All That Glitters… Return of FOMO

BTC Tops US$ 23,000

In best monthly performance since October 2021 and saw a number of short squeezes throughout the period. BTC climbed more than 39%, breaking through the US$23,000 resistance ceiling. ARK Investment put out a highly bullish long-term report for BTC. We agree with the direction of travel however balance views, focusing on a steadier and stable long-term appreciation, adoption rate and horizon.

”Renaissance” for Strategic Investors

The story for digital assets is broad-based. As Web3 & Crypto integrates into the real economy via Digital Assets, this sector is bound to pick up in correlation and adoption. Opportunities are beyond BTC and ETH and highlight a ‘broad sector’ long-only strategy for investors accessing technologies and opportunities of the next generation.

IMF Raises 2023 Global Growth Forecast

Improvements in global economic growth forecasts as the US, ECB and UK all raise interest rates as inflation peaks. Fundamental indicators remain mixed as global factory activity contracts and major tech companies retrench staff, in contrast to improvements in US unemployment data, India’s plans to boost capital spending, and a sharp rebound as HK / China borders reopen.

Most ‘Crypto Ready’ Cities Index

According to a Tax startup in the UK,?London?is named as the world’s leading crypto hub, followed by?Dubai, New York?and?Singapore?(4th place). Hong Kong slipped into 7th place. London, apparently, has a high number of people working in the industry, hosts the 2nd highest number of crypto-related conferences and is home to ~800 crypto-related companies.

Decentralized Finance: dYdX Shows the Way

DEX users intensified a price rejuvenation of +15% for its DEX token after a bullish ecosystem report and a large upshoot of trading volume, which doubled over the past week. Transaction volume was up by 102%, bolstered by the DEX activities on the Ethereum chain.

BTC Tops US$ 23,000

The world’s largest digital asset by market capitalization, rose 2.50% in the week from Jan. 27 to Feb. 3, trading at US$23,528 at 8 p.m. on Friday in Hong Kong. Ether gained 4.47% in the same timeframe to change hands at US$1,648. Bitcoin surged 39.93% in January, rallying from US$16,496 at the start of the month to US$23,954 by Jan. 31, outpacing the historical best month since Oct. 2021, when it rallied ~39%.

Exhibit A / B:?Asset management giant ARK Invest published the 7th edition of the report, Big Ideas 2023 report on 1-Feb-2023, estimating that the price of one Bitcoin could exceed US$1 million by 2030, Outspoken asset management firm ARK outlined three scenarios for BTC into 2030: a bear case, puts BTC at US$ 258.5K with a 40% compound annual growth rate (CAGR); a base case, estimates US$682,800 with a CAGR of 60%; and a bull case, which predicts that Bitcoin will grow with a 75% CAGR to reach US$1.48m by 2030.

While we are firm and long-term supporters of BTC adoption, to achieve such a stellar valuation Bitcoin needs to achieve major mass adoption. We temper bullish calls, given current technology, regulation and competition by alternative crypto assets, including ETH (and other layer 1’s), stablecoins and CDBC, all of which can coexist alongside BTC, inherently supporting trading liquidity. That said, this requires some time to be resolved with many speed bumps along the way.

Positive indications reflect public research showing recent trading cycles coinciding with patterns of stablecoins flowing into exchanges during workdays specifically, in contrast to crypto markets trading 24/7. In our view, this is an indicator of a more professional crowd, increasingly lead by institutional interest, buying into the digital assets narrative as FOMO resettles into investors’ minds.

With increasing institutional custody services to support the demand for ‘spot asset’ ownership versus financial derivatives used purely for hedging and trading purposes, demand for spot Bitcoin will steadily advance.

Further, we remain positive on ETH and EVM-compatible related chains, including Polygon’s Matic, which was positive as last week’s biggest gainer among the ten largest non-stablecoin cryptocurrencies, up 10.43% on the weekly chart, trading at US$1.19 per token.

Exhibit A:?ARK Research Estimates for BTC to Scale Exponentially (2030 BTC Price Target 31-Dec-22 to 31-Dec-2030 CAGR)

Exhibit B:?BTC Use Cases and Penetration Rates Price Assumptions

“Renaissance” for Strategic Alternative Digital Investors…?The story for digital assets is broad-based. The?‘Renaissance’?for Web3 & crypto integrating into the real economy via Digital Assets and other forms is bound to pick-up in correlation and adoption to the real economy.?Exhibit C?shows where the allocation sector value is.?Exhibit E?are areas investors should seek to research/understand.

Exhibit C:?Strategic Rationales for Wide Diversification of Digital Assets

Strategy objective is to track and outperform the price growth of selected Web3 and crypto sectors beyond BTC and ETH, provide balanced allocation for diversification, risk management and liquidity to access public chains, metaverse, DeFi, dApps as well as other rising sectors.?Exhibit D?reflects in the recent rally, the smaller digital asset markets outperformed as investors sought higher returns.

Exhibit D:?A ‘Renaissance’ Strategy Outperforms Within Recent Rally

Exhibit E:?Factors to Drive ‘Renaissance’ Style Blockchain Investment Opportunities

IMF: 2023 Global Growth Forecasts Revised Upwards

Despite the long-term disruption of blockchain technology and its impact on the traditional financial economy, we are still in the very early days of innovation and user community development.?Hence, macro remains highly influential on investors’ risk sentiment for crypto and web3 assets. As such, the International Monetary Fund (IMF) made revisions to its global growth outlook for 2023 due to “surprisingly resilient” demand in the US and EU regions, easing energy costs and the reopening of China’s economy after Beijing abandoned its strict COVID-19 restrictions. While still the pace of global growth falls compared with 2022, the IMF still forecasts positive absolute growth of 2.9% for 2023, up from a 2.7% forecast in October. This is a positive ‘top-down’ support for recent price appreciation. That said, ‘bottom-up’ data is mixed as “Big Tech” continue to adjust with staff firings across the board.

