The markets opened 2022 with fears of rising inflation and interest rate hikes. In our latest crypto ecosystem update we’ll see how turbulence is to be expected as the Fed hastens the tapering narrative that began in November 2021

So where do the cryptocurrency markets fit into this?

Fed tapering and interest rate hikes have historically threatened crypto and other risk-on bets, including tech stocks and other traditional risk assets. Rising interest rates were enough for cryptos to experience the 2018-19 bear market, where Bitcoin fell by 85% and altcoins fell by more than 90% on average. The composition of the digital asset market looks much different today than it did three years ago. However, the impact of Fed tapering, or the prospect thereof, can create unfavorable conditions that do not reward volatile assets.

Not all experts are bearish on crypto for 2022. Some pundits note the Fed has no room to raise rates to the extent historically seen given the current level of inflation. The last inflationary stretch that resembles current circumstances came from 1979 to 1981. The Fed Chairman at the time, Paul Volcker, raised the Fed Funds Rate 8.8% over the two year period. Doing so today threatens bringing the global economy to a halt in the midst of an ongoing recession. If the Fed can’t sustainably rates, financial markets, especially risk-on bets like crypto, have room to melt up at an accelerated pace. It would add to the mounting impact of inflationary pressure on investors’ savings which has been a major catalyst for the migration to crypto since March 2020. 

This week’s crypto ecosystem update examines the current state of the market, and considers where Bitcoin and Ethereum are headed in the near term from technical and on-chain perspectives. Finally, we evaluate the latest news, industry developments, and top 10 cryptos as we enter 2022. 

BITCOIN ANALYSIS

Price Overview

• 7-day change: -8.5%
• 30-day change: -17.9%
• 7-day low: $45,651
• 7-day high: $52,000
• 30-day low: $42,220
• 30-day high: $57,658

Network Overview

• Blocks Mined (7-day): 1,017 Blocks
• Coins Discovered (7-day):  5,518 BTC
• TX Count (7-day): 1.676 million
• TX Volume (7-day): 17.7 million BTC
• Net Change in Exchange Balance (7-day): -19,913.36 BTC

• On-Chain Activity:

Leveraged speculators, positive funding, and elevated allocation to futures continue to have the upper hand on Bitcoin’s current price action. Although futures liquidations have induced considerable volatility during December, long-term hodlers are still reluctant to sell their coins.

The amount of long liquidations have increased due to the rising open interest dominance, positive funding rates, and estimated leverage ratio. For example, positive funding of .01%, open interest dominance of 1.3%, and an estimated leverage ratio of ~20% ended in a 7% lapse in Bitcoin’s value on December 28. 

Speculators using high leverage and leaning confidently bullish have caused the overall market to deleverage, which was manifested in the highest magnitude of long liquidations since the sell-off on December 3. Although Bitcoin futures funding flipped negative for only a very brief period following the 13% decline in price between December 3 and 4, it has again turned to positive since then. To have a decisive trend reversal in Bitcoin price’s ongoing downtrend, funding needs to turn negative for a number of consecutive days.

Longer-term holders of bitcoin have hodled through the recent dip. Coin Days Destroyed (CDD) measures the number of days that a single bitcoin is held before it is sold. A high CDD suggests that coins are hodled for long periods of time before they are sold, and a low CDD means that the majority of coins sold have been held for a short period of time. The seven-day moving average of Coin Days Destroyed (CDD) is currently at its lowest level since June and September 2021, which suggests that selling pressure from long-term holders is quite low. CDD has remained well below its two-year high (2019 & 2020) throughout 2021, as long-term holders have mostly been reluctant to part ways with their bitcoins.

The portion of Bitcoin’s supply in profit is around similar levels as it was the last time CDD was this low. This is a positive indicator of a near-term rise in price.

Source: Glassnode

• Bitcoin Technical Analysis:

Bitcoin started the new year with a new all-time high global hash rate of 208 million TH/s. This could act as a game-changing indicator considering the ongoing indecisive technicals for the alpha cryptocurrency in terms of its future direction.  

It is also worth noting that Bitcoin pullbacks to the sub-$46,000 region are constantly being bought up by buyers for over a month now, which could indicate accumulation. 

1. Buyers Stepping in at Around $46,000

As you can observe in the chart below, following the December 3 crash, buyers keep buying the lows whenever Bitcoin tries to hang down below $46,000. This has created a temporary price floor and reduced the volatility since then. 

Flat price action is unlikely to be sustainable for a larger time period. Due to that, a dead-flat price is generally ended with a ferocious break either to the upside or downside. In that shell, although buyers have been buying the dips at between $45,000 and $46,000, a last shake-out to the downside is quite possible (testing the $37,000-$40,000 support levels) in order to shake out the final weak hands before Bitcoin could start a new trend to the upside.

