Ansem Xiongwen: Upcoming Revival of the Q2 Cryptocurrency Market and Investment Forecast

Original Title: Quarter II 2022

Original Author: Ansem

Compiled by: TechFlow Intern

First, let me clarify that I am not a financial advisor, and this is not financial advice. This is merely a written form of the thoughts that come to my mind while I spend too much time online each day deeply researching the strange microcosm of cryptocurrency with friends.

I am not particularly skilled at analyzing most macro events, and if you are like me, you wouldn’t prioritize the Russia-Ukraine conflict in your analysis. When I sold some of my precious tokens in November, it was because I saw risks in the candlestick charts, not because I had any thoughts on the fundamental reasons. Incorporating macro analysis into the assessment of the cryptocurrency market is definitely a weakness for me, and I plan to study it well.

That said, apart from a few exceptions, the first quarter was tough for most cryptocurrency markets. This time, other markets also entered a downward trend alongside cryptocurrencies. We saw that due to global geopolitical risks and a deteriorating macro environment, many tech stocks and growth stocks suffered significant blows, while commodities and war stocks performed well. Many of the technical charts look similar to the carpet-like declines we saw during the first DeFi Summer in 2020, and these are billion-dollar companies that employ large numbers of people. Pray for those entering 2022 with short-term volatility.

This is the first stage in Bitcoin's history to showcase its value to the world, where Bitcoin's relative advantages are particularly important.

"In 2022, we will see whether certain sectors continue to experience bear market cycles during the macro bull market cycle of cryptocurrencies, or whether we will see another market-wide drop of -90% like in previous cycles. The challenge for traders is to determine what the mispriced assets in the current market are, how to capitalize on these mispricings, and to identify new trends before the crowd does," someone from Brooklyn said before the New York night pregame.

Based on this situation, if investor sentiment regarding the macro conditions improves, I expect cryptocurrencies to lead the recovery, and we have been fluctuating between 33k-45k throughout the quarter. In my view, the 30k-60k range for Bitcoin is a multi-year reaccumulation, and the next trend will resemble its rise to the previous 2017 highs at the end of 2020. The question is how long this consolidation will last. Many altcoins have dropped over 80% from their fourth-quarter highs, with some having completely retraced to the bull market starting point at the end of 2020, but some coins have recovered much faster than others. I certainly know that being bullish here is not well-received, just as being bearish in November was unpopular. I believe we have seen the peak of fear and uncertainty in the first half of this year, and I expect these accumulation ranges to break upward in the second quarter, led by BTC and several outperforming altcoins.

Q1 Review

Macro

From my brief study of macro analysis, I understand that there are four main things that, if they happen, would be detrimental to the market:

• 1. The situation between Russia and Ukraine escalates to involve other NATO member countries.

• 2. The Federal Reserve raises interest rates faster than the market expects.

• 3. Putin thinks using nuclear weapons is a good idea.

• 4. China actively enters this stage with their own imperial pursuits (perhaps referring to reclaiming Taiwan).

In my view, most of these things are unlikely, and we are more likely to continue dealing with the existing Russia-Ukraine situation + the current Federal Reserve QT (quantitative tightening) schedule. But again, I am not an expert in this area and have been reading works by others who are more knowledgeable than I am. For this reason, I primarily rely on candlestick charts.

Bitcoin

Bitcoin is experiencing its first midlife crisis. This so-called safe digital gold haven has traded as a risk asset alongside high-growth names for most of its life, and now it is in the spotlight during a time of high inflation and global conflict. So how will it perform? Given the parabolic rise and sharp declines in BTC's history, I assert that it will no longer be traded as a risk asset in the near future. In all previous BTC cycles, we have seen parabolic peaks followed by lower highs + lower lows until the timeline approaches the next halving, at which point we restart the cycle. In contrast, this cycle has seen Bitcoin trade near the highs of February 2021 for several months, then sell off in May, followed by reaccumulation in the summer, and a retest of the early-year highs in Q4 2021. We have established a trading range of over 400 days in this area, unlike the price action in 2018, which was characterized by consecutive lower highs.