Exhibit E:?IMF Global Growth Expectations for 2023.

During supportive news, the IMF report states that the margin for error in maintaining growth is increasingly slim: “Central banks are likely to tighten monetary policy, fighting inflation, concerns that the restrictive stance could tip advanced economies into a recession.” In other words, the IMF has concerns over the “quality” of the recovery.

The US Fed slowed its interest rate rises to 4.50-4.75% however ongoing increases are still expected as it battles inflation. Fed Chair Jerome Powell does not see the Fed cutting rates this year.

As we have written in the past, US job openings unexpectedly rose in December, showing that demand for labour remains strong despite higher interest rates and mounting fears of a recession, keeping the Fed on its policy tightening path.

The Eurozone outlook is also up – to 0.7%, versus 0.5% in October, although this is down from 3.5% growth in 2022. The IMF says Europe has adapted to higher energy costs more quickly than expected, despite the conflict in Ukraine vs. Russia.

The Bank of England has raised interest rates for the 10th time in a row, but dropped its pledge to keep increasing them “forcefully, indicating inflation has probably peaked. Rates now stand at 4.0%, their highest since 2008, up from 3.5% beforehand. Britain is still on course for a recession, but a “much shallower” one than previously forecast, thanks largely to a fall in energy prices.

Crypto Ready Cities Index… According to a Crypto Startup, Recap.

London?was named the world’s leading crypto hub, followed by?Dubai, New York?and?Singapore?(4th place). Hong Kong slipped into 7th place. The Recap index report ranks each city by measuring eight key criteria, including the number of crypto workers, companies, meet-ups, quality of life score and R&D spending as a percentage of GDP.

Exhibit D:?Top-20 Cities Crypto-Readiness

Now, this is a startup that produced this report. So, please treat it as an indication, not science. Further, we note that one of our favourite cities for crypto adoption,?Miami, is not even mentioned.

So that said, this?“indicative list”?by startup?“Recap” – with 7 employees currently, according to LinkedIn -?shows the top?20 major cities?with infrastructure ready for the mass adoption of cryptocurrencies. Key factors considered include the total number of crypto-specific events, crypto-related jobs, crypto-specific companies and the number of crypto ATMs. Some of the non-crypto considerations include quality of life, research, and development spending as a percentage of gross domestic product and capital gains tax rate.

What is more telling is the report by the?Financial Times (Exhibit F) –?who seem to be permanent crypto-bears. The report is consistent with UK Prime Minister Rishi Sunak’s vision to “ensure the U.K. financial services industry is always at the forefront of technology and innovation” as the government introduces new crypto rules, potentially impacting traditional financial custodians, exchanges, and lenders which aim to offer services within this area. In a sweeping consultation on regulating the crypto industry, the Treasury said crypto firms will be subject to similar rules as those governing traditional finance when it comes to crypto custody.

Nomura (Laser Digital)?and?Standard Chartered, among other global entities, run digital asset custody services. Crypto-native firms running custody operations have also attracted significant interest from traditional finance.

Dubai?comes in second place as a city prepared it pushes to become the leading centre for cryptocurrency and blockchain technology in the Middle East, following a year of multiple new laws for crypto exchanges to operate in the city.

While?Singapore?has seen a short-term pullback in activity, albeit sentiment remains strong given the capital flow and drive to attract talent. And it is also true that?Hong Kong?has certainly slipped down the ranks but does aim to recover as the HKMA (HK Monetary Authority) sought to welcome digital assets back to its industry and has been active in public consultations and has explicitly started to welcome investors and providers back to its market.

Again, we can only place so much support behind a report that is crafted by a startup company of 7-people, however, we do applaud the intentions/indications of our own observations.

Decentralized Finance: dYdX Shows the Way…?dYdX has been on a tear since they delayed the token unlock from Feb to Dec – for the remainder of the year there will be no further supply – the token is up >100% since the announcement. The price of its token rallied from US$1.21 to over US$ 3.50 per token over the last 1.5 weeks.

dYdX, a Decentralised Exchange (DEX) designed specifically for perpetual swaps and its protocol works differently versus other DEXs such as Uniswap, a direct token for token exchange. dYdx offers advanced methods of DeFi trading based on the Ethereum layer two system StarkWare and utilizes zero-knowledge proofs (ZK) to create a more secure, decentralized and privacy-focused platform.

Exhibit D:?dYdX Token Rallies, but Still Off Sept-2021 Peak of US$ 21.0

The initial catalysts for the token rally was the dYdX token unlock schedule being delayed until December. Ahead of token unlocks, crypto markets are known to show volatile trading patterns, dYdX traders sought to take advantage of the changing technical tighter supply dynamic as next month’s 150 million-token unlock was reduced, 83 million tokens to be allocated to investors remain locked until December 2023, a decrease of 55%.

Further, the DEX released its growth report, highlighting the strength of its developer community, retaining a positive attitude to the building despite a short-term industry cooldown post FTX contagion. The protocol bucked the trend with significant growth over the past year in terms of robust exchange liquidity, an increment in generated revenue and a 62.5% increase in engagements via Twitter.

Author: Kevin Loo, Managing Director, IDEG

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