Cryptoverse Weekly #8: Crypto Winter is Over - are you ready?

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ANATOMY OF A CRYPTO BOTTOM

Exactly a month ago, we have turned bullish (here) as we expected that the headwinds from inflation, interest rate hikes (here), Bitcoin miners’ liquidations (here), protocols’ insolvencies, Crypto investment funds closing etc. would come to an end (here) – we have come a long way

? The cascading decline was driven by a shift in interest rate expectations but with commodity prices and rate hike expectations shifting, this pressure appears to have diminished, opening the possibility of a sustainable rally – investors seem underinvested

? Last year, the crypto rally was initially stopped on its way to $100k when Tesla’s Elon Musk questioned the industry’s carbon footprint – after initially purchasing $1.5bn of Bitcoin which Tesla just announced they have liquidated 75% – remaining open to buy again

? But Tesla is not the only entity that has shown poor market timing, ProShares launched a long BTC Futures ETF near the top in Oct ‘21, only to launch a short BTC Futures ETF near the low in June ‘21

? Now, the market narrative is changing from news becoming less ‘negative’ (as mentioned above) to becoming outright constructive

? While there has been delays and minor setbacks in the PoW to PoS migration for Ethereum, the Merge is now projected for Sep ‘22 – this is giving the market a clear ‘positive upside catalyst’ to run with

? Up until a month ago, we have focused on market neutral exposure to weather the storm that we expected to occur this year. After prices have largely declined by minus 60-80%, we now prefer strategies to gain greater exposure to the markets

? Some of our strategies are expected to switch exposure once or twice a year, allocating among income, yield generating and beta strategies – the current decline appears to offer a unique investment case

? To reflect on this potential, monumental shift, we re-publish our thoughts from the last four weeks so that investors can clearly see how the investment landscape might have changed for the better

Switching from ‘Neutral’ to ‘Bullish’

IDEG has developed an ‘All-Weather’ approach for various market environments to Digital Assets. Historically, crypto has seen significant corrections during mid-halving years and in anticipation of this year’s expected correction, our attention has been focused on the ‘neutral’ bucket (see below).

We identified the potential catalyst in switching from the ‘neutral’ bucket to the strategies within the ‘bullish’ bucket based on either a -60% decline from the two-year price level ahead of the halving (price end of Mar ‘22) and / or an expected low 18 months ahead of the next halving (Sep ’22).

Bitcoin has indeed experienced this -60% drop from the end of Mar ’22 high of 45,700 to 17,600 (-61.5%) on Jun 18th ’22 – hence we judged that the risk / reward has become attractive as one of those above-mentioned criteria has been met.

So far, the $1,000 price level for Ethereum has remained as solid support and prices have indeed rallied already by +47% since the June 18th low. Ethereum’s market capitalization is recorded at $176bn with $19.4bn of that being staked (10.7%) – earning staking rewards of +4.1% per annum.

While plenty has been written about Ethereum’s proof-of-work to proof-of-state switch, what appears to be less understood is ‘Wright’s Law’. Some have argued that Ethereum’s gas fees will be reduced significantly after the Merge and with it, adoption is expected to grow, and the transaction volume will also growth automatically.

Wright’s Law aims to provide a reliable framework for forecasting cost declines as a function of cumulative production. This ‘Law’ indicates that for every cumulative doubling of units produced, costs will fall by a constant percentage. Turning Wright’s Law around, we might conclude that if transaction prices drop sharply for validations on the Ethereum chain, we might see a predictable increase of ‘production’ – or use cases.

History offers plenty of examples of when costs are declining, output rises exponentially (internet, streaming, etc.) and new business models appear to take advantage of this. With the Merge appearing to be imminent, we might see new applications and protocols being launched that are taking advantage of this potential cost reduction.

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