Annual Outlook Recap
Yesterday, we held our annual outlook call, in which we discussed the carnage of 2022 and reasons to be optimistic about 2023. Below are some highlights, but we invite you to review the entire deck and watch the webinar.
Bottom is In for the Majors
We think that the majors have seen their absolute cyclical lows. This rationale is supported by (1) the nature, magnitude, and duration of the drawdown since late 2021, (2) volatility having churned in recent months (crypto often bottoms on boring), and (3) on-chain price discovery that has transpired for bitcoin around the $16.5k level.
Further, from a fundamental perspective, bitcoin is currently trading at a historically low MVRV multiple. As a reminder, Market-value-to-realized-value (MVRV) measures the profitability of coins presently held across the entire network. Naturally, the higher this metric rises, the “frothier” the market price for Bitcoin, and the more potential selling pressure there will be from holders. Current MVRV levels align with historical cycle lows and impressive forward returns.
Key Themes and Bullish Catalysts
Halvening Narrative to Pick Up Steam in 2H
We think that the bitcoin halvening narrative should start to garner attention in the second half of this year. The programmed reduction in block subsidy is not expected to take place for over a year, but traditionally, we have seen considerable increases in BTC price leading up to the event.
Shanghai Will Have Market Tripping on LSDs
Staking withdrawals will be enabled at the end of Q1 or the beginning of Q2. Although many perceive this as a headwind to ETH price, we do not hold that view. Withdrawals are likely to be staggered and this upgrade should de-risk ETH staking immensely, as stakers will no longer be required to lock up their ETH indefinitely and will be able to achieve liquidity if they wish to do so. Thus, it is reasonable to expect a net increase in ETH staked.
As discussed in prior weekly notes, we think that the native tokens for liquid staking providers (LSDs), particularly Lido and Rocket Pool, should benefit due to the added clarity around timing and the step function increase in demand for liquid staking.
EIP-4844 Will Shift Some Value Capture to L2
EIP 4844 will be the next major upgrade to the Ethereum network following Shanghai. At a high level, this upgrade will reduce the cost for Layer 2 networks to operate. This is positive for Ethereum insofar as it moves the network a step closer towards its ultimate goal of being an infinitely scalable modular network. Yet successful L2s could possibly begin siphoning some value capture from ETH following the upgrade’s implementation.
Every Network Has Had its Share of Scams to Tend With
Many individuals have been quick to write off Solana due to its affiliation with SBF. He was a major proponent of Solana upon its launch and had shilled several scams that were issued on the network. While we would agree that it will be a long and challenging road for Solana developers to restore confidence in the ecosystem, the long-term risk/reward is favorable at these levels.
Both ETH and BTC have been used by scammers that leveraged each network’s core attributes for an illegitimate use case. Ethereum witnessed countless scam ICOs issued following its launch, as seedy characters realized they now had a permissionless global liquidity network to tap into. In the same way, we think the scams launched on Solana showed many legitimate developers the benefits of fast settlement, and we expect to see more legitimate applications built on the platform as a result.
Price Predictions
Coupled with the structural tailwinds and catalysts mentioned, we think that bitcoin will see $35k – $44k this year, and ETH will see $2,400 – $3,200. These prices are supported by applying conservative assumptions around capital inflows projected MVRV multiples.
Macro Thoughts
The Dollar
Since 2015, annual returns for the DXY and BTC have had a demonstrably strong relationship. While we think there remains the risk of one more bout of dollar strength, there is a rational argument that we have seen the peak in USD for this tightening cycle. This should be constructive for crypto.
BTC the Liquidity Sink
Despite inflation ticking higher at the start of 2022, few were pricing in a terminal rate north of 400 BPS. In fact, in February 2022, the market was pricing a target rate of 150 BPS at the end of Q2 2023. Below we can see the clear relationship between bitcoin and the removal of future excess liquidity from the economy.
Correlations, Earnings, and BTC Performance in Different Economic Scenarios
Bitcoin’s positive correlation to equities remains strong, which has many thinking that crypto can only succeed in an economic regime conducive to stocks.
Now investors are naturally concerned about the additional weight on equities due to a decrease in earnings. Coupled with the strong correlations with risk assets, there is further concern that declining equity performance will automatically result in lower prices for crypto. However, historically, BTC has outperformed the S&P 500 during periods of declining EPS. We speculate that in an instance of a recession, absent a further reduction in market liquidity, bitcoin would likely outperform equities.
Some Key Risks Remaining
Despite our view that the absolute lows for the majors are in, we still believe there are some near-term risks to remain cognizant of. These include additional fallout from DCG, one more swipe at risk assets at the next FOMC meeting, and the fact that despite the recent rally, we are still amidst what we would consider an on-chain bear market. Rallies that lack underlying on-chain activity are susceptible to fading more easily than rallies that are supported by fundamental demand for the token on-chain.
Introducing the Crypto Core Strategy
The Crypto Core Strategy offers clients an easy and digestible tool to manage their crypto portfolio by following along with our core strategy. This strategy seeks to outperform the industry’s king, bitcoin, by tweaking one’s allocations to stablecoins, bitcoin, and select altcoins that our team has evaluated.
Eligible assets will be those within the top 200 by circulating market cap on CoinMarketCap.com. Given the wide-ranging universe of cryptoassets, we may exclude certain assets from eligibility based on a perceived lack of transparency or inconsistent documentation. All selected assets must also have sufficient liquidity across multiple centralized crypto exchanges.
During times of increased downside risk, one might notice our relative allocation shifting to stablecoins. Similarly, during periods favorable to crypto, one might expect increased exposure to higher beta names further out on the risk curve. We will look to use our weekly strategy notes to touch upon our core allocations in the coming weeks.
At a high level, the absolute lows are in ($15.5k BTC, $800 ETH), but several key risks have us thinking probabilistically right now. Thus, despite having bottomed, we are still ascribing 50% weight to stables. Regarding our altcoin selection, we have discussed the investment rationale behind SOL, LDO, RPL, and MATIC throughout our research. We’ll talk about ATOM in more detail in future notes, but at a high level, we see application-specific chains garnering increased attention this year, and Cosmos should benefit from this trend.
