Report: Crypto fundamentals are stronger than ever

2022 crypto markets didn’t get off to a positive start as asset prices have fallen sharply since the new year, a decline that already began in November last year. Since all-time-highs, bitcoin (BTC) and ether (ETH), the leading cryptocurrencies by market cap, are down 45 and 48.2 percent respectively. Over the past 30 days, the wider market lost $757 billion in total market cap.

In a fresh report out of American crypto asset managers Bitwise, authored by Chief Investment Officer Matt Hougan and Director of Research David Lawant, the authors point to market sentiment as the driving force behind the downturn. According to the report, “weak sentiment is driving the market lower, even as fundamentals remain strong.” Over the last week, the Bitwise 10 Index has dropped over 20 percent.

“The market is likely to continue experiencing short-term volatility as it works through macro challenges, but our experience from past crypto pullbacks (along with the space’s strong fundamentals) leaves us optimistic about the long-term outlook,” the report reads.

Broad shift in capital market sentiment

Over the past three months, the most important driver of the crypto market drawdown has been a broad shift in capital market sentiment from risk-on assets, typically tech stocks and crypto, to a risk-off sentiment driving investors towards protecting investments and favoring risk-off assets such as sovereign bonds. “This movement is being driven by an emerging consensus that the Federal Reserve will soon begin tightening monetary policy in an effort to battle inflation.”

The result of this shift in sentiment is clear: the Nasdaq Composite Index is down more than 10 percent from its November 2021 peak, and many tech stocks are down 20 percent or more. 

“The recent sell-off is reminiscent of Q4 2018, the last time the market got uncomfortable with a more hawkish Fed. Then as now, the Fed’s stance sent risk assets tumbling across the board: The Nasdaq Composite fell 18 percent during the quarter, and the Dow and the S&P 500 had their worst December since the Great Depression. Bitcoin dropped 44 percent in that same quarter,” the report continues.

Though weak sentiments is the most likely force driving the recent pullback, the fundamentals of crypto are robust.

2021 best year ever for crypto fundamentals

According to the report, last year strengthened crypto’s fundamentals more than any year before:

• Venture capital investors poured over $30 billion into crypto startups in 2021, more than all previous years combined.

• The number of developers working in the crypto ecosystem rose 75% in 2021 above year-ago levels, to a new all-time high.

• The number of people actually using crypto applications soared last year. As one example, monthly active users of MetaMask rose more than 20 times in 2021, from 1 million to 21 million.

• Crypto crossed the mainstream divide in a major way in 2021: According to a new study, a majority of the world’s largest banks are now invested in crypto and/or blockchain projects.

• Public markets opened up to crypto in a major way in 2021, headlined by Coinbase’s debut at an $80+ billion valuation, the largest debut in the public markets last year in any industry.

• Before 2021, crypto was mostly about bitcoin and digital gold, at least for mainstream investors. In the past year, however, it has added massive new markets, such as DeFi, NFTs, DAOs, the Metaverse and Web3.

All eyes on Biden administration’s executive order

In the immediate future, markets will closely follow both eventual changes in Fed’s policies, however unlikely in the short term, and the February release of the Biden administration’s executive order on crypto.

Bitwise’s report concludes that the market “currently expects a fairly bearish directive, with a large focus on systemic risks, investor challenges, and issues around criminal activity.”

“Any sign that these concerns are balanced by the positive impacts that crypto can provide—whether technological innovation, economic competitiveness, or more efficient access to capital—would be welcomed by the market.”