Bloomberg 2022 Crypto Outlook: The United States may accept cryptocurrency next year

Source: Bloomberg Intelligence

Compiled by: Corn

Main content:

1. Bitcoin, Ethereum, Cryptocurrency, the Federal Reserve, and the Forces of Deflation in 2022

2. The three main cryptocurrencies in 2022? US dollar, Ethereum, Bitcoin

3. Has Bitcoin started a new bull market in 2021? Updated trends

4. What might stop Ethereum’s bull run in 2022? Higher prices

Encouraged by the Chinese ban and the proliferation of revolutionary technologies such as stablecoins (mostly centralized stablecoins) and NFTs, we expect the US to embrace cryptocurrencies in 2022 with proper regulation and associated bullish price impacts. Stablecoins may be a misnomer as most of them are pegged to the US dollar. The unlimited supply of fiat currencies should sustain price increases, especially Bitcoin and Ethereum, which have a limited supply.

For 2022, perhaps the more profound question is what are the factors that hinder the progress of Bitcoin, Ethereum and stablecoins? However, we expect that most turbulent factors, such as the nearly 50% correction in 2021, can be overcome through wider adoption. As stock market returns normalize and the US economy continues to decline, Bitcoin and Ethereum in US Treasury yield portfolios may shine.

Bitcoin, Bonds, and the Federal Reserve

Bitcoin, Ethereum, Cryptocurrency, the Fed, and 2022: The Forces of Deflation

The Fed’s renewed push to remove pressure and falling bond yields could indicate a favorable macroeconomic environment for top cryptocurrencies — Bitcoin and Ethereum — in 2022. Crypto assets showed different strengths than stocks at the end of 2021 , which could indicate continued outperformance for digital assets in 2022.

Figure 1: Is Fed tightening a dream? Bitcoin may hold the answer

Is Bitcoin expecting the Fed to end its game?

The main force that could reverse Fed tightening expectations in 2022 is a falling stock market, which could be a win-win for Bitcoin. As the benchmark cryptocurrency, it is moving towards a digital store of value, but it is still in price discovery mode and is a risk asset that has been rising with the equity tide. If the stock market falls, Bitcoin will face initial resistance, but to the extent that falling stock prices put pressure on bond yields and stimulate central banks to increase liquidity, cryptocurrencies may become the main beneficiaries. Figure 1 depicts the Fed Funds rate hike expectations for 2022 over a one-year period. The fact that the Fed's attempts to maintain a tightening cycle have failed, especially since the 2015 rate hike, suggests that the United States will follow Japan and Europe in moving towards negative yields.

The relationship between the general decline in bond yields and Bitcoin

The inability of long-term U.S. Treasury bonds to stay above 2% despite the consensus view of higher yields could be a leading indicator that the transition to a more deflationary environment in 2022 is favorable for Bitcoin. In February 2020, long-term bonds fell below the 2% threshold for the first time, showing the severity of the pandemic. Most risk assets followed suit in March. Figure 2 shows that U.S. Treasury yields could follow the footsteps of Japanese and European government bond yields and enter negative territory. The upcoming digital reserve assets could be the most prominent beneficiaries.

Chart 2: Bitcoin could be the main beneficiary of low yields

Funds have already moved from traditional simulated gold to Bitcoin and Ethereum. The question for 2022 is mainly about the swap or acceleration of these flows. As bond yields fall, we tend to favor funds moving to Bitcoin and Ethereum.

Do cryptocurrencies have advantages over the stock market?

Differential strength relative to the stock market in 2021 and the support of the sharp decline could set the stage for further appreciation of crypto asset prices in 2022. Since the 2020 crash, the overall stock market has never seen a 10% correction, and the cryptocurrency market may have a relative advantage in 2022. Figure 3 shows that the Bloomberg Galaxy Crypto Index is still recovering despite the S&P 500's decline in late November. Cryptocurrencies are risky assets, but at their core, Bitcoin and Ethereum, they may be transitioning to a store of value.

A decreasing supply is a key attribute shared by both cryptocurrencies. Digital assets may have an advantage over the expanded stock market during a period of early adoption and migration into portfolios, but there is the risk of volatility, especially if the Federal Reserve reduces liquidity.

Figure 3: Different strengths of crypto assets and stock markets

USD, Bitcoin, Ethereum

The three main crypto forces in 2022 - the US dollar, Ethereum, and Bitcoin

Cryptocurrency represents a better way to trade, a stronger ecosystem, and an asset class that is here to stay. The crypto dollar is the most important driving force in the digital currency revolution and the backbone of cryptocurrencies. The bull run in both Bitcoin and Ethereum looks as durable as the rising market value of stablecoins anchored to the US dollar.

