Hashdex conducted a mid-year reassessment of the state of the crypto asset class, compiling secular and cyclical factors acting as tailwinds for digital assets.
Secular - Longer-term reaffirmations of crypto’s investment case such as user adoption, regulatory clarity, and institutional investment.
Cyclical - Shorter-term positive forces that include a US inflation downtrend, the upcoming Bitcoin halving, and crypto’s post-FTX cycle.
Crypto remains undervalued, even while the technology continues to advance rapidly, institutional adoption is at full steam, and macroeconomic conditions are steadily leaning towards risk assets.
This confluence of factors presents investors with an exceptionally favorable moment where secular trends are aligned with cyclical forces, a rare and unique opportunity that should not be overlooked.
By leaning into crypto’s volatility, the next 12 to 18 months seem to be ideal for long-term investors to average into the asset class, making a strategic allocation that prepares a multi-asset portfolio to benefit from an upcoming bull phase for crypto assets.
With half of the year behind us, and crypto dominating year-to-date performances among asset classes, it’s easy to lose track of where we were just eight months ago. As the FTX debacle unfolded widespread pessimism over crypto’s future dominated headlines. The November 2022 edition of The Economist was titled “Crypto’s Downfall” and featured a meteor storm over a desert—a representation of the inescapable doomsday that surely would end crypto.
During this time our team was just finishing writing our 2023 Crypto Outlook, released the month after the FTX implosion. Back then, while we were processing the many lessons from a turbulent year, our key message was that “the crypto end game remained unfazed.” The first half of 2023 has shown us that this statement was no pipe dream. While it’s been reassuring to confirm some of our predictions—such as the successful activation of Ethereum’s Shanghai upgrade, broader institutional adoption, and significant advancements in crypto regulation—we were also surprised by major events that we didn’t see coming, including this year’s banking crisis or BlackRock CEO Larry Fink publicly stating that “bitcoin is an international asset” and that “crypto is digitizing gold in many ways.”
Together, this year’s expected and unexpected events are reinforcing a series of long-term secular trends and shifting cyclical forces, a combination of factors that Charlie Munger has referred to as a “Lollapalooza effect” to describe a scenario where human biases act in concert to create exceptional human behaviors. We think crypto has arrived at just such a moment, and in this report identify five secular and five cyclical forces that substantiate why, in our opinion, crypto is presenting investors with a generational opportunity.
SECULAR1: Major networks are on the path to reach billions of users.
In our 2023 Crypto Outlook, we dedicated sections to the two crypto blue-chips, Bitcoin and Ethereum, emphasizing important milestones they had reached in 2022. As 2023 was approaching, we were pleased to see Bitcoin’s hash rate reach new all-time-highs, and anticipated the activation of the Shanghai upgrade on Ethereum (in addition to the implementation of the functionalities that would enable higher scalability on the network).
Now, Bitcoin is twice as secure as it was before the 2021 China mining ban while the environmental discussion around mining has been shifting toward a more positive outlook. And while Lightning Network liquidity is up a modest 7% compared to the end of 2022, positive news around the Bitcoin scaling solution continues, such as Strike’s expansion of its Lightning services to 65 countries, and Santander releasing a report on the potential of the Lightning Network. On Ethereum, the Shanghai upgrade was flawlessly activated, igniting a new wave of staking deposits that made the network surpass the 20 million staked ether milestone by the end of June. Moreover, the Cancun upgrade is now expected to happen in the second semester, implementing initial sharding functionalities that will enable rollups to scale Ethereum much more efficiently. As these developments bring crypto’s broadband phase into fruition, it’s clear to us that the major networks in this space are on the path to reach billions of users, having more security, scalability and utility that will make their use easier, faster and broader.
SECULAR2: Crypto’s value accrual has advanced rapidly in the past 4 years.
If we focused only on short-term price swings, it would be easy to dismiss where we were in the beginning of the previous crypto cycle in late 2018. At the end of that year, crypto had a total market cap of $120 billion, there was no volume in decentralized finance (DeFi) and applications were basically nonexistent, NFTs had a total monthly volume of less than $100,000, and the total value locked (TVL) on the Ethereum ecosystem had topped at a modest $1.4 million. Traveling four years ahead, and comparing those figures to the ones at the end of 2022, it’s difficult not to appreciate the long-term growth of crypto in all of those fronts. By the end of last year, the asset class was sitting at almost $800 billion in market cap, monthly DeFi volumes hovered around $50 billion, NFTs amassed $760 million in monthly traded figures, Bitcoin and Ethereum holders had reached 135 million, and Ethereum’s TVL was at $45 billion. These several fold multiplications in a mere four years span are a clear indication that the crypto industry is anything but dead, continuing in its long-term trend of value accrual.
