The last 2 days have been a whirlwind, and there were some heavy sell-offs as cryptocurrency prices tumbled (which had a nice bounce in the past 24 hours). I suggest checking out Checkmate’s great posts dissecting exactly what happened.
In this post, I wanted to share my take on where I think we’re heading, why we could be shaping up for an end of year rally, the short-medium term threats from a shaky macro environment and imminent crypto regulation.
State of play
BTC and ETH remain ~-30% below their ATHs despite some market sell-off. There remains a lot of fear in the market—yesterday, the Fear and Greed Index went to Extreme Fear for the first time since the market hit a local bottom in mid-July and remains at ‘Fear’.
There’s plenty to be fearful about at the moment, especially the amount of talk about imminent crypto regulation. The macro backdrop is very uncertain, and many people will be wondering where this leaves crypto markets.
Still steam left?
I believe the development going on in cryptocurrency still leaves us with plenty of room for another rally. If we look beyond the immediate fear gripping the market, I feel like the fundamentals are still there:
- Ethereum scaling solutions: Abritrum and Optimism remain fairly handicapped, with limits on transactions and are only now opening up to the wider community and becoming permissionless. These are still in the early days, and scaling solutions are yet to provide liquidity mining incentives.
- Currently, many layer-1 blockchains are offering huge incentives for users to test out their applications, move liquidity and engage with the ecosystem. Be mindful, though, as once these incentives reduce, it could result in TVL reduction.
- Jack Dorsey’s Bitcoin plans and El Salvador: Dorsey has plans for a DEX-like product built on Bitcoin, some very legitimising signs. With countries like El Salvador adopting Bitcoin, could we see another similar event unfold by year-end?
- Bitcoin will also get an upgrade (Taproot) in November.
- Bitcoin-QE: As a result of Evergrande nearly defaulting the Chinese central bank pumped ~$19B into the banking system. If loose monetary policy continues it could be a positive for Bitcoin.
- Supply-side pressures: There still appears legitimate upcoming supply-side pressure for cryptocurrencies like ETH once issuance is reduced (see my previous post) via a move to Proof-of-Stake (PoS) combined with the large ETH burns. A merge may begin but will not be fully complete.
- Builders keep building: Although onlookers or investors may worry about a 10-15% decrease in price, keep in mind a lot of industry builders have been in this position before. They’re still building and developing and will not wait around for regulators to give the go-ahead. This is why I remain bullish cryptocurrency could have another strong push towards the end of the year due to the wild innovation in the space.
- Talent pool: This is both short-term, and long-term—the talent entering the cryptocurrency space is enormous and perhaps underestimated. Many builders from big tech or people migrating from traditional finance, which can only fuel innovation, investment and interest.
- Use cases coming to life: With the emergence of lower fee platforms, dApps can finally deploy their use cases on a range of emerging layer-1 or Ethereum scaling solutions. Many users remained priced out, and these platforms should cater to larger transactions and retail participants than before (thanks to platforms such as Solana).
- Bitcoin ETF: There has been so much talk about a BTC ETF in the U.S. They’re required to announce the results of pending applications in November. If one is passed, it could set off a lot of attention.
- NFTs rotation: There has been a lot of money made from NFTs and money flowing into the hands of creators with the emergence of the creator economy.
These are only a few, but I would love to hear your reason why or why not you’re still bullish on the fundamentals.
For the reasons discussed above, I believe there is enough steam, interest and potential for cryptocurrency to experience another wave by the end of the year, which could exceed these ATHs. If you’re in the same belief as me and think the fundamentals behind cryptocurrency haven’t changed, now and the next few weeks could be the last opportunity to pick up those bags you believe in.
Will the party be cut short?
I believe the fundamentals haven’t changed and remain slightly more bearish in the medium-term.
Shaky macro environment
The macroeconomic environment remains very unstable.
- Global housing: The pressure of homeownership, limited supply, and a buying frenzy has caused global housing prices to accelerate. Low immediate interest rates have encouraged significant debt, but once rates start to increase, many households could face increased pressure or the inability to repay their soaring debt.
- Equity markets: Global equity markets largely sit at ATHs. Looking simply at the MCSI World Index Fund (capturing large and mid-cap representation across 23 Developed Markets), we can see the explosive impact of government intervention and soaring equities values.
- Crypto could inevitably be dragged down with wider markets if global equities markets finally cool off and come down to earth.
- There also remains some overhang about the possible Evergrande defaults, which could have knock-on impacts.
- Taper: As discussed in my previous post, the Federal Reserve have heavily been buying bonds to the tune of $120B monthly and increased QE to help the domestic economy and financial infrastructure in the wake of Covid. The Federal Reserve held a meeting today, indicating there’s no immediate date set to taper its bond-buying program, but it could be coming ‘soon’ (as soon as November, but most likely at the start of next year).
- Inflation: In the U.S., inflation is expected to continue above its 2% target for the next 4 years. The U.S. isn’t alone with high inflation, with many other countries feeling the effects of substantial QE and bond-buying programs.
Regulation
I believe regulation is a strong factor that could halt this bull market and is something that would bring short-term pressure on the industry. At Messari’s Mainnet 2021 event, it was revealed a speaker was subpoenaed (although this has not been confirmed by the individual, which remains unclear).
- This builds on the news earlier in the month Uniswap Labs is being investigated by the SEC, and other DeFi organisations have been given requests for information.
Gary Gensler is not joking around and intends to build a cryptocurrency policy framework. According to Gensler, many cryptocurrencies will inevitably be characterised as securities and come under his and the SEC’s jurisdiction.
Stablecoins also remain a core target, outlining “stablecoins may have attributes of investment contracts, have some attributes like banking products.” Coinbase recently backed off with their ‘Lend’ program to see users earn 4% APY on USDC, following the SEC warning against it.
- Celsius and BlockFi have also come under pressure from local regulators about their lending platforms.
This could also just be the beginning of the regulation fight. Outside of the U.S, the EU is also watching closely and could follow suit and target more conclusive regulation of their own.
Summing it up
With such extreme fear and uncertainty in the market, if you’re a believer in the core crypto fundamentals, this could present a buying opportunity to position yourself for a possible end of year rally.
Keep in mind, the SEC is slow-moving, which gives me a reason to believe there could still be an extended rally before the full regulatory effects are felt. The macroeconomic background also remains a significant threat to a continued cryptocurrency bull market.
A deterioration of traditional markets combined with stronger immediate regulatory action would be cause for concern and could come down to which comes first—I’m leaning towards another crypto rally and breaking ATHs.