If Bitcoin cannot perform well under the current macro backdrop, then its expected use as an asset has already failed, which is why I believe the current range cannot be broken. I believe there are primarily two types of people buying/trading BTC: one type trades it alongside other high-risk assets, while the other type accumulates it long-term for situations like the one we are currently in.

The latter is growing daily, while the former's scale will continue to shrink. For those looking to take on more risk, there are many better opportunities in the cryptocurrency space, and as more funds enter the space, I believe new capital will correspondingly diversify their strategies. Being bullish on gold and bearish on Bitcoin is absurd, and I am very confident.

Ethereum

When market risks rise, it is easy to find alternatives that outperform ETH, while during market downturns, BTC tends to perform stronger than Ethereum. For financing, I believe the strongest is Lido, a liquid staking solution, as it greatly benefits users who want to participate in ETH staking but still wish to have funds available for other parts of DeFi. They recently completed a funding round led by a16z, and they mentioned that they have used the service to stake their ETH for mergers. Lido is well-positioned to serve both institutional and retail investors and can support other L1s as they are multi-chain.

Crypto Market

Although prices do not reflect this, the influx of funds and ideas into the cryptocurrency space has not slowed down in recent months. We have seen the emergence of many new funds, crypto-native fundraising, collaborations between traditional companies and crypto natives, NFT partnerships, and more. Some notable things that have happened:

• Consensus raised $450 million at a valuation of $7 billion

• Stripe increased support for crypto businesses

• Immutable raised $200 million at a valuation of $2.5 billion

• FC Barcelona plans to launch its own cryptocurrency and NFTs

• Spartan Group announced a $200 million metaverse fund

• Bain Capital Ventures launched a $560 million crypto fund

• Alchemy raised $200 million at a valuation of $10.2 billion

• FTX raised $400 million

• Sequoia Capital launched a $600 million crypto fund

Honestly, there is too much to keep up with here, but it is clear that many people are currently paying attention to the crypto market.

Other Highlights

• Strange Clans launched the first NFT marketplace on JUNO

• Aurory released its whitepaper + game design

• Yuga Labs (BAYC) acquired the rights to Punks & Meebits, allowing users to control IP

Q2 2022

For me, the main focus will be the Cosmos ecosystem and the recovery of BTC. I have been profiting from strong projects like OSMO and JUNO and reinvesting into LUNA and RUNE while cutting back on many underperformers, but I may continue to stay within this ecosystem for the remainder of the year.

To me, the final stage of a multi-chain world looks like application-specific blockchains coexisting and communicating easily with each other. We have not yet scratched the surface of what IBC could achieve, and I am excited to see how cross-chain accounts and IBC-enabled smart contracts work after implementation. As the crypto market matures, we will see fewer useless tokens being added to applications that do not need them, and more tokens whose demand is closely tied to the growth of the entire protocol.

All the best-performing protocols this quarter have strong token economics, which is no coincidence. I have integrated most of my infrastructure into POKT and Genesys Go, both of which have seen significant declines in the past few months, but if the market improves, I expect them to perform well. For GameFi, I remain bullish on DFK, as the development pace has not slowed at all during the market downturn. Once its guilds, land, PvP, and its first cross-chain expansion to Avalanche subnets are in place, there will be greater development. I am also waiting for the release of Strange Clans' second edition NFT and the beta version of Aurory, and Treeverse should launch later this year.

Power in Cosmos: Osmo, Juno, LUNAtics, and THORchads

If you have a heavy position in the Cosmos ecosystem, you have not experienced the sell-offs in other sectors. Osmo and Juno, as the two main Cosmos alts aside from Atom, have mostly been in an uptrend, while other alts have dropped 80-90% from their historical highs.

As the main Dex in the Cosmos ecosystem, Osmo benefits from the overall growth of IBC, especially since we are in the early stages of Cosmos DeFi. Unlike other Dexes running on layer 1 with many other applications, Osmo is both its own chain and its flagship application, so it is not constrained like other AMMs. There are two main innovations that distinguish it from other Dexes; it is an application chain specifically designed for this use case.

