2022 Bloomberg Crypto Outlook: Bitcoin, Ethereum, and Crypto Dollar

Original Author: Mike McGlone, Senior Commodity Analyst at BI
Original Compilation: Moni, Odaily Planet Daily

With the spread of revolutionary technologies such as crypto dollars and non-fungible tokens (NFTs), we expect the U.S. to fully embrace cryptocurrencies in 2022 and introduce appropriate regulations, all of which will have some impact on price increases. It should be noted that due to the significant increase in the money supply of the dollar caused by quantitative easing policies, cryptocurrency prices should continue to maintain an upward trend, especially for the two major cryptocurrencies, Bitcoin and Ethereum, which have limited supply. So, what could potentially trip up the ever-advancing "Three Musketeers"—Bitcoin, Ethereum, and crypto dollars? This may be a question that requires deeper discussion in 2022, but we anticipate that Bitcoin and Ethereum will gain broader market adoption and overcome most market volatility (for example, the crypto market experienced nearly a 50% correction in 2021). Additionally, the normalization of stock market returns and the continued decline in U.S. Treasury yields may also affect Bitcoin and Ethereum.

The term stablecoin may be misleading, as most stablecoins are actually pegged to the dollar, so we believe it may be more appropriate to refer to them as crypto dollars.

Bitcoin, Bonds, and the Federal Reserve

Bitcoin, Ethereum, cryptocurrencies, the Federal Reserve, and deflationary forces in 2022. The Federal Reserve may reassess its quantitative easing strategy, and the decline in bond yields may indicate that the macroeconomic environment in 2022 is favorable for the two leading cryptocurrencies, Bitcoin and Ethereum. At the end of 2021, crypto assets exhibited different strengths compared to stocks, which may suggest that digital assets will continue to perform well in 2022.

Is Bitcoin expecting the Federal Reserve to end its monetary games? Some believe that the Federal Reserve will still not adopt a tightening policy in 2022 due to concerns about a stock market decline, which could be a positive for Bitcoin. As a benchmark for the cryptocurrency industry, Bitcoin is becoming a digital store of value, but it is important to note that Bitcoin is still in a price discovery mode, so it remains a risky asset. If the stock market declines, Bitcoin will inevitably face growth resistance, but in a scenario where falling stock prices put pressure on bond yields and incentivize more central bank liquidity, cryptocurrencies may become the main beneficiaries.

Our chart depicts the future pricing of the one-year federal funds rate in 2022, expecting higher rates. In fact, the Federal Reserve's attempts to maintain a tightening cycle have already failed, especially since the interest rate hikes in 2015, indicating that the U.S. will inevitably follow Japan and Europe toward negative yields.

Will the Federal Reserve's contraction be a dream? Bitcoin may tell you the answer.

Bond yields contradict the consensus of decline. Although it is widely believed that the long-term bond yields of U.S. Treasuries are higher, this indicator still cannot maintain above 2%, which may be favorable for Bitcoin to become a major asset in a deflationary environment in 2022. The yield on U.S. long-term bonds first fell below 2% in February 2020, primarily due to the outbreak of COVID-19 in the U.S., which also led to a sharp decline in most risk assets in March. Our chart depicts that U.S. yields may follow Japan and Europe into negative territory, which means that the upcoming digital reserve assets could be the most prominent beneficiaries.

Due to the decline in U.S. Treasury yields, Bitcoin may be the main beneficiary.

Funds in the market have already shifted from gold to Bitcoin and Ethereum, and for 2022, the focus is on liquidity reversal or acceleration. As bond yields decline, we tend to believe that cryptocurrencies can gain greater liquidity.

Does cryptocurrency have an advantage compared to the stock market? The different strengths compared to the stock market and the significant declines in 2021 may lay the foundation for further appreciation of cryptocurrency asset prices in 2022. The market in 2022 may have a relative advantage. Our chart depicts that despite the decline in the S&P 500 index at the end of November, the Bloomberg Galaxy Crypto Index is still rising. It is important to note that crypto remains a risk asset, but the main assets—Bitcoin and Ethereum—may be transitioning to a store of value.

The reduction in supply is a key attribute shared by the two leading cryptocurrencies, Bitcoin and Ethereum. Whether it is early adopters of these two cryptocurrencies or those who have recently migrated to their portfolios, it is important to note that while digital assets may have advantages over an expanding stock market, there are risks of volatility, especially in a scenario where the Federal Reserve reduces liquidity.

Different strengths of crypto assets compared to the stock market.

Crypto Dollars, Bitcoin, Ethereum

Who are the "Three Musketeers" of 2022? The answer: crypto dollars, Ethereum, and Bitcoin. Crypto dollars represent a better way to transact, a more powerful ecosystem, and an asset class that will continue to exist; it is the most important driving force in the digital currency revolution and the third leg of the crypto stool. The other two "musketeers"—Bitcoin and Ethereum—seem to perform as persistently in a bull market as stablecoins tracking the dollar.