Bitcoin, Ethereum, and Stablecoins in 2022

Past performance is not indicative of future results, but when a new asset class outperforms existing assets, naysayers have no choice but to join. We believe this process will play a major role in 2022, as money managers will face greater risks if they continue to not allocate cryptocurrencies in their portfolios. Figure 4 shows that since the end of 2019, the Bloomberg Galaxy Crypto Index (BGCI) has increased by about 1,200%, while the S&P 500 has increased by nearly 90%. Such outstanding performance is usually accompanied by volatility, and the nearly 60% decline in the BGCI in 2021 may lay the foundation for further appreciation in 2022.

Figure 4: Crypto-dollar proliferation and advancement of BGCI

BGCI is 80% Bitcoin and Ethereum. One stable trend in 2021 that we expect to accelerate in 2022 is the proliferation of stablecoins. The chart shows that the market capitalization of stablecoins has exceeded $130 billion.

The U.S. dollar dominates cryptocurrencies

Strong stablecoins along with Bitcoin and Ethereum are expected to remain at the top of the ecosystem compared to about 15,000 competitors vying for speculative leadership. Binance Coin, Solana, and Cardano have replaced XRP, Bitcoin Cash, and Chainlink, which were near the top a year ago. Figure 5 depicts the continued upward trajectory of crypto dollar market capitalization versus Bitcoin and Ethereum. In our opinion, there is a lot of speculation in this space, as Shiba Inu and Dogecoin show, but the top three should continue to maintain their position: maintaining dominance.

Figure 5: Cryptocurrency bull market

Ethereum’s percentage of the total has been rising, especially from around 10% a year ago to around 20%. Most stablecoins run on the Ethereum platform.

Cryptocurrency bull run: Stablecoins

The ability to trade and transfer dollars 24 hours a day with instant settlement, and earn interest far higher than Eurodollars, is a property of stablecoins, and also has an impact on digital assets such as Ethereum. This has boosted the dollar and has affected most financial assets. In a world that is rapidly going digital, the shift to trading through digital currencies may be unstoppable. Figure 6 compares the market capitalization of the top five stablecoins (Tether ranks first) with Bitcoin and Ethereum. According to Coinmarketcap data, Tether's trading volume often exceeds the combined trading volume of Bitcoin and Ethereum.

Figure 6: Market value changes since the end of 2019

There are predictable bumps in the road, but there is a natural progression towards central bank digital currencies, and the world is chasing the dollar.

Bitcoin’s bull run

Is Bitcoin starting a new bull run in 2021? An updated trend

As we approach 2022, the key question for Bitcoin is whether it has reached its peak or is simply consolidating in a bull market. We believe it is the latter and see the benchmark crypto on its way to becoming global digital collateral. Key support levels in 2022 are likely to be around $50,000, with resistance around $100,000.

Bitcoin's initial price in 2022: $40,000-70,000

As we can see, Bitcoin’s correction of about 50% in 2021 is due to bullish fundamentals and could consolidate rising prices in 2022. Overcoming China’s ban on cryptocurrency mining and energy consumption issues has improved the fundamentals of the benchmark index, as evidenced by its price recovery since bottoming in July. Most mining operations have moved to safer locations in the United States and Canada, and the energy usage of the world’s largest decentralized network shows its strength. Figure 7 depicts the new bull run we have seen, especially since the July low of about $30,000.

Figure 7: Bitcoin’s 2021 decline erases speculative excesses

Good support is around $40,000, just below the 20-week moving average and trend line since July. Around $70,000 is the initial resistance at the upper end of the trend channel and the distance above the 20-week average.

Is Bitcoin on track to hit $100,000 by 2022?

Bitcoin price appears to be on track for $100,000 and we believe it is more of a matter of when, especially given the economic fundamentals of increasing demand vs decreasing supply. There are numerous examples that Bitcoin will continue to advance in its journey towards mainstream adoption in 2022. ETFs and futures in the U.S., Canada, and Europe, migration to a 60/40 mix, and legal tender status in El Salvador all point to a bull run in global markets. Figure 8 depicts a scenario where Bitcoin supply is falling vs rising prices and volatility looks mild.

Figure 8: Bitcoin’s popularity and supply decline

It’s normal to expect a decline in volatility for mature assets, and that’s what we see with the benchmark cryptocurrency. Annualized volatility is just under 80%, which looks roughly the same as in 2018, but the price is much higher, which indicates a mainstream migration.

Bitcoin may be more than just a digital version of gold

If past patterns repeat themselves, the potential path for Bitcoin prices is to stabilize at around 100x gold per ounce and for volatility to resume its downward trajectory. Figure 9 depicts a good reason for cryptocurrency prices to remain elevated relative to metals, as Bitcoin’s 260-day volatility has seen an early recovery after reaching an all-time low in early 2021. In late 2016, this relative risk metric formed a similar bottom as the Bitcoin-to-gold ratio broke through 1x resistance at the end of 2017 to reach 10x. Supply reduction years (halvings) are another factor that is common in 2020 as in 2016.

