Investment Themes for 2022
5 Investment themes we will be tracking for the rest of 2022
Introduction
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We wanted to take a quick break from deep dives and analyses on various DeFi protocols to give our general investment themes for 2022. Yes, we know we’re already a couple weeks into 2022. Oh well, better late than never! These themes we’ll be focusing on will be broad and encompass the entire crypto market. We’re not focusing on outcomes for specific cryptoassets, other than Bitcoin, but rather on sectors within the cryptoeconomy. We have five main themes that we will be tracking for this year. Alright, that’s enough blabbering. Let’s get right into it!
Bitcoin Continues Going Global
Let’s start with arguably the most important theme in our opinion. Bitcoin, as of late, has been quiet. All the predictions of “100K EOY” and “Super Cycle” did not come to fruition. Instead, Bitcoin slumped throughout Q4 2021 and is currently trading in the low 40,000s. Bitcoin’s weakness has brought down the rest of the crypto market with it, bringing in the new year with snoozes rather than fireworks.
We do not think 2022 will replicate the end of last year. The path going forward for the crypto market is global adoption. If the bull run is to continue, it is a necessity that Bitcoin continues its global adoption. As of late, there has been talks of “decoupling”- cryptoassets not being correlated with the price of Bitcoin. Although this may be true in a bull run, we can assure you that if Bitcoin was to tank and go full on bear, 99% of cryptos will follow Bitcoin to the depths of the bear market.
However gloomy this section sounds so far; we are actually expecting a strong year for Bitcoin’s global adoption. Starting with every Bitcoiner’s favorite country, El Salvador, their experiment with Bitcoin seems to still be going strong. El Salvador’s $1 Billion Volcano Bonds seems set for launch by February of this year. Additionally, President Nayib Bukele believes the bonds will be oversubscribed (Take that with a grain of salt, obviously).
We’re going to be keeping a close eye on these Volcano Bonds. While it isn’t the end-all-be-all, an oversubscription would definitely be a bullish signal for Bitcoin. Why? Because it would mean that investors who cannot purchase Bitcoin outright do indeed have interest in the asset class. There are plenty of institutional investors who simply are not allowed to invest in Bitcoin and other cryptoassets. An oversubscription of the Volcano Bonds could be a signal of pent-up demand.
Other than El Salvador, Bitcoin does have some other catalysts going for it. One that caught our eye recently was a Fidelity Report on Digital Assets. In the report, they talk about Bitcoin adoption. Here is the relevant part for the purposes of this post:
“We also think there is very high stakes game theory at play here, whereby if bitcoin adoption increases, the countries that secure some bitcoin today will be better off competitively than their peers. Therefore, even if other countries do not believe in the investment thesis or adoption of bitcoin, they will be forced to acquire some as a form of insurance. In other words, a small cost can be paid today as a hedge compared to a potentially much larger cost years in the future. We therefore wouldn't be surprised to see other sovereign nation states acquire bitcoin in 2022 and perhaps even see a central bank make an acquisition.”
For those of you who have been following us for a while, you may remember that we talked about this exact game theory back in September of last year.
Source: Friday Newsletter #1: Chaos on Bitcoin Day!
Our views on this have not changed. The game theory behind Bitcoin adoption is still intact. Countries will continue to adopt Bitcoin. Our guess? Most likely other Central or Southern American countries, especially if inflation is rampant.
Additionally, this may be happening sooner than expected. Rio De Janeiro, a city of ~7 million in Brazil, just announced that they will be investing 1% of their treasuries into cryptocurrency. If that wasn’t enough, they will also be offering a 10% discount on taxes paid in Bitcoin. Although it’s not a country, it’s a steppingstone for the country of Brazil to adopt Bitcoin as a currency.
P.S. There is a bill being discussed to make Bitcoin a currency in Brazil.
In all honesty, we think Bitcoin going global is the most important trend for 2022 and beyond for crypto. If more countries begin to adopt, a central bank or two makes Bitcoin a portion of their reserves, and institutional investors continue to take the “Orange Pill,” 2022 should be a bullish year for Bitcoin and the crypto markets. We won’t be making any bold price predictions on Bitcoin, but we do tend to agree with Nayib that Bitcoin will reach $100K in 2022. Ultimately though, it does not matter if Bitcoin reaches that number in 2022. At this point, $100K is a question of when, not if.
The Layer 1 Rotation Continues
Perhaps the most anticipated event in the world of crypto for 2022 is “The Merge.” Haven’t heard of it? Don’t worry, it’s fairly simple. In the most basic sense, “The Merge” is just when Ethereum switches from Proof-of-Work (PoW) to Proof-of-Stake (PoS). We won’t get into the technical details of how this will happen, but just know that it’s shipping in ~Q2 of 2022. However, big Ethereum updates have been known to take longer than expected, so the possibility of a delay is there. Note: We’re not saying it will be delayed, just that there is a chance. Nevertheless, we expect the Layer 1 Rotation to continue.
