEO and chairman made explicit mention of the metaverse not once but twice in the short release, fuelling speculation that the company would follow the likes of Ubisoft to release primary and secondary markets for in-game unique NFT assets -- with the French gaming studio’s innovation based on Tezos blockchain technology.

So — to Google. Reports via Bloomberg and ArsTechnica now suggest that the web giant has switched focus to run headlong into blockchain, starting up a new division headed by long-time advertising chief Shivakumar Venkataraman.

Little has been revealed publicly about the division, other than it will focus on “blockchain and other next-gen distributed computing and data storage technologies”.

It will sit as part of newly reopened Google Labs vertical (shuttered in 2011 but reappearing now), which acts as the multinational’s sandbox for beta testing new programs and apps, and which has since been revitalised to incubate “high-potential, long-term"” projects.

Markets

BTC/USD

After four weeks trading in a tight range between $40k and $44k, Bitcoin took a dive: enough has been written about the recent crypto market slide that more evaluation here would add little to the argument. But suffice it to say that Bitcoin’s 11.3% bounce back from" a mid-July low of $33k to finish the session at $36.7k will provide some succour for those with bullish intentions in mind. As noted above, technical indicators suggest selling has reached the point of exhaustion and institutions are scooping up BTC at these levels.

ETH/USD

Ethereum’s travels over the past two weeks largely aped those of market-leader Bitcoin: a tight $400 trading range followed by a sharp dip to the downside. However, $2,173 proved the limit that bears could pull out of ETH across the fortnight and a 13.2% rebound from this recent low is stronger than almost any other major cryptoasset could manage.

LTC/USD

An interesting theme is developing among Litecoin investors, noting that the payments protocol is not moving in the same direction as its scion Bitcoin.Certainly its break above recent highs to $153.88 in the early part of the fortnight, and making higher lows from" $96.50 towards the end showed more positivity than at the start of 2022.This decoupling has played out over multiple months and suggests a potential maturation in the investment focus for LTC.

BCH/USD

There has been markedly little volatility for traders to play with in Bitcoin Cash since the start of 2022. A high just short of $400 proved to be the ceiling for now, but volume and buying pressure soared to four-week highs as BCH hit a low of $259.39, the resulting push adding 12% to the price of the payments blockchain’s internal currency. With wider markets gaining ground, traders are watching intently for the next move.

ADA/USD

The launch of Cardano’s first decentralised exchange — SundaeSwap — in the early part of the fortnight provided sound fundamental backing to prove out its promising technology, and traders responded in kind, re-rating ADA up a stunning 46.2% to a seven-week high at $1.64. Proof, perhaps, that only multi-asset portfolio can capture the best alpha that crypto markets have to offer. Momentum" did shift back the other way and ADA gave up those gains, but it still ended the week holding at 11.9% gain to $1.03from a low of $0.92.

DOT/USD

The wide-scale success of Polkadot’s parachain auctions — and the $2.6bn raised by winning blockchains — in the pre-Christmas period brought many plaudits to this Ethereum" competitor. Market moves across the fortnight appeared to underscore some of that positivity, as DOT climbed 21.1% to a peak of $28.48 and seemed ready for a fresh assault to reclaim $30. It was not to be, though, as Polkadot succumbed to a bearish rout in line with wider conditions, a 12.9% hike at fortnight’s end proving the bright spot from a tough week.

SOL/USD

Solana's recent attempt to maintain fresh air above $200 seems less of a chore when we realise it has only managed that feat for five and a half weeks of its entire lifespan to date. The Layer 1 Ethereum alternative has been adding yield-bearing staking products, NFTs and DeFi marketplaces with gay abandon over the last few months, giving it many industry bona fides alongside its lightning fast transaction throughput. Bullish traders could maintain an upswing only briefly and then the $170 to $180 tight trading range became its home for the next week or so. From there, along with its competitors Solana dipped 22.8% to $129.64, but again a 9.5% bounce to the upside to finish the fortnight adds a positive spin to the rest of January.

XTZ/USD

The yield and staking rewards available with Proof of Stake pioneer Tezos have provided some comfort to inflation-hit investors, but wide-scale integrations and its moves in NFT adoption with major multinationals seem" to have been disregarded by traders in recent weeks. Starting from dead-on $4, XTZ gained a tidy 11.5% before its downside slip as low as $2.54. The upside from here appears relatively strong with volume returning in droves to buy up Tezos and return it to a finish just shy of $3.

XLM/USD

Stellar’s 2022 started relatively strong, thereafter settling into a trading range of $0.240 to $0.293 with neither bulls nor bears in control. Its downside shift along with the market proved one of the least dramatic, and a 16.5% return back to near $0.20 since the low of 24 January is the best on this ETC list, suggesting there is more upside potential to come from" the cross-border currency.