The cryptocurrency market is trying to find its direction since the early December crash. After a number of bounce attempts following the crash, the total market value of cryptocurrencies have been hovering in a tight range between $2 trillion and $2.4 trillion.

The week started with losses across the board due to concerns regarding the Federal Reserve’s (FED) Federal Open Market Committee meeting on Wednesday, December 15. Fear dominated the cryptocurrency market about the possibility of a decisive and aggressive interest rate hike announcement by the FED for 2022, as a response to accelerating inflation rates. 

Rising interest rates have historically been bearish for capital markets, especially so for the more speculative ones like the cryptocurrency market. Even the prospect of it was enough to drop the price of Bitcoin and Ethereum by close to 10% back on Monday, December 13.

Fortunately, the rate hike schedule (total of 3 planned hikes in 2022) announced by the FED on Wednesday was received positively by the markets, which immediately followed with strong buying activity for cryptocurrencies. Developments in the coming days will show us whether the total market capitalization will be able to break out of its current $2-2.4 trillion range to the upside.

This week’s crypto ecosystem update discusses what is going on-chain in major cryptocurrencies like Bitcoin and Ethereum, their technicals, and a number of critical developments in cryptocurrency products, in an effort to shed light on the possible future direction of the market.

BITCOIN ANALYSIS

Price Overview

Last 7-day change: -7.5%

Last 30-day change: -26.2%

7-day low: $45,723.48

7-day high: $51,248.38

30-day low: $42,728.75

30-day high: $69,050.61

• On-Chain Activity:

There are a few factors to watch as Bitcoin tries to find its footing in the $45,000 to $50,000 range. Canada’s spot ETF, the Purpose ETF, has begun adding coins to its holdings as miners continue to ramp up their operations. In the wings, however, is rising speculator exposure and positive funding that have historically followed with a leverage flush out.

1. Purpose ETF (Canada)

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Canada’s spot Bitcoin ETF, the Purpose ETF, has increased its BTC holdings by ~5,100 BTC since December 1 and by 6,300 BTC over the last month. Now sitting at 30,528.45 BTC, the cumulative holdings of the ETF has increased by 405.7% since its inception in February. The growth in the Purpose ETF is a positive sign that traditional investment vehicles around BTC have felt consistent demand throughout the year.

2. Futures Open Interest Dominance

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*Data provided by GlassNode

Futures open interest (OI) dominance measures the ratio of the total capital allocated to perpetual futures and Bitcoin’s market cap; it is calculated as (Futures Perpetual Open Interest / Market Cap). This ratio indicates whether speculators have above average exposure to futures relative to the amount of value locked in the Bitcoin protocol. Futures perpetual open interest dominance fell to a monthly low of .99% after the market crash on December 3. It has since climbed back to 1.10% as price has remained in a slight downtrend. Rising OI dominance despite positive funding (currently at +.04%) can create another round of long liquidations, similar to what we experienced early this month. In contrast, the estimated futures leverage ratio has fallen to 13% from 16% on December 3.

3. Hash

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*Data provided by GlassNode

New miners have continued to come online despite shaky price action and an uncertain fundamental backdrop. Hash rate’s seven day simple moving average reached an all time high of 182.02 million Th/s as the daily mean rate inched within 5% of its 199 million Th/s all time high from April. The divergence forming between price and hash rate is a positive indication that miners aren’t capitulating despite the 32% drawdown in price. Adding to the positive momentum of miners is a difficulty adjustment of +8.33% from December 11, and an upcoming adjustment estimated to be +2.33% on December 25.

• Bitcoin Technical Analysis:

Bitcoin decreased considerably on December 13, falling to a low of $45,672, in light of the uncertainties before the monthly FED meeting. Positive sentiment following the meeting on December 15 caused the Bitcoin price to bounce from $46,000 to $49,000. 

