Crypto Outlook for Q1 2022
Frog Nation. WAGMI
Crypto Outlook for Q1 2022
Macro
Many market participants expect large sovereign debt defaults (US in particular) to happen over the next decade, what if it doesn’t happen and instead of having a debt default, a dollar devaluation has been happening. This makes a lot of sense as well, since having debt defaults will make the whole population unhappy, central banks/governments could just allow dollar devaluation which has similar effects as a debt default, but the masses won’t be as angry as there is no major economic shock but will still feel the effects gradually. TLDR; slow death rather than a quick death is what may happen and it will be painful for those unprepared.
The expectation here is that the dollar devalues and everything else that has a somewhat limited supply appreciates in value. BTC and Digital assets ecosystem will be huge beneficiaries. This is the biggest macro trade ever (as explained by Raoul Pal).
China defaults/fud (evergrande, etc), New Covid variants and Fed Chair Powell accelerating tapering headlines have been causing uncertainties in global markets. Personally, I think that Chair Powell is unlikely to taper quickly due to the new covid variant concerns, taper tantrum and rate hikes will have a negative effect on the market and could lead us back into a deep recession. While there is no certainty to all this, could all these just be “Occasion noise”?
In a chapter of Daniel Kahneman’s Noise book titled “Occasion noise” he zeros in on short-term flaws in human judgement. “Your judgement depends on what mood you are in, what you’ve discussed, and even what the weather is – you are not the same person at all times” (pg 93), especially AFTER major market corrections.
Personally, I tend to think that these are all noise. The macro trade and premise for the rise of Digital Assets (Crypto) remains unchanged. It is certainly not going to change when BTC moves down. This is the reason I decided to pen my thoughts down in this platform as a diary so that I can always refer to it.
TLDR; Crypto is the greatest macro trade of all time. There must be a reason GOATs of the macro world (Paul Tudor Jones, Dalio, Druckenmiller, Soros, etc) are venturing into the digital assets space, let’s tag along and enjoy the ride.
General Crypto Market
Massive increase in crypto funding from tradFi / crypto funds in 2021, from $3.1B funding for full year 2020 to $15B from Jan-Sept 2021 (source: CB Insights). That’s almost a 4x increase, and that’s not even counting in the new inflows in Q4 2021 after Facebook announced name change to Meta. Increasingly, we are seeing large investors like Softbank, Singapore Gov Wealth Fund (GIC), Alphabet’s Capital G and many more raise their allocation into the Digital assets space. The big boys are here to stay and that’s what we have been waiting for. In 2017, most of the market participants were retails chasing ICOs and scams. In 2021, newer market participants have significantly larger funds and usually hold for longer periods. This institutional buying wave has and will continue to change the way selected digital assets behave. For example, BTC is increasingly held by corporate treasuries like Saylor’s microstrategy (it’s almost like a stock trading like an BTC ETF), chad macro investors like Stanley Druckenmiller/Ray Dalio/Paul Tudor Jones and the first country to use BTC as legal tender – El Salvador. Such investors will buy the dip as appose to retail investors who will panic sell dips. tradFi funds (hedge funds, etc) usually have quarterly rebalancing, which means end of each quarter, funds may sell of outperforming coins and buy underperforming coins on watchlist.
Metaverse coins had a monster rally after Facebook announced name change to Meta on 28th October 2021. Metaverse projects like The Sandbox and Decentraland flew by almost 8x before peaking. Other gaming/metaverse coins like $PYR, $WILD, $ILV followed. The massive metaverse rotation sucked liquidity out of most coins such that at one point, only the metaverse coins were moving and everything else became stablecoins. Could this be bad for overall market structure? We will have to see.
“SoLunAvax” had pretty much been outperformers. Rotations have pretty much been Sol -> Luna - > Avax and repeat. I’m not certain if this trend continues. As at time of writing, Luna looks most likely to lead while Solana and Avax takes a backseat for some time. Luna is about to have a massive unstoppable pipeline of DeFi & Gaming protocols which will lead to more demand for Terra’s stablecoin UST, which will lead to more burns of Luna, this loop is only about to get much more massive.