Bitcoin, Ethereum, and crypto dollars in 2022. Past performance does not predict future results, but when a new asset class outperforms existing assets, there seems to be little reason to argue against it; your choice seems to be only one—follow along. We believe this situation is expected to play a major role in 2022, as fund managers may continue to hold crypto assets, as they may face greater risks if they do not allocate crypto assets in their portfolios. According to our chart data, the Bloomberg Galaxy Crypto Index (BGCI) has risen approximately 1,200% since the end of 2019, while the S&P 500 index has risen nearly 90%. Such outstanding performance is usually accompanied by volatility; it is worth noting that the BGCI fell nearly 60% in 2021, but this situation may lay the groundwork for further appreciation in 2022.

The spread of crypto dollars and the rising BGCI index.

In the asset allocation of the BGCI index, 80% is Bitcoin and Ethereum, so we expect that in 2022, the trend of the cryptocurrency market will further solidify and may even see a surge, as our chart data shows that the market capitalization of crypto dollars has risen to over $13 billion.

The dollar has always dominated in cryptocurrencies. Compared to about 15,000 competing cryptocurrencies vying for speculative leadership, Bitcoin and Ethereum are expected to continue to maintain their leading positions in the crypto ecosystem. BNB, SOL, and ADA have replaced XRP, BCH, and LINK, which were close to the top a year ago. Our chart depicts the continued upward trajectory of the market capitalization of crypto dollars alongside Bitcoin and Ethereum; in our view, there are still many speculations in the crypto space, as indicated by Shiba Inu and Dogecoin, but there should not be too many changes in the top three positions.

Crypto dollars will continue to maintain a bull market.

The market capitalization percentage of Ethereum has been rising, increasing from around 10% a year ago to about 20%, as most crypto dollars operate on the Ethereum platform.

Leading digital asset bull market: crypto dollars. The attributes of crypto dollars mainly include instant settlement, round-the-clock trading, transferring dollars, and earning interest far exceeding that of euro/dollar, which significantly impacts digital assets like Ethereum, thereby boosting the dollar and affecting most other financial assets. In a rapidly digitizing world, trading through digital tokens may be the trend. Our chart compares the market capitalization of the top five crypto dollars (with Tether ranked first) to Bitcoin and Ethereum. According to Coinmarketcap data, Tether's trading volume often exceeds the total trading volume of Bitcoin and Ethereum combined; let’s not forget that Tether is also an Ethereum token.

Trends in crypto market capitalization since the end of 2019.

Volatility in the crypto market is to be expected, as the emergence of central bank digital currencies has occurred organically, but data shows that the crypto market has already shifted toward the dollar.

Bitcoin Bull Market

Has Bitcoin already entered a new bull market in 2021? An updated trend. As we approach 2022, the key question facing Bitcoin is whether it has peaked or is merely consolidating in a bull market. We believe it is the latter, and in such a market environment, Bitcoin is moving toward becoming a global digital collateral. In 2022, Bitcoin's key support level may be around $50,000, with resistance around $100,000.

The price range for Bitcoin in 2022 may be between $40,000 and $70,000. As we have seen, Bitcoin corrected about 50% in 2021, but the fundamentals remain optimistic, and there may be another price increase in 2022. China has fully banned cryptocurrencies, but the improvement in energy consumption has enhanced Bitcoin's fundamentals, as evidenced by its rapid recovery after hitting a low in July. Now, most mining operations have shifted to places like the U.S. and Canada, and the energy usage of the world's largest decentralized network indicates that Bitcoin still possesses considerable strength. Our chart depicts the new bull market seen since the low of around $30,000 in July.

The speculative excess issue of Bitcoin in 2021 has been cleared.

The support level for Bitcoin should be around $40,000—slightly below the 20-week moving average, and at the upper end of the trend channel, we find initial resistance at around $70,000.

Will Bitcoin reach $100,000 in 2022? Bitcoin seems to be on track for $100,000. We believe this should just be a matter of time, as it is economically grounded: first, market demand is increasing, and second, Bitcoin's supply is limited. There are many examples indicating that Bitcoin will continue to advance in 2022 as it gains mainstream adoption. The U.S., Canada, and Europe have launched Bitcoin exchange-traded funds and futures, and El Salvador has recognized Bitcoin as legal tender, all indicating that the global adoption of Bitcoin will increase. Our chart depicts the decline in Bitcoin's supply alongside price increases and volatility, overall suggesting that market performance remains relatively mild.

As adoption rises and supply decreases, Bitcoin remains bullish.

If an asset gradually matures, it is normal for volatility to decrease, which is our view on Bitcoin. Currently, Bitcoin's annualized volatility is slightly below 80%, a situation similar to 2018, but Bitcoin's price is much higher than in 2018, indicating that the mainstream is beginning to embrace Bitcoin.

Bitcoin may no longer be limited to playing the role of a digital version of gold. If evaluated by traditional models, the potential development path of Bitcoin's price may stabilize at around 100 times the price of gold per ounce, with decreasing volatility. According to our chart data, compared to gold prices, Bitcoin prices show a continued upward trend, and Bitcoin's 260-day volatility has reached its lowest level since early 2021. At the end of 2016, Bitcoin's 260-day volatility, a relative risk measure, hit a bottom, followed by a bull market in 2017, and 2020 and 2016 share similarities as both are years of Bitcoin's halving; in 2021, Bitcoin set a new all-time high.

