RESEARCH
The Catch up
From the dizzying heights of the leveraged spring rally fuelled by Elon Musk's tweets to the summer lull, after Tesla did an about face and China expelled miners, bitcoin dropped over 50%. Autumn brought better news and fresh all time highs as El Salvador adopted bitcoin as legal tender. The US allowed the first bitcoin futures ETF the following month. Then taper talk and potential rate hikes dampened performance once again, with weakness in higher growth equities spilling over into crypto. The Fed’s change in tone just as we reached peak inflation and lower growth into 2022, mean sentiment has remained fragile. At times, price action seemed to be driven by memes, others by the bond market. With all of the noise, it is important to remember the underlying technology and use cases underpinning the growth of digital assets. Crypto market cap reached $2.24 trillion from $650 bn in 2021, trading volume shot up from $2 to $6 trillion per month on exchanges, and VC investment jumped from $3bn FY20 to $15bn as of Q321. Adoption grew over 800%, with estimates of 300 million investors worldwide. Financial institutions are allowing client access, trading themselves or experimenting with blockchain technology. 2021 was also the year regulators were forced to take the sector seriously and it became clearer that there was no intention to ban crypto in most countries. Let’s take a walk down memory lane with a selection of highlights.Year in review
January - Happy 2021!
- Elon Musk and Jack Dorsey add bitcoin to their Twitter handles, while Musk also supports Dogecoin. Bitcoin surpasses 40k before giving back 25% by month end.
- Janet Yellen, US Treasury Secretary, says in the Senate that cryptocurrencies have the potential to improve the efficiency of the financial system and would work with the Fed and other agencies on a framework to encourage their use for legitimate activities while curtailing their use for illegal ones.
February - Tesla tweets and Bitcoin breaks 50k
- Tesla accepts bitcoin as a means of payment for its products and acquires $1.5 bn in BTC for “more flexibility to further diversify and maximize returns on our cash.”. At the end of 2020 they had $19 bn in cash and equivalents, so not an insignificant sum. Musk had declared he was a Bitcoin believer a few weeks before, pushing up prices of the digital asset to over $44,000.
- Bank of New York Mellon reports it will be storing crypto on behalf of its clients, treating it the same way as it does traditional assets. In the same month, behemoth Blackrock reveals it started trading bitcoin futures on the CME (Chicago Mercantile Exchange).
March
- The First 5000 Days sells for $69 million
- The artist Beeple sells an NFT of his work for $69 million at a first-of-its kind auction at Christie’s. This sale makes Beeple one of the most valuable living artists.
- Morgan Stanley announces it will offer its wealthiest clients access to crypto funds, up to 2.5% of their net worth.
- PayPal reveals the company’s plans to delve further into crypto-currency as they aim to stay relevant. A new business unit will experiment with smart contracts and testing Ethereum and other blockchains to improve payments.
April- Coinbase IPO pushes BTC to a new ATH and a hangover wipeout
- Coinbase debuts on the Nasdaq, in a direct listing, with its market cap briefly surpassing $100 bn. The exchange made crypto trading easier for users and became one of the most downloaded apps, with 73 million users. It was the seventh biggest listing of all time.
Leverage builds up in the system on the excitement around the Coinbase listing and leads to a wipeout of $10 bn in longs just a few days later, on April 18. What a hangover.
May - China mining crackdown and Musk u-turn, Uniswap upgrade is a success
- Tesla rescinds its acceptance of bitcoin as a means of payment on ESG concerns (shareholder pressure perhaps?) causing a 15% fall in the coin. "Cryptocurrency is a good idea, but this cannot come at great cost to the environment." He also said the EV producer would not sell any of its bitcoin, and would use it for transactions as soon as mining became more sustainable.
- China bans financial institutions and payment companies from providing services related to cryptocurrency transactions, and warns investors against speculative crypto trading.