Fantom, Harmony and Cosmos had their runs but remain pretty much muted towards December. I think Fantom and Cosmos have a lot more room to run in the next up cycle, but that depends how much time you have for research. I prefer to be focused on SoLunAvax as I think their ecosystem has more adoption and at the speed crypto is moving, it may be better to focus on strength.
NFTs have been in a down cycle for the past weeks and is likely to remain that way for the year. Personally, only minted CryptoSeal on Avax and button didn’t work for me on Aurory. I intend to look at some ETH and SOL NFTs going forward, but that will be a discussion for another time.
For the rest of Dec 2021 and Jan 2022, I would expect increased volatility and this could be good buying opportunities if the bull run continues in the later part of Q1 2022. There is a potential catalyst in Q1 2022 where large funds start allocating their portfolio after the holiday season, in the west, its Christmas and in Asia, the Lunar New Year.
There are some themes that I believe the market will begin to rotate to:
Selected Blue Chip DeFi plays and DeFi 2.0 continuation
Low cap L1s and L2s that already have a coin
Gaming 2.0
Bitcoin
While most market participants expected btc to hit $100k+ by eoy 2021, crowded views generally do not happen.
BTC market structure is different now. Major holders are increasingly institutions and big firms. They operate differently than retails/btc whales. Towards eoy, trading usually muted, and activity restarts in Q1. $100k+ is more likely in Q2/3 2022.
BTC is now being increasingly seen as a SOV, volatility likely to gradually reduce and price will just move up steadily. The ultimate bull case is that with lower volatility, btc is being seen as a replacement to bond which could us a ridiculous price target.
We may still be 2-3 years away from a full decoupling from BTC, as long as BTC remains in a chop or have a slow steady uptrend, the rest of the crypto market will continue to do well.
Ethereum
Personally think ETH gets more action in the next 6 months, super resilient during the recent dip
Institutions likely to increase allocation to ETH and ETH DeFi in 2022 (more on defi later)
Eth/Btc chart breakout supportive of trending rotation into ETH.
ETH merging, supply emissions cut to ~1/3 and high burn rate are super bullish
It is likely that fundamentals are not yet reflected in price
L2 scaling solution narrative will also keep ETH market share (more on this later)
ETH $15k+ possible in next 6 months
Possible with institutions coming into the market because some of these funds are unlikely to deploy capital too far out the risk curve. Eth offers enough upside potential and lower risk than VC bets.
Also, easy for large allocations due to deep liquidity vs most others
Ethereum L2 scaling
Unless you have access to equity rounds, there are only 2 ways for most market participants to position for this:
Invest in L2 with tokens (MATIC, BOBA, LRC)
Use the protocols and pray for airdrop (Eg. ZKS - ZigZag Exchange)
Polygon ($MATIC)
Polygon is working on zk-Rollups and have bought over Hermez which is a zk-Rollup focused payments scaling solution. There are more than 3,000 DeFi, Gaming and Metaverse application. To grow the already thriving ecosystem, Wintermute has launched a $20 mil venture fund dedicated to projects running on Polygon. In addition, Coindesk reported that investors like Sequoia India and Steadview Capital are looking to make an investment of between $50 to 150 mil through the purchase of MATIC tokens.
It is probably the right time to ride the ETH L2 narrative and there are only a few L2 projects with a token. The first explosive move for Polygon in Q2 2021 made many early investors wealthy and many retails were onboarded because of the Matic rewards on Aave and Sushi. Since Polygon is already known to most, I think there is a chance the market will jump at the opportunity to ride the next wave up.
Based on data provided by @RaphaelSignal, there are 340k DAUs in the ecosystem and net positive bridging inflows. Just last week, Polygon averaged 64% of ETH’s DAU. Net bridge inflows had more than double to $212 mil. Pegaxy, a gaming project on Polygon multiplied DAU 4.7x week over week, which is insane. Polygon is not only establishing themselves as a front runner in the zk-Rollup scaling solution, but also a solid gaming solution. We all know how games accelerate new user onboarding and fee capture in a protocol.