Bitcoin/Us Dollar price chart. Each candle in the chart represents a 2-hour period. Source: Tradingview

2. Descending Resistance Line

 

Bitcoin/Us Dollar price chart. Each candle in the chart represents a 2-hour period. 

 

Bitcoin has been descending down a resistance line, indicated by the red line on the above chart. Although it had made an attempt to break out of it during December 23-27, it failed to do so and fell back below the line. 

Now Bitcoin is approaching the resistance line horizontally, which suggests that the desired breakout to the upside should happen sooner or later. Otherwise, it may break down one level further to the $37,000-$40,000 support level and shake out a large number of traders as a consequence.  

3. Weekly Stochastic Cross and Engulfing Candle

Bitcoin’s stochastic RSI made a bullish cross on the week of December 20 (the blue line crossing up the orange line, circled in red in the below chart) but the cross was not followed by an increase in the strength of recent price changes. In fact, the stochastic is on the verge of crossing back down again, in case the week closes with a bearish price candle.  

The bullish engulfing candle that was printed upon the closing of week December 20 (the green candle circled in yellow) may save the day, if the next few weeks do not generate a candle with their bodies closing below the body of December 20’s candle. 

 

Bitcoin/Us Dollar price & stochastic RSI charts on a weekly basis

Bitcoin Dominance:

Bitcoin dominance measures the total market value of Bitcoin against that of the entire cryptocurrency market. In other words, it shows the strength of Bitcoin against altcoins in the market, including Ethereum. Bitcoin dominance is measured in percentage points. 

Following the altcoin ICO craze of late 2017, Bitcoin dominance crashed to its all-time lows from 75% to 35% in a matter of only one month in January 2018 (please see the below chart).

During the 2018-19 bear market, money from altcoins flowed back into Bitcoin, increasing the dominance of Bitcoin all the way back to 70%. During Bitcoin’s bullrun from $10,000 to $40,000 per coin between October 2020 and January 2021, the Bitcoin dominance reached its climax at 74%.

Bitcoin Dominance percentage & stochastic RSI charts on a weekly basis

 

However, by the beginning of 2021, it failed to break out of the flag that it has been forming since 2019 (see the turquoise-color descending channel in the above chart) because the Bitcoin price pretty much ran out of steam after hiking from $10,000 to $43,000 in a matter of three months. 

In 2021, the exploding popularity of a number of cryptocurrency products, such as layer-1 blockchains like Ethereum, Binance Chain, Solana, and Avalanche, or blockchain gaming/NFT products like Axie Infinity, Sandbox, Decentraland, or meme coins like Doge and Shiba Inu caused the Bitcoin dominance to crash from its high of 74% down to 39%  by May 2021.

The dominance has been consolidating between 40% and 48% during the last 6 months and it is now on the verge of a huge breakout either to the downside or to the upside, as it has been testing the 40% support level for the third time.

Bitcoin’s price action in the coming weeks will determine the direction of Bitcoin dominance. The stochastic RSI on the weekly chart seems to have bottomed out at zero (circled in red above) indicating that Bitcoin may be oversold against altcoins. Therefore, if Bitcoin can manage to start a new and strong uptrend, the dominance may test the highs of the horizontal channel it has formed since May 2021 at around 48-50% levels. This would mean that the price of altcoins would either drop or stay flat, while Bitcoin is surging.

 

ETHEREUM ANALYSIS

Price Overview

• Last 7-day change: %
• Last 30-day change: %
• 7-day low: $3,584.83
• 7-day high: $4,037.55
• 30-day low: $3,584.83
• 30-day high: $4,660.49

Network Overview

• ETH Burned (7-day): 56,175.8 ETH
• TX Count (7-day): 8.3 million
• TX Volume (7-day): 12.4 million ETH
• ETH Moved in/out of Smart Contracts (7-day): +41,174.34 ETH
• Net Change in Exchange Balance (7-day): +83,260 ETH

On-Chain Activity:

The number of daily on-chain ETH transactions jumped slightly this week, but still remains in a larger downward trend against a lowering mean gas price. This has led to a reduction in the amount of ETH burned on a daily basis. The EIP-1559 instated burning mechanism is reliant on a consistent flow of on-chain transactions and heightened gas prices to burn the most ETH; the correlation between on-chain transaction count and gas burned has held a 98% correlation since the update was initiated in early August. Declining on-chain transaction count and mean gas price has led to a 12% monthly reduction in ETH burned and a 27.5% weekly reduction (seven day period leading up to January 28) since the initiation of EIP-1559. The current number of on-chain transactions is 2% above the daily average and mean gas price is 22% below the daily average since August 6.

