Crypto for all seasons
Outlook and opportunities in the digital assets space, through a seasonal lens
IN crypto, you hardly find anyone sitting on the fence. Most are either bulls or bears. But like all things in life, very little is purely in black and white.
Sometimes, we overcomplicate things, so let’s simplify a bit by taking a view of the digital asset class through a seasonal lens.
Winter
There is no denying that we are now in a crypto winter. Whether this winter is going to be long or short, it is certainly a harsh one. With the ongoing troubles at Three Arrows Capital and large centralised lenders such as Celsius and BlockFi, this seems like a “Bear Stearns tipping point” for crypto.
As of writing, 17 of the top 20 crypto coins/tokens by market capitalisation are down more than 50 per cent year-to-date. Crypto Twitter has unsurprisingly turned tail and gone quiet.
The winter has not even spared the 2 most prominent crypto-coins, Bitcoin and Ethereum, which are both down 65 per cent and 75 per cent respectively, at the time of writing, from their recent all-time highs in late 2021.
While crypto has a relatively short history, our research shows that Bitcoin was – and still is – neither a hedge against inflation nor the traditional stock market. Crypto and traditional assets are strongly correlated in that crypto moves in an accentuated manner, especially when stocks fall.
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Thinking about this crypto winter in price terms may not be very useful. Instead, we should be thinking about the opportunities the underlying technology may bring, such as its longer-term uses and further applications.
There is no doubt that there is currently a higher risk to trading digital assets, given their early stage of development.
Very few regulated firms like banks have yet to offer a full suite of digital asset services in Singapore. Nobody knows how the price of Bitcoin will move, and should the US Federal Reserve suddenly reverse course and stocks rally, crypto will likely rally hard too, and many could forget this frigid episode.
Autumn
While most of the attention is on the liquidity crunch impacting prices, we see some “autumnal” trends that may have the potential to head into winter.
One recent trend in the crypto space is “X-2-earn”, where X implies an activity like “play”, “move” or any type of user action that “earns” crypto. Users can download an app, buy a pair of non-fungible token (NFT) sneakers and start running to earn money.
Does this sound too good to be true?
At its peak, users on a certain “move-2-earn” platform were earning an equivalent of US$40 in tokens every 10 minutes. “X-2-earn” gained popularity during the Covid-19 pandemic lockdowns, where many who lost their jobs turned to new ways to earn money, such as by playing blockchain-based games.
Axie Infinity was one of the more popular games. Early adopters were rewarded handsomely, with news reports of some Axie players in the Philippines earning enough to buy new homes in the real world.
This play-to-earn model appears to be falling on itself now, as the only way such platforms can keep paying their users is to attract even more users willing to pay higher prices to enter the ecosystem.
With user growth stumbling, incentives fall in tandem, and this triggers a vicious cycle of current users exiting the platform. “X-2-earn” has severely derated, and we see a continued exodus on the horizon.
When the lending platform Celsius imploded, a cascading effect caused a number of other centralised and unregulated platforms to unilaterally freeze user accounts to ensure their survival. These centralised entities are on the verge of heading into a wintery season.
On the other side of the spectrum, decentralised autonomous organisations (DAOs), where the code of governance is enshrined in code, are in theory controlled by all of an organisation’s members, and not influenced by a small minority (like the C-suite of a traditional company).
Recently, the decentralised lending platform on Solana abruptly voted to seize control of a large wallet, as liquidation posed a danger not just to the platform but to the whole of Solana’s network. If the anticipated huge liquidation had occurred, the platform would have little collateral left and would have effectively collapsed, as the rush then to buy the automatically liquidated tokens would seriously have stressed the Solana network.
In the end, the wallet was not seized, and its funds were diversified, but it left no question that DAOs have a long way to go in achieving actual decentralisation. DAOs are likely to go into a period of cold, hard reflection to examine their collective ability (or non-ability) to make tough decisions.
Summer
When our surroundings are dark, it may sometimes hurt to look at a bright light, but it appears there is still a bright summer ahead in venture capital’s (VC) appetite for crypto.
The highest funding monthly total took place in January of this year, when VCs pumped nearly US$5 billion into crypto startups. That took VC funding into crypto for the first quarter of 2022 to US$9.2 billion, the highest ever recorded.
As we close off the second quarter, investments slowed with the crypto winter and achieved a still respectable US$6.7 billion. The pertinent question now is whether all that smart VC money was invested in error that could result in poor returns – but we doubt it.
The question is timing. Will 5 or 20 years need to pass before those investments see returns?
It is hard to predict the future, but we can use the recent technology revolution as a guide.
To use a term coined by Jim Cramer in 2013, FAANG (Facebook or Meta, Amazon, Apple, Netflix, Google) is a group of 5 stocks collectively worth US$1.2 trillion at the end of that year. This group of stocks is worth US$6.2 trillion today, despite the recent fallout of technology stocks.
As innovation cycles compress, some industry players believe that payback will come earlier than later, especially considering the interesting potential of the underlying blockchain technology.
Spring
Spinning back around to the start of our seasonal review, comes the spring of blockchain.
Sometimes, blockchain technology is seen as “a solution looking for a problem”, rather than “a solution to a problem”. Our view is that the proliferation of blockchain technology will disrupt much of what we know today.
One of the most impacted areas will be the Internet, as it progresses from the read/write of Web 2.0 to the read/write/own of Web 3.0.
In particular, blockchain technology will enable decentralisation and disintermediation, and will give control of personal data back to owners. New and highly efficient business models will start to emerge and drive growth for those embracing this technology.
Better yet, these tools will be open to anyone with access to the Internet and act as a societal equaliser.
American futurist Roy Amara said: “We tend to overestimate the effect of technology in the short run and underestimate the effect in the long run.”
There will be more booms and busts to come, and the technology sector has quite far to go before disrupting today’s giants, but the gears are in motion for a significant revolution.
The writer is Bank Julius Baer’s deputy head of research for Asia.
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