ETH-DeFi
Institutions are gearing up to enter this space in a big way. Due to nature of their investment mandates, going for large market cap protocols will be a given. ETH-DeFi protocols have been in a downtrend for many months, but selected protocols could spark a reversal sooner than later.
Curve Finance
Curve has been mentioned in a research report written by BoA as an option to diversify corporate treasury and increase their yield significantly.
TLDR; Curve/CVX wars lead to massive demand for both tokens.
DAOs like Lobis are accumulating CRV tokens
CVX already dominates the CRV emissions – bribes are only increasing
Trend of accumulation of both CRV/CVX not stopping
Curve flywheel effect will continue to create unsatisfiable demand -> leads to supply shock -> CRV price only direction is up.
Aave
Aave is launching ARC - an institutional product for tradFi which is enabled by the partnership with Fireblocks.
This will significantly increase TVL on Aave
Cross-chain composability could re-route funds back to Aave from similar protocols on other L1s. Stani hinted at integrations with Solana.
Aave is a large market cap candidate which is suitable for institution allocation (current mcap: >$2B).
Layer 1s (SoLunAvax)
Solana
Solana had a stellar run from $10 to an all-time high of $260 and is now in a consolidation phase. With an increasing number of developers working on the ecosystem more projects are poised to be launched over the next few quarters.
DeFI plays to follow will be HXRO, a derivatives trading protocol. HXRO raised $34 mil from noteable investors like Coinbase Ventures, Alameda and most notably Jump Capital which are leaders in this space in traditional markets. Derivatives are the largest markets in tradFi and if HXRO can capture marke share in this space, it’s poised to do well.
Gaming/Metaverse plays to follow will be Aurory and Nyan Heros. With the success of Axie Infinity, there has been a huge onboarding of gamers into the crypto space. However, most of the gamers will not play these games without the profit incentives. I am hopeful that in 2022, we will see games that requires skill, fun to navigate and have solid gaming economies.
Luna
The recent Luna resilience during Btc dips gave me the same vibes when Solana hit $10 and subsequently rallied to $200. There are tons of DeFi and Gaming dApps launching in the Terra ecosystem which will just massively increase use case and demand for Luna, the token burns will be insane.
DeFI plays to follow will be Astroport, a leading AMMs for the Terra ecosystem that will have their token launch soon.
Gaming/Metaverse plays to follow will be DeviantsNFT and TerraFloki. DeviantsNFT is a trading card game that has a storyline based on current events that happen in the real world, the team has been developing games for more than 15 years and got seed funding from GT Capital and Do Kwon himself. DeviantsNFT will also be using the power of Anchor Protocol to generate rewards. TerraFloki is a MMORPG game with their own metaverse, you enter the Flokiverse by having an NFT in your wallet. While the game is still in early development, I think this is one of the games to watch.
Avax
DeFi plays to follow will be Platypus, a stableswap protocol with single sided liquidity on avax ecosystem, funding secured from Three Arrows Cap, Defiance and CMS.
Gaming/Metaverse must follow play continues to be Wonderland ($time). The risk of NOT investing in Wonderland is a greater than the risk of losing money. Wonderland is a Gaming/DAO/Income play, with a RFV backing of $2000 per coin and ever-growing treasury. The treasury could be used to invest in games and other uses soon. The word is out that there will be many more solid games being built on avax, so will follow the developments as they come.
DeFi 2.0
This theme should continue to have strong narratives. I think one of the reasons why most OG DeFi protocols are in a bear market is most developers made it (there are exceptions) and are focusing on having a life now and less developing and innovating. Below are protocols in my watchlist, some I have already invested.
Rari Capital ($RGT) x Fei Protocol ($TRIBE)
There is a merger discussion ongoing for RGT to be absorbed by TRIBE.
