For a long time, the crypto market has had a saying of “a cycle of four years”. There are different opinions behind this theory. Some believe that it is due to the law of Bitcoin’s 4-year halving, and some believe that it is the U.S. election every 4 years. Whatever the reason, crypto market participants in 2021 will admit that this theory has been tested again – as in 2013 and 2017, the boom has once again swept the entire crypto market, despite the operations behind them. The logic is not exactly the same.
But the question is: if the boom in 2021 is a repeat of 2013 and 2017, will the next 2022 be a replica of 2014 and 2018?How will the participants respond?
2018 Market Review
This is clearly a series of issues that will raise alarm. After all, the crypto market in 2018 is hardly a positive memory.Although at the beginning of 2018, the industry had basically reached a consensus on the start of a new cycle, when the downturn began, the performance of the crypto market still far exceeded many people’s expectations, and this kind of accident did not occur at that time. Not only because of the magnitude of the token retracement.
To explain this requires a comprehensive dissection of the crypto market at the time. In the traditional financial market represented by securities, the factors affecting the market are usually classified into three categories: one is fundamentals.It depends on the internal development of the project, as well as external macro policies and industry situation, and has a greater impact on the long-term trend of the target price; the second is the capital aspect, which depends on the capital direction of the investment institution, and has a certain medium-term trend of the target price. The third is market sentiment, which is mostly determined by the investment behavior of small institutions and individuals, and its characteristics are random to a certain extent, which mainly affects the short-term trend of the target.
In 2018, when the crypto market entered a downward cycle, especially when many projects that were funded at the top of the market entered the start-up stage, the factors affecting the three levels of the crypto market were roughly as follows:
First of all, in terms of fundamentals, the biggest fundamental support of the crypto market at that time was the concept of “blockchain” itself. In google trend, the peak of “blockchain” appeared in early 2018, even in the subsequent encryption cycle. It has not surpassed this trend (Figure 1). Due to information asymmetry and other factors, the market has placed quite high expectations on the blockchain, and a series of blockchain-based industry solutions have been derived. However, due to a series of reasons, Most projects ultimately fail to land.
Figure 1 The Google trend of “Blockchain” peaked in January 2018, after which a large number of industry solutions have been envisaged
Secondly, in terms of funds, due to the low threshold of tokenfund in 2018, the overall professionalism is not satisfactory, far less than that of current investment institutions. The absence of supervision has resulted in intensive market speculation. More importantly, since the main settlement units of the primary market in 2018 are ETH and BTC, in order to quickly participate in the primary market, the Token fund’s capital reserves also exist in the form of ETH and BTC, and the project party’s financing assets are also For BTC and ETH, and the scale is no less than that of investment institutions. As a result, in order to maintain the normal operation of projects and institutions when the market goes down across the board, it needs to continue to sell mainstream crypto assets in the market, causing the crypto market, which was already in a downtrend, to be hit again. This trend ran through almost the entire short cycle from 2018 to 2020. As shown in Figure 2, from 2019 to 2020, Bitcoin’s Fund flow indicator was always at a high level due to the normal operation of institutions (Fund flow is a transaction The comparison between the transfer volume of the wallet and the total transfer volume on the chain, since the large-value transfer in and out of the exchange is often completed by the institution, it can be used to measure the activity of the institution to transfer and trade encrypted assets), until the market improves gradually. decline.
Chart 2 Bitcoin Fund flow changes in recent years
Data source: CryptoQuant
Finally, in terms of market sentiment, factors such as the lack of fundamentals, institutional speculation, and trading rules that do not close the market have magnified the anxiety of individual investors, thereby further increasing the uncertainty of the market.
In general, among the major factors affecting the crypto market in 2018, the performance of fundamentals and capital was significantly lower than expected. Considering that there were many elites in traditional industries participating in the market at that time, this result was even more surprising. people are surprised. This, in turn, magnified the market sentiment, and the superposition of the three together contributed to the hard landing of the crypto market in 2018.Although the retracement of the market value of the entire market at that time (about 66%) was lower than that in 2014 (about 75%), considering that the society had extremely high expectations for blockchain technology at that time, and the investment cost performance of related projects was far lower than expected, so The pessimism in the market is actually no less than the previous cycle in 2014.