Source: Glassnode

 

The declining number of on-chain transactions is, in part, attributed to users’ deflection toward Layer 2 (L2) solutions for lower fees. Low transaction costs have become a primary demand of DeFi users that Ethereum has struggled to fill. The current average fee per ETH transaction is 81% higher than its two year average and ~40% higher than its 2021 average. The chart below tracks the average fee per transaction weighted by daily transaction count for the last two years.

Source: Glassnode

 

Users increasing demand for L2 doesn’t mean ETH isn’t being used, it just means less users are leveraging Ethereum mainnet to transact. At the time of writing, ETH makes up ~27% of the TVL locked in the top ten L2 platforms. For reference, stablecoins make up ~23% of TVL on L2 and platform native coins make up ~46%. ETH has fled exchanges at a consistent rate throughout much of the year as well, which is indicative of strong demand and use.

Ethereum Technical Analysis:

Ethereum’s price action has historically been very strongly correlated to that of Bitcoin as discussed in the Bitcoin dominance section. Throughout the history of cryptocurrencies, Bitcoin managed to drag Ethereum and other altcoins along with itself, either to the upside or to the downside. The reason for this synchronized price action was that funds entering and exiting the cryptocurrency market initially flowed into Bitcoin, which then moved in and out of Ethereum and other altcoins. In that sense, Bitcoin should not be on a downtrend for the Ethereum price to climb higher, and history tells us that Bitcoin should not be having an extended bull run either for the big money to enter into Ethereum.

1. Ethereum Broke Down From Its Rising Channel

In December’s ecosystem updates, we discussed that Ethereum has been respecting its rising channel that it started to follow since the summer 2021 lows. However, we also mentioned that it has been testing the bottom support line of the channel too many times and that this is not a good thing for the price action. 

Ethereum finally broke down from this rising channel as of January 5, as you can see in the below chart. This makes the future price action of Bitcoin even more critical for Ethereum. Now Ethereum is hanging in limbo, due to which a sustained downtrend for Bitcoin could take the Ethereum price down to the $2,500 support level from late-September lows.  

Ethereum/US Dollar price chart. Each candle in the chart represents a 6-hour timeframe.

2. Ethereum vs. Bitcoin

We also stipulated in December’s blog updates that Ethereum’s relative strength index (RSI) against Bitcoin must close the month in the overbought territory above the 70 level (above the purple zone in the below RSI chart) so that it can sustain its positive divergence from Bitcoin’s negative price action.

Ethereum vs. Bitcoin monthly stochastic RSI chart 

 

Other Top 10 Cryptocurrencies

Other major cryptocurrencies usually follow the path of Ethereum, albeit in larger magnitudes. In that sense, today’s top 10 currencies like Binance Coin, Solana, Cardano, Polkadot, Terra, and Avalanche (all of which are layer-1s like Ethereum, excluding Polkadot) are highly correlated to the prevailing trend of Ethereum.    

The price charts of these layer-1 currencies are generally similar to that of Ethereum, as you can observe below. The timing of uptrends and downtrends are on-par; only the magnitudes are different.  

For example, Binance Coin (BNB), Solana (SOL), and Polkadot (DOT) almost identically followed Ethereum, where they recorded a slightly higher all-time high in early November (compared to their early-2021 records) and then retraced to their September/October lows. 

Price charts for Binance Coin, Solana, Cardano, Polkadot, Luna, and Avax. Each candle in the charts represents a 3-day period. 

As an exception, Cardano (ADA) made its new all-time high two months before (in early September) Ethereum. However, in return, it was faced with the most ferocious correction during the last 3 months, dropping all the way back to its summer lows. Cardano is the only cryptocurrency among the top 10 coins that has retracted back to the July 2021 lows. Issues going on with Cardano’s project team also contributed to its unique price drop besides the look of its technicals.   

The other exceptions are Avalanche (AVAX) and Terra (LUNA), both of which made new record prices that are much higher than their early-year all-time highs (Avax by 2x and Luna by 5x). Terra specifically succeeded in continuing its uptrend throughout December, when the entire market was falling down.  

Now that all uptrends are gone and everything in the market is correcting, these major cryptos are likely to correlate back to Ethereum, and Ethereum back to Bitcoin.

 

CRYPTO INDUSTRY UPDATES

Bitcoin Mining Developments:

Hash Rates Drop Due to Kazakhstan’s Internet Shutdown

The Kazakhstan government shut down the internet on January 5 in an effort to crack down the rising fuel cost protests. The loss of internet connection has adversely affected the country’s Bitcoin mining pools. 

Kazakhstan currently constitutes the second largest Bitcoin mining capacity in the world (at 18%), in the wake of China’s mining bans. A large number of miners from China flocked to Kazakhstan during the summer of 2021 due to exceptionally low energy prices in this country.

