Heading in Year-End…Back to Basics (Beta)

Heading in Year-End

Readers are invited to kindly read our 2023 Outlook, published last week. We review past 2022 predictions, ranking our accuracy and outline our secular macro viewpoints for industry direction over 2023. Strong winds of regulation and global geo-political frictions are blowing. We are hopeful for balanced regulation for robust sector growth. The reaction to this means DeFi (Decentralised Finance) will be ‘the’ sector to watch as cost of compliance rises, technology lowers costs, increases scale of adoption, new DeFi protocols and strategies will emerge, e.g. Compound, AAVE, Uniswap…etc worked relatively well during recent tumultuous events, supporting this thesis.

Lower Trading Volume and Volatility

During the global holiday period. Digital asset prices consolidated to the lower end of their recent ranges with BTC hovering around 16,555 and ETH holding just below 1,190, in sympathy with TradFi macro volatility levels which came off from last week’s Friday spike, coming in wake of hawkish rhetoric from the ECB and US PMI?showing the lowest index level since 2009. Front-end volatility fell sharply bringing futures curves to steeper contango. 1m BTC is down -3.7 to 52.8 (5th percentile of 52w range) and 1m ETH is up slightly +1.3 to 65.6 (8th percentile of 52w range).

The macroeconomic Calendar Chugs Onwards and still has several important US numbers coming this week.

Consumer Confidence is on Wednesday and PCE comes this Friday 23rd Dec 2022. Consumer Confidence may be more interesting given the huge miss in retail sales last week, which sparked fears of a sharp drop in consumer demand.

Overleaf, while headline US inflation numbers have lowered, the ECB still shows a hawkish tone as they play catch-up. All eyes remain on the US Fed, general employment, and input costs levels to determine US interest rate levels.

Exhibit A shows S&P equities (risk asset) versus long term US Fed rates. Dovish rhetoric from US policy makers, Bitcoin and related digital assets, like equities, have some propensity to outperform as rate expectations lower. Benchmark digital asset (BTC) took a beating in 2022 but, subject to what happens with DCG’s grayscales issues, could be poised to outperform. When the Fed pivots to easing, it should test of crypto's potential to transition toward trading more like gold or US Treasury bonds. Ethereum may outpace Bitcoin in the coming quarter.

CSOP AM (Hong Kong) Launches First BTC / ETH ETFs

CSOP Bitcoin Futures ETF (3066.HK), CSOP Ethereum Futures ETF (3068.HK). The ETF launched, officially listed, and traded on the Hong Kong Stock Exchange on December 16. While the ETF is still futures based, this was a small and positive step for general institutional adoption of digital assets.

Cautiously Optimistic as Risk is Pushed Out of the Market

Our team has experienced several cycles. The deepest crypto winter in recent memory indicates conditions are likely “to get worse, before they get better”. Downside risks exists for H1-2023, we are fine with this as Risk Is Pushed Out of the Market. The market will eventually recover.

Geopolitical “Actions” and Commensurate “Reactions” Drive Global Uncertainty

The margin for error for sovereign disagreement is shrinking.Finally, for those digital asset institutions which can remain intact, the long-term growth prospects remain, driven by blockchain technology, a major growth sector for the future.

Author: Kevin Loo, Managing Director, IDEG

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