The withdrawal of the market value of the encrypted market has greatly reduced the valuation of assets in the hands of investors, so finding safe-haven assets has become one of the most important issues in the industry at that time. Tracks with anti-periodic properties include but are not limited to the following directions:
The first is the mining industry, which played a certain risk-avoiding role in the crypto downturn in 2014. Even its upstream mining machine sales increased during the market’s cold winter (Figure 3). Coin/Mining” concept. The second is the exchange. Since the trading platform is in the upstream of the token industry chain, the concentration is high, and it has a certain right to speak in the industry, so it is considered to be expected to avoid the risks of the operation of the blockchain project; the third is the industrial blockchain ( alliance chain). Since there is no token, it is less affected by the crypto market conditions.
From the perspective of hindsight, the operation logic of these three “risk-off methods” is not strict: although mining and exchanges are in the upstream of tokens, under the effect of the linkage of the industrial chain, when they face the impact in the downstream It is difficult to be alone, and industrial blockchain companies mostly target the replacement of existing traditional public trust institutions, so it is more difficult to implement. The facts of 2019 and 2020 also proved this: mining farms soon faced downtime due to cost inversion and policy shocks, and the entire industry chain was hit hard (Figure 3). , As for the industrial blockchain, since a reasonable business model has never been found, there will be nothing more in the end. All in all, the “anti-cyclicality” of these three tracks can be said to have fallen short of expectations.
Figure 3 The scale of the domestic blockchain hardware market, which increased rather than decreased in the cold winter of 2014, but its data in 2019 dropped significantly
Data source: The data before 2018 comes from Bitmain’s prospectus, and the data after 2018 comes from Canaan’s data estimates
In fact, during the post-2018 market winter, the operation logic of the track that really played the role of “risk aversion” does not seem complicated now, and it mainly follows the “Merrill Lynch” theory in the financial market. This theory divides the economic development cycle into four stages of “recession, recovery, overheating, and stagflation”, and the crypto bear market in 2018-2020 can correspond to the “recession” stage of the Merrill Lynch clock. According to the “Merrill Lynch Clock” explanation, compared with other stages, the market’s risk appetite in the “recession period” is weakened, and the intention to invest in commodities and non-dividend securities is reduced, while assets with fixed returns are favored. Specifically, In other words, bonds>cash>commodities; while stocks (with dividends)>commodities.
Judging from the subsequent development, the projects that benefited from the down cycle in 2018, to a certain extent, are in line with the characteristics of the “ideal asset” during the economic recession in the Merrill Lynch clock, such as decentralized lending (bonds), stable currency (currency), contract exchange platform token (dividend securities). The most intuitive manifestation of this point of view and one of the most powerful proofs is that since mid-2021, the above-mentioned types of projects have made great progress in terms of the number of users, ecological construction, and market value management, and even changed. The encrypted market structure that has been solidified for many years – some projects that have been ranked high in market value for a long time in the past, but lacked internal logic and ecological support, such as XRP, LTC, NEM, etc., began to give way to platform tokens, stable coins, new For more commercial closed-loop projects such as the DEFI public chain, such intensive substitution has never occurred in the previous encryption market.
Figure 4 Schematic diagram of Merrill Lynch clock
Market characteristics in 2022
As a developing industry, the past experience of the crypto market cannot simply be translated to the present as a reference. However, considering that the reference value of the traditional financial market relative to the crypto industry does have limitations, the development history of the last cycle is still one of the few references for the current market—especially considering This is the first time that the encryption industry has jumped out of a single payment field and tried to develop applications in other fields.
To analyze possible responses in a possible down cycle, it is still necessary to first analyze the current market characteristics.
