Crypto Monthly Report | January

Cryptocurrency Monthly Report: Key Takeaways

• Institutional altcoin season underway as blue chips trend sideways

• Banks seek bitcoin-backed loans to accelerate crypto credentials

• ETH burn hits $5bn as global inflation bites

Macro Outlook

Institutional altcoin season underway as blue chips trend sideways

Bitcoin and Ethereum are the cryptocurrencies that most investors with a passing interest in the space will know well. But the influence of their rivals spiked in December 2021 with billions flowing into these alternate protocols, as users sought to expand their portfolios beyond these two leading lights. Across the month, Bitcoin dipped from $57k to $48k while Ethereum slid from $4.6k to $3.8k.

Layer 1 alternatives to Bitcoin and Ethereum offer the potential for upgraded technological possibilities: such as Polkadot with its multichain bridges, Solana’s instant trade finality and the corporate staking and NFT abilities afforded by the likes of Tezos.

One could suggest that institutional altcoin season is underway: typified by a slew of institutionally focused products launched on Deutsche Börse offering access to the sixth, eighth and ninth-largest cryptoassets by market cap. [1] Multi-chain portfolios are certainly expanding: research by Big Four firm PwC [2] and crypto-native analysts Messari [3] both show that funds high up on the risk-reward curve are making bets across DeFi, NFTs, infrastructure and the metaverse, with the latter attesting that 53 funds own 228 unique cryptoassets.

In general, investors now a little more comfortable with the asset class are starting to discover the world of value propositions further down the market cap chain.

Banks seek bitcoin-backed loans to accelerate crypto credentials

Tier one US banks are investigating the possibility of using bitcoin as collateral for institutional cash loans, with Goldman Sachs spearheading the charge.

Sources told industry news website Coindesk: “Goldman was working on getting approved for lending against collateral and tri-party repo. And if they had a liquidation agent, then they were just doing secured lending without ever having bitcoin touch their balance sheet.” [4] 

It will come as no surprise that the world’s richest investment banks are considering how they can gain access to cryptoassets without needing to directly engage with coins or tokens. Wall Street firms have been desperate to gain access to booming crypto markets for their wealthy clients, but current US regulation makes it difficult for banks to handle crypto directly.

Instead, banks are looking at whether they can offer loans using tri-party repo arrangements: this set up would use third-party liquidation agents, so they can introduce lending that uses bitcoin as collateral without needing to hold the asset on their balance sheet.

Testament to the largest banks’ desire to expand their crypto credentials is their move to initiate crypto futures trading. Goldman began trading bitcoin futures in June 2021 with Galaxy Digital, [5] one of the leading companies tracked by ETC Group Digital Assets and Blockchain Equity UCITS ETF (ticker: KOIN). [6] It expanded to offer Ether futures the same month. [7]

Earlier this year, news outlets carried multiple articles about bank trader FOMO (Fear of Missing Out) as crypto markets surged. As reported in the Financial Times8, the first ever crypto market note issued by Bank of America read: “The digital asset universe is too large to ignore. We believe crypto-based digital assets could form an entirely new asset class.”

ETH burn hits $5bn as global inflation bites

A total of 247,272 Ether (ETH) was burned — permanently removed from circulation — in December 2021, the equivalent of more than $1bn. [9]

The amount of Ether destroyed programmatically now totals 1.35bn ($5.2bn) since the introduction of EIP-1559. This blockchain code upgrade permanently altered Ethereum’s tokenomics, creating a deflationary mechanism in its internal currency, and adding a critical element to its long-term narrative as an investable asset for institutions. Now each time a blockchain operation occurs, a small amount of ETH is removed from the overall supply.

The Merge, which is the long-awaited blockchain upgrade that will switch off Proof of Work and introduce Proof of Stake to Ethereum, is stated to arrive some time in Q2 or Q3 2022. The new chain is broadly known as ‘Ethereum 2.0’ or ETH2.

Net issuance of ETH was negative on a total of 15 days in 2021 — these numbers vary quite widely day-to-day depending on the popularity of certain actions: for example, NFT sales, DeFi interactions and transfers between wallets. [10] The supply growth of Ethereum’s native coin now stands at 1.4%. After the Merge, that will turn entirely negative, with the latest projections by data provider Ultrasound. Money pegging the figure at negative 2.8%. [11]

Additionally, the more ETH that users stake in the ETH2 smart contract reduces the amount available to the wider market, squeezing supply and heightening demand. When crypto is staked, it is locked up on-chain for a set period and is usually not available for trading. On-chain data now shows that more than $34.4bn is locked in the ETH2 deposit contract. [12]

On the flat side, surging inflation will be the defining theme of 2022, according to any business-focused newspaper one cares to read. With US, UK, and EU inflation each erupting to multi-decade highs, and the US Federal Reserve now signalling multiple interest rate hikes this year, interest in provably scarce and deflationary assets like Bitcoin, Ethereum and their crypto scions will likely gather pace. [13]

Please note that all performance figures are showing net data.

Crypto Performance (As of 31.12.2021)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/12/2021
Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.

Learn more about our crypto products:

BTCetc – ETC Group Physical Bitcoin

ETHetc - ETC Group Physical Ethereum

LTCetc - ETC Group Physical Litecoin

BCHetc – ETC Group Physical Bitcoin Cash

ETC Group Digital Assets & Blockchain Equity UCITS ETF (Acc)

Download the PDF