2022 Negative News

• Highest Inflation in 40 years
• Increased likelihood of a recession
• Russia & Ukraine war
• Fastest interest rate increase since the 1970s in America
• Reduced money supply and liquidity hurting investment valuations of most types
• Bankruptcy of centralized funds, lenders and exchanges

2022 Positive News

• Fairly priced cryptocurrencies compared to the bubble in 2021-2022
• Bad actors are washed out of the industry and continue to be picked out as assets decrease in value
• Regulation and consumer protection with clarity of laws
• Innovation comes out during this time of building

2023 Expectations

• Flight to quality for institutional investors and retail
• New builders and inventions in this period
• Crypto bottom with Equities
• Mild recession with low growth
• $12,000 – $13,000 bottom for Bitcoin
• $34,000 – $36,000 end-of-year target for Bitcoin

Summary

• On 1/1/2022, total crypto market capitalization was $2.4 trillion. Today on 1/1/2023, the market capitalization is ~$850 Billion. A 65% decline YoY.
• Exchanged tokens (BNB, KCS) and meme coins (DOGE, SHIB) outperformed BTC and ETH
• The bitcoin network has its largest decrease in difficulty of 7.3% (excluding China’s ban on mining).
• Even as the price of Bitcoin falls, the total hash rate hit an all-time high of 270 Million TH/s in November. This shows a strong interest in the Bitcoin network even as prices decline. 
• Defi total value locked decreased from ~170 Billion on 1/1/22 to ~40 Billion on 1/1/23. This marks a 76% decline in total value locked. The most significant cause was the collapse of the Luna ecosystem and the subsequent fall of 3AC, Celsius, and FTX.
• Stablecoin transactions reached 7.6 Trillion, beating out major credit card companies such as Mastercard, American Express, and Discover in transaction volume.  
• Cryptocurrency and digital asset prices were driven by two things in 2022. Macroeconomic conditions and centralized entities bankruptcies. Macroeconomic conditions drove prices’ fast decrease, which caused liquidations and bad loans from overextended market participants.

Looking back at 2022

Market

After hitting an ATH(All time high) in 2021, the overall crypto market has experienced its infamous unwanted bear cycle in full force for 2022. Bitcoin and Ethereum have traded under their 200-day simple moving average for the year. The 200-day MA is often considered a bear/bull differentiation line from technical analysis. The total crypto market capitalization declined 65% from $2.4 Trillion in January to just above ~$850 Billion. 

Bitcoin is still the most valuable coin by market capitalization ($325 Billion) and has doubled Ethereum’s market capitalization ($150 Billion). Bitcoin declined -64% Year-over-Year (YoY) versus Nasdaq’s (QQQ) decline of -33.8% YoY. 

Most top coins had negative double-digit returns in 2022. The cryptocurrency market overall still moves in lockstep. There is a high correlation between the performance of cryptocurrencies in a bear market. It is rare to see any coins outperforming when the general market is down. There is no diversification for the crypto market, like in the traditional equities market. Investors have bundled all tokens (except stablecoins) into the risk asset investment class. 

In 2022 a prevalent topic arose about the correlation between crypto and the traditional equities market as institutional investors came in doves. Crypto, represented by BTC, and traditional risk assets, represented by Nasdaq futures, have steadily hovered around a 0.8 correlation for most of 2022, the longest period we have seen in Bitcoin’s history. However, we believe this does not mean crypto as an asset class has become just a risk on assets that is the same as equities. Instead, we acknowledge that Crypto as an asset class is affected by macro factors just as other investment vehicles. There’s a saying, “in times of fear, all correlations go to 1.” 2022 was a year full of fear with inflation, aggressive interest hikes, and slowing global economic growth. We foresee this continuing into 2023 as macro factors remain the main focus. 

Spot

Stablecoins, even though unsexy as they represent fiat currency digitized, have been one of the best adopted digital currencies to date. Transaction volumes on-chain have reached $7.4 trillion in 2022 compared to $6 trillion in 2021. Compared to the ~$100 Billion in transactions for 2018, this is an enormous increase and just shows the breadth of global adoption for digital currencies. Stablecoin transaction volume beat out traditional credit card companies such as Mastercard($2.2 T), Discover($200 B), and American Express($1T). 