First, at the fundamental level. Every time the bull market appears, the fundamentals of the crypto market will be overestimated by the outside world, but from the data point of view, compared with the previous cycle, the degree of overestimation of the market fundamentals this time is not high. As can be seen from the figure below, when the prospect of DAPP was the most uncertain in 2018, the market value of projects other than Bitcoin reached the highest in history, about 66% (this does not include a large amount of equity funds invested in alliance chain enterprises) , and when various applications are launched in 2021, the proportion of non-Bitcoin targets cannot exceed 60%, and public opinion is more conservative about the practicality of on-chain applications, which shows that the fundamentals of this round of market are overestimated. The extent is not exaggerated compared to before.
Chart 5 Changes in the market value ratio of Bitcoin and mainstream Tokens
Data source: Coinmarketcap
Second, the financial level. Although the supervision of investment institutions is still absent, compared with the various tokenfunds that were temporarily formed in the previous round, institutions in the current crypto market have undergone one or even two rounds of baptism, and have accumulated more in terms of project selection. With more experience (see the table below), professional ability has been greatly improved, investment style has been recognized, and the probability of short-term speculation is less. In addition, the main asset settlement units of the current primary market and mainstream institutional assets are more USDT or fiat cash, rather than ETH and BTC in previous years, which have stronger anti-risk capabilities. The impact is unlikely.
Chart 6 2018 and 2022 Major Institutions’ Encryption Industry Investment Experience
Finally, there is the market sentiment level. Due to the dispersion of market participants, the concealment of emotions, and the difficulty of quantitatively measuring emotions, it is still difficult to find a clear data indicator to judge the current stability of market sentiment compared to 2018. degree of transformation. From the perspective of qualitative analysis, after the relevant policies of major economies for encrypted assets are gradually introduced or even implemented, the weight of major unexpected factors on the market is decreasing. From the frequency of public reports, meme sentiment affects encryption. The threshold of the market has also increased (the words and deeds of a certain community KOL a few years ago may have an impact on the market, and this round requires a cross-border technology giant like Musk), more importantly, in the new round In the market, mainstream institutions represented by traditional financial institutions hold about 10% of the circulating Bitcoin, which plays a role in stabilizing the market to a certain extent. incomparable. In short, it can be considered with some reservations that the market’s sensitivity threshold for news is increasing, and the influence of irrational decisions on the market is decreasing.
Looking ahead to a down cycle
From the above comparison, it is not difficult to find that the crypto market today is very different from 4 years ago.However, it may be too early to say that it has achieved a qualitative change. Although the operation of the market is becoming more and more logical, its maturity is still not high, and challenges from fundamental bubbles and institutional speculation still exist. In the upcoming downturn, how to find anti-cyclical and even counter-cyclical assets is still a difficult problem to think about. Combining the relevant experience in the last cycle, the current layout actions of major institutional players, the investor habits of the traditional financial market, and possible policy expectations, it is expected that the market in 2022 and even the next one or two years may show the following: A few features:
Mainstream institutions continue to deploy and market high-quality projects, and they are cautious in the face of new tracks
Compared with 2018, one of the most important features of the crypto market in 2022 is the enhanced ability of projects and institutions to resist risks. Specifically at the investment level, it is reflected in the improvement of the viability and sustainability of projects in the primary market. From the data point of view, although the market downturn is expected to be quite high, the number of early-stage projects invested by well-known institutions in the market every month has not significantly decreased (see Below), it can be seen that the confidence of relevant institutions in the primary market is still there.
Chart 7 Frequency of investment in early-stage projects (including seed, private placement, A round, etc.) by mainstream institutions in the past 5 months (unit: units)
Data source: Combining public information
Note: The “mainstream institutions” referred to in the chart are mainly institutions that have a high frequency of deployment in the past two years and have achieved a certain rate of return, including Sequoia, a16z, Sanjian, Binance, DCG, Paradigm, Multicoin, NGC, Polychain , Alameda, Coinbase, Blockchain, HASHED, Animoca, etc.
In terms of specific directions, all kinds of application layers, including NFT, DAO, and Metaverse, have become new investment hotspots in the primary market, in line with the popularity of public opinion on related topics. The data shows that in the investment and financing records of the past 4 months, projects with the theme of “Metaverse & NFT & Chain Games” accounted for 21% of the A round of financing, but accounted for about 47% of the seed round financing. It can be seen that more and more Many new projects are starting to take root on this track.