Figure 9: Bitcoin 100x Gold - Volatility

We believe that some unexpected factors will hinder this technical indicator, which is fundamental for Bitcoin to maintain its appreciation path relative to gold.

A Consolidated, Mature Bitcoin Bull Market

We believe Bitcoin will have a pause, correction, and re-energized bull run in 2022. Figure 10 shows the benchmark cryptocurrency at about the same price on November 18 as it was at the end of the first quarter. Declining volatility is a continuing trend we see as market depth and adoption increase, and prices tend to rise. The beginning of 2021 was a milestone for Bitcoin, with the cryptocurrency's 260-day volatility falling to its lowest level ever compared to most major asset classes, especially the S&P 500. The benchmark cryptocurrency is up about 100% so far in 2021 and should begin to find support from this year's average price of just under $50,000.

Figure 10: Bitcoin in the fourth quarter is the same as in the first quarter (marked time)

The ~50% drop in Q2 should help solidify the foundation, and we believe Bitcoin has more potential to move toward $100,000 than to remain below $50,000. (11/19/21)

Ethereum Bull Run

Higher Prices Could Halt Ethereum’s Bull Run in 2022

Demand is increasing, supply is decreasing, and Ethereum's position at the center of financial and monetary digitization is fundamental for further price appreciation. Ethereum has been the best performing major crypto asset in 2021, and we expect this trend to continue after falling by about 60% in the first half of the year.

Ethereum bull run price range is $4,000-5,000

Ethereum enters 2022 with usage rising and supply falling, while withstanding a sharp correction this year. The key question is how high prices may have to go before overextended prices pull back, and how deep support for the second-largest cryptocurrency may fall before it finds responsive buyers. Figure XI depicts a new bull run we are seeing, which comes on the back of a roughly 60% drop to the July low. The pullback has helped establish $4,000 as key resistance and $2,000 as support. What was once resistance is now support, and $4,000 could become a key pivot point in 2022.

Figure 11: There is no reason to complicate the bull market

As the primary denominator for non-fungible tokens (NFTs) and platform tokens for cryptocurrencies, Ethereum established its utility in 2021, and we expect 2022 to build on that. Success leads to competition, but the result is that so-called Ethereum killers come and go.

Ethereum is the biggest beneficiary of Bitcoin ETFs

The fact that Ethereum has been outperforming since the launch of the first exchange-traded fund tracking Bitcoin on a U.S. exchange could indicate a more sustained bull run for the second-largest cryptocurrency. Ethereum is up about 20% since Oct. 19, the day before the launch of the Proshares Bitcoin Strategy ETF (BITO). Bitcoin is down about 8%. Ethereum appears to be in the early stages of becoming an internet collateral and a hub for building DeFi, fintech and NFTs platforms.

Figure 12: Performance of US Bitcoin ETF since its launch

Supply reductions add to the underlying basis for Ethereum prices against the backdrop of protocol changes in 2021. If rising volumes and open interest on CME futures contracts are any guide, a futures ETF tracking Bitcoin should only be a matter of time.

The rise of cryptocurrencies, DeFi, and Ethereum

Ethereum is leading the wave of digitization, tokenization, DeFi, Fintech, and NFTs. Figure XIII depicts the price of the second largest cryptocurrency, roughly parallel to the total market capitalization of crypto assets on Coinmarketcap. Most NFTs are denominated in Ethereum, which means that the expanding ecosystem represents demand for ETH. Bitcoin is gradually becoming a global digital reserve asset, while Ethereum is being used as collateral for the Internet. Tether is the most widely traded crypto asset. The popular play-and-earn game "Axies Infinity" runs on the Ethereum network.

According to data from Etherchain.org, approximately 630,000 ETH (about 50% of the normal supply) were delisted between the beginning of August and October 26, while the average monthly supply since August 2020 has been approximately 410,000.

Figure 13: Ethereum-Crypto Platform, Internet Collateral

Ethereum has earned depth and dominance. With success comes competition, and there are many potential Ethereum killers, but we’ve seen the second-largest cryptocurrency withstand challenges to its leadership.

Ethereum supply could plummet

There can be a lot of issues with upgrading to new technology, but we are seeing a maturing market as incremental supply continues to decline, which is positive for Ethereum’s price if the economic rules apply. Figure 14 depicts how new Ethereum supply is decreasing faster after the protocol change that began removing tokens from circulation in early August. For the first time, the 52-week rate of change in the number of new Ethereum tokens to the total number of outstanding coins is expected to fall below 4%. Demand for the second-largest cryptocurrency is not as direct, but supply is likely to fall below that of Bitcoin, which is down less than 2% this year.

Figure 14: Supply trends favor Ethereum price increases