2022 Market Outlook
Tags: Cryptocurrency, Web3, Defi, Market Research Reports, Bitcoin

Key takeaways:

Illiquid supply in Bitcoin Ethereum.

DXY and the S&P, how this has an effect on the crypto space.

Macro market, how US policy might affect outcomes. Money printing, Covid, War and regulation.

Media coverage preparing retail to reenter.

(Retail has essentially been sidelined since May 2021)

(Retail has essentially been sidelined since May 2021) DeFi and stablecoins. Regulation means you should move into decentralised stables. i.e UST, Frax, MIM.

Bull market, blow off top, bear market. What will happen and how to prepare.

Some notes: These are observations connecting the unfolding of recent and future events and how to best prepare for the next year. NFA



Even though I am long term very bullish for the Crypto & Web3 space as a whole, it is important to remember that all markets enter cycles — especially young markets. For those reasons, I believe there may be more volatility this year (yes, more volatile than normal for crypto).

Up until now, we have had relatively clear market cycles. With the introduction of ‘big money’, these patterns are changing. This means there are more things to watch out for moving forward.

Illiquid supply in Bitcoin and some On-chain Analysis.



Many people have called this year a bull market. This is not incorrect as we have seen some intense growth in many crypto assets, however, the On-chain data shows a different story — a story of accumulation and price consolidation. Let’s look at the illiquid supply chart and see how this chart has been on a pretty aggressive downtrend. It’s getting to the point where close to 78% of Bitcoin is currently out of circulation, leaving less Bitcoin to be traded. This lack of liquidity can make for volatile movements as only close to 22% of the supply is actually being traded. This means it takes less money to move the price in either direction.

Here we can see how illiquid supply has grown for the past 2 years. Even with the price action we’ve had.

There is a direct relation with how illiquid supply tends to be a precursor to some form of bullish rally. You can find more information on why Illiquid supply matters here.

Here we can see how illiquid supply has grown for the past 2 years. Even with the price action we’ve had.

Moving on, let’s quickly see who has been selling recently and if the market will continue downward. Looking at ‘dormancy’, we can see the average age of the coins that are being spent. In this recent downtrend, most of the coins spent have been young coins. Usually this means whales and ‘smart money’ aren’t spending, rather, recent local top sellers are capitulating.

Furthermore, looking at the Entity-adjusted Dormancy Flow we can see that we have almost reset to the summer lows and are essentially forming another bottom.

Entity-adjusted Dormancy Flow is the ratio of the current market capitalisation and the annualised dormancy value (measured in USD). Entity-adjusted Dormancy Flow can be used to time market lows and assess whether the bull market remains in relatively normal conditions



If we have a look at the full Bitcoin history for the Entity-adjusted Dormancy Flow, we can see that we have only touched this zone in market bottoms.

Furthermore, Supply on Exchanges has been moving off into storage that historically is less willing to sell. This would indicate aggressive accumulation, especially since March 2020. Even though we have seen some moments of profit raking, the overall actions have been of accumulation and supply leaving exchanges.

Ethereum tells a similar story. It has actually had more aggressive withdrawals in the past two years and recently has started to see inflows on exchanges. Typically this would mean intense selling, but given that only about 12% of Ethereum was actually on exchanges, it looks more like the start of a run for it.

We can see that since the March crash, Ethereum has been leaving exchanges — reaching a low of 11.2%. As money flows back, it will historically move into the hands of new adopters who do not understand the value of owning your own keys and will typically leave their new bought Eth (or any crypto) on the exchange.

DXY and the S&P: How this has an effect on the crypto space



Historically when the dollar has struggled, but the stock market has rallied, it has created a perfect combination for Bitcoin to flourish.

If the dollar starts to show weakness here, we could see a short but sweet rally of the investment assets as people look for ways to conserve their wealth and purchasing power. Inflation reached its highest point in 40 years and shows now signs of slowing. That is unless they raise interest rates and find a reason to justify printing money, war… more on that later…

With the S&P marching on and the Dollar not looking pretty, money will flow into assets that have proven to protect purchasing power. Sorry Peter, gold has not kept up with inflation in the past 10 years….

Macro market, how US policy might affect outcomes.

Money printing, Covid, War and regulation.



“The United States printed more money in June than in the first two centuries after its founding. Last month the U.S. budget deficit — $864 billion — was larger than the total debt incurred from 1776 through the end of 1979.”- Pantera Capital

Jul 29, 2020

This is only recently catching up to the US as inflation intensifies and the people in charge scapegoat with supply shortage excuses. Or even worse — boogymen greedy corporate owners hiking up prices out of hate of the general public… Oh Elly…

All of this while still being in the middle of an ongoing pandemic. Yes, the one we have been in for two years now, and for some reason, the COVID case count is at ATH now. I won’t get into that but let’s just say lots of things don’t add up. I’ll mention some of these things: lack of prevention care, excessive use of vaccines (4 doses seems like something didn’t work the first time), arbitrary numbers/counting, oh and the 38 billion in profits from big pharma (a successful new product launch is 1 billion in a year). I won’t add wood to the fire, but more COVID cases tends to mean more justification for government spending.



