The global equities market is approximately $122 Trillion – The crypto market cap touched $3 Trillion USD briefly before cooling off to around $2.2T throughout November and into 2022. The long-standing thesis of protocol value accrual is still intact, and we do expect the liquid crypto market caps to continue to gain value relative to its equity(stocks) counterpart over the next few years, which is a significant reason why we are investing in this space.
By the year 2030, the crypto markets will be the deepest and most liquid asset class in the world, due their global, inclusive, and permissionless nature.
Bitcoin remains less than 10% of the total market cap of Gold, which leads us to believe we are still early to the decentralized paradigm shift. We expect Bitcoin to slowly continue to chip away here and expect this metric to be around 50% or more in the next 2-5 years as the world becomes increasingly digital and 3rd world currencies continue to hyperinflate. However, the rise of new blockchain use cases being implemented in the world of NFTs and decentralized finance lead us to believe that there are abundant growth opportunities present beyond simple BTC and ETH exposure. This is nothing short of a cambrian explosion, and we expect this growth to continue into 2022.
Bitcoin has appreciated approximately 80% in 2021, while altcoins have increased 700%.
Over the past year, we have seen BTC lose relevance in the crypto ecosystem in terms of both market structure and market capitalization dominance. Bitcoin dominance sits at ~40%, at its lowest point in 3 years, and close to its all time low. We believe Bitcoin’s dominance is in an irreversible long term decline due to the following reasons.
The Rise of Stablecoins
Stable coins have grown from $5 billion in December 2019 to over $158 billion in December 2021 for good reason. Stablecoins possess all of the advantages of blockchain technology(24/7 settlement, no middlemen), with none of the drawbacks of the traditional financial system(expensive, slow, 40 hr work weeks, etc). USDT is now cleared by the NYAG and USDC issuance through the roof; a lot more trading volume is done with stablecoins in lieu of bitcoin.
Put simply, crypto market makers no longer have to sit on large amounts of Bitcoin to run their business. BitMex, a once dominant BTC only collateralized futures trading market, has lost its relevance in the market. Currently, Binance is the largest derivatives exchange and it accepts USDT collateral. FTX has the most advanced collateral management engine and supports a wide variety of collateral; no BTC needed anymore.
Institutional investors now have the ability to look past BTC and buy other cryptos directly. The custody, exchange, and structured product infrastructure is now in place to support a growing variety of crypto assets.
Productive Assets vs. Non-Productive Assets
There are a lot of investors in the world who don’t want to own non-productive assets. These investors would never hold gold because gold doesn’t do anything, it just sits there. BTC is digital gold and is unappealing to this class of investors. Conversely, other cryptos have tangible utility such as discounts, rewards, and access to network functionality. It is still early for utility driven crypto assets, and we expect this trend to continue to proliferate.
Capital Growth vs Technology Growth
It is possible to segment crypto investors into two broad categories; money crypto people and technology crypto people. The reality is that technology innovation grows exponentially, while capital growth is more linear. Bitcoin’s price appreciation likely will have to come from outside capital flows(traditional investors allocating a small % of their portfolio to BTC). Smart contract platforms can accrue value internally(via staking and burning, network resource consumption, etc) when more applications build on top of them. There is theoretically an unlimited amount of upside since there is no real cap on how much development and usage can occur. This leads us to believe there are attractive returns to be captured beyond simple BTC exposure as we move into 2022.
This has led and will continue to lead to a decreased correlation between bitcoin and other cryptos, and a wider dispersion of returns.
As institutional adoption continues, Bitcoin is undoubtedly viewed as a macro asset by traditional investors. The data suggests this as well, with the SPY and BTC correlation coefficient sitting around .3 in 2021. However, as the crypto market matures, the crypto correlation to equities will continue to decline, especially beyond the top 10 cryptos by market capitalization.
