Every quarter, we like to take a look at changes in the overall climate in order to determine the health of the industry as a whole. Today, we’re going to analyze trends and recent events that have affected and will continue to affect the adoption of Bitcoin and other digital assets.
Following 2021’s all-time highs, prices have calmed down a little bit. But we’ve seen major developments unfold which suggest Bitcoin is going to have many more holders in the near future.
There are 3 main reasons why adoption is progressing so well right now:
- Macroeconomic shifts
- Institutions becoming more comfortable
- Less friction for retail
Bitcoin closed Q1 of 2022 nearly flat (-0.6%), but each of these factors will have a major effect on pricing in the coming months.
Macroeconomic Shifts
On the macro front, there were two items that everyone was talking bout this quarter:
- Russia’s invasion of Ukraine
- High inflation
Already, Blackrock executive Larry Fink has said the Russia-Ukraine conflict may speed up the adoption of cryptocurrencies in international transactions. Bitcoin is a risk-on asset, and military conflict is the most “risk-on” event that could occur short of open nuclear war. So it’s natural that demand for these hedges would go up in these circumstances.
The Federal Reserve is now beginning to tighten monetary policy, which will soon show us how much of a hold macroeconomics has on the price of Bitcoin. An inflationary marketplace may hurt tech stocks, but it is also the founding premise of Bitcoin, so over time, this could become untethered again and lead to more money flowing into Bitcoin.
Investor attitudes are changing, and we now have a perceived increase in risk, as reflected by the rise in the U.S. 10-year treasury to 2.88%. At this point, the NASDAQ is showing a 90-day correlation with Bitcoin of over 0.6, which shows a strong likelihood that tech stocks and crypto will rise (or fall) together.
The macro is interesting because it indicates that institutions that are making decisions external to the blockchain are now here.
An Institutional Narrative
The crypto market saw a rapid influx of funds over the last two years, but the question is whether this money will leave just as easily. Are some people cashing out and leaving the market?
Whatever outflow of funds we’re seeing in the investment market, it’s difficult to pinpoint what could be causing it and whether this is a short-term or long-term trend. Inflation, interest rate hikes, recession, and war are all possibilities, but it’s also common to see selloffs around the time of the U.S. tax report.
As pointed out on Glassnode, many short-term holders have unrealized losses, and there is a shift towards long-term holders who are less likely to capitulate. This split between short-term holders capitulating and more price-insensitive holders who are less likely to give into sell-side pressure could be attributed to the presence of institutional investors.
Another way to assess it is by looking at the HODL Wave chart. The HODL Wave shows the percentage of all bitcoins that have not been moved from one wallet to another for at least 1 year. The implication of the below chart is that the number of people not selling is continuing to expand, and now more than 60% of bitcoin has been held for over a year.
One trend we’re excited about is shown below. CryptoQuant’s Fund Flow Ratio for Bitcoin shows a decreasing ratio of transfers being done on-exchange, which suggests that more institutions are transacting off-exchange.
On the investment side, Ava Labs, the main developer of the Avalanche blockchain, has just raised $350 million at a $5.25B valuation. This would reflect more of a unicorn status for Avalanche and be a good sign for the health of funding around crypto in general.
As you can see in the below chart of SEC response dates, several applications for Bitcoin Trusts are pending, any of which would change the inflows to the crypto space overnight.
The US Executive Order issued in March didn’t provide much regulatory clarity for digital assets but did remove worries that a full ban may be put in effect. While institutions wait for more information to be released, they have lowered worries of U.S. regulators pushing crypto out of the U.S.A.
Finally, the narrative around Bitcoin being a tool for criminals is slowly but surely being dispelled. Early in Q1, a New York City couple was caught with incriminating evidence showing their involvement in the theft and attempted laundering of $3.6B in stolen Bitcoin. The funds were stolen from digital asset exchange Bitfinex, and these arrests took place nearly 6 years after the theft took place.
Retail Momentum
Aside from institutional interest and flows, we also have an unlocking of retail money as more credit cards and payment products gain adoption. With Nexo’s Mastercard on the way, and BlockFi and Gemini also serving more customers with their products, crypto is going to be less rigid soon.
Sponsorship deals are yet another way to bring more retail users onboard. The Dallas Cowboys just announced a sponsorship deal with Blockchain.com that they expect to significantly expand the retail user base.
Other recent deals include ByBit’s 3-year, $150 million deal with Red Bull Racing, FTX’s 19-year, $135 million commitment to Miami Heat, and Crypto.com’s $175 million, 10-year deal with the UFC.
Conclusion
All the above factors individually represent a shift in the risk perception users have around cryptocurrencies and digital assets right now. Macroeconomics may have some investors skittish, but there are also a ton of risk-reducing variables in play for institutions. On the retail side, it’s easier and easier to buy and spend cryptocurrency, which will continue to affect the on-ramp going forward.