1. 200-Day Moving Average Support

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Bitcoin is on thin ice now as it currently sits on its 200 daily moving average, which is the blue line on the above chart. The 200-day moving average has historically been the decisive factor in terms of the direction of Bitcoin trends. Positive developments in the market need to ensue so that Bitcoin can remain above this line and start a new uptrend. 

2. Descending Parallel Channel 

What Bitcoin needs to start a new uptrend is to break out of its current descending parallel channel first. Bitcoin started a descending parallel channel since reaching a new all-time high price of $68,000 on November 10, as you can see in the below chart. 

If Bitcoin fails to break above this descdending channel and falls down further, the lower end of the channel will likely act as support at around $40,000, which also corresponds to the swing low back in September.

3. Significant Divergence on the RSI

There has been a huge divergence emerging on the Relative Strength Index (RSI) of Bitcoin since the $42,000 low at the beginning of the month. This indicates that the decrease in price was not accompanied by a similar drop in momentum, which can act as a harbinger for a trend reversal:

4. Weekly Stochastic Bottomed Out

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Bitcoin’s weekly stochastic RSI has bottomed out, as highlighted in red in the above chart, which indicates the current downtrend may be close to a reversal. Still, it takes substantial time for higher timeframe momentum indicators to reverse and turn positive, so Bitcoin can still test the lower boundary of its current descending channel discussed in section II.   

5. Bitcoin Logarithmic Growth Curve

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Bitcoin price has been following a perfect logarithmic growth curve since its inception 10 years ago. The median line (0.5 Fibonacci Curve) in the logarithmic curve has acted as strong resistance, breaking which led to the supercycles of Bitcoin that end with touching the top of the log curve. Bitcoin spent 2021 struggling with breaking above the median 0.5 Fibonacci Curve. It failed to remain above it in both attempts, which correspond to the all-time high prices back in April and November 2021. 

The median line is still acting as strong resistance, which is currently at around $70,000. If Bitcoin can rise back to its previous all-time highs and close above $70,000 on a monthly-close, this could start a new supercycle for Bitcoin.   

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ETHEREUM ANALYSIS

Price Overview

Last 7-day change: -15.1%

Last 30-day change: -20.7%

7-day low: $3,660.00

7-day high: $4,490.72

30-day low: $3,575.00

30-day high: $4,867.81

• On-Chain Activity:

There are healthy signals coming from Ethereum’s on-chain data. Coins are locked in smart contracts at a historically high rate and the cost to use the network has come down significantly. Against positive fundamental drivers, including EIP-4488, Ethereum has held its footing on-chain despite volatile price action.

1. Supply in Smart Contracts

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*Data provided by GlassNode

The portion of ETH’s supply locked in smart contracts sits at 27%, which is just shy of an all time high. The last year has seen ETH entering smart contracts at an unprecedented velocity relative to new supply issuance, which adds to supply illiquidity and is the result of developments within the DeFi ecosystem. Currently sitting at 3.3x issuance, ~11.5 million Ethereum have been locked in smart contracts against ~3.5 million new Ethereum being issued this year. Combined with the tokenomic impact of EIP-1559, high smart contract velocity has the potential to dampen the liquid supply of Ethereum over longer periods of time.

2. Gas

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The average transaction gas price has come down over 50% since the recent highs seen in late October and is relatively low on a comparative basis. Currently sitting at 83 Gwei, the average transaction gas price is in the 37th percentile over the last five month period and in the 43rd percentile for the year of 2021. Ethereum has faced an uphill battle in keeping gas prices at bay. EIP-4488 on the horizon is expected to bring a short term band-aid to the problem as Ethereum 2.0 development continues; however, it is unknown how defensible the proposal will be in practice.

• Ethereum Technical Analysis:

Ethereum’s price action has historically been very strongly correlated to that of Bitcoin. Throughout the history of the cryptocurrency market, Bitcoin managed to drag Ethereum and other cryptocurrencies along with itself, either to the upside or to the downside. The reason for this synchronized price action was that funds entering and exiting the cryptocurrency market initially flowed into Bitcoin, which then moved in and out of Ethereum and other cryptocurrencies, i.e. the altcoins. In that sense, Bitcoin should not be on a downtrend for the Ethereum price to climb higher.

