A Year of Expensive Lessons? 

A year-end review by Arcane Research put everything in perspective about 2022. Here were some of the more interesting highlights (and predictions) from this report: 

Trust No One – an old Bitcoin slogan came to life again as it was clear through some very bad actors that you cannot trust anyone more than yourself to maintain your assets. Not your keys, not your cheese. “Your funds in someone else’s custody is someone else’s liability, and their intentions could be harmful. While there are good arguments for storing funds at exchanges, traders should strive to avoid concentrating risks on one venue.”

Second-Worst BTC YTD Return Since Launch – “BTC ends the year down 65%, seeing its second-worst yearly performance since 2011, only beaten by 2018’s-73%.  In this year’s high inflation environment, physical gold (-1% YTD) has vastly outperformed bitcoin, the digital gold. BTC’s digital gold narrative was premature, but the narrative delivered during the inflation build up of 2021.  Few cryptocurrencies have been exempt from the violent destruction of value this year, and there are few apparent winners this year. We’ll later make a case for stablecoins and Binance being the winners of 2022.  In essence, the crypto winter of 2022 was fueled by tightening macro conditions and vastly exacerbated by crypto-specific leverage and awful risk management by core market participants.  In conclusion, the honest market participant is the loser of 2022. Charlatans have been exposed, and it’s clear who swam naked. Contagion will likely play out in early 2023 as well, but we view it as likely that the majority of 2023 will be less frantic and borderline uneventful compared to the last three years.”. Their prediction:  Bitcoin will trade in a predominantly flat range this year, but close 2023 at a higher price than the yearly open. 

Their Comments on Market Cycles – “Bitcoin’s current drawdowns closely resemble the bear market patterns of previous cycles. The 2018 bear market saw a 364-day long duration from peak to through, while the 2014-15 bear market lasted for 407 days. For now, BTC has bottomed 376 days after peaking, right in between the duration of earlier cycle peak to through periods. If a new bottom is reached in 2023, this will be the longest-lasting BTC drawdown ever. Related to catalysts and reshaping narratives, there are several potential catalysts. The FTX proceedings may incentivize more rapid progress with regulations, and we view both positive signals related to U.S. spot BTC ETF launches and more coherent classifications of tokens as a plausible outcome by the end of the year, with exchange tokens being particularly exposed for potential security classifications. Additionally, the European Parliament is expected to vote on the MiCA bill in February 2023, and the effects of the bill will gradually take effect over a 12-to-18-month-long transitional period which could affect and reshape crypto markets. Further, Grayscale’s SEC lawsuit is set to make progress early in 2023, with a three-judge panel ruling occurring shortly after the release of the final written briefs on February 3rd, 2023”. Our Core 2023 Prediction: While the tightening macro landscape and BTC’s correlated relationship to macro complicate analogies to previous bear markets, we firmly believe that this is an excellent area to build gradual BTC exposure. However, we expect low activity to be the key trend throughout most of 2023, with diminishing trading volumes and volatility in a significantly more boring market than the previous three years. As we advance into the next year, patience and long-term positioning will be key.

Sector Performance – Alternative layer 1s and the mythical metaverse was 2021’s killer narrative. In 2022, both have seen valuations plunge by more than 85%.  Privacy coins outperformed the rest of the market this year, seeing a year-to-date loss of 47%. The relative strength of privacy coins is likely caused by the sustained utility of Monero related to darknet transactions.  Surprisingly, exchange tokens outperformed BTC and ETH this year, even when including FTT. The exchange token performance is highly dependent on how BNB is labeled. When excluding BNB, we note that exchange tokens underperformed BTC and ETH.  Last year’s alternative layer-1 craze and metaverse hype has seen a brutal collapse, and these sectors are the year’s worst performers. 2023 prediction: Privacy coins will maintain softer price reactions both up and down due to utility demand.  Exchange tokens will face serious regulatory scrutiny due to the FTX collapse, and certain tokens will be labeled as securities.