But it is worth noting that mainstream institutions including a16z, Three arrows, Paradigm and other mainstream institutions are relatively cautious about their participation in these new fields of application layer. Among the early projects they have invested in from the fourth quarter of 2021 to the present, the theme of “Metaverse & NFT & Chain Games” It accounts for 35%, which seems to be in line with the market average of 37%. However, if the institutions such as Animoca, which are relatively strong in NFT investment and have a relatively special situation, are excluded, this proportion will drop to 23% (see the figure below). It can be seen from this Well-known institutions have relatively low expectations for concepts such as “Metaverse & NFT & Chain Games” currently propping up the crypto market, and are more inclined to invest in infrastructure, exchanges, DEFI, etc.
Figure 8 The proportion of projects with the theme of “Metaverse & NFT & Chain Games” in different institutional portfolios
Data source: Combining public information
The direction of hedging or differentiation: Large institutions will increase later-stage investment in high-quality projects, and individuals and small and medium-sized institutions will still tend to be bonds and cash assets.
The relative cautiousness of mainstream institutions towards nascent concepts reflects the decline in their risk appetite during the market downturn. Although the quality and anti-risk capabilities of today’s projects have exceeded the previous cycle, the downturn in the market will inevitably bring operational risks. Observing the capital flow of mainstream institutions, it can be found that from the fourth quarter of 2021 to the present, these institutions are more inclined to invest more in existing projects than the new project market: data shows that among the disclosed rounds of investment and financing, Nearly 80% of the transactions of mainstream institutions are invested in early projects before the A round, but the proportion of their investment in the projects after the B round has reached as much as 2/3 (see the figure below).Among them, lower-level technologies and applications such as cross-chain, privacy, expansion, Defi, and exchanges are the main ones.
Figure 9 The number and amount of investment in new and old projects by mainstream institutions recently
Data source: Combining public information
For individual investors and even some small and medium-sized institutions, according to the experience of the traditional financial market, in the absence of investment entrances for high-quality projects (security targets) in the primary market, the on-chain mortgage business (bonds) and stablecoins (cash) are still would be an important hedging target. In addition, according to incomplete statistics, since the fourth quarter of last year, the number of on-chain lending and stablecoin projects that well-known institutions have participated in has reached more than 10, indicating that in the future, under the market reshuffle, there are still projects due to incremental projects. Possibility of changing the pattern due to participation.
There is still the possibility of large fluctuations in market sentiment: policy is still the biggest potential risk, and the regulation of DEFI and stablecoins may become a risk-averse uncertainty.
As the gap between the expected and actual crypto market fundamentals narrows, the project side’s ability to resist risks is enhanced, and the institutional quality on the funding side is gradually improving, and the emotional disturbance to the market will also be less than 18 years. However, considering that the crypto market is still in the In the early stage of development, the possibility of irrational fluctuations caused by major emergencies still exists.
For now, the biggest factor affecting market sentiment is still from the policy side. Although the attitude of major countries towards Bitcoin and derivative encrypted assets has gradually become clear, with the implementation of on-chain products, future regulatory measures will be more targeted, that is, regulation will be more inclined to a certain track or even a certain project , not the crypto asset itself.
Due to the impact of the rapid development of DEFI on existing centralized financial institutions, and the rapid increase in the amount of funds stolen from DEFI funds in the past two years (see the figure below), the supervision direction of the policy has gradually shifted towards DEFI and stability in the past two years. The trend of extending the direction of applications such as currency, although theoretically, the regulatory policy for a specific track brings more structural rather than systemic risks, but if the market is at a trough period, DEFI and stable currency fields gather. If there are more safe-haven funds, then the regulatory policies in these areas are likely to bring about more than expected market sentiment reactions. Therefore, in the foreseeable period, large fluctuations will still be one of the important characteristics of the crypto market.
Figure 10 The growth rate of DEFI stolen funds will reach 1,610% in 2021, attracting the attention of law enforcement agencies (unit: US$ 100 million)
Data source: ZDnet, cryptonews
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/2018-and-2022-market-comparison-and-future-market-outlook/
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