December 2022.
This update intends to inform you about relevant market developments and market insights in the digital asset market.
| November | December | Delta | |
| Total market (Billion) | $819 b | $756 b | -7,7% |
| Bitcoin (dollar) | $17.170 | $16.525 | -3,75% |
| Ethereum (dollar) | $1.294 | $1.195 | -7,7% |
| Nasdaq 100 (points) | 12.030 | 10.945 | -9,91% |
| S&P 500 (points) | 4.078 | 3.840 | -5,96% |
KEY TAKEAWAYS
- US Consumer Price Index data for November was 7,1%, lower than the expected 7,3%
- Nasdaq drops 10% to 10.800 points and S&P500 drops 6% to 3.800 after hawkish Powell speech
- Bitcoin trades sideways around $17.000, but technical analysis shows first signs of potential trend reversal
- FTX aftermath ongoing, Sam Bankman-Fried arrested
- Binance processes 6 billion dollars of customer withdrawals in a few days, while fighting FUD to maintain customer trust
- Gemini and the Digital Currency Group (DCG) argue about a 1-billion-dollar outstanding position
- Adoptie case: STARBUCKS
- Adoptie case: PAYPAL
- Adoptie case: VISA
- Adoptie case: TURKEY
Macro-economic Developments
On December 13, all eyes were focused on the Consumer Price Index (CPI) for November. In October, the CPI data was 7,7% and analysts expected a 7,3% for November. On December 13 the CPI data came in at 7,1%, which was lower than the expected 7,3%. A second in row decline was solidifying the hopes that inflation may have peaked and might be entering a steady downtrend.
Initially markets reacted positively to the announcement. The Nasdaq jumped to 12.150 points and the S&P500 (S&P) jumped to 4.100 points. On December 14 the US Federal Reserve (FED) announced its decision to hike the federal funds rates by 0,50% (50 basis points), bringing the total to 4.25% to 4.50%.
Despite that this rate hike was also expected by analysts, markets started to reverse down during the explanation of the rate hike by FED chairman Jerome Powell. Powell indicated that the FED expects to keep raising rates at a slower pace over a longer period of time, meaning that financial markets will likely experience more pain in the months ahead. In his speech Powell reaffirmed his commitment to bring inflation down to 2%. The hawkish monetary policy could push the US into a, potentially long, recession. As a result of the hawkish speech, the Nasdaq dropped to 10.800 points and S&P500 to 3.800 as per December 31.
Another impactful event was the unexpected value increase of the Japanese Yen against the US Dollar. Japan announced an unexpected monetary pivot that gives room to a 2% inflation rate, while for decennia Japan is pursuing an inflation neutral policy. Japan is a giant global liquidity provider by offering low interest rate capital. However, this monetary pivot could trigger Japanese investors to invest inside Japan instead of financing outside Japan. A stronger Japanese Yen against foreign currencies will put more pressure on the Dollar Index (DXY).
A decline of the dollar index (DXY) is often a catalyst for investors to invest in risk assets like stock markets and digital assets. They invest based on the assumption that low-cost capital will lead to more investments and thus shareholder value. However, the decline of DXY in this case is caused by an event that instead might reduce investments and put pressure on realizing growth and shareholder value. This can be seen as another sign for a potentially longer period of economic downturn.
Digital assets
Since the catastrophic collapse of the FTX imperium in November, the aftermath of the fall of FTX and Alameda Research is still ongoing. On December 12, FTX founder and CEO Sam Bankman-Fried was arrested in the Bahamas after US prosecutors filed criminal charges against him. This is the first step in a legal process that will most likely last for a long period.
Where Binance was trying to act as the big savior of the industry, they were caught by some heavy backfire themselves. And while Genesis and the Digital Currency Group are in argument about a 1-billion-dollar outstanding position, Bitcoin mainly traded sideways throughout December and closed the month at $16.525 with a minor loss of 3,75%.
It could have been a glorious month for Binance. Its biggest competitor FTX imploded, and Binance should have emerged as the platform of choice for FTX refugees. Instead, it was hit with controversies and accusations. In the immediate aftermath of the FTX implosion, Binance CEO Changpeng “CZ” Zhao announced that his exchange would provide a Proof-of-Reserves system to ensure customers could verify the company’s solvency. However, Kraken CEO Jesse Powell pointed out that Binance’s Proof-of-Reserves system cannot be trusted to provide a complete picture of the exchange’s assets and liabilities. In addition, Mazars, the accounting firm that is responsible for producing reports of the Proof-of-Reserves of Binance and other exchanges like Crypto.com and Kucoin, halted their activities.