• 1. Customizable AMM and sovereign liquidity pools

• 2. Cross-chain functionality with IBC assets

Vision of Osmosis

The recently launched superfluid staking by Osmo is also novel, allowing users to stake their assets in LP pools while binding. The development team and community of Osmosis are very strong, and they align with the core vision of Cosmos Hub and IBC cross-chain functionality.

Juno positions itself as the premier cosmwasm L1. Most of its supply was airdropped to Atom stakers, and its core idea is to be a community-focused protocol centered on cross-chain smart contracts. Compared to most other L1s, Juno's valuation is much lower, and if they can successfully become the first place to launch novel dApps aside from Luna, they have significant momentum and upside potential. I really dislike the recent Proposal 16 governance proposal, which suggested removing funds from one account because they clearly received staking from multiple addresses. I think it sets a bad precedent, being able to restrict individual users in this way, and I hope it does not pass or at least gets rewritten in some way.

From the first quarter's article, "Terra Luna is the only ecosystem in the crypto space that can simultaneously directly stake stablecoins and grow a layer 1 smart contract system. For this reason, LUNA is my favorite among all the largest Layer 1s entering 2022. I bet that their ecosystem growth, stablecoin growth, and the overall growth of IBC will propel them ahead of other competitors."

Anchor is one of the few applications that significantly increased its TVL in Q1, with a TVL of $15.7 billion, just behind AAVE by about $3 billion, and with the addition of new assets like sAvax and the release of Anchor V2, this upward trend will continue.

The Luna Foundation Guard's decision to buy Bitcoin to increase its reserves to support its stable $UST will make Terra USD more resilient to market sell-offs and increase confidence in the ecosystem. A large part of this guiding phase for Luna is building confidence in their stablecoin among retail and institutional investors. They have received strong backing from big names like Jump, Alameda, and 3AC, and $UST has managed to maintain its peg during peaks of market volatility. As their funds and $UST grow, the risk of decoupling becomes smaller. There are also systems in place to assess risks within the system, such as Kujira and Risk Harbor, and this year will not be a bet on Do Kwon and Co. Since the growth of UST is directly related to the reduction in LUNA supply, this growth continues to have a significant impact on its price.

In addition to the growth of Terra USD, DeFi on Terra is also starting to rebound. Terra's main dex platform, Astroport, has been seeing daily trading volumes exceeding $200 million, with liquidity comparable to Osmosis. Currently, most of the trading volume comes from Luna-UST and bLuna-Luna pairs, but as more dApps are launched and gain popularity, Astro should see more activity. Some other innovative protocols recently launched in the Terra ecosystem do not have much competition with existing DeFi protocols, so it will be interesting to see how much market share they can capture in the coming months.

Thorchain (RUNE) is one of my favorite trading pairs alongside Solana in 2021. After several hacks last summer, it has been less popular over the past year, but builders continue to work steadily in the background. The core focus of Rune is cross-chain Dex, allowing for native swaps between different chains. Thorchain's design requires that the Rune collateral posted by bonded nodes is three times more than the other assets added for liquidity, so as the TVL within Thorchain grows, the demand for Rune also increases. What is most interesting to me about the Rune community is the genuine interest from Bitcoin holders, as they are typically less interested in ETH or DeFi. If they can tap into this target market of hodlers, it bodes very well for Thorchain and its future. There is currently a large amount of BTC that is not earning any yield, and for those who are very keen on passive buying and holding low-risk yields, this should be one of the most attractive value pillars. In the past, Rune has encountered hacking issues, so rebuilding investor confidence will be very important.