Note: I feel for all the deaths and am sorry. I deeply thank all first responders.



Pair this with a country that is showing intense divide with each side becoming more extremist, the great hate of democrats and republicans. Historically there has been solved one way: war. Now the US is too woke to enter into a direct war with anyone. However, the United States is set to spend $768 billion next year on the military. This is much more than the year before, but this year the US has already exited Afghanistan and isn’t active in any public conflict.



Up for “democratisation” and country reshaping are Ukraine and Taiwan. Most likely, the US would enter into a proxy war with China and Russia through these 2 fronts. Also “protecting” the South China Sea and its allies in the region. Nothing unites a country more than war and threat of foreign fighters…

More on military spending: Politico Opinion (ignore the crying about not getting what dems want, look at numbers for military). Aljazeera article

I don’t pick sides and am not American. But know the effect that the world’s biggest economy has on the rest of the world. For now.

Finally, interest rate hikes. Most central banks around the world announced no hikes for Q1 of this year fearing it would hamper recovery, and blaming the supply shortage for inflation even though inflation has happened everywhere in the world and debt is reaching pretty extreme levels. Most central banks did mention intentions to start hiking interest rates later in the year.



Once this happens, it can spark a quick selling of on-risk assets as well as a general deleveraging in the market. Big players don’t want to hold onto loans as it isn’t cheap anymore to have outstanding debt. Yes the whole economy runs on debt, but it is all about who ends up holding that bag of debt. As interest rates begin to pick up, the hot potato will begin moving around until the last person gets stuck holding the bag.

Media coverage preparing retail to reenter

A lot has happened this year in Crypto as it has slowly grown, however, most of the retail buyers left after the May crash. Since then, big companies have been spending big amounts of money on ads and branding. I’ll mention a few of the most important ones:

Remember that retail moves slowly. Most of what has been happening this past year will start to take effect this year as retail sees the ads in more spaces. As crypto prices pick up, so will interest.



As much as this can sound bullish, I think it’s more of an exit strategy (pump and dump but in rich people words) before the impending doom of the year ahead.



In a tale as old as time, big money exits on risk assets and purchases war and consumer stocks (stock that will perform regardless of market conditions. i.e food, water, McDonalds, etc.) as a safe heaven — not growth stock. Bye bye Tesla.

DeFi and stablecoins.

Regulation means you should move into decentralised stables. i.e UST, Frax, MIM



Stablecoins have been one of the most debated topics in US policy. I’ll keep it short. US wants control and to make sure the USD stays as the world reserve currency. Good luck. But even then, crypto native users do look for some form of stability in order to sidestep the markets in volatile times. We have seen this year how USDT and USDC can easily be frozen, and because of policy, will most likely require KYC to use in the future (it’s all about control).



In the spirit of Cypher Punks and a free, decentralised economy, I support other solutions.

UST is on the top of my list as it has grown the most this year. I believe this growth will continue and adoption of a decentralised stablecoin in DeFi is only natural.

MIM is another solution. Similar to DAI, MIM is a crypto collateralised stablecoin, however, unlike DAI, MIM uses yield bearing collateral and allows anyone to mint MIM (when it is available).



Lastly, Frax. Frax is the first fractional-algorithmic stablecoin protocol. Frax is open-source, permissionless, and entirely on-chain. Unlike UST, Frax has some backing and is not completely algorithmic. However, Frax has not yet grown as much and in my opinion has the most growth ahead for the year. Keep an eye out for FXS (Frax share token).



This year will most likely be the migration from USDT/USDC to decentralised alternatives. Decentralised finance needs decentralised money.

Bull market, blow off top, bear market. What will happen and how to prepare.



With all that has been explained until this point, this is what it predict (I hate predictions) for the year 2022.



I expect Q1 and possibly Q2 to be part of a blow off top mania phase, mostly due to big money looking to exit pump before interest rate hikes and the impending war.



Events to watch for tops:

— Bitcoin backed ETF announcement is set for February to likely launch in March.

— Interest rate hikes. This is said to be re-evaluated quarterly but most likely will begin in the second half of the year Q3.

— War. This only will be harder to see a clear start, but Russia acting on Ukraine or China getting violent will be clear enough.



Lastly, it is important to monitor exchange inflows to see when big money is starting to move out. Smart money sells into strength — not on the other end as price starts to move down.



We must look for dormancy to start to pick up — this would mean old money is preparing for a move. Next blow off tops tend to have 2–6 weeks of exchange inflows as price continues to rally. So when your aunt asks you how to buy some of those “Crypto coins”, tell her how to but that it’s all NFA and then subsequently exit all positions.



My primary objectives and moves for Q1 will be to deleverage and repay all of my DeFi loans, consolidate my portfolio into stablecoin farming strategies, identify potential out performers for the year and work on short time frames, and focusing on the 4H chart and Daily chart in a paranoid way for the next 2–5 months (this, or forgetting about my holdings for 2–5 years).



Be well.



Xulian.

@kingjulianIam on twitter