Bloomberg Crypto Outlook Report: Ethereum is Rising Amid the Digitalization Wave

Original text from: Bloomberg Intelligence

Original author: BI Senior Commodity Strategist Mike McGlone

Translation: Moni

2022 is just around the corner.

For global asset management fund managers who have not yet invested in Bitcoin and Ethereum, now is the time to reconsider investment allocations. As digital assets rapidly evolve, risks exist, but changes seem to be emerging. China's ban on cryptocurrencies is not a coincidence; meanwhile, the U.S., Canada, and Europe have launched Bitcoin and Ethereum exchange-traded funds. Currently, it seems that the U.S. has temporarily won the "new cold war of digital assets," with a surge in the use of the dollar in digital asset trading, while the use of the yuan has significantly decreased. Additionally, for the crypto industry in 2022, the most iconic aspect should be the increasing clarity of regulations.

Bitcoin's support level is rising from $50,000 to $60,000, and given the current market conditions, it may be gearing up for a year-end sprint to $100,000, while Ethereum's price is expected to reach $5,000, with a support level around $4,000.

The Surge of U.S. Crypto ETFs

Is 2021 another "foundational year for crypto"? At least one thing is certain: the foundation of the cryptocurrency industry was indeed further solidified in 2021. After the market correction in early 2021, with increasing market demand and adoption, along with a decrease in supply, Bitcoin and Ethereum are unlikely to retract before the end of the year, suggesting that the bull market may continue. Furthermore, the U.S. government's approval of Bitcoin exchange-traded funds has also reduced the downside risks in the market fundamentals.

What is preventing the adoption and expansion of crypto assets? Since November 2021, the crypto industry has seen a significant rebound. It is important to note that people easily forget past market crashes once they heal from their wounds. In 2021, there were several "contradictory events" in the crypto industry; for example, on one hand, China announced a ban on crypto asset trading, while on the other hand, the U.S. and Canada launched Bitcoin and Ethereum exchange-traded funds (ETFs) and futures, indicating that a new cold war is erupting in the crypto market. Currently, it seems that the U.S. has temporarily won the "new cold war of digital assets," with a surge in the use of the dollar in digital asset trading and a significant decrease in the use of the yuan, indicating that the organic demand for crypto based on the dollar is growing.

Above: The "small reasons" complicating the bull market

From the price trends of Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, it can be seen that the market is continuously rising. Although Bitcoin is the first cryptocurrency in the world, its performance in 2021 seems to have lagged behind that of Ethereum, the second largest by market cap. However, if Bitcoin can catch up with Ethereum's performance in the last two months of this year, its target could reach $100,000. Comparatively, Bitcoin should be able to remain stable in the $60,000 range.

Crypto Asset Investment Managers Need to Bear High Volatility Risks for High Returns

The relatively high returns of crypto asset investment managers are partly due to the higher risks they bear compared to traditional fund managers. Data shows that the Bloomberg Galaxy Crypto and DeFi Index has outperformed the S&P 500 Index by over 200%, but it also comes with higher volatility. For instance, the cryptocurrency market fell over 50% in early 2021, while the U.S. stock market benchmark index did not experience more than a 10% drop even during its lowest points (such as the early 2020 COVID-19 pandemic). In simple terms, crypto asset investment managers must endure high volatility risks in exchange for high returns. On the other hand, crypto asset sellers seem to be attracting responsive buyers, and for the vast majority of buyers, they may need to be cautious in their crypto asset allocations, or risk "underperforming the market."

Above: The better the cryptocurrency market performs, the more demand can be "stimulated."

Considering the current low interest rates in traditional financial markets, crypto asset investment managers need to stay ahead of retail investors. With this in mind, if they continue to follow an investment model of "60% stocks / 40% bonds," these crypto asset investment managers may face some challenges.

Futures-Based Crypto ETFs: The Starting Point?