- Inner Mongolia intensifies its efforts against crypto mining after Beijing vows to crack down on bitcoin mining and trading.This kicks off a mass exodus of miners from China taking out half of the hash rate away. That hash rate has now recovered and the mix towards renewables has improved.
- Uniswap, the leading decentralised exchange, upgrades from V2 to V3 to offer up to 4k times better capital efficiency and high returns. It is a runaway success, achieving the number one position within weeks. Concentrated liquidity offers liquidity providers increased control over price ranges. Those positions are then aggregated together into one pool, allowing users to trade against one combined curve. Multiple fee tiers allow liquidity providers to be more fairly compensated for the level of risk they take on.
June - A month to forget
- The China mining crackdown intensifies, with Sichuan shutting down major mines in its province, while banks and payment firms are instructed (again) to ban anything related to crypto trading. BTC falls below 30k, as it also did in May, and $400bn is erased from the market on June 22.
July: Rise of Play to Earn
- In just the first week in July, Axie Infinity surpasses the $12 million in revenue the game made in the entire month of June, to $102 million, higher than every DeFi protocol combined. As a result the AXS token, which is integral to the game, rallies almost 500%. AXS can be used in-game but also receives a portion of the protocol’s revenues and the game has proved popular in developing countries where gamers are looking to supplement their incomes. The game has 1.5 million players per day and its success has led to increased investment in the space.
August - NFT mania and lobbying on Capitol Hill, ETH London hard fork, BTC briefly above 50k for the first time since May
- NFT sales on OpenSea hit all-time highs of over US $3bn as people scramble to buy digital collectibles. There are over 300 million transactions on a single day. Celebrities, influencers, and artists get in on the action, while large companies take note of the burgeoning cultural movement and exchanges have since announced NFT platform launches.
- Seemingly catching the industry by surprise, a clause in the US infrastructure bill making its way through Congress requires crypto “brokers” to report customer information including transactions to the Internal Revenue Service (IRS). The issue was that the definition of “broker” was open ended, prompting concern that it would apply to everyone from wallet providers to miners, who would be unable to meet the requirements. This prompts crypto players to launch lobbying efforts as they become more aware of the need to have their interests represented in Washington. Ultimately, the Treasury clarifies the law would apply only to exchanges.
- Ethereum’s London hard fork goes live, a step towards Ethereum 2.0 and Proof of Stake leading to a more deflationary ETH and more predictable gas fees. This, as well as increased DeFi and NFT usage helps ETH to outperform BTC in 2021.
- Hackers stole $600 million from Poly Network, a platform that connects different blockchains, exploiting a weakness in the network, but returned most of the funds.
September - First nation-state adoption
- El Salvador becomes the first country to officially accept bitcoin as legal tender, alongside the US dollar. The Bitcoin Law which took effect Sept. 7 means businesses would be required to accept bitcoin for all payments. The government hands out $30 per person for anyone who downloads a Chivo wallet to facilitate payments on the Lightning Network. Three million people, almost half the population, do so, more than the number of people with bank accounts. Bitcoin rallies to $51,900, a four month high, in anticipation of the news, with increased leverage in the system, but investors sell into the fact.
- At the other end of the spectrum, the PBOC (People’s Bank of China) reveals it will fully launch the e-CNY by February 2022, after having tested it in several major cities. The system is centralised using non-blockchain technology, and banks act as intermediaries in the traditional way. However, it will have the ability to be programmed via smart contracts.
- Evergrande, the indebted giant Chinese real estate consortium stumbles and causes short term market jitters as local property bonds plummet. The contagion is contained.
October - Hit ETFS and the Metaverse Land Grab
- The first bitcoin-linked exchange-traded fund debuts in the US, under the ProShares banner and BITO ticker. The $1bn volume on day one was one of the most successful to date. The caveat is that it is a futures ETF, which means higher costs for investors, but at least it makes crypto more accessible for trading without custody and is a step towards an eventual spot version. The news propels BTC to a new all time high, above the previous $64.9k level.
