The drumbeat of gloomy news and confidence-deflating price actions in the crypto market lately has sent chills to investors, but a winter isn’t coming for the $1.7 trillion asset class this time around, according to Sean Farrell, the head of digital asset strategy at Fundstrat Global Advisors.
If history is any guide, cryptocurrencies often experience bull runs in the time leading up to and following bitcoin’s halving event, which takes place every four years as the reward for mining bitcoins is cut in half. The soaring prices are then followed by sudden crashes characterized by a protracted period of downward price . The latest and third halving took place in May 2020, while the next halving is expected in 2024.
After a year of breakneck growth for the industry in 2021, those four-year cycles are “a thing of the past,” Farrell said in a Tuesday webinar about his 2022 crypto outlook.
The key to his argument is the amount of capital that investors of all stripes have plowed into the space.
Last year, venture capital investors poured a record $30 billion into crypto and blockchain-related companies, nearly four times the previous record of $8 billion in 2018. Legacy institutional investors and corporations have also jumped in as pensions waded into crypto investmentsand companies like MicroStrategy, Square, and Tesla added bitcoin to their balance sheets. In addition to the usual financial players, El Salvador became the first country to adopt bitcoin as legal tender.
“Flows still matter way more than fundamentals while we are maturing as an asset class. These are still, on the most part, commodities, so flows matter quite a bit,” Farrell said during the webinar. “And there’s not really a price discovery around multiples regardless of how much revenue is flowing through each of these platforms.”
Bitcoin to $200k as global crypto market surges to $9.6 trillion
Notably, while institutional inflows have boosted the crypto sector, they are also a double-edged sword. As thecorrelated with tech stocks.prepares to tighten financial conditions, institutional investors are selling off risk assets along with bitcoin, which in turn makes the cryptocurrency increasingly
“A lot of legacy capital has entered the market and now hold bitcoin and are liquidating all their risk assets,” he said. “We obviously have a negative side to that coin where when risk assets sell off, bitcoin is going to sell off. This is much different from in 2018 where tech stocks were still doing well but bitcoin sold off along with the rest of the crypto.”
Despite the price correlation, the bitcoin network has some “incredibly bullish supply-side dynamics,” Farrell observed. “We have a scenario in which there’s not a lot of demand in the market, but there are big players entering the fold and a lot of illiquid entities,” he said, referring to investors who hoard bitcoin with the expectation of long-term price appreciation.
In fact, the balance of illiquid supply as a percentage of total bitcoin supply has reached at least a five-year high, making the current supply dynamic (as shown in the chart below) “a powder keg” waiting to be set off.
As a result, if bitcoin were to attract another wave of inflows, the cryptocurrency could have “a reasonable chance” to reach $200,000 in the second half of this year assuming that marginal sellers become exhausted and macro tailwinds blow in bitcoin’s way, Farrell said.
Based on this assumption and prior historical data, he found a strong relationship between bitcoin reaching all-time highs and an increase in realized capitalization. He then applied a market-value-to-realized-value ratio of 3.2x, the historical median for bitcoin when an all-time high price is reached, to projected realized cap.
“And using that analysis, we reasoned that if we are anticipating a second-half rebound, we could see fund flows increase to 3x, which would push us to this $200,000 range,” he said. The price model is shown in the chart below.
While there is much uncertainty around how the price trajectory could play out, Farrell offers four potential catalysts:(1) TINA (there is no alternative) investment-driven thesis, (2) top-down emerging market adoption in Central America, (3) bottoms-up emerging market adoption in countries such as Turkey, (4) a spot bitcoin ETF approval.
If bitcoin reaches the $200,000 price forecast, the entire crypto market could notch an estimated $9.6 trillion global market cap based on the bitcoin dominance support, which was about 40% throughout last year.
Ethereum’s potential trajectory to $12k
Despite the growing competition from fellow smart-contract platforms, the ethereum network generated nearly $10 billion in fees given the explosive growth of decentralized finance, stablecoins, non-fungible tokens, and other Web3 applications, according to Farrell’s calculation.
Like bitcoin, ethereum could also benefit from attractive supply dynamics. The network’s London upgrade or EIP-1559 last year “enacted a burning mechanism that results in disinflationary pressure on supply when fees are paid to miners.” So far, more than 1.7 million ether tokensworth over $4.5 billion have been burned.
Additionally, the much-anticipated merge between ethereum’s base layer and consensus layer could exert even more disinflationary pressure on the network.
In Farrell’s view, ethereum is “remarkably undervalued” on a qualitative basis. He applied a similar analysis focusing on inflows and estimated MVRV, which allows him to arrive at the price target of $12,000 for ether. His price model is presented below.
To be sure, bitcoin and ethereum did not reach Fundstrat’s $100,000 and $10,500 year-end price targets for 2021. Instead, the two largest cryptocurrencies closed out last year at around $46,000 and $3,600, respectively. As of Thursday afternoon, bitcoin was trading at about $36,000 while ethereum was changing hands at around $2,600. The entire global crypto market cap was at $1.7 trillion, according to CoinMarketCap.
Farrell acknowledges that there could be further turbulence ahead, but he remains bullish given the “asymmetry to the upside.”
“We could go lower for sure. All assets can sell off and drop another 50% if the Fed hikes 4% tomorrow or next month,” he said. ” But right now, as things stand, the upside to both bitcoin and ETH is much larger than the downside.”