Since crypto is a risk asset, we may continue to have steep, quick, highly correlated corrections, but certain assets and sectors within the crypto markets will bounce back faster and stronger than others(seen in December 2021 price action). Crypto correlation to public equities rises only in short spurts. It is important to zoom out and see the larger picture, which is that long term correlations between the long tail of cryptos and equities are near zero.
Ethereum has shown resiliency in this recent market correction in early December, only down ~1% in the last 60 days while Bitcoin is down ~17% and most alts took a significant haircut seemingly overnight of 15-30%. This is compelling evidence that Ethereum is beginning to act as a store of value and is showing signs of a monetary premium, which is encouraging for ETH bulls. The reality is that with the high gas fees, people are deciding to let their ETH sit in its metamask wallet, rather than transfer it and pay the fees. Rising gas fees make Ethereum basically unusable, but Polygon is here to save the day, which is seeing significant adoption as a layer -2 scaling solution, and therefore price appreciation. However, most new development teams in crypto have been gravitating to other new layer-1 blockchains which seem to have growing robust Defi and NFT ecosystems. It appears that coexistence between ETH and its competition is possible, at least for now.
Recently, we have even started to see a slowdown in Ethereum smart contract deployments. It is possible that Ethereum may slowly lose its market share to faster and cheaper blockchains. It is unclear whether the wave behind Polygon(MATIC) will be enough to keep Ethereum relevant in the layer 1 game.
Valuations have come down significantly in the Defi space over the past 6 months and we think there is massive upside in 2022 as more institutional funds pay attention to the stablecoin markets and market neutral crypto strategies become more commonplace. However, the looming risk of strict regulations being imposed around DeFi, to become effective 2023, is something we are monitoring.
While the growing metaverse is gaining vast popularity, we may have seen a local top here as most metaverse related cryptos are down 20-30% in the past month. Most of these projects do not have much of a working product and as the euphoria and market narrative dies out we expect these projects to come back to reality. Current valuations remain skeptical but we remain long term bullish on the space, and are happy to sit on the sidelines here as the space transforms and finds product market fit. There are likely amazing opportunities with massive upside within the metaverse infrastructure space. We believe it is still early for NFT adoption, and there is opportunity to onboard the current xbox/PS5 gaming community into crypto and NFTs which presents massive upside.
What to expect in 2022
As we look into 2022, we expect rather dull and uninspiring price action, if not mild declines, through the holidays into the new year, as people take gains and spend time with family. However, we believe sometime in January we will start to see risk appetite return to the crypto markets as people and funds are comfortable deploying fresh capital into cryptos that are 30-50% off of their all time highs.
As the crypto market grows, this is no longer a single attribute asset class, but a technology ecosystem that has specific sub sectors. In 2021, most DeFi tokens were down 30-60%, while it was a bull market for NFTs, gaming, and layer 1 protocols. We think 2022 will likely yield something similar; a bull market in some sectors, and a bear market in others. This is a healthy dynamic that makes it near impossible to have 2018 style “crypto winter.” The data suggests this as well, as we have seen more shallow corrections as time goes on. Taking Bitcoin as an example, we saw an 83% correction in 2018, a 54% correction in July 2021, followed by a 38% correction in December. Notice the pattern?
Beyond 2022 – Is the Future Multichain?
With over $26 Billion in crypto VC capital raised in 2021, compared to $4.5 Billion in 2020, the future is as bright as ever. Given the sheer size of the VC raises in 2021, the next 12-24 months are clearly a more heterogeneous and multi-chain future. These startups will continue to build stuff until they run out of money. Beyond 24 months, the future is less apparent. Specifically in the smart contract space, and likely other blockchain verticals over time, an argument can be made that the world will eventually revert back toward homogeneity. These platform technologies need economies of scale and standardization in developer tooling, libraries, and documentation in order to scale efficiently. Think about Web2 operating systems; the world eventually converged around Windows and Macintosh OS(iOS and android for mobile). Regardless of your view here, the future is exceedingly bright for open, permissionless, distributed, and utility driven digital assets.