For those of you who are unsure what the Layer 1 Rotation is, it is a popularized trade in crypto markets that has been categorized by taking long positions in “alternative” smart contracts platforms other than Ethereum. This trade has spawned phrases such as SoLunaAvax (Solana, Terra, Avalanche) and FOAN (Fantom, Harmony One, Cosmos, Near). Basically, Layer 1 smart contract platforms proved to be one of the most profitable trades of 2021 and outperformed the market.
Some have speculated that Ethereum’s switch to PoS in conjunction with the rise of Layer 2 scaling solutions will bring an end to the rise of the alternative layer 1’s. On the surface, this may not be a ridiculous idea given the graveyard of past “ETH-Killers” who failed to usurp any meaningful market share away from Ethereum. Looking at you EOS and NEO…
Dive a little deeper, however, and you may realize that may not be the case for this cycle. There are two main reasons for this. The first, and probably most important for 2022, is that the merge will not reduce gas fees- at least not in any significant capacity. Sometime over the summer, once the merge is complete, you’ll probably see some Twitter thread asserting something along the lines of how “Ethereum failed since the switch to PoS did not reduce gas fees.” That take will be missing one crucial piece of information, however. The Merge was never intended to lower gas fees. All the merge does is change the consensus layer of Ethereum from PoW to PoS. Gas fees will now accumulate to validators, not miners. The update that will lower fees and increase TPS on Ethereum is “Sharding,” and that won’t be shipped until 2023 at the earliest. Gas fees will remain high on Ethereum for 2022, and thus the main reason to remain bullish on these alternative Layer 1 platforms (significantly lower fees) remains intact.
The second and more consequential long-term reason is the fact that we’re headed towards a multi-chain world. Time for a thought experiment:
Imagine a world that has fully adopted the blockchain. Every company, bank, country, person, etc. interacts with the blockchain on a daily basis. The question we must ask ourselves is “What is the probability all this activity will occur on one single chain?” Our guess? Low. The reasoning behind this is simple. It is impossible for any blockchain to scale infinitely, so therefore, differing groups will be competing for valuable blockchain space. What may be favorable to one company may be the absolute worse outcome for a differing company. Somebody may extremely value decentralization whereas someone else really values transaction speed. Rather than compete for influence and power over one singular blockchain, it makes sense for groups to utilize different blockchains that accommodate their differing needs and values.
Based on this logic, the Layer 1 trade is one that should exist for the long term. No, we don’t mean that Layer 1’s will continue to outperform the market indefinitely. We just mean that alternative Layer 1’s are here to stay. We can’t say for certain which ones, but the market will eventually sort itself out. In case you’re skeptical of anything we said, even Vitalik Buterin himself shares a similar viewpoint.
Stablecoins Become the Center of DeFi
Lately, a lot of our research and attention has been focused on various stablecoins and associated protocols such as Terra, Convex, Curve, etc. There’s a reason for that. We firmly believe that stablecoins are becoming the centerpiece of DeFi. In 2022, we expect stablecoins to attract the most volume, the most users, and the most yield (Cumulative, not by %), of any DeFi segment in 2022.
This transition already started the beginning of last year. Curve Finance and Convex Finance became the #1 and #2 dApps by Total Value Locked, eclipsing MakerDao and AAVE. New stablecoins such as MIM, FRAX, and UST ballooned in both usage and supply. The Curve Wars became the dominant narrative over the final months of 2021. But what if 2021 was only the beginning?
Stablecoins seem like the perfect crypto asset to attain widespread capital from investors looking for exposure to crypto. Firstly, it’s a representation of a real-world asset. In the case of centralized stablecoins such as USDC, it’s even backed by actual US dollars. Even for decentralized algostables such as UST and FRAX, they’re simply just representations of the US dollar. If you’re an investor who doesn’t have much knowledge about crypto, stablecoins are an easy concept to grasp.
The question we now must ask is why would investors choose stablecoins? For that, the answer is pretty straightforward: Yields. To better appreciate the opportunity that stablecoins provide, we must take a look at the wider macroenvironment. Let’s start with the global bond market. As of 2020, the global bond market was valued at $123.5 trillion, according to sifma. For comparison, the market cap of crypto as of writing is $2 trillion. That means the global bond market is ~62x bigger than the crypto market. Take a look at this image:
What are we looking at here? That chart represents the value of negative yielding debt. For those of you who don’t know what that is, negative yielding debt are bonds that investors are guaranteed to lose money on. Pay money upfront today for the bond and receive less than what you invested in payoffs. Surely, not much money is invested in assets that will guarantee you to lose money…right? You would be wrong. As of 2021, negative yielding debt has a market value of ~$15 trillion, according to the Financial Times. For comparison, the total market cap of stablecoins is ~$174 billion. Negative yielding debt has a value that is ~86x bigger than the value of stablecoins. Seeing where this going?