USDT continues to be the most popular trading pair denomination for exchanges. At the end of the year, ~60% of all spot trading volumes were denominated in USDT, which has been embroiled in controversy. Even as reports of insolvency and criticisms about no audited reserves cloud the company, most of the spot trading volume is still in USDT. 

Bitcoin Miners

It has been a difficult year for everyone in cryptocurrency, especially miners. Part of it might be their fault and lack of risk management. In the traditional commodities market, farmers, oil producers, etc, will likely hedge at least some of their exposure with futures contracts or options to prevent a massive decline in price and profits. This is especially relevant in the crypto market as the price of Bitcoin has large swings -80% on average in bear markets. I would be hedging at least a part of my Bitcoin holdings with those kinds of statistics.

The largest publicly traded miners, Core Scientific, mined around 25% of the Bitcoins mined by these companies in total, ~11,000 BTC. In December, Core Scientific filed for chapter 11 bankruptcy. They stated this was mainly correlated with the prolonged decrease in the price of Bitcoin. This wouldn’t be the case, but most miners tend to hold Bitcoin as a speculative bet and hold most of their mined coins on their balance sheet. For example, according to their quarterly filings, Core Scientific did not sell any Bitcoins until June. They sold ~7,000 Bitcoins, according to their June announcement, at a price of ~$23,000, more than 50% lower than the price at the start of the year. 

Aside from the price of Bitcoin dropping, global energy prices soared this year, putting pressure on the cost it takes to mine each Bitcoin. One way to illustrate miner profitability is hash price, dividing miner revenue by hash rate. This has made fresh lows this year, showing an all-time low in miner revenue per hash.

The combination of factors described above has triggered two capitulatory periods for Bitcoin miners this year, illustrated by comparing the 30-day and 60-day moving averages of hash rate.

Adoption 

Blackrock adds a Bitcoin investment option for Aladdin clients and private trust for direct Bitcoin access. In August, Blackrock partnered with Coinbase to provide Blackrock’s client base direct access to Bitcoin and potentially other digital assets in the future.

Fidelity, one of the biggest providers of 401k, added Bitcoin as an investment option for its retirement accounts. Fidelity continues to lead the market in institutionalizing Crypto by providing it as an investment asset for its 27 million retirement accounts and offering BTC and ETH trading through its Fidelity crypto platform.

Disney accelerator invites Polygon to work with them on a proof of concept for exclusive digital collectibles. 

Meta’s Instagram partners with Polygon to offer NFT creation and purchase to its users all within the platform. This is a big move bringing easily accessible NFTs to Instagram’s 2.5 Billion users and also providing another way to create for influencers. 

JPMorgan uses Aave Arc on Polygon. JPMorgan, the world’s largest bank, executed its first Defi trade. JPM was able to exchange tokenized Singapore dollars for tokenized Japanese yen using Aave Arc, which features KYC. 

Outlook for 2023

Market

The primary trend we saw in 2022 was the rotation to quality value assets and the selling of risky growth assets due to rising interest rates, high inflation, and disappointing equity earnings. This can be seen through the 90% decline in ARKK, a primary proxy for growth and risk assets. Money flowed from risk assets into defensive assets like Gold, Coca-Cola, and UnitedHealthcare. 

We believe this trend will continue into 2023 until we get signs of a recession. Currently, there is still low unemployment and leftover stimulus money, keeping consumer spending afloat. However, we believe this will tick up as we move into 2023. This is not a “surprise” recession, but one everyone is waiting to happen, which could make it milder than expected. In 2008 the recession was seen early on, but no one could see how widespread the toxic CDO debt had spread throughout the financial system. Now there are laws in place to prevent the situation from happening again. We do not expect another 50% drop like in 2008, but a gradual 20% move lower in equities would translate into a 30% – 40% drop in Bitcoin. One comparison that I like to make in this bear market is the comparison of FTX/3AC to Lehman brothers and Celsius/BlockFi/Voyager to subprime lenders. Now we are through the worst of the disaster but still have to deal with the potential contagion with FTX bankruptcy proceedings, Gemini & DCG lawsuit, and the solvency of Genesis. As talked about above, we see a gradual decline in 2023 before hitting a cycle low with strong 20% – 30% bear-market rallies in between.

