Market insights for February 2022
Market insights for February 2022
Crypto market performance, macro recap, market structure, and theme of the month (NFTs as a market hedge).
Crypto market performance
Since last month’s market insight, BTC and ETH have recovered 5.78% and 2.15%, respectively, sitting comfortably at $43,500 and $3,100 levels. In the first week of February, we saw the majors gain an average of 15%. SHIB was the best performing large-cap coin, up 56% in 7 days on the back of an announcement about creating “Shibaverse,” a Shiba Inu themed metaverse. SOL and AVAX continue to be strong performing smart contract chains, up 18% and 19%, respectively, at the time of writing. For the first time since the start of the year, not all sectors across crypto were negative. L1s had the best performance, up 7.7% despite the January blues, with DeFi following up 4.5% and Web 3 up 4.3%.
The market continues to play to the Federal Reserve’s tune as Chairman Powell showed a hawkish stance by indicating a high likelihood of a rate hike next month and a reduction of the balance sheet (AKA quantitative tightening). Despite trading upwards on that session, the SP500 and NASDAQ ended up shedding all the gains and closing the session flat, with the Dow Jones seeing losses. Bond yields for the 10-year treasury rose ten bps from 1.78% to 1.88%, indicating the market’s risk-off behavior. Interestingly, BTC has outperformed equities by 18% and held the $35,000 support level since January 21st. This market behavior could indicate a fresh flow of dollars into the largest crypto by market cap. Since January, the implied volatility (IV) in the BTC options market has increased, reaching 63%, close to its December 2021 peak.
Market Structure: Consolidation before upside capitulation
In last month’s recap, we mentioned that the market seemed to have bottomed. BTC and ETH tested support levels between Jan 12–25, and have since generally traded sideways. We now see more favorable market conditions and believe that we will be in a more extended period of stability, with bulls having a slight advantage over bears.
On-chain metrics show growth in wallet addresses within the BTC network — up to 18.5k new entities per day — beating the 12.5k daily growth we saw in wallets from June to December 2021. This suggests new flow into the market and new BTC hodlers, indicating renewed market sentiment at current price levels.
Assets locked within the largest smart contract chains also saw a spike in the first week of the month, with AVAX posting a category-leading 15.8% increase in total value locked (TVL). Despite the recent market volatility, this shows a risk-on market bias as more users are willing to lock up their assets across different leading chains.
Furthermore, in the recent BTC price recovery, we saw a divergence between futures and spot volumes, with the latter having a larger impact on market moves. Increasing spot volumes are a bullish indicator of actual accumulation by BTC hodlers, rather than a byproduct of speculation or risk hedging activity (futures volume).
Theme of the month
NFTs: the ultimate market hedge
Last year, NFTs saw meteoric growth, with sales hitting $25 billion across 94 million transactions. The market was pouring money into everything from Cryptopunks to ETH Rocks, BAYC, and even CoolCats, with the most expensive NFT sold by Sotheby’s for $69 million (Everydays: The First 5000 Days). The frenzy did not stop there. We saw celebrities and public figures starting to acquire NFTs (e.g., Stephen Curry, Jimmy Fallon, Eminem) and even create their own collections to monetize their presence in Web 3.0 (e.g., Lionel Messi, Justin Bieber, Snoop Dog). This year, jpegs have outperformed the market as crypto traders rotate their portfolios into NFTs. As of January 2022, sales reached an all-time high of $7 billion.
But why a risk-off market rotation into, arguably, a less liquid and more volatile market such as NFTs?
NFTs are a unique market sector because they have significantly increased the interest and participation of non-crypto natives in the space. NFTs have become a means of tracking provenance and ownership, helping creators and artists solve an age-old problem and begin to monetize their work at scale. Further, we are starting to see metaverses imbue value and utility into NFTs through gamification and financial incentives such as lending and staking. Several Web 2.0 companies are starting to actively get involved in this market segment to increase brand recognition.
However, the question remains, how do we value NFTs? And what NFTs should I look at?
NFTs, unlike traditional art, can’t be valued as just one type of asset. NFTs have different (and arguably more) utility and can be considered a combination of many value-accruing assets. For example, people are starting to use NFTs as collateral for borrowing and lending, tokenizing derivatives (e.g., LP positions on Uniswap) and even representing real assets on the blockchain.
There are a few notable market trends:
- Valuing first movers: Crypto-natives, degens, Millennials, and Gen-Zers alike tend to be biased towards valuing the first movers such as Crypto Punks, ETH rocks, and ArtBlocks. These projects have rewarded well-thought-out communities in the long term. We saw this trend following other L1 chains projects such as Solana, Fantom, Avalanche, Harmony, and Binance Smart Chain. The highest value NFTs on the respective L1s were similarly created not long after the launch of these chains. As L1s continue to grow, we have yet to see if new “origin” NFTs continue to accrue value at such multiples.
- Profile pics and Avatars: We are seeing the growth of internet “real estate” through our increasing presence across social media platforms. As our online activity becomes more intertwined with our digital reputation and social status, we will naturally start to seek new means of building our online recognition and so-called digital personal brands. The latest example is the use of NFTs as profile pics. The Bored Ape Yacht Club (BAYC) has captured the attention of athletes and celebrities the world over, creating a cult-like following of the NFT collection through its exclusive community.
- Play-to-Earn (P2E) and Metaverses: One of the hottest sectors in the market, blockchain gaming, has utilized NFTs in creative ways such as bootstrapping liquidity via staking in-game NFTs. Users can also employ NFTs for other gaming experiences such as borrow/lending and in-game swaps. Naturally, NFTs associated with the most popular metaverses and P2E games should see the most sustained value growth.
- Traditional art and NFTs: As the NFT space absorbs more air in the room, more of the “TradArt” industry will rotate into the NFT space as volume and sales follow. NFT art will likely be more difficult to assess in terms of valuation; however, the work of well-known artists should see solid performance due to their existing clout and network effect. (We are already seeing this in the space with Banksy’s NFT selling for millions of dollars.)
- NFT marketplaces: Lastly, another way to get exposure to this market is via NFT marketplace tokens such as OpenSea, DoinGud, Rarible and LooksRARE. These platforms benefit from the trading fees of NFTs, so the higher the NFT volumes, the higher the price of their governance tokens (assuming revenues and token valuation are tied to activities such as burning activity or other marketplace-specific mechanisms).
Other interesting NFT plays we see in the space are:
– Strange Clan: The first metaverse on the Cosmos network with an in-game NFT marketplace.
– Aurory project: A P2E metaverse on Solana with in-game NFTs.
– Crabada: The first P2E game on AVAX with NFT minting.
William P. Eason