Monthly Chartbook - When It Rains, It Pours [February 2022]

When It Rains, It Pours

Surprisingly, the saying “when it rains, it pours” was first coined by advertising executives at the Morton Salt Company in the early 1900s as they searched for a catchy slogan to sell their new and improved table salt. It was a phrase used to describe the “free-flowing” nature of their new product, which unlike others on the market at that time, wouldn’t clump together (even if it rained, hence the slogan).

Over the years, this expression has taken on a new meaning in our lexicon; unfortunately, it’s also one of the few adages that adequately describe the events that transpired over the last few weeks.

Volatility has been a consistent thread this past month, not just in crypto, but everywhere, with implied volatility across global currencies, equities, rates, and commodities all spiking. On the macro front, we’ve clearly seen a significant transformation over the last few weeks. Russia’s unprovoked invasion of Ukraine has been top of mind for everyone, the fallout of which goes far beyond its market impact, so it’s imperative we don’t lose sight of the appalling humanitarian cost this conflict has already inflicted.

In crypto land, markets haven’t had much reprieve either as the historical trend of VIX spikes and BTC price drawdowns hold strong. Bitcoin made two separate attempts to break out of its recent trading range, each of which topped out near key resistance levels (~$45K) before rolling over.

When we look at trends in metrics like active addresses for mega-caps like BTC and ETH, price performance is largely responding as we’d expect, offering some reassurances. We saw the growth in ETH active addresses peak relative to BTC, for instance, right around the same time we saw a price peak in ETHBTC. The ratio between these two serves as a decent proxy for risk appetite, and its latest downtrend has coincided with a decline in other indicators of network activity as well.

Total transaction fees on Ethereum, for example, have fallen since the start of the year, with the latest culprit being the material decline in NFT trading activity. OpenSea, the world’s largest NFT marketplace, has been one of the top “gas guzzlers” on Ethereum over the last 6-9 months, making the recent reduction in NFT volumes a key contributing factor.

Ethereum still remains the dominant chain for NFT sales, boasting over 80% of total transaction volumes. Other major L1s with their own burgeoning NFT markets also saw a considerable contraction in NFT sales over the last 30 days, though Ethereum’s decline has been among the worst. Even the total number of unique NFT buyers, which saw a substantial increase from late December through mid-January, has started to wane.

Several L1 chains are seeing a reduction in transaction activity too, though there are some exceptions. Terra (LUNA) has been one of the best performing L1 assets coming out of the January market low, in part driven by greater demand for UST across its growing ecosystem of DeFi applications and protocols. Avalanche is another notable exception, which continues to see a strong uptrend in transaction activity; Avalanche has been facilitating over 1M daily transactions for the better part of the last two weeks, putting it within ~10% of Ethereum’s average daily transaction count. The Cosmos ecosystem, which we wrote about recently, also appears to be gaining traction on the back of plentiful airdrops and the highly anticipated launch of Evmos.

Many believe crypto is isolated from traditional market trends, though we continue to caution those who disregard the broader macro environment – more specific, downtrends in indicators like global liquidity growth or financial conditions – for oftentimes major trend shifts in the crypto market coincide with key inflection points in macro trends and consensus narratives.

Take the U.S. dollar, for instance. If the long-term value proposition of bitcoin is a leveraged bet on fiat currency debasement, then we’d expect periods of dollar strength to serve as a headwind for BTC. With the DXY making its way back towards the high end of its multi-year range, it’s no wonder bitcoin has struggled to sustain any upward price momentum. The denominator effect is not the only reason for this; an accelerated tightening of global financial conditions is not an optimal backdrop for asset prices, including BTC and crypto.

Meanwhile, the value ascribed to foreign reserves is being reconsidered in the aftermath of stifling sanctions as the West’s response to render business activities with the Bank of Russia “off-limits” has forced many foreign leaders to reevaluate their own exposure to the “unhedgeable risk” that one-day major powers (i.e. the U.S., U.K. EU, etc.) could enact similar penalties if any type of conflict should arise. The weaponization of the U.S. dollar (and dollar-denominated reserve assets) is now on full display, giving light to decentralized alternatives that, in theory, don’t carry the same counterparty risk.

Bitcoin has obviously received the most attention here, but we’d also highlight the potential value of decentralized stablecoins, especially for ordinary citizens who’ve been unfairly hurt by massive currency devaluation and limited ability to hedge themselves. There’s clearly a dark side to such open and permissionless networks, but if the average person needs to not only shelter their wealth but also preserve their wealth, then they likely can’t afford to put all of their eggs into a highly volatile basket.

We know the outlook for inflation is only getting worse, with the latest surge in commodity prices (oil, gas, wheat, corn, you name it, etc.) exacerbating growing price concerns just as inflation-related headlines capture more and more mainstream media attention. We’ve already seen consumer sentiment start to turn more pessimistic, especially in regards to current financial situati