Defi

Defi was all the hype during the 2021 bull market, with applications such as Yearn, Uniswap, Sushi Swap, Curve, and Aave taking the market by storm. These 1st generation Defi protocols have pioneered the decentralized finance system, allowing users to truly control their money and trading without a centralized entity. However, much of the hype surrounding these platforms was the high-yield rewards that drove profit seekers to deposit funds in liquidity pools. From 2021 to now, we saw a rapid outflow of funds from the Defi ecosystem as yields fell and leverage washed out due to the collapse of Celsius, BlockFi, 3AC, and others. However, this also supports the need for decentralized finance, as centralized entities can fail, and you will have no control over them. With Defi, there is no single source of failure, and you are responsible for your own money. We see further adoption of Defi among retail as the industry was shaken by the collapse of the most prominent exchanges in the past couple of months. As noted in a recent Federal Reserve Bank of New York blog post, “Defi protocols appear to have continued to function as intended in 2022, and no protocols have been closed down.”

Macro

We expect the Fed and interest rates to be on the backburners for 2023, but they will still likely have an effect, especially at the beginning (Q1) of the year and the end (Q4). The next leg lower will be driven by higher unemployment, slowing growth in terms of lowered corporate earnings estimates, and a decrease in consumer spending. The first Fed meeting in February will likely set the whole tone for the year, and if the Fed does raise rates by 50 basis points, then we are likely to see the markets decline for the first half of the year. Then towards the end of the year, hearing what the Fed says will come back into focus as many expect a pivot and rate cut before 2023 ends. If that does not come to fruition, we can expect more volatile action and a retest of the lows or even establish new lows. 

What I am expecting is three 25 basis point hikes in the next year, raising the Fed’s funds rate to 5.25%. This aligns with what the Fed communicates and corresponds to their dot plot. However, the 6-month interest rate futures market is pricing in only a 4.8% top rate. Unlike others, I do believe that the Fed will stand firm in its fight against inflation as it cannot risk a secondary recovery of inflation like in the 1970s, which would destroy the Fed’s credibility. Powell has communicated that this is the scenario he will do anything to avoid. This means he would rather bring the U.S. into a recession than loosen monetary policy.

This does not mean asset prices will remain the same throughout the year. In the short-term Q1, there could be a bear-market rally due to positive CPI numbers and a weakening job market, which the market will interpret as signals for the Fed to pivot. This year, we could see strong counter-trend rallies, especially in Q1 or Q4. 

Neutral and negative wall street estimates have SPY EPS at about $200 or a 10% decrease. Looking at the global credit impulse, which represents the amount of credit available to non-finance firms (you and me), we see a considerable decline. This is a leading indicator of future S&P 500 EPS growth, and right now, it is showing a swift downward revision is in the cards. 

We see the same trend of investing in value and safety for most of 2023. Value has been performing because of its steady cash flows and relatively cheap EPS ratio. So investors tend to flock toward this group of assets. However, as more investors leave growth/risk assets such as tech stocks and crypto, it will be an attractive price point to start accumulating. As the shift continues toward value assets, they will become overpriced, and growth/risk assets will be more attractive, especially with a potential turnaround in Fed policy towards the end of 2023.

Bottoming Signals & Price Prediction

Below, we will talk about some of the bottoming signs we see through a combination of historical price, on-chain analysis, and fundamental analysis. 