Given the scale of the cryptocurrency and gold markets, the market size of Bitcoin futures remains relatively small, which certainly leaves room for expanding market participation and potential price increases. According to Bloomberg Intelligence analysis, the current open interest in Bitcoin futures on the CME is in a "mini bull market," while gold futures are the opposite. However, when looking at the open interest size, the approximately $4 billion in Bitcoin open contracts pales in comparison to the roughly $90 billion in gold open contracts. But don't forget, at the beginning of 2020, the crypto futures market was only about $200 million, while gold was as high as $125 billion.

Below: Trends are indeed important - Bitcoin vs. Gold

Trends are indeed important. Some investment managers have employed a "cash and carry" strategy, which has yielded substantial profits. In fact, more and more participants are engaging in Bitcoin futures trading, which is expected to accelerate upward potential. Over the past year, if you had gone long on BTC and then hedged 1:1 with futures, you could have achieved over 20% returns.

The Rise of the "Cash-and-Carry" Investment Strategy

With U.S. regulators approving Bitcoin exchange-traded funds and more people trying out the "Cash-and-Carry" trading strategy, it can be said that 2021 has been a milestone year for the crypto industry, with increasing market participation and demand, especially as the U.S. launched Ethereum futures and Bitcoin-tracking futures ETFs, making 2021 a turning point for the maturity of the crypto market. Bitcoin and Ethereum are gradually evolving into "general collateral," with Ethereum almost becoming the "universal collateral of the internet," gaining significant influence.

Above: Bitcoin, Ethereum, and Cash and Carry

Although the margin ratio for Bitcoin futures is still somewhat limited, this ratio should decrease as the market matures. Over the past year, if you had gone long on BTC and then hedged 1:1 with futures, you could have achieved over 20% returns.

Above: Will the Bitcoin futures curve resemble gold more and more?

Bloomberg Intelligence analysis suggests that the Bitcoin futures curve is expected to resemble that of gold. As market participation continues to increase, the restrictive trading of Bitcoin futures will not last long; "liberation" is merely a matter of time. Compared to the 21x leverage of gold futures, Bitcoin futures leverage is less than 3x, but it is important to note that Bitcoin's volatility is higher than that of gold.

Bitcoin is expected to trade like gold. The U.S. Securities and Exchange Commission has approved Bitcoin ETFs tracking CME futures, which means that the maturity of Bitcoin as a nascent asset will accelerate further. According to Bloomberg Intelligence analysis, compared to the 200-day average premium of Bitcoin spot prices, the 200-day average premium of Bitcoin futures has decreased. With the launch of the first Bitcoin ETF—ProShares Bitcoin Strategy ETF—the gap between Bitcoin futures and spot premiums is expected to widen further, with the recovery trend likely resembling that of gold. In the past, the barrier to entry for ordinary people to invest in Bitcoin was high, but with the emergence of ETFs, this situation has changed. The CME has limited the leverage of Bitcoin futures to around 2.5 times, while gold leverage can exceed 20 times. One major reason for this is Bitcoin's extreme volatility, and the approval of ETFs can increase market participation.

Will the Bitcoin futures curve resemble gold?

Perhaps it will, as Bitcoin ETFs open the door for major brokers to enter the world of cryptocurrency and futures arbitrage.

The Three Musketeers vs. Meme Coin

In the cryptocurrency industry, the three musketeers are Bitcoin, Ethereum, and Tether, which have consistently remained at the top of the ecosystem. However, there are also about 13,000 competitors vying for leadership in the crypto industry. A year ago, the leading cryptocurrencies included XRP, Bitcoin Cash, and Chainlink, but now they have been replaced by Binance Coin, Cardano, and Solana.

Tether, Ethereum, and Bitcoin vs. 13,000 watchful competitors. The growth trend of the crypto market can largely be attributed to the proliferation of Tether. Additionally, Bitcoin is transitioning towards a "general collateral" role, while Ethereum has become the foundational platform for DeFi fintech and NFTs. As a stablecoin pegged to the dollar, Tether's rapid adoption in a short period is noteworthy, as it has dominated the stablecoin market and has seen a number of "Tether worshippers," highlighting the importance of the dollar in the crypto ecosystem—the demand for crypto trading in dollars exceeds that of all other fiat currencies.

