It has been an excellent year for the cryptocurrency market, as reflected in the SBLI performance this year. Our Smart Beta Liquidity Index (SBLI) Portfolio closed out the year +109.08% vs. BTC + 59.67% in 2021, while Ethereum (ETH) had a breakout year +399.14%. As expected, investors took profit in December, with SBLI -22.9% vs. BTC -19.3% for the month.
In December, SBLI allocated more weightings to Alts vs. BTC in December, given then the BTC market cap dominance % have been breaking down lower. We continue to see this becoming the trend for 2022, as adoption grows on applications outside of just Bitcoin.
Going into January, the overall market capitalization has dropped -13% YTD; prices of BTC -12.5%, ETH% -16.3%, and SBLI -14% YTD. The SBLI portfolio had it's most recent rebalance on January 9th. The portfolio continues to skew its allocation more towards Alts vs. BTC while having 15% cash (vs. 0% in December), just because the market is entering into a consolidation mode and there may be
As adoption continues to grow (DeFi, Blockchain Games, Metaverse, etc), investors are generally positive for the overall cryptocurrency market this year and most are waiting for a good entry to gradually dial up more of their investment exposure. Therefore, we believe any market pullback is healthy.
Our mission for SBLI is to become the best-in-class vehicle for professional investors to obtain investment exposure in the cryptocurrency markets, outside of just Bitcoin alone, with an added-on layer of hybrid-active investment management.
Specifically, our investment approach involves targeting specific drivers (quantitative factors) of return across the top cryptocurrencies by market cap; to help improve portfolio outcomes, reduce volatility and enhance diversification.
Lastly, the SBLI ensures that its constituents have custody available at Coinbase and Bitgo without any legal or business issues, as well as the oversight from the best of AGAM's management.
As scary as some of the technicals may look currently, we share on some thoughts in why at the desk we are still bullish in Crypto in 2022.
Since Nov 2021 (when BTC was closing in on 70k) markets finally sold off on momentum weakness. Markets stabilized at around 45-50k but then slid further into low 40k's as we are typing this.
The Total Marketcap now stands at 1.9T. The highest we went was around 3.0T. BTC dominance, from a high level view, has been on a downtrend since 2020.
While BTC still represents 40% of total marketcap, think about how much the dominance weakened since 2020. Now one can argue that there was a surge in dominance during the bear market back to 70%. Remember during last cycle the market was full of vaporware and scams. While the scams still persist today, the amount of real development in the crypto space further invalidates the comparison of previous downcycles.
With over 30 billion has poured into this market in 2021 alone, spanning across defi, art, gamefi/metaverse, infrastructure etc, it is hard to not be bullish when you see such large amount of talent and resources being deployed. What you may see is a decoupling from BTC market, which is already happening as we saw other infrastructure tokens such as ATOM and NEAR rising during the slump last night.
As many have chat with us in the past, many of you have heard of this but I'm going to reiterate again: Do you think an asset class that touches upon so many different industries, will stay at 1.9T ? Zoom out, look at the bigger picture. The time to buy is always when the majority of the market is fearful.
With that said, here are one of the thematic plays we like in 2022:
Fight for L2 dominance begins
We saw an influx of dapps, NFTs and more rushing into the smart contract space - ultimately facing the same issues - high network fees, centralized nodes and prolonged bridging waiting time. Infrastructure plays should still be hot as different chains will try to tackle all the aforementioned problems. Below are a list of ZK/Optimistic/Plasma rollup projects to look out for this year (some of it already have gone up since early January).
As you can see below, some of the protocol layer tokens are hugely undervalued, while possessing same (if not better) performances and security as the top chains by marketcap.
Total Marketcap trend
The total market cap went through a roller coaster in the month of December as it started out at 2.6T and swung in both directions between 1.9T to 2.5T before ending the month at 2.2T. From the chart below as soon as it broke back below the orange horizontal support at around 2.4T, the area flipped to resistance as the market retested and proceeded to reverse lower. Much of the reason in the dump can be attributed to mainly profit taking at the end of the year - granted many cryptocurrencies have risen multiple fold this year. The market started 2022 with a continuation dump as we stand at W1 50EMA/SMA support (1.95T). We appear to be an area of structural support as bulls are desperately trying to fend off a possible bear market here (more confluence from other indicators coming shortly). As we continue to look at the higher time frame (weekly chart), we're seeing a possible RSI divergence against the July 2021 low - however until we see a reversal candle we should continue to stay vigilant until the market improves.
The corn is following the same fate similar to the total market cap - but in a worse position as we are breaking through the W1 50EMA/SMA at the time of writing. Our call in a reversal in BTC around 45-46k became invalidated as the RSI divergence did not hold up the price pierced below the 45k support. We seem to be sitting near a structural support here (highlighted by the white box). We've lost the D3 setup as the corn traded below the ichimoku cloud - if we continue to dump here we're looking at D3 200EMA (37.7k) as next area of support here. However in the meantime given we have been on a slump since early December we are not surprised to see some reversals to retest D1 200EMA (46-48k) before assessing the next move.
BTC D3 Chart showing possible bullish divergence against RSI
As predicted from last month's commentary BTC dominance is once again saved by the key 40% support as the Alt market bled higher than BTC (with ETH leading the bloodshed). If we continue to see weakness in the total marketcap expect BTC Dominance to head back north to 42-44% area. Long term wise we remain confident that dominance may ultimately break 40% as other smart contract platforms take over the market.
Spot vs Derivatives
As BTC continues to trend lower we're seeing a surge in open interest building up. By the looks of the funding it does not look like the positions are over leveraged however the direction of CVD versus the rising amount of open interest suggests there are more traders trying to open short positions since BTC has broken below the 200 Day moving average. Whether we find a bottom soon or not, as explained in the technical analysis above, we know that as open interest increases expect more turbulence in the ensuing days/weeks.
Option Markets still pricing in fear for the short dated expiries - however, we are seeing a change in sentiment past end of February expiry - seeing much higher skew towards the upside all the way until end of 2022. Signs of hope for the crypto market?
30 Day implied vs Realized vols spreads remained quite wide (with the exception of January 3rd). We're seeing implied vols rising in the past few days - as hinted in our derivatives commentary with rising open interest something is cooking.
Looking at the upcoming listed expires we see that a lot of open interest is concentrated in the January month end contract, with more calls traded over puts.
Zooming into 28 January expiry, we see quite a lot of low delta calls at around strikes 70k have been traded. Max pain price currently sits at 50k - however, we have learned overtime that there are many instances spot price does not necessarily merge into max pain price upon expiry time (as depicted in the second chart below).
Fear and Greed
Fear and greed continues to hover at low levels - it would be foolish to use fear and greed to time market bottoms; however when we see prolonged fear (like what happened between May to July 2021), combined with all other technical and fundamental analysis it could be a powerful indicator. We are more than 1 month in the 'fear' category - the longer we stay in this area the bigger the bounce.