"The code committed no crime" - 2023 Cryptos Outlook

Mike McGlone, Senior Macro Strategist at Bloomberg Intelligence, shared on LinkedIn, about 2023 Cryptos' outlook, along with contributing analysts, BI Senior Market Structure Analyst Jamie Douglas Coutts, Eric Balchunas (Strategy), and James Seyffart(Strategy).

Performance: Bloomberg Galaxy Cypto Index(BGCI)

Nov.-18%，2022 to Dec.2:-67%

Bloomberg Galaxy DeFi Index(DeFi)

Nov.-20%，2022 to Dec.2:-73%

Bitcoin Nov-16%2022 to Dec2:-63%

Ethereum Nov. -17%, 2022 to Dec 2:-65%

(Bloomberg Intelligence)-. "The code committed no crime may be how history looks back upon cryptos in 2022. That the fastest horse on the way up has been leading loser