Digital Assets Monthly Report | July

Cryptocurrency Monthly Report: Key Takeaways

• Equities see worst first half in 50 years; Bitcoin whales on spending spree

• BoE Deputy Governor: Crypto rout survivors to become next Amazon

• Forced selling, fund flows show investors near peak bearishness

Macro Outlook

Equities see worst first half in 50 years; Bitcoin whales on spending spree

It is difficult to overstate the bearish macro picture in which cryptoassets exist at the close of Q2 2022. Markets are reeling from their worst first half year in decades. The pain is not confined to any single asset class, either.

Reuters calculated by the end of Q2 and H1 2022, $13 trillion had been wiped off stock market values, exclaiming: “Investors knew that, after two years of Covid-19 chaos, 2022 would be a bumpy ride, but nobody expected this — the most turbulent first half global markets have ever seen.” [1]

By market close on 30 June 2022, the MSCI World Equity Index had fallen by a fifth since the start of the year: the worst performance since it was created in 1990. [2]

The US benchmark, the S&P 500, lost -20.6% of its value in the six months of 2022, marking its worst first-half performance since 1970 and plunging US equities into an official bear market. Wall Street expects more pain to come with Morgan Stanley strategists noting on 21 June 2022 that the S&P 500 could drop a further 23% in a worst-case scenario of unbridled global recession. Bloomberg’s Economics team are now modelling for the virtual certainty of a US recession this year, with the consensus that Federal Reserve rate hikes will peak in Q4 2022 and the central bank will reverse course to cut rates in Q1 2023. [4]

Cryptoasset markets shed -58% over the same period, from $2.2 trillion at the turn of 2022 to $905m as of the end of June 2022.

Bitcoin has again emerged as the best performer in a falling market, with Bitcoin’s largest holders investing heavily at these depressed price levels. The two largest Bitcoin wallets globally, holding BTC worth $5.1bn and $3.3bn, belong to cryptoexchanges Binance and Bitfinex. The third-largest Bitcoin wallet globally (thought to be a single investor) snapped up 10,075 BTC ($202.8m) across the quarter as prices fell from $38,000 to under $20,000.

The second largest cryptoasset, Ethereum, did not fare as well. Concerns over delays to its long-planned network upgrade to Proof of Stake battered investor confidence in June, with the leading smart contract blockchain struggling to keep hold of the critical $1,000 level.

Please remember that cryptocurrencies can be highly volatile, and your capital is at risk. Past performance is not indicative of future performance.

BoE Deputy Governor: survivors of crypto rout to become next Amazon

The Bank of England’s Financial Stability report for July 2022 says that the UK economic outlook has “deteriorated materially”, with prices of essential goods such as food and energy rising sharply in the UK and globally, and the outlook for growth worsened,” largely as a result of Russia’s illegal invasion of Ukraine.” [5]

Higher prices, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt, the BoE said.

None of this is news. But what did surprise market commentators was a 22 June 2022 speech to Zurich’s Point Zero Forum by the BoE’s deputy governor Sir Jon Cunliffe.[6] The central banker noted that the blockchain and crypto projects that survive the current price crash would become the Amazons and eBays of the next market cycle.

“The analogy for me is the dot-com boom when $5 trillion was wiped off values. A lot of companies went, but the technology didn’t go away. Those that survived — the Amazons and the eBays — turned out to be the dominant players,” Cunliffe said. The deputy governor has not always been a Bitcoin or Ethereum fanatic. But his comments do perhaps speak to a shift in tone from key traditional finance experts that public blockchains will become the most important technologies of the future. [7]

The UK has already marked out significant plans to become a global hub for cryptoasset technology, as stated by Rishi Sunak, ex-Chancellor of the Exchequer, in an April statement announcing plans to regulate stablecoins and foster a more welcoming environment for crypto businesses. [8]

As Silicon Valley VC giant a16z (formerly Andreessen Horowitz) wrote in their recent State of Crypto report: “Consider that any prospective founders who swore off tech and the internet in the aftermath of the early 2000s dotcom crash missed the best opportunities of the decade: cloud computing, social networks, online video streaming, smartphones etc.” On 25 May 2022 a16z debuted its $4.5bn Crypto Fund 4, the largest crypto and blockchain venture fund in history, to “take advantage of bargains in a downward-trending market”. [10]

So while amid the crash there has been the expected ‘I told you so’ from long-time sceptics like the Bank for International Settlements, other leading figures from the traditional finance world are starting to realise the potential future created by leading cryptoassets. [11]

Venture funding is a key metric to watch to gain a sense of the future moves likely from crypto markets, JP Morgan added.  “If VC funding dries up from here…then a return to the long winter of 2018/19 would look more likely. Thus far, there is little evidence of VC funding drying up post-Terra’s collapse.” [16]

Forced selling, fund flows show investors near peak bearishness

Digital asset fund flows across the investable landscape shows investors are nearing peak bearishness. The launch of a US-based short Bitcoin ETF saw $51m of inflows in the week to 1 July 2022, accounting for nearly 80% of all inflows across cryptoasset investment vehicles aimed at institutions.

Analysis by ETC Group shows that multiple on-chain and technical indicators reached record lows in June 2022, including Bitcoin’s price relative to its 200-day moving average, the Fear/Greed index (a crypto-specific sentiment and volatility tracker) and price momentum as described by monthly average Relative Strength Index.

Short-term traders largely follow the market to make their profits, so such action is not too surprising. But contrarian value investors are continuing to move in the opposite direction.

Institutions added $28m to Bitcoin-focused investment vehicles, such as ETC Group’s Physical Bitcoin (BTCE) in the week to 17 June 2022, followed by a smaller $0.6m net inflows in the week to 1 July 2022. [12]

One other key indicator, called Bitcoin Net Unrealised Profit and Loss, provides a measure of how much investors paid for their coins. This metric also shows markets in capitulation mode, with likely large amounts of forced selling to cover margin calls.

Testament to the importance of following such metrics is the following: over the course of four days in mid-June, Canada’s Purpose Bitcoin ETF lost half its assets under management.[13] Between 16 and 20 June 2022 the fund registered outflows of more than 24,000 BTC worth more than $500m. The rapid scale of the outflows suggests capitulation from a single forced seller.

Following the advice to dollar-cost average in bear markets is considerably more difficult than understanding the principle. At times like these, we believe fear overtakes courage of conviction and investors tend to pull cash out of the market instead of placing bets on the next set of winners — at relative bargain prices. Such is the nature of crowds.

Investors in both equities and crypto are watching carefully for bull traps: relief rallies that suck up the last remaining dry powder retail investors have on hand, before continuing to slide. And downside risks remain exceptionally elevated as of the early part of July 2022.

However, even amid the chaos consuming all asset classes, we believe it has become increasingly clear that investors with capital to deploy are adding significantly at these levels.

Digital Assets Performance (As of 30.06.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/05/2022 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

ETC Group Digital Assets and Blockchain Equity UCITS ETF

ETC Group Global Metaverse UCITS ETF