1. Rising Channel Support

Ethereum is similarly on thin ice like Bitcoin. It is flirting with the bottom of its rising parallel channel ascending from its July lows. The price of Ethereum better starts to climb back up soon in order not to break down from this channel, which would likely result in a significant downside movement.

2. Weekly Stochastic RSI

Although the weekly stochastic RSI for Bitcoin has almost bottomed out, Ethereum’s US Dollar pair still has plenty of room to the downside until its weekly stochastic RSI can reverse the downside momentum. This may suggest that Ethereum’s price may fall with a larger magnitude if Bitcoin resumes its downtrend, or Bitcoin may start a new uptrend while Ethereum waits at the sidelines, which has historically been the case during Bitcoin supercycles.  

2. Ethereum vs. Bitcoin

Although the current outlook for Ethereum’s price action against Bitcoin is still bullish, there is a chance for the trend to reverse if the ETH/BTC parity’s monthly relative strength index (RSI) does not close this month above the 70 resistance level and carry itself onto the overbought zone:

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CRYPTO INDUSTRY UPDATES

• Regulatory Updates:

1. India Will Not Ban Cryptos, But Regulate Them

According to reports from the local media, the Indian government will not ban cryptocurrencies entirely, which has been the expectation for some time due to the Modi administration’s hostile stance against this asset class. The government will instead opt to regulate the sector.

Earlier in the year, the Indian government was speculated to issue a central bank-backed digital currency and outright ban all cryptocurrencies. However, as the details of the proposed cryptocurrency bill emerges, it is becoming more evident that the bill actually seeks to authorize the Securities and Exchange Board of India (SEBI) to oversee the regulation of local cryptocurrency exchanges, not ban them.  

Reports also claim that the Indian government will pause its plans for the central-bank digital currency for now, although it will still not allow any cryptocurrency assets to be accepted as a currency or legal tender in the country.

• Funding Updates:

1. New ETF by Valkyrie

A new exchange-traded fund (ETF) from Valkyrie invests in companies that have large Bitcoin holdings in their balance sheets, which include MicroStrategy, Square, Tesla, and other crypto industry bulls. This is clearly a new genre of ETFs, which seeks to focus only on equities that invest in Bitcoin and stays away from Bitcoin futures.

2. NYDIG Announces $1 billion Funding Round

U.S. based NYDIG announced the closing of a $1 billion fundraising round led by WestCap on December 14. The raised capital values the group at a total of $7 billion and funds will be used to expand the company’s institutional grade Bitcoin platform, product offerings, and aid in growing the company’s global personnel.

This is a massive injection of capital that will be used to fuel the company’s “Bitcoin for all” initiatives. Historically, these enterprises have come in the form of partnerships with banks and products that integrate Bitcoin. The capital from this recent raise, however, will have a focus on newer developments within the Bitcoin ecosystem. This includes Lightning payments, asset tokenization, and smart contract capabilities.

Groups that led previous funding rounds, such as Bessemer Venture Partners and FinTech Collective, participated in this recent raise; in addition to other previous investors, including Affirm, FIS, Fiserv, MassMutual, Morgan Stanley, and New York Life. The breadth of NYDIG’s investor base casts a spotlight on the reach of the company’s operations and ability to execute. More importantly, it emphasizes the impact Bitcoin has on all facets of the traditional financial realm.

CRYPTOCURRENCY PRODUCT UPDATES

• Layer 2 Protocols:

Polygon Acquires Predictable Labs

The leading Layer-2 blockchain scaling solution, Polygon has partnered and integrated with hundreds of DeFi applications to date. The network has left a heavy mark on the DeFi industry and is a major contributor to its rising efficiency and accessibility. 