SECULAR3: Bitcoin’s value proposition was reassured during the US banking crisis.
The Fed’s fastest rate hike in many decades put regional banks in the US under a lot of pressure in early March. In that environment, 14 years after its creation, bitcoin was perceived as a safe-haven asset alongside gold. Its emerging digital store-of-value thesis, in particular, has played out exactly when the traditional financial system was shaken out, with upward spikes in the asset’s price right in midst of the Silicon Valley Bank collapse and the downfall of First Republic Bank. As fears of a continued US banking crisis started to pick up, and the Fed injected liquidity into the system through its new Bank Term Funding Program, the inscription by Satoshi Nakamoto on the Bitcoin genesis block couldn’t be more appropriate, refreshing the conviction that the world indeed needs a fixed-supply bearer asset with no counterparty risk—an alternative to the fragilities of our legacy financial system.
SECULAR4: Crypto regulation is advancing worldwide.
A distinct section of our 2023 Crypto Outlook was regulation, and the fact that regulatory clarity would accelerate in the wake of FTX. Six months later, the Markets in Crypto Assets (MiCA) regulation was passed in the EU, Brazilian legislators approved a regulatory framework for crypto, Hong Kong regulators started conducting pilot projects to assess the advantages of integrating digital assets in financial markets, and UK policymakers and regulators are working toward an approach uniquely tailored to blockchain and digital asset regulation. While the US may be lagging in such advancements, proposed bills in the US Congress (such as the Digital Asset Market Structure and the Stablecoin Bill) will eventually put the world’s largest economy on par with other jurisdictions, bringing more security and confidence to investors worldwide.
SECULAR5: Major players are in crypto to stay.
As we also highlighted in our outlook for the year, despite, at the time, prices being over 70% off all-time-highs, institutions continued building in the bear market. With crypto’s recovery phase finally starting in 2023, it’s rejuvenating to see that major institutions are showing a deeper understanding of crypto and a greater degree of conviction than ever before. There’s a big number of companies and financial institutions that are integrating crypto into their services, be it banks like JP Morgan and Nubank; payment services such as PayPal and Stripe; online marketplaces like Mercadolibre; brands like Adidas, Nike, and Tommy Hilfiger; and the list goes on. Perhaps more importantly, the largest German bank, Deutsche Bank, has applied for a digital asset custody license in its home country; and the largest crypto investor, a16z, will open its first international office in the UK. BlackRock, the world’s largest asset manager (with $8.5 trillion in assets under management), has filed for a spot bitcoin ETF in the US, as have other massive global asset managers like Fidelity, Invesco, WisdomTree, and VanEck. These strong tailwinds of adoption reinforce what we’ve witnessed in 2022, making it clear that major institutions are in crypto to stay.
CYCLICAL1: FTX was the turning point for a new cycle.
Bear markets like 2022 usually come to an end after a climax, which Hashdex believes, in this case, was the fallout of FTX in early November, cleansing the reminiscent bad leverage in the crypto ecosystem. Since then, the general trend has been positive for bitcoin and the overall digital asset space, with the asset class shrugging off the Genesis bankruptcy in mid-January, and blue chips assets like bitcoin and ether coming out unscathed of the regulatory crackdown on major exchanges. Furthermore, the reversal of bitcoin and ether has been accompanied by a sideways consolidation as a follow-through, giving the opportunity for market participants to settle-down the idea that the 2022 bear market is already behind us. Our belief is that this follow-through is exactly what we’ve been experiencing since the middle of March.
CYCLICAL2: US inflation figures have recently crossed below the Fed Funds Rate.