First, we are looking at the on-chain data. By looking at the on-chain activity of Bitcoin holder addresses, we can see that long-term holders (Bitcoin has not moved in over 1 year) now account for over 66% of the supply available. We look at holders that haven’t moved their Bitcoin in over 1 year because prices declined over 65% this year, but these holders did not move their Bitcoin to sell. This shows that these holders are insensitive to price and are trenched in and riding out the storm. This is often a leading signal to a Bitcoin bottom based on investor behavior. Looking at the bottom price in the 2018 bear market, we can see as prices declined to $3,000, the percentage of long-term holders increased from 40% to around 60%. These “whales” or smart money have been accumulating Bitcoin long before prices hit bottom, or else their addresses wouldn’t have been aged enough to be considered long-term holders. This means that if you are watching indicators like this, you can get a better cost basis than the whales. However, if we see this trend break and long-term holders are selling out of their positions instead of being inactive, that could be a warning of a future decrease in Bitcoin price. 

Next, we look at the price of production per Bitcoin or the Bitcoin Energy Gravity Model coined by the BlockwareSolutions team. Bitcoin price has historically gone up, and so has the price of mining. Through the deflationary tokenomics of Bitcoin and competition among miners, the cost of production always trends up. Energy Mass, or the blue line on the chart below, represents the estimated cost of production for a modern mining rig using commercial electricity rates. When the price of Bitcoin deviates from the Energy Mass, it represents that miners have huge profit margins per mined coin. This could also be seen as Bitcoin being overvalued compared to the cost of production. Whenever this has happened in the past, we see the price reverting to the Energy Mass price. Not surprisingly, when the price of Bitcoin intersects or falls below the cost of production, it has historically coincided with the bottom of a bear market. 

I released this chart right after the FTX collapse, which is still applicable today. The contagion from the FTX collapse (Genesis, Gemini, Grayscale, and DCG) with the declining global macroeconomic conditions could cause the final leg down for the crypto market. Our bottom target for Bitcoin is in the $12,000 to $13,000 range. Wallstreet estimates a 20% decline for the equities market before hitting bottom. At current prices, our Bitcoin bottom target price would represent a 35% – 40% decline which corresponds to the 20% decline in equities due to the volatile nature of crypto assets. 

My end-of-year target for Bitcoin is $34,000 – $36,000. After reaching a bottom during the first half of the year, we could see a slow recovery for the global economy. This would lead to multiple bear-market rallies on the backs of improving conditions and loosening monetary policies. Ultimately ending the year around $34,000 – $36,000 This sideways market is difficult to trade, but Pionex offers great tools to help you profit in these conditions. If you disagree with my views, we have products that can help you profit from your own!

Technical

BTC

Bias: Long-term Bearish, Medium-term Neutral

Bitcoin is ripping up after an inline CPI print last Thursday, showing that inflation is officially in a downtrend and expected to continue through 2023. Before that, FTX’s bankruptcy lawyers also “found” approximately $5 Billion of liquid assets, which boosted the markets. We have officially broken over $18,000, the top of the trading range we have been in for the last 2 months. However, Bitcoin went straight into its $19,000 resistance, a large supply zone, as seen on the right-hand side of the chart through the volume profile. However, Bitcoin cut through it like butter and went straight into its previous higher low resistance of $21,400. This is the type of good ‘ol Bitcoin up-only price action we like to see! I would be extremely surprised if we can break above our previous high without retracing first but seeing as we went down for all of 2022, I think the bulls are tired of losing. If we can retrace and consolidate above $19,000 for some time, it would give us a more bullish structure and could see a continuation of this rally. In the past, when realized volatility hit levels under 25%, a small short-term trend usually formed to the upside. (Highlighted in blue)

ETH

Bias: Long-term Bearish, Medium-term Neutral

ETH had a very bullish past 2-weeks for the same reasons driving up the price of BTC. However, there are better places to get long as many strong resistance areas are ahead. We just reclaimed the $1,500 level; the price before ETH fell 30% from the FTX event. The $1,500 level is also the most probable level where we would get a lower high put in on the chart, but since prices were able to reclaim, the chances of that happening is decreasing. Going long at current prices doesn’t offer better risk-reward. Instead, I would use a buy-the-dip order with a strike at $1,450. If prices retrace to $1,450, you get in at a price that offers good risk-reward. If prices don’t retrace, you still profit from your cash instead of sitting on the sidelines.

Bullish signs:

• Above the 200-day MA for the first time since 2022
• Broke out of the previous month’s range top
• Broke out of the yearly trendline from 2022