RΞCAP: Slowly, Then Suddenly
Happy Chinese New Year!
Whilst it may be the Year of the Rabbit in the Chinese zodiac, in crypto it's looking like this may be the Year of the Ape - but that's a story for another time and could probably do with an entire article dedicated to it. In this article, we'll take a look at how market sentiment is slowly changing, some of the trends we've seen over the past week, as well as a brief overview of the current state of play with nation state stablecoins and CBDCs.
So, let's take a look at where we stand following another week in crypto:
TLDR: Market is warming up - but be careful to not get burned. There's still someway to go...
Market Overview
Since the beginning of the year, we've seen a reset on sentiment across the crypto markets. In 2022, month after month it felt as if the market was going to constantly bleed - death by a thousand cuts; traders would get caught in the chop and the fake breakouts, yet the market would continue to trend downwards. If you were around in 2018, this was a similar experience but over a longer time period. With the multiple lenders blowing up, trust in centralised exchanges at an all time low, it is easy to see why sentiment was so low last year - both retail and institutional investors had been burned badly by these events and far more than in recent years.
But with the new year, comes new sentiment and a fresh start. Whilst I may have joked in one of my first articles that we'd be in "up only" mode from the beginning of the year, now that we're just over 3 weeks in there is signal that we have hit a turning point. If we use Bitcoin as a proxy for this, as the crypto market is highly correlated with Bitcoin's price movement, the change in trend is quite noticeable, up almost 40% from the lows with the total crypto market cap back over $1T.
If we zoom out and look at the macro (with some crudely applied indicators), then this reversal also looks to have some merit:
Three weeks into the new year - so far, so good?
At face value, this confluence of these signals and the region in which this has happened appears to have merit in suggesting a reversal is underway and does lead me to believe that we may be through the worse of it - barring another Black Swan event. Although, it should be noted that there is no clear confirmation yet. It is still possible that we range between this region and the lows over the coming months given the residual risk in the market with the consequences of 2022's contagion events still playing out, as seen by crypto lender Genesis filing for Chapter 11 bankruptcy this week.
Of course, this is not investment advice and whatever your take on this is, it's always worth keeping this chart in mind (people are usually terrible at timing the market):
Alchemy Dropped Their Web3 Development Report For Q4 2022
Another good indicator for assessing the health of the broader Web3 landscape is looking at the underlying development activity and how engaged devs are. "Build in bear markets" is a phrase that is often thrown around in this industry, but that seems to have been the case during the end of 2022, with the number of dev teams increasing throughout the year, despite the decline in prices across the market:
And this is reinforced by the developer survey showing a strong signal that devs had not been negatively affected by the market turmoil:
And this is something that we've seen on the ground as well at Entrepreneur First , with our first Web3 cohort having been busy building relentlessly over the past 3 months despite the fear in the broader market - with several exciting startups being built that will be announced in the near future. What is clear from this report, is that there is strong evidence that dev teams are among the most resiliant and not shaken out by the volatility, which is encouraging to see as this is a key part in the "price-innovation" cycle that a16z crypto documented in their 2022 State of Crypto Report:
Nation State Stablecoin Posturing
With constraints on traditional financial systems being placed on the likes of Russia and Iran, it is unsurprising that they are looking for means to bypass the international banking system. In this case, over the past week it was announced that the two coutnries have started talks to consider a cryptocurrency backed by gold that they could use for bilateral trade deals. This would allow them to avoid settling deals in USD and as such the US sanctions currently imposed on them. Whilst for years, Bitcoin owned this monetary sovereignty narrative - with it's digitally scare nature and it's robustness due to its decentralisation - it is far more practical for nations that are looking to trade to consider different approaches with stablecoins given that they are less volatile in value.
Whilst it is still to see how other nations react to sanctioned states launching their own stablecoins, there are also other nations exploring this technology, not for the purposes of skirting regulation and sanctions, but to capitalise on the benefits of the underlying technology. In this case, in the past week National Australia Bank created their own stablecoin that is pegged to the Australian dollar to help bring institutional customers on-chain, with $AUDN (the stablecoin) being used to facilitate "carbon credit trading, overseas money transfers and repurchase agreements". This is a timely announcement, given Bank of America's latest research report, which is reported to have stated that CBDCs and stablecoins are the evolution of money and "have the potential to revolutionize global financial systems" - although not all bankers agree with this view, as seen by the response this week from Bank of England governor, Andrew Bailey and his sceptical response to the need for such means of settlement.
Other Catalysts To Watch Out For Over The Coming Weeks And Months
Given the long bear market and the number of teams that have been building throughout it, it will be unsurprising if a number look to launch a token to decentralise their protocol as the market picks back up.
Tokens are not only a useful tool to be used for governance purposes, allowing the community to help shape the direction that the protocol takes moving forwards through token-based voting mechanisms, but they can also be used to attract users to an ecosystem and retain them. A Token Generated Event (TGE) can be achieved through different mechanisms once the protocol is live, but often features an "airdrop" - an event where a % of the total token supply is distributed to the community for free. The likely reason for these airdrops coming sooner rather than later is due to the increasing competition within these markets and the need for a lever that they can pull in order to further increase their own market share.
As well as being an opportunity for seasoned apes to benefit from such drops, it often lowers the barrier to those who are also new to the ecosystem allowing people who may not own lots of cryptocurrency to increase their exposure with little upfront risk (relative to buying crypto). Often, there are rules for individuals to become eligible, in the first instance to promote the use of the protocol, but also to prevent sybil attacks and other gaming of the drop by bad actors. In the past, these airdrops have been extremely profitable for those that were eligible and the are a number of highly anticipated airdrops that are expected over the next year or so based on publically available information, including:
As with any airdrop, be aware that multiple scammers will look to exploit this rush to claim what is potentially a valuable airdrop so be wary of the links that you click! A good quality project will not rush you in your claim, so make sure you do your due diligence before signing any transactions!
Concluding Thoughts
I've tried to keep this week's article a little shorter than normal. Apart from the Genesis news, this week has been relatively uneventful. It feels as if the whole market has been holding it's breath as price action ticks upwards, breaking out of some of the low-time frame downtrends. Whilst it should be noted that it is too early to claim that we've seen a definite reversal, it is somewhat encouraging to see that the Genesis news breaking hasn't shaken the market, suggesting that it was already priced in. In any case, a Chapter 11 filing was probably the best outcome from the challenging position that Genesis found itself in following the events of 2022.
In light of this, there are a number of catalysts as mentioned above that may act as fuel for any continuation over the coming weeks and months. It will also be interesting to see what stories emerge from Davos over the past week given the ever-growing stablecoin and CBDC discussions that multiple countries around the world are starting to have. If we are to see increasing institutional adoption of cryptocurrency, then increasing stablecoin liquidity will be a necessity - we will just have to wait and see what kind of stablecoin this is:
We'll dig into the differences of these different approaches in a future article.
Followed other stories over the week that you think are also important and worth a discussion??
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All comments within this newsletter represent my own opinions and not my employer's.?Nothing within this newsletter constitutes financial advice.