TRIBE has about $1.1 bil in treasury at time of writing (mostly in ETH)
RGT has many new innovations coming – one of it is a collaboration with Sense Finance to potentially create >=18% fixed yields.
Dopex ($DPX)
Options are going to grow exponentially as more institutional players enter the space. Deriavatives is already the largest market in tradFi space so will not be surprise if crypto options explodes further. Deribit is the market leader currently but Dopex could be a strong competitor.
Ribbon Finance ($RBN)
Same thesis as Dopex, RBN is a deriavatives protocol which already has tradFi / Crypto options market maker QCP capital collaborating with them. QCP’s founder Darius is an advisor to RBN.
Convex Finance ($CVX)
More about this later in the diary post
Badger ($BADGER)
Will be watching this closely – buying after an exploit has been +EV in general. Badger is a solid protocol with a good developers (Spada) and I think they will get emerge better after this setback.
Tokemak ($TOKE)
Liquidity-as-a-service (LaaS) provider that is likely to be an important DeFi lego going forward.
There is a high probability that protocols will fight for TOKE just like they do for CRV in CRV wars.
Frax Finance ($FXS)
More about this later in the diary post
Abracadabra ($SPELL) & Popsicle Finance ($ICE)
More about this later in the diary post
Emerging DeFi plays
Maple Finance ($MPL)
Pendle ($PENDLE)
JPEG DAO ($JPEG)
Not launched yet
Gaming Guilds
There are many games that are being developed but only a handful will be successful. Picking out a game that ultimately becomes a home run like Axie Infinity requires both foresight and perhaps some luck. As an individual, I don’t have the time and resource to allocate into multiple games, therefore I think investing in high quality guilds is a time efficient and effective choice.
High quality guilds will effectively become a metaverse index for the successful games available to their players/scholars. The best guilds will be able to identify games that will have the best risk/reward for their players. ETF managers will add/remove companies from the fund, likewise the best guilds with a solid team will be able to onboard good games and drop underwhelming games. Two gaming guild names come to mind:
Merit Circle ($MC)
MC takes a Superguild approach over a Guild of guilds ($YGG) approach. Guilds like YGG takes a 10% cut from guilds under the YGG brand. The Guilds in a guilds of guild model maintains ownership of their assets and can have a separate token. This means guilds like YGG doesn’t own any assets. They only earn the 10% cut.
The SuperGuild structure also allows SubGuilds under the main brand, but SubGuilds are directly integrated into the main ecosustem, sharing the same token. This allows for division of governance and community without sacrificing network value, in this case $MC token value.
MC collects 30% from scholars instead of 10% collected by YGG, a 3x better margin. MC also owns 100% of the assets (in-game NFTs, etc), which means any asset appreciation is also fully captured by the Guild. (source: pentoshi)
Ultimately, owning the MC token is equivalent to owning both the player revenues and in-game assets.
GuildFi ($GF)
The launch of GuildFi brings the beginning of Guild 2.0. GuildFi provides the infrastructure to onboard, connect and add value to all GameFi participants – whether you are a player, guild, investor or game. (source: Hashed)
GuildFi provides ease of access, just like DEX aggregators (1inch) and Yield aggregators (Yearn), GuildFi has the infrastructure to become the go-to gaming ecosystem aggregator platform. GuildFi enables ease of operations, one notable capability is the introduction of GuildFi ID – similar to a metaverse passport which stores the players’ achievements and footprint across the metaverse.
Token Launch Auction (TLA) for $GF token raised $140 mil (mainly USDC) over 3 days into their treasury. $GF has a market cap now of $125 mil. Any price below $2.9 would be a great opportunity to pick up $GF at a discount to treasury value.
Q1 2022 Portfolio Allocations
General thoughts for next year – what I think happens to the market will naturally be expressed in my portfolio allocation, so here goes.
What is the likelihood of a prolonged bear market?
Personally think this scenario is increasingly unlikely with large institutional investors and big funds entering the space. How the market behaves will likely change, since institutional investors will prefer to have a steady uptrend in BTC rather than have a blow off top with extreme high volatility.