Following an upward spike in inflation figures since the beginning of 2021, the Fed started its fastest interest rate hike in many decades, causing huge aversion to all risk asset classes, and to crypto in particular. After a year-long effort, inflation figures have been on a consistent downtrend since June 2022, with CPI numbers crossing below the effective Fed Funds Rate in recent months. While there's a hot debate on whether tighter monetary conditions will soon lead to a recession, it seems only a matter of time before the Fed reaches the terminal rate for this cycle. In fact, if hard landing takes place in the next twelve months, we do expect crypto to suffer in the short term. However, similar to what happened in March 2020, when the Covid-19 outbreak was officially declared a pandemic by the World Health Organization, crypto is likely to rebound within a few months, fueled by a shift back to stimulative monetary policies. If no recession, or a mild one, takes place, interest rates are likely to stop being hiked or even revert back to neutral. In either scenario, despite possible short-term volatility, investors can expect risk appetite to increase in the next 12 to 18 months, with crypto being one of the first asset classes to react positively in response to more “ordinary” macro conditions. In fact, the past semester performance might have been a glimpse that this reaction has already started.
CYCLICAL3: The US will continue monetizing its debt.
While inflation is showing clear signs of a cool off, the total US public debt has recently surpassed $32 trillion, in a clear parabolic rise since the closing of the gold window in 1971. Alongside this explosion of debt, US debt-to-GDP continues consolidating above 100%. This ratio, also in a clear uptrend since the early 1970s, is only likely to dim if (i) US government spending were to decrease, or (ii) if US GDP were to go up beyond its growth rate in the past several decades, either through a huge increase in productivity or artificially through monetary stimulus. As the months-long debate on the debt ceiling issue came to an end, and the US finally approved yet another raise of the upper limit for its indebtedness, it seems clear that option (ii) will continue to be the go-to solution. And as the US continues to monetize its debt, more liquidity will flow into the system, eventually going to hard assets and investments at the tail end of the risk curve, the latter making crypto quite an attractive asset class for investors.
CYCLICAL4: The Bitcoin halving is just around the corner.
The Bitcoin halving is expected to take place somewhere between late April and early May of 2024. The next halving will immediately cut the emission of new bitcoin from today’s 6.25 bitcoins per block to 3.125 bitcoins approximately every 10 minutes. This will happen at a point in time in which almost 94% of the total bitcoin supply will have already been issued, with a big part of that either lost or being held by long-term investors. While these supply shocks are completely expected since Bitcoin’s inception, historically speaking, the 12 to 18 months following each halving have been pretty positive for bitcoin prices, which lead the way for the digital asset space to reach new valuation levels.
CYCLICAL5: Crypto is still far below its long-term “fair” value trend.
Given the fact blockchains are networks, which behave somewhat like biological systems, a way to assess their long-term growth in market value is through a logarithmic trend line. The rationale behind that is that network effects drive demand for crypto assets, whose value should go through more explosive growth early on, and then through diminishing growth rates as the asset class matures. By deriving a “fair” value for the combined market cap of bitcoin and ether from inception until the end of 2022, we believe that, despite their outstanding performance so far in 2023, crypto is still far below its long-term “fair” value.
In fact, the combined market cap of bitcoin and ether is in a region that historically accounted for 56% of trading days since Bitcoin’s inception, at around 50% undervaluation with respect to its long-term trend. These moments have historically proven to be great accumulation phases in preparation for a new bull phase. In the two previous cycles, these periods of time lasted for an average of 800 days. We’ve entered this accumulation region in the middle of 2022, staying there for around 400 days so far. If history rhymes, we should be halfway into the accumulation region for this new cycle. By taking this average trend as a likely scenario to be reached by the end of next year, bitcoin and ether could together provide around 300% upside only 18 months from now. Naturally, these statements are based on a very simplified model, and as the British statistician George Box would say, “all models are wrong, but some are useful.” If this is the case for our model, now is an ideal time to consider an allocation in crypto.
Why should investors care about crypto’s Lollapalooza effect?
Hashdex’s Research team compiled these 10 factors because we believe they help assess the current state of the digital asset space. With the cards on the table, our belief is that crypto is undervalued, the technology continues to advance rapidly, institutional adoption is at full steam, and macroeconomic conditions are steadily leaning towards risk assets. This confluence of factors presents investors with an exceptionally favorable moment where secular trends are aligned with cyclical forces, a rare and unique opportunity that should not be overlooked. By leaning into crypto’s volatility, the next 12 to 18 months seem to be ideal for long-term investors to average into the asset class, making a strategic allocation that prepares a multi-asset portfolio to benefit from an upcoming bull phase for crypto assets.
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