- Facebook announces a $10 bn investment in the Metaverse and rebrands to Meta, triggering a rally in Metaverse-related crypto projects Decentraland, The Sandbox, Enjin and Axie Infinity and causing a rush to buy virtual land. The 1849 Gold Rush has nothing on this. "Now we have a new North Star: to help bring the Metaverse to life." Mark Zuckerberg , CEO of Meta, said.
- Microstrategy continues to boost its Bitcoin investment adding 242 million dollars for 5k coins, for a total of 114k and approximately $3bn. The largest corporate holder by far.
November - Hostage to the macro and Omicron yet the largest crypto fund ever launches
Fed chairman, Jerome Powell, spoils Thanksgiving by removing the word “transitory” from the agency’s inflation outlook, just as inflation peaked and Omicron surged, causing short term yields to spike as investors fully factored in three rate hikes in 2002. The long end of the curve fell as the market grew concerned the hikes would kill growth. The result was a further sell off in risk assets that began earlier in the month with high growth stocks and crypto.
- Amongst the market weakness, Paradigm, run by a Coinbase co-founder, Fred Ehrsam, launches a $2.5 bn crypto fund, the largest ever of its kind. Andreessen Horowitz, the Silicon Valley firm investing actively in the space, had announced one in June at $2.2 bn.
December
- Key industry members including Circle CEO Jeremy Allaire, FTX CEO Sam Bankman-Fried, Bitfury CEO Brian Brooks, Paxos Trust CEO Charles Cascarilla, Stellar Development Foundation CEO Denelle Dixon, and Coinbase CFO Alesia Haas, testify before the House Financial Services Committee. The hearing evaluated how the government should oversee and improve regulation of the industry. The five hour event was constructive, with many positive statements from lawmakers about digital ledger technology and good questions about systemic risks and consumer protection.
- FTX announces it is seeking $1.5bn in funding including for FTX US, which would bring the exchange’s valuation to $32 billion. In July, they raised $900mn, crypto’s largest ever VC funding round.
- Pak breaks record for most expensive NFT sale on the Nifty Gateway platform. He is now technically the most expensive living artist with his artwork entitled Merge, which saw almost 30k collectors spend over 90 million dollars to buy 312k units of “mass”. Buyers could unlock an exclusive NFT that expanded into several works as more units were added.
Exchange volumes at $6 trillion per month, up from just over $2 trillion Dec 2020
Bloody Sunday: Exchanges offering futures liquidated $10 billion worth of positions on April 18 as investors leveraged up in the run up to the Coinbase IPO
Source: CoinDesk
Long term investment into Blockchain picks up despite lacklustre short term price action
Chinese miner exodus benefited the U.S. and a higher share of renewable energy
Source: Cambridge Center for Alternative Finance
Mining hash rate recovers from the Great Chinese Migration
NFT volumes surpassed $1bn per week during the summer mania, primarily on OpenSea
Source: The Block
ETH has its first deflationary week in November post hard fork due to high usage and gas fees
Source: Delphi Digital, Dune Analytics
Bitcoin loses its dominance to Ethereum, and other protocols as investors broaden their portfolios
Source: Trading View
Value Locked in DeFi has almost 10xed in a year, with Ethereum still dominating but alternatives such as Solana gaining some ground due to high ETH gas fees
Source: The Block
The Fed’s Dot Plot, Dec 2020 versus Dec 2021, Before and After
Source: The Fed, Blockworks
PAK NFTs, Merge Collection sells for over $90 million
See you in 2022! We welcome comments and suggestions.
Martha @reyeshmartha
Disclaimer: The views expressed in this newsletter are my own and not intended as financial advice or a recommendation, but only for informational purposes. You should carry out your own independent research or consult a financial adviser if you are unsure. Please also be advised that I hold investments in some of the assets mentioned in this report, including digital assets, equities and ETFs.