Jason choi (@mrjasonchoi) recently wrote a twitter thread on how the next bear market might look like, personally agree and have the same view that we may see
Market wide corrections phases that may recover quickly as funds realises there is nowhere else really to go
With the general market desperately searching for yield because of -ve yielding bonds, already toppish real estate prices and basically extremely difficult to find excess yield, crypto as a new investment asset just seem like the only place to go especially with the massive growth opportunity in the space.
Brutal multiple month resets in some sectors as capital flows to other sectors (just like sector rotation in tradFi during different economic conditions, ie. Tech -> utility during risk off periods)
How this may pen out remains to be seen, but I believe we may see a rotation into income plays like FXS during uncertain periods.
Another example is DeFi 2.0 coins rally while OG DeFi coins are in a bear market
What market segment that isn’t being discussed now, and will be more popular over the next few months / next year? (this question is taken from Ansem’s article, and something I have been thinking about)
Answer to this in 2018 would have been DeFi
Answer to this in 2019 would have been NFTs
What I the next major trend remains to be seen (always reviewing this thoughts), but what everyone is talking about now are L2 scaling and Metaverse/GameFi.
My Portfolio Construction
NFA.
(40%) Productive Assets
CRV/CVX
The main reason to hold this for a long time – CRV wars. Never have I come across a protocol that has all types of market participants wanting to own.
DAOs, Protocols, DeFi Whales and Retails all want to own a piece of CRV and CVX. There are many articles discussing the dynamics of CRV wards, will put a link to a good one at the end of this diary post.
FXS
Sam Kazemian, the founder of Frax Finance is an incredibly smart guy and what I’ve learnt from great investors, they always back a good team. I believe in his long term vision for the protocol and I don’t think he will end up like other founders of OG DeFi, leaving after they get rich.
I asked Sam about his future plans, given Terra (Luna) is building an ecosystem of DeFi and Games to increase usage of UST, what is next for FXS? The end goal is to have FXS control the Trinity – protocol owned lending, AMM liquidity and stablecoin.
Doing this allows Frax Finance to deploy the entire stack to new chains and expand fast without having to wait on dependencies like lending markets or AMMs or their criteria for adding borrowing etc.
Owning FXS own lending market allows routing the interest payments people pay to borrow FRAX directly to the LPs of the pool that provides liquidity for liquidations so that the protocol can lend more. Leading to sustainable deeper liquidity.
Dani ecosystem (Spell/Time/Ice)
With so much planned for Dani ecosystem coins, these coins cannot be ignored. Dani clearly mentioned that we will see how the composability, co-ordination and use cases for the full stack will work, we just have to watch as it unfolds in front of our eyes.
I am also looking forward to an upcoming article from @blocmatesdotcom on the entire stack. If you like to read his other article on Wonderland, will leave a link at the end.
(25%) Majors / L1s
HODL ETH
Considering picking up far OTM ETH options on Deribit
(25%) Trading Portfolio
Will be rotating between themes as an when they present themselves
MATIC / LRC / BOBA
SOL/LUNA/AVAX
(10%) Ember Bags – [gems <~50m mcap] + [gaming]
Currently not allocated yet
Gaming/Metaverse (may consider increasing allocation)
Intend to pick up some MC and GF
Will be exploring Defi Kingdom (JEWEL)
Digitalax ($MONA) currently ~$10 mil mcap – is a platform to build your own web3 fashion label. Think digital skins for your avatar in the metaverse. Imagine how big the market could be?
Looking to pick up a position into MPL and PENDLE
MPL is a undercollateralized loans protocol for institution borrowers. Hedge funds like Blocktower, Maven11 and Alameda have started to use the protocol. Personally think there will be use case for this and is still early days.
PENDLE is a fixed yield protocol. Not many people will use this at the moment, but in time, when there is a bear market or when there is a need for fixed yields >20%, there will be high growth of new users.
If you have made it to the end of this post, thank you for taking time to read my crypto investment diary. Always appreciate your views and feedback to help broaden my view of the market and investments.
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