Bitcoin's price may stabilize at around 100 times the price of gold per ounce.

We believe that Bitcoin's fundamentals remain on an appreciation path compared to gold.

A consolidated, mature Bitcoin bull market. As 2022 approaches, we see a pause, correction, and update in the Bitcoin bull market as we approach 2022. With increasing depth and adoption rates, Bitcoin's volatility will decrease in the long-term trend, while prices will show an upward trend. At the beginning of 2021, Bitcoin reached a milestone: its 260-day volatility dropped to the lowest level ever compared to most major asset classes (especially the S&P 500 index). In 2021, Bitcoin's price increased by about 100%, with the average price for the year slightly below $50,000.

No change in Bitcoin in Q4 2021 compared to Q1.

In the second quarter of this year, Bitcoin's decline reached about 50%, but this actually helped consolidate the fundamentals. We believe that in 2022, Bitcoin has a greater potential to break through $100,000 than to remain below $50,000.

Ethereum Bull Market

What could potentially stop the Ethereum bull market in 2022? The answer may be unexpected: higher prices. Currently, market demand is increasing while supply is decreasing, and Ethereum's central position in the digitalization of finance and currency is the basis for its further price appreciation. Ethereum has been the best-performing major crypto asset in 2021, turning bullish in the second half after a decline of about 60% in the first half.

The price range for the Ethereum bull market may be between $4,000 and $5,000. As we enter 2022, Ethereum may experience two trends: increasing adoption and decreasing supply. In 2021, Ethereum withstood significant adjustments, and the key question now is how high Ethereum's price may go before a correction occurs. According to our analysis, Ethereum may enter a new bull market, of course, based on the context of Ethereum dropping to the July low, ultimately establishing $4,000 as a key resistance level, while $2,000 serves as a key support level.

You will find that future resistance levels are now support levels; $4,000 may become a key pivot point in 2022.

No reason to complicate the bull market.

Ethereum remains the preferred platform for NFTs and crypto dollars, a situation that has already emerged and played a role in 2021, and we expect 2022 to build on this and successfully nurture greater market competition. Of course, we have all seen many cryptocurrencies claiming to be "Ethereum killers," but in the end, they still failed to shake Ethereum's position.

Who is the biggest beneficiary of the Bitcoin ETF? The answer: Ethereum. Since the U.S. launched the first exchange-traded fund tracking Bitcoin, Ethereum's performance has improved significantly, a fact that may indicate that Ethereum's bull market will be more sustainable. On October 19, Proshares Bitcoin Strategy ETF (BITO) was officially launched, and on that day, Ethereum rose about 20%, while Bitcoin fell about 8%. Ethereum seems to be in the early stages of becoming internet collateral; additionally, Ethereum is becoming the center for DeFi, fintech, and NFT building platforms.

Ethereum's performance since the U.S. launched the Bitcoin ETF.

In 2021, changes were made to the Ethereum protocol (EIP-1559), and in this context, the supply of ETH began to decrease. Subsequently, the volume and open interest of Ethereum futures contracts on the Chicago Mercantile Exchange increased, and if viewed as an indicator, it should only be a matter of time before regulators approve a futures-based Ethereum ETF.

The rise of crypto, DeFi, and Ethereum. In leading the waves of digitization, tokenization, DeFi, fintech, and NFTs, Ethereum has always been at the forefront. According to our chart analysis, Ethereum's price remains roughly parallel to the total market capitalization of crypto assets from Coinmarketcap. Most NFTs are priced in Ethereum, which means that as the NFT ecosystem continues to expand, the market demand for ETH will also increase. Bitcoin is gradually becoming a global digital reserve asset, while Ethereum is being used as collateral for the internet. The most widely traded crypto asset (Tether) is both a crypto dollar and an Ethereum token, and the currently most popular play-to-earn game, Axie Infinity, also runs on the Ethereum network.

Ethereum - Crypto platform, collateral for the internet.

Ethereum has gained depth and dominance. Ethereum's success will stimulate market competition, leading to more potential Ethereum killers, but we see that Ethereum can respond well to market adjustments and continues to maintain its market leadership.

Ethereum's supply may enter a free-fall state. Ethereum upgrades may encounter many issues, but the incremental supply of Ethereum has begun to decline consistently, indicating that Ethereum will become more mature—if applicable economic rules hold—this situation is clearly favorable for Ethereum's price increase. The chart below depicts that after the implementation of Ethereum EIP-1559, the supply began to decrease from early August, and the rate of ETH destruction is becoming increasingly rapid, with the 52-week change rate of the number of new Ethereum tokens relative to the total outstanding amount expected to fall below 4% for the first time. Although market demand for Ethereum may not be so direct, ultimately its supply may fall below that of Bitcoin.

Supply trends favor Ethereum's price increase.