Recently, its launched Thor Synths and the upcoming Luna integration have been fundamental catalysts driving the conversation, as Luna has been the best performer, combined with the connection between BTC holders → Luna holders will link decentralized hard currency with the most popular decentralized stablecoin. In short, Thor Synths allow users to deposit Rune and receive a synthetic version of the asset they want, which already exists on Thorchain as a Rune-paired LP. Since these assets exist on the Thorchain blockchain, Thor Synth holders benefit from lower fees and faster confirmations than native swaps, while LP holders benefit from increased revenue due to synthetic holders relinquishing their share in LP for directed access to an asset. These are the first parts of Rune's ThorFi products, which will include future lending and single-sided savings accounts. The token economics of Rune can rival that of Luna, and both protocols are well-positioned to continue attracting liquidity from the rest of DeFi.

Yield and Speculative Premium in GameFi and DeFi in the Metaverse

Where do the yields in cryptocurrencies come from, and who are the users of these platforms? Yield farming has been one of the most popular activities for new DeFi users, taking many different forms, almost all of which lead to poor price action for the tokens being farmed. One question I have been pondering is, what designs can prevent this trend, or will all DeFi applications that use token emissions to incentivize users experience this?

Recently, with the launch of GameFi, I believe we have seen a new way to determine the valuations of these tokens, as these games introduce a new set of users to the protocol. To compare GameFi with DeFi, we can first look at where the yields come from in regular DeFi applications (like Dexes or lending platforms).

• 1. Token emissions

• 2. Speculators

• 3. Borrowers using the protocol

Many DeFi applications are essentially inflationary, as they pay user rewards in their native tokens, so part of the rewards comes from these emissions. Additionally, there are always speculators buying/selling these tokens, but very few actually use these platforms. This does not directly affect your APR but does impact the ROI you get from single yield farming. If you are an early user before a platform becomes popular, you will benefit from more speculators betting on the project's future success. Finally, borrowers wanting to use leverage will pay variable rates to those willing to lend their assets. For yield farming on Dexes, you can substitute the fees associated with providing liquidity to LPs instead of borrowers.

If the in-game economy is designed well enough, there will be another layer of demand that did not previously exist, as people play the game aside from the protocol's basic users. In Axie, there is a completely separate group of users playing the game who had no prior relationship with cryptocurrency, but the design of the system does not necessarily ensure that every individual user has a positive impact on the demand for the protocol's token.

Most Axie scholars who rent Axies from guilds or other larger players will immediately relinquish the rewards they earn from the game, which is why the SLP chart has been mostly declining.

• 1. Token emissions

• 2. Speculators

• 3. Borrowers [lending protocols] or LP fees [Dexes]

• 4. Players

Players actively engaged in competitive gaming will be incentivized to buy and use tokens in the game, which will never exist for strict DeFi products. We have yet to see a game that is engaging enough to sustain long-term players within the system, but if a game can create such an ecosystem, it allows users to increase their yields by actively playing the game.

DeFi Kingdoms is the closest example I have seen, which is one of the reasons I am bullish on DFK long-term. One example in the DFK ecosystem is the different pricing of heroes in the tavern and higher-level heroes. The current floor for a common hero is about 35 gems, while the floor for a 10/10 summoned hero is about 95 gems, and the floor for a level 1 hero is about 35 gems, while the floor for a level 6 hero is about 69 gems.

In the past few months, this has yielded about 100%, and I have mentioned in the past few months that I believe the best returns for DFK will come from upgrading your heroes and finding the best summoning strategies, as later, if people want to catch up on lost time, they will have no way to purchase the best heroes in the game without paying a market premium.

With more incentives for stronger heroes in the game being introduced, this will allow users to profit more from their yield farming in liquidity pools or increase their chances of obtaining rare items from completing quests, and these price discrepancies should continue to widen. One of the benefits of playing DFK is that the complexity of the game is largely hidden from outsiders who do not actively study the ecosystem and how it works.

One thing that exists in both DeFi and GameFi protocols is that speculative premiums will always lead product development. Due to the way momentum drives crypto and how much external capital enters the space during bull markets, market valuations often exceed the speed at which teams achieve milestones. It is difficult to determine how much premium exists in the alts you hold right now and what the fair value of these projects is once pure speculators leave.

In recent months, we have seen retail investors exit most altcoin markets, with part of the evidence being the extremely low Ethereum gas fees recently and the lack of premium in derivatives.