Perhaps the biggest macrotrend of the year is inflation. By this point, we’re sure you’re sick of hearing about it. Don’t worry, we’ll make this quick. Inflation is currently at 7%. The average savings rate for a United States savings account is 0.06%. As you can tell, that’s a big issue. Money cannot be stored in a savings account without losing a significant amount of purchasing power. As of 2020, ~$2.3 trillion were in personal savings accounts in the US. That’s ~13x bigger than the market cap of stablecoins.
The point of all that boring data on bonds, inflation, and savings was to demonstrate that there is a tremendous need for an investment vehicle that can offer yields on the US dollar that can beat inflation. Trillions of dollars are currently yielding negative rates, both nominal and real. Could stablecoins and DeFi fulfill that need? Maybe! It’s possible to get ~20% yield on your stablecoins without any leverage. With leverage, there are whole different sorts of different yields possible. 2022 should see substantial stablecoin growth, and DeFi should flourish with this growth. Stablecoins will become the center of DeFi in 2022.
Privacy Coins Get a Bump
2021 was a *how do we put it* dull year for privacy coins. For those who are unfamiliar what privacy coins are, we’ll give a brief primer. One of the key features of blockchains like Bitcoin and Ethereum is that they are public and transparent. Anyone can track an address’s transactions, how much of the asset they own, and so on and so on. Privacy coins exist on blockchains that are not transparent. You cannot track an individual’s transactions and balance. Some of the most popular privacy coins are Monero (XMR), Zcash (ZEC), and Secret (SCRT).
Privacy coins in 2021 didn’t really do much in terms of price action. They didn’t too bad, but they didn’t do good either. While other segments such as Layer 1’s, NFTs, DeFi 2.0, etc. caught fire at some points during the year, privacy coins were never a popular trade. Basically, the privacy coin segment just followed the broader crypto market. However, we expect that privacy coins should see some outperformance relative to the rest of the market in 2022.
We’re already seeing this in action. Coincidentally, whilst working on this post, important news broke related to the Secret Network. The network received a $400 investment to help bolster the ecosystem and accelerate development.
We think that this investment could be indicative of further demand for privacy coins. Additionally, if a bullish privacy coin thesis is to play out, we would bet that SCRT leads the pack. Why? Because it’s also a smart contract platform. NFTs and DeFi are possible on Secret whereas older privacy chains such as Monero and Zcash do not have this operability.
While privacy coins do make illicit activities more accessible (Think things like money laundering), we don’t think that this negates a bullish view on privacy coins. Cash enables plenty of illicit activities, yet it is still used every day by people everywhere. We make this comparison because we tend to think of privacy coins as the cash of the crypto world. Let’s face it: there is not a need for every transaction to be public. If someone wants to send $25 to their friend for giving them a ride or something, that transaction doesn’t need to be broadcasted to the entire crypto world.
The Big Question: Are we Bulls or Bears?
We wanted to take this last section to focus on the crypto market as a whole. We weren’t going to include a section like this originally, but we felt it was apt for two reasons. One, it’s a nice way to tie up our theses into one metathesis. More importantly, however, we’ve noticed a lot of bearish sentiment on Twitter and in real-life for crypto. And let’s be honest, the price action has been depressing as of late. It seems like every day you check prices; Bitcoin is lower than the previous day. Maybe this is just pure hopium, but we think this shitty price action will eventually come to an end. Yes, we are bullish on crypto for 2022.
When will the green days come? Who knows… That’s not our strongpoint. We don’t try to day trade or anything of that sort. We just believe that crypto will eventually resume its bull run. That doesn’t mean to go lever up and long some Bitcoin and Ethereum… Seriously, do not do that. Rather, use these low prices to buy more of investments you have extremely high conviction in. There is simply just too much innovation and development going on in the crypto space to not be a bull in our opinions. Every day, it seems like some company announces plans to enter the metaverse or Web 3.0 in some capacity.
If you’ve made it to this part of the web, you know what we are talking about. Crypto is the future, it’s not going anywhere. We’re not going to give any outlandish price predictions, we just think price will be higher on December 31st, 2022, than January 1st, 2022. Just remember, you are early! Although that saying has almost become a meme at this point, it still rings true. Try to imagine where crypto will be in 3 years, 5 years, 10 years, 50 years from now… Those who bought Amazon and Alphabet in the early 2000s probably didn’t feel like they were early either. Take a deep breath, try to stay calm, and don’t panic sell your bags.
Conclusion
Well, there you have it: Our five investment theses for 2022! We hope you enjoyed this post. If you did, please give it a share and subscribe! Your support really means a whole lot to us! Disagree with anything we said? We’d love to hear why! Please feel free to either tweet at us or leave a comment. We’re always willing to discuss the topics we go over in our post.
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Disclaimer: None of this should be deemed financial advice. It is purely for entertainment purposes only.