Above: The Three Musketeers - Bitcoin, Ethereum, Tether

There is almost nothing that can stop Bitcoin from becoming the global digital reserve asset. On the other hand, while so-called Ethereum killers frequently emerge in the market, they rarely manage to maintain a stable position among the top cryptocurrencies.

For those cryptocurrencies looking to compete with Bitcoin, Ethereum, and Tether, the following chart serves as a warning: in terms of durability? It still depends on Bitcoin, Ethereum, and Tether.

You will find that a year ago, Bitcoin, Ethereum, and Tether consistently occupied the top three positions, followed closely by XRP, Bitcoin Cash, and Chainlink. However, looking at the situation a year later, XRP has dropped to 7th place, Bitcoin Cash to 21st, and Chainlink to 14th. The reason for this is largely due to the fact that these cryptocurrencies are often driven by hype and speculation, so when you see certain cryptocurrencies rising too quickly, you should be very cautious.

Did You Think "Joke Coin" Was Just a Joke? Only to Find Out the Clown Was Yourself

In the first half of 2021, Dogecoin became the most representative "speculative cryptocurrency"; in the second half of 2021, this "honor" belongs to Shiba Inu. From the market situation, they seem to satisfy the "gamblers' fun."

When "Joke Coin" is no longer a joke. It can be said that Shiba Inu has seemingly become a representative of high-quality marketing, ESG, supply and demand economics, and "gambling," with its value showing a parabolic rise. Meme coins have caught the attention of Bloomberg Intelligence, especially regarding risks; Shiba Inu's situation seems very similar to that of Dogecoin in May. For speculators, this phenomenon seems very interesting, considering that Shiba Inu's market cap has dropped from a peak of $40 billion to $30 billion.

Above: Ethereum is the driver of Shiba Inu

Shiba Inu has attracted a large audience mainly due to its "relatively low" price. Let's look at an example: based on the price data from October 29, if you had $100, you could purchase about 1.4 million Shiba Inu tokens, while with Bitcoin, you could only buy 0.0016 BTC, as Bitcoin was priced at $61,000 at that time. For the Ethereum platform, Shiba Inu has become a typical use case and demand factor.

So, will Shiba Inu behave like Dogecoin? Although Dogecoin's performance was once less than satisfactory, according to the current Bloomberg Galaxy Crypto Index, Dogecoin has returned to its 2021 highs, and a similar situation may occur with Shiba Inu, as more institutional investors are getting involved. In fact, Bloomberg Intelligence analysis suggests that just as all revolutionary technologies go through a "market speculation phase" at their inception, the crypto market is also transforming and taking effect. Shiba Inu's low pricing makes it attractive for more participants, and the community's enthusiasm on Twitter is high. Additionally, Ethereum co-founder Vitalik Buterin announced that he donated his investment in Shiba Inu to India to combat COVID-19, which is part of the reason attracting speculators.

Above: Unique speculation; Shiba Inu may face risk aversion impacts

Vitalik Buterin's donation of Shiba Inu is noteworthy because he removed a large portion of Shiba Inu from circulation and donated it to charity, an action that may trigger risk aversion in the market.

Ethereum is Rising with the Digitalization Wave

Undeniably, the market demand for Ethereum is increasing while supply is decreasing. In the process of financial and monetary digitalization, Ethereum is gradually moving towards a central role—this is also the foundation for its price to further grow. For a long time, Ethereum has been the second-largest cryptocurrency by market cap, but now it has become the preferred platform for NFTs and the top platform for tokenization. Now ETH is slowly transforming into the "universal collateral" of the internet, a trajectory that seems very similar to Bitcoin's path to becoming the global digital reserve asset.

Although Ethereum experienced a staggering drop of about 60% in the first half of 2021, it has now become the best-performing mainstream crypto asset of 2021 so far. Bloomberg Intelligence analysis suggests that Ethereum should be able to maintain this growth momentum.

Sometimes, the market develops many unknown situations, leading to emerging technologies going off track. Additionally, intense competition can lead to many adverse effects, but in 2021, Ethereum successfully completed its protocol upgrade, paving the way for its smooth transition to ETH 2.0. The ETH 2.0 upgrade is significant and will greatly reduce the energy consumption of the Ethereum blockchain.