Now that the Kazakhstan government has cut off internet access to suppress the escalating protests, the country’s Bitcoin mining operations are jeopardized. Some of the worst impacted mining pools so far are 1THas, which experienced a whopping 82% decline in its hash rate, while OKExPool and KuCoinPool, mining pools of two of the largest cryptocurrency exchanges in the world, took a hit of 46% and 23%, respectively. 

Despite these concerning developments, the hashrate drop is still far smaller compared to the drop back in May and June 2021, when China banned the entire Bitcoin mining ecosystem in its jurisdiction. 

Corporate Treasury Updates:

Microstrategy Adds More Bitcoin to its Treasury

Microstrategy purchased 1,914 BTC for $94.2 million on December 30. The company now holds ~124,391 BTC at a rate of ~$30,159. The total treasury was valued at ~$5.7 billion at the end of 2021, giving the company ~$2 billion in profit on its position.

Michael Saylor’s high conviction bet has gotten the attention of corporate leaders, including Elon Musk, who have adopted BTC as a reserve asset to some capacity. The systematic framework of most corporations disallows them from purchasing BTC at will. Approval processes and other measures must be satisfied before making such a move. The start of a new year has the potential to see more companies follow Saylor’s lead.

CRYPTOCURRENCY PRODUCT UPDATES

Layer 2 Protocols:

Shiba Inu Introduces “Shibarium”

The developers of meme coin Shiba Inu announced their plan to launch a layer 2 scaling protocol called “Shibarium”. 

What is interesting to note is that 7% of Shiba Inu’s all current holders were added during the last month, according to data from Glassnode. This may suggest that there are a large number of investors investing in Shiba Inu based on this layer-2 development, since the timing is rather meaningful.

Shiba Inu’s developers also expressed their intention to launch Shibarium because they do not want to wait for Ethereum’s 2.0 upgrade. With a layer 2 scaling solution, transaction fees can be reduced dramatically in Shiba Inu’s network, although what it seeks to achieve in the long run as a meme coin remains as a big question, as is the case with all meme coins in the market.

NFT & Metaverse

1. The “New Axie Infinity” Launches

A new play-to-earn game that is almost universally named as the “New Axie Infinity” by the blockchain gaming community was launched on December 23.

The name of the game is Battle for Life, which has started its life with a sale of 7,000 Battle for Life NFTs. The game was developed on the Binance Smart Chain (BSC) and is expected to start the next wave in metaverse and play-to-earn gaming. 

The game seeks to position itself in the market with its ability to reward all of its players in cryptocurrency while offering a unique story that unites avatars with science fiction. Using the tokens of the game, players will be able to receive daily tasks and combat in battles that generate them income.

2. New Year’s Party Held in Metaverse

Jamestown, one of the largest real estate companies in the US, purchased 170 parcels of virtual land on the Decentraland (MANA) platform in order to host a virtual New Year’s party on the metaverse.

In real, physical life, Jamestown is the owner of the One Times Square building at the heart of Times Square in Manhattan. Jamestown replicated this 26-story tower on the virtual land it purchased from Decentraland.

The company hosted a virtual New Year’s party in the building last Friday, at the same hour as the party hosted in its real counterpart. The motivation behind this virtual event was the limited number of attendees allowed in the physical venue due to the rise in COVID-19 cases. There were only 15,000 socially-distanced attendees this year instead of the typical 50,000 guests. 

Digital Currency Group, which is a major investor in the platform’s MANA and LAND tokens, developed the virtual building and created the event. The name of the party was “MetaFest 2022” in which there were non-fungible token (NFT) art galleries and rooftop VIP lounges. Virtual billboards tied the experience to the event’s physical counterpart via live streams of New York City.

Demand for virtual real estate has been skyrocketing. Due to that, the participation of a real-world real estate company like Jamestown could indicate something important for the industry’s future.

DeFi

Aave Launches Aave Arc

Aave, a permissionless and non-custodial lending & borrowing protocol, has launched its first permissioned DeFi platform, called Aave Arc, in an effort to conform with the compliance requirements of the traditional finance industry. In that sense, Aave Arc is tailored for institutions. 

Aave Arc allows institutions that are subject to legal financial due diligence to be able to borrow and lend cryptocurrencies without breaking the law. Its operation is pretty much identical to that of Aave’s main protocol. However, only approved parties can participate in Aave Arc.

Fireblocks, an institutional cryptocurrency custody company, is the first client of Aave Arc. Other institutions that are whitelisted to participate in Aave Arc so far include large, renowned organizations like SEBA Bank, Bluefire Capital, Celsius, CoinShares, GSR, Ribbit Capital, QCP Capital, and Wintermute.

Aave Arc initially supports only four assets on the platform, which are Ethereum, Wrapped Bitcoin (WBTC), the USDC stablecoin, and Aave’s native token AAVE.

With the addition of more assets, Aave Arc has the potential to bring together the world’s largest institutions to begin participating in DeFi in the coming days.

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