Outlook for Crypto 2022 – Be optimistic. Be curious. Be careful.

On 11 January 2022, The Broker Club came together with the Society of Technical Analysts and ACI UK to host a panel discussion on the Outlook for Crypto 2022.  During a fascinating and informative hour-long panel discussion moderated by Gavin Wells of 360T, Nick Philpott of Zodia Markets, Charlie Morris of ByteTree Asset Management and Geoff Kendrick of Standard Chartered offered their views on the Crypto world in 2022.

The debate opened with an excellent Crypto ‘primer’, taking viewers on a journey from the birth of Crypto (‘an opportunity to address the original sin of the internet’ with respect to the inability to make payments directly through browsers) through to today’s opportunities and challenges.

Observing that Crypto technology is not new, but a combination of a lot of old technology to make a ‘brand new thing’, the panel also acknowledged that in terms of market structure, in many respects it ‘looks familiar’ in terms of the players e.g., exchanges, brokers, market-makers.  Where it differs, of course, is the new role of coin ‘miners’, and in terms of asset ‘security’.  As ‘bearer tokens’, whomever ‘holds’ the crypto key effectively ‘owns’ the asset so wallet security is an imperative, with different wallet ‘temperatures’ from hot to frozen determining the level of asset accessibility. As such, while KYC is still a focus, KYV (Know Your Virtual Asset Service Provider) is a new and essential component of crypto engagement.

Another key difference from ‘traditional’ financial markets is that Crypto trades 24/7, with a continuing stream of new assets being traded non-stop, and settling T+0, rendering any post trade confirmation pointless.  This presents its own operational challenges – as one speaker notes ‘not investing sufficiently in associated operations is a potential recipe for disaster’ and ‘we’re still working on how to match fiat movements to crypto, when fiat only settles five days a week.’

Other challenges referenced during the debate were securing basic banking services, with many banks still having zero appetite for crypto, ‘pretty backward’ accounting treatment and the (perhaps understandable) nervousness of market regulators towards crypto investment.  In response to a question from the floor, panellists noted that regulation to date has been largely geared towards protecting retail investors.  It was noted, however, that as chair of the SEC, Gary Gensler ‘knows an awful lot about crypto’ suggesting that the US may take a more pragmatic approach and that the UK’s approach to market regulation is ‘also fine’.

The panel felt overall that crypto remains ‘a fascinating asset’, with likely continuing and significant uptick in value: Bitcoin, for example, has doubled 20 times in just 12 years.  It was acknowledged, however, that from a market perspective, there is much need to ‘evangelise’ and win people over to this (relatively) new asset class.

One speaker indicated that in line with the halving of fees paid to Miners, crypto markets appear to work on a four-year cycle, although this isn’t correlated necessarily with return (based on Bitcoin performance, the only source of demand – and sample group – large enough to measure). Crypto is also highly correlated with technology sector performance.

In terms of choosing the ‘right’ crypto opportunity, one view was that Ethereum – the dominant smart contract crypto – might be a ‘big trade’ in 2022, as long as there are no further delays rolling out its upgrade, ETH 2.0 (currently slated for June 2022).  And in a climate of ‘calmer markets and lower inflation’ it was ‘reasonable to assume that smart contract growth would outpace transaction crypto and capture most of the value’.

Overall, the panel’s expert advice for 2022 was ‘be wary’, given ‘weakness in the market right now’ and evidence of investors cashing out in anticipation of a ‘choppy year’ ahead.  While 2020 – the end of a cycle – saw a very tight market with strong fund and retail demand, panellists felt that without a surge in institutional demand there would unlikely be a corresponding surge in value in the near term.  As one speaker observed ‘the end of bear markets is where money is really made’.

For those considering entering this new market, the experts’ advice is to watch the market closely, consider relative value opportunities and diversify investment across other crypto assets.  In other words, treat it like any other investment decision.  

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