Cryptocurrencies: the pressure is on as the wind is knocked out of the market’s sails Cryptocurrencies: the pressure is on as the wind is knocked out of the market’s sails Cryptocurrencies: the pressure is on as the wind is knocked out of the market’s sails

Cryptocurrencies: the pressure is on as the wind is knocked out of the market’s sails

Anders Nysteen

Senior Quantitative Analyst, Saxo Bank

Summary:  The cryptocurrency market in 2022 has been dominated by macropolitical events and inflation worries, as well as questionable crypto applications; cryptos have been in a heavy downtrend through a large part of the second quarter. The narrative around cryptocurrencies has changed, and many parts of the crypto community are under pressure.


Bitcoin—digital gold, fool’s gold or something else? 

Bitcoin was originally created as the first decentralised cryptocurrency as a way of transferring money over the internet, which operates free of central control. Like physical gold, the supply of Bitcoin is limited, and both have been popular in countries with high inflation. Thus Bitcoin has been proposed to be the ‘gold of the 21st century.’ From a technical point of view, the correlation between Bitcoin and physical gold was significant throughout 2020 and into the beginning of 2021, as shown in figure 1.  

The market events in 2022 have, however, wiped out this narrative, and the correlation between the two is now low. The concerns around using cryptocurrencies as a store-of-value grew even bigger in May when a stablecoin turned out not to be stable. The depegging of TerraUSD—a crypto token supposed to be pegged to the value of $1—raised even larger concerns around cryptocurrency stability.  

So what kind of investments are cryptocurrencies then? Looking at the correlation between the Nasdaq-100 Index and Bitcoin in figure 1, the correlation in 2022 is at record high. Thus, crypto investments are behaving more as regular high-risk assets with similarity especially to tech stocks. This applies not just to Bitcoin, but to most major cryptocurrencies. The fact that more professional investors are considering cryptocurrencies for their portfolios causes these crypto investments to fall under a risk management framework, in contrast to the speculative traders during the previous crypto bubble trends. The framework typically reduces portfolio risks in volatile market periods, causing a selloff in cryptos similar to high-risk equities and thus proving that the correlations are high. During these times of high correlations, cryptos are less likely to add any diversification to a portfolio to spread out risk. 
Figure 1: Weekly correlation, based on a six-month rolling window. The correlation is a measure of co-variation in price movements: a high correlation is obtained if the price of two instruments tends to move in the same direction, whereas a low correlation is obtained if one instrument in general decreases in value when the other increases. There’s zero correlation if there does not seem to be any connection between the two instruments.

The pressure is on in all corners of the crypto community 

The crypto headwind in 2022 has increased the focus on whether cryptocurrencies can withstand the pressure and maintain growth in the long run. This requires all parts of the crypto networks to work properly, as well as synergies among these—the crypto traders, the facilitators/developers and validators, not to mention the use cases for the specific crypto token. 

Crypto users and traders: The sharp decline in crypto markets this year has removed some of the speculators who were riding the crypto uptrends in 2020 and 2021. Using the search activity on Google as a quantification of public interest, we find that the interest in cryptos has faded to moderate levels, as shown in figure 2. Other indicators, however, point in the other direction, as investment in exchange-traded crypto trackers saw record highs in June, showing increased interest from the general equity investor, despite Bitcoin trading at half of its peak value. Also, a Bank of America survey shows that consumer interest remains high, although it must be noted that the survey was carried out in the beginning of June.  
Figure 2: Google search activity for Bitcoin and Ethereum, the two largest cryptocurrencies
Developers/facilitators: The decline in cryptocurrencies, combined with rising inflation figures and worsening global economic conditions, has forced several crypto industry companies such as Coinbase, Crypto.com and Gemini to lay off employees. This gives flashbacks to 2018 when crypto startups had to cut their staff, resulting in the industry lying dormant for some years. Not all crypto firms share this view; Binance, Kraken and FTX are seeing the bear market as a great opportunity to prepare for the next bull run—to make acquisitions and investments at low prices and recruit top talents.  

Validators: Transactions are verified by validators on the different blockchains, with the ‘miners’ on the Bitcoin blockchain being the most well-known. The miners’ profitability has gone down a lot with crypto prices, reaching levels where the net profitability for running the mining rigs is close to zero. Additionally, an increasing share of the mining rewards is transferred to exchanges instead of personal wallets, signaling a larger intention to sell on a short term. On the other hand, the computational power provided by the miners is only slightly down from the peak, as shown in figure 3, indicating that the miners are showing no sign of capitulation to the price pressure. 
Figure 3: The hash rate on the Bitcoin network is a measure of the total computational power on the network. The larger hashing power, the more secure the network is.
Use cases: Throughout 2021 and in the beginning of 2022, several major companies expanded their engagement in the crypto space either through partnerships with payment services, or investments in crypto infrastructure or in other corners of the crypto industry such as the Metaverse—the concept of a virtual world, where all ownership is governed by a blockchain through a digital currency. Some of these investments are based on direct business cases, while others seem to be struck by the popular fear-of-missing-out trend present during crypto bull runs. Further into 2022, the engagement in applications of crypto technology seems to have calmed down.

One popular application is where customers deposit digital currencies in a company offering high interest rates, and then the company lend out the given coins to earn a return. Regulators have warned that these high interest rates seem ‘too good to be true,’ and 2022 has shown how these businesses can break down in a bear market. One example is the crypto lending company Celsius Network which in mid-June froze withdrawals and transfers for clients, citing ‘extreme market conditions,’ sending a shockwave through the crypto markets.  


Summarizing the points above, the crypto stakeholders from users to developers and miners are divided in their outlook for cryptocurrencies over the next couple of months. When it comes to current and potential use cases, the cryptocurrency space is screaming for a proper regulatory framework for doing business and protecting investors.  

Crypto bear market—a healthy clean-up? 

The sharp decline in the market cap of cryptocurrencies since the November 2021 peak has definitely shaken the crypto community, and the clean-up of the industry may just have started, making it tough for those with unreliable business models, as well as removing speculators and fake project funders who can no longer get quick funding. A major clean-up is however still expected when the US and EU announce a regulatory framework around digital assets, as this will strongly influence the role that cryptocurrencies may have in the future. Furthermore, the crash of the TerraUSD stablecoin and rising concerns around decentralised finance services may cause the regulation to turn out to be stricter than originally expected.  

Cryptocurrencies are currently in limbo, awaiting changes in the general macroeconomic sentiment, regulation and institutional adoption, not to mention the ongoing research into central bank digital currencies as a potential competitor. Pessimists see 2022 as the beginning of a crypto winter, where lower crypto prices and reduced engagement in crypto applications will decrease hand in hand in a negative feedback loop. On the other hand, optimists hope for a positive spiral if the investment appetite in cryptos increases, driving up the price and eagerness to engage in crypto technologies. They see the bear market as an opportunity to prepare for the next bull run and as a healthy clean-up of the crypto space, which can bring back some of the stability and reliability that were lost during the first half of 2022. 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
You can access both of our platforms from a single Saxo account.
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.