The boundaries of Polygon have recently expanded beyond the sphere of decentralized finance. In late November, CEX.IO integrated Polygon for its users to benefit from low-cost deposits and withdrawals, while at the same time interacting with a fiat-to-crypto exchange.

Continuing its mission as a leading scalability solution, Polygon has announced the $400 million acquisition of Predictable Labs. This acquisition is part of the protocol’s greater mission to become the lead developer in Zero Knowledge (ZK) roll-up technology, which it intends to invest up to $1 billion in.  Predictable Labs is the creator of the Mirror (Mir) protocol, which is a host for ZK roll-ups and other technologies that will be integrated and rebranded into the Polygon ecosystem.

The acquisition makes Polygon an even larger player in the Layer 2 space and adds to its already hyper-competitive landscape. Competing protocols, such as Loopring, Arbitrum, and Optimism, will be forced to make significant moves in order to keep up. The mounting game theory-type competitiveness that is emerging among Layer 2 creators will assist in fueling accessibility and efficiency of the entire ecosystem.

• DeFi

1. Injective Protocol Integrates Terra

The first Injective Bridge IBC connection to Terra is live after a successful integration. The Injective protocol is a dex that offers exotic DeFi investment products such as cross-chain margin trading, derivatives, forex, synthetics, and futures. The protocol is built on Ethereum and is backed by Layer 2 solutions that allows for efficient transactions moving in, out, and within the protocol. In addition to the integration with Terra, Injective allows for trading on Cosmos (ATOM) and Ethereum (ETH) through the Keplr and Metamask extensions respectively.

Platforms offering trading projects similar to that of Injective have attracted users en masse and have seen high volumes throughout the year. Most notably, dYdX has amassed ~$962 million in total value locked (TVL) and does ~$1.8 billion in daily volume on average. The integration brings highly demanded products to Terra, which will help expand the already rapidly growing ecosystem. Other protocols on Terra, such as Anchor, are strong complements to Injective which adds a maturing element to the network.

Luna (Terra’s native network token) and UST (Terra’s native stablecoin) can be transferred directly to Injective via the Terrastation web extension using the Injective Bridge. Injective reports that transfer fees come in under $.040 to bridge Luna or UST to the platform.

2. Nexo Allows Users Borrow Funds Against CryptoPunks and Bored Apes 

Nexo, one of the largest DeFi lending and borrowing protocols, partners with Three Arrows Capital, a prominent crypto hedge fund to launch a new loan product that can be collateralized with non-fungible token (NFT) items.

Clients will be able to use their NFTs as collateral to borrow stablecoins, Ethereum, and a number of other cryptos.

Nexo’s NFT Lending Desk will specifically accept CryptoPunks and Bored Ape Yacht Club NFT collections as collateral, which are currently the most popular and expensive NFT collections in the market. Price of a single Punk or Bored Ape image NFT can exceed well beyond a million USD today.

3. Plasma Finance Brings DeFi to the Masses

The complexity of current DeFi products prevent their mainstream adoption. Plasma Finance addresses this problem by introducing a highly simplified and streamlined DeFi application. 

The platform offers a very simple onboarding process with easy-to-follow instructions to download a wallet and connect to DeFi applications. Plasma Finance aggregates DeFi protocols so its users can directly and conveniently access top DeFi protocols like Uniswap, Curve, YFI, and PancakeSwap. The company seeks to become the one-stop destination for less experienced, retail DeFi users.

• NFT & Metaverse

$100 Million Stolen from Vulcan Forged NFT Marketplace

Vulcan Forged, a highly popular NFT marketplace as of recently, announced on December 13 that around 150 wallets holding its native token, PYR have been hacked. The hacker stole a total of over 4.5 million PYR tokens, which is worth around $100 million.

Although the developer team is currently working on compensating those wallets with an equivalent number of stolen tokens, the investigation has just begun. The price of the PYR token has crashed significantly since the announcement of the hack.

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