While Binance was trying to reassure customers that their funds are safe customers withdrew their funds on a large scale – over 6 billion dollar was withdrawn from the exchange in just a few days. The exchange however does seem to have over $58 billion of assets spread across various wallets, which makes its situation very different from FTX. Recently, on-chain analytics platform CryptoQuant analyzed the exchange’s proof-of-reserves audit. The report is reassuring: BTC liabilities are 97% collateralized. Binance also showed additional strength by finalizing the acquisition of Tokocrypto, a leading Indonesian crypto trading firm and by purchasing the bankrupt Voyager exchange for a billion dollars.
Where Binance is fighting to maintain their trust, Gemini and the Digital Currency Group are having a public dispute about outstanding positions worth over 1 billion dollars. Both companies are facing liquidity issues as a result of the FTX drama. Although it is not yet clear what the total damage to the industry will be, it is already clear that it will take time to recover from all what is happening.
While the market is recovering from the latest black swan event, the ecosystem overall keeps building. Web3 startups raised a total of $7.1B in investment in 2022. In the last quarter, investors shifted their attention more to augmented, virtual, and mixed-reality startups. Artificial intelligence, such as the AI chatbot ChatGPT, also received much interest from VC firms. The focus was also on the importance of security in Web3, leading to greater investments in web3 infrastructure startups.
TECHNICAL ANALYSIS
The FTX collapse in November wiped away roughly 200 billion USD. The total market value declined from 1 trillion dollar to around 750-800 billion USD. From the top of the digital assets market value in November 2021, this value dropped 75% to the current total market value which is now at the same level of the top of the 2017 bull cycle.
With a market dominance of 42%, Bitcoin is trading sideways in December around $17.000. On the monthly timeframe Bitcoin gets support from the 100 moving average (average of closing prices of the previous 100 days). The 100 moving average often offers support either resistance before breaking to a next level. On the weekly timeframe Bitcoin is still trading well below the 200 moving average and 100 moving average in a downward trend. To break this downtrend and start an uptrend, a weekly Bitcoin close is required above 21K USD.
The weekly relative Strength Index (RSI) shows signs for a bullish divergence, a signal that indicates that a downward price movement is likely to lose its momentum and that a reversal to the upside is getting more likely. The longer Bitcoin is trading sideways, the more likely it gets that the downtrend on RSI will reverse to an uptrend. When 21K breaks to the upside, targets of 25K-28K will come into play.
Ethereum roughly followed the Bitcoin price movement in December. The ETH-BTC chart is still trading in a huge cup-and-handle pattern that is forming since 2018. This pattern more often tends to break to the upside. If that happens, Ethereum is likely to perform about 50-75% better compared to Bitcoin. It could take several months before this pattern will come to resolution with a break either to the upside or the downside.
ONCHAIN ANALYSIS
An interesting on-chain indicator is the circulating supply in profit and the circulating supply in loss. The analysis aims to determine the bear market’s stage, whether the macro bottom has already been reached, and how long the subsequent accumulation will last. Currently, the supply in profit and loss metrics are reaching levels that have historically correlated with the macro bottoms of the Bitcoin price. However, they also give clues to the subsequent multi-month accumulation phase, which we have yet to see signals of completion. Moreover, the indicator suggests that the Bitcoin price may be in for one more final move down in this bear cycle.
ADOPTION CASES
STARBUCKS ODYSSEY – THE ‘STAR’ IN STARBUCKS ARE NFTs
Starbucks has launched its NFT-driven rewards program Starbucks Odyssey in beta early November 2022. Starbucks Odyssey, the web3 rewards platform from Starbucks, has seen unprecedented demand shortly after its beta release early November 2022.
First announced in September following months of teases, Starbucks Odyssey builds upon the firm’s existing Starbucks Rewards initiative, but with a Web3 twist. Users can earn rewards points for buying food and drinks at stores, but also for participating in activities via the Odyssey mobile app, such as quizzes and other digital experiences. Completing activities and amassing points then earns users “Journey Stamps” tokenized as NFT collectibles on Polygon.
In 2023, Starbucks Odyssey will launch its NFT marketplace, letting users buy and sell their Journey Stamps, as well as purchase limited-edition NFTs created in collaboration with company partners.