Decentralization of Crypto Assets, Varying Degrees of Correlation

I have been advocating for gaming because I believe the current environment is very different from the altcoin seasons of previous years. One might point to the ridiculous Dogecoin season we saw in Q2 2021 to counter this, but I do not think that is an accurate complaint either. The fundamental analysis of cryptocurrencies should also include the number of participants in these coins; moreover, memory value and public enthusiasm are very strong momentum indicators (both up and down).

So, let’s look at some different altcoins from the past quarter to last year and their varying degrees of being Rekt. It is important to identify which are the most resilient and which may recover the fastest.

Super Rekt: Compound

• 307 days since its all-time high

• Down 89.9% from its all-time high

• COMP and many other "DeFi blue chips" exhibited similar price action after initially rising in Q1 2021, more accurately, most of them peaked in August 2020 in ETH terms, so it has been nearly two years of bear market.

• Given that BTC and ETH have not set new lows for several months, the demand for a further -90% drop from here seems unfounded, but these would not be the first tokens I would buy here.

• Interestingly, after setting its all-time high in 2017, ETH took about 330 days to find its bottom, then consolidated and began a new trend again.

Rekt: DeFi Kingdoms

• 62 days from its all-time high

• Down 85% from its all-time high, down 71% from the annual opening price

• Jewel and many other metaverse tokens have also been crushed, although not as badly as many early DeFi names, as these names did not spend nearly as much time in a downtrend in Q4 as they did outperforming the market.

• No signs of recovery have been seen in the metaverse, DFK has a catalyst with the launch of Crystalvale in Eom, but if we venture again, we will see the market's reaction.

Slightly Rekt: BTC

• 126 days since its all-time high

• Down 52.4% from its all-time high

• Bitcoin has dropped like many other assets, but it is still better than about 90% of altcoins and even some tech companies.

• If we get a rebound this quarter, BTC seems likely to play a leading role in this recovery.

Rekt but Recovering: Thorchain

• 301 days since its all-time high

• Down 85% from its all-time high, but up about 150% from the bottom

• Since the summer of 2021, another set of alts has tested their lows, with some being harder to rebound than others. RUNE has some fundamental catalysts here helping it, and the timing seems good.

Close to ATH: Luna

• 5 days since its all-time high

• Down 58% from its all-time high, now down 14% from the peak

• LUNA has led the rebound in recent price action and has shown strong dominance among any alt in the top 10, surpassing Solana in market capitalization.

• If we gain a sustained trend, this excellent performance is expected to continue, as LUNA also led the recovery after Axie last summer.

Not Rekt: Juno

• 10 days since its all-time high

• Down 22% from its all-time high

• One of the few alts that has been in an uptrend for most of the year.

If you are a passive investor and took risks in Q4, I think you have two clear trigger points on BTC:

• 1. Reclaiming the annual opening price of around $4600,

• 2. Surrendering to around $2800, the summer low of 2021.

I personally lean towards the former happening first, but I think these are equally fair re-entry points if you are not actively watching the market. If you are actively trading, then you should look for potentially strong narratives before they become common consensus, as it is clear that even in the downturn of most markets, there will still be those that perform well.

Conclusion

Q1 Thoughts

• Be more cautious when realizing a lack of advantages [i.e., lack of macro knowledge]

• Bet more concentrated without strong biases, lower diversification

• Use hedging more diligently; hedging trades are more important when the overall market is bearish

• Application chains seem to be the current metadata, with stronger token economics than conventional governance tokens

Favorite Trades

• Long Luna / Short Eth

• Long Rune / Short Ftm

• Long BTC / Short Doge

• Long Avax / Short ONE

Some Bold Predictions for This Quarter:

• BTC touches sixty thousand again

• ETHBTC trading below 0.055

• Anchor's TVL surpasses AAVE

• Astroport's daily trading volume surpasses Pancake Swap

• Increased interest in Alt L1s, with more people using Rollups, and ETH's gas fees remain low

• AVAX launches over a dozen subnets, attracting new users

• Solana becomes the main venue for on-chain Perps and options