PAYPAL AND METAMASK PARTNERSHIP
Digital payments platform PayPal has teamed up with MetaMask parent company ConsenSys to allow MetaMask users to purchase and transfer Ethereum via PayPal’s platform. According to the Dec. 14 announcement, the service will initially be rolled out only to select PayPal users within the United States, as the country is one of MetaMask’s largest markets in terms of users. The collaboration is intended to allow users to seamlessly purchase and transfer ETH from PayPal to MetaMask by simply logging onto their Mobile MetaMask App, which will then redirect them to their PayPal account to complete transactions.
PayPal is among a growing number of traditional payments companies integrating crypto into their services and seeking to allow users to interact with the crypto ecosystem with ease. In November, global digital peer-to-peer payments company MoneyGram announced that U.S. users, including those in Washington, DC, could buy, sell and hold cryptocurrency — specifically, Bitcoin, Ether and Litecoin.
In October, Western Union also filed three trademarks for managing digital wallets and exchanging digital assets, as well as commodities derivatives, which indicates the payments company likely plans to expand its services into the Web3 sphere. Mobile payment processing app Cash App has also added support for transactions via the Bitcoin Lightning Network to allow users to send and receive BTC on the faster, more efficient layer-2 protocol.
VISA IS BUILDING ETHEREUM AUTO-PAYMENTS
Global payments giant Visa signaled its stronger, sustained interest in crypto, releasing a paper outlining how the firm could one day collaborate with the Ethereum network on automatic payments.
The paper, sparked by an internal company hackathon held earlier this year, details how Ethereum users could -with support from Visa- schedule auto-payments sent from self-custodial crypto wallets. Such capability is not yet possible on the Ethereum mainnet but would be enabled by a popular Ethereum proposal called “Account Abstraction,” which would allow Ethereum user accounts to function like smart contracts and feature pre-scheduled execution functions.
TURKEY’S CENTRAL BANK CONDUCTS FIRST DIGITAL LIRA TRANSACTIONS
The Central Bank of the Republic of Turkey (CBRT) has completed the first trial of its central bank digital currency (CBDC), the Digital Turkish Lira. In the scope of the first-phase studies of the Digital Turkish Lira Project the first payment transactions on the Digital Turkish Lira Network were executed successfully. The CBRT will continue to run the limited, closed-circuit pilot tests with technology stakeholders in the first quarter of 2023. Findings obtained from these tests will be shared with the public via a comprehensive evaluation report.
In 2023, the CBRT will expand the Digital Turkish Lira Collaboration Platform to involve selected banks and financial technology companies and will unveil advanced phases of the pilot study that will further widen the participation. Against this backdrop, the CBRT will continue to run tests for authentic architectural setups designed in areas such as the use of distributed ledger technologies in payment systems and the integration of these technologies with instant payment systems.
Studies on the legal aspects of the Digital Turkish Lira demonstrate that digital identification is of critical importance for the project. Therefore, studies on the economic and legal framework of the Digital Turkish Lira as well as its technological requirements will be prioritized throughout 2023.
Turkey is not the only country exploring the use of central bank digital currencies (CBDCs). In fact, many countries are considering the implementation of digital fiat as a means of modernizing their financial systems and increasing financial inclusion. China, for example, has been at the forefront of the CBDC movement and has recently expanded its digital yuan pilot to include additional cities. Additionally, Hong Kong and Mainland China are set to launch the first cross-border pilot project for the digital yuan.
CONCLUSION
The December digital assets market performance (-7,7%) was in accordance with the Nasdaq and S&P performance, mainly caused by the hawkish speech of FED chairman Jerome Powell. Bitcoin merely traded sideways, meaning a large portion of the decline in the digital assets markets was caused by a decline in altcoins.
An important sign of confidence in the digital assets market was derived from the strong foundation of Binance, where publications about the potential incorrect Proof-of-Funds / Reserves (for now) turned out to be rumors aimed at causing more fear, uncertainty, and doubt. Also, the arrest of FTX founder / CEO Sam Bankman-Fried can be perceived as an important step for re-establishing trust in the digital assets market.
Our technical analysis shows first signs of a potential trend reversal to a potential uptrend, more confirmation of these signs should occur in Q1 2023.
In 2022 various corporate companies started with web3 based product launches (a.o. Starbucks, Nike, Porsche, Gucci and others), and Central Bank Digital Currencies and integrations between existing payment companies (PayPal, Mastercard, Visa) and web3 companies are in development (as outlined in this and previous newsletters). VC’s are clearly lining up to profit from this opportunity, investments in web3 companies by VC’s soared to 7.1B dollars in 2022.
We believe these trends will continue and accelerate in 2023. Combined with an increased regulation pace, we remain confident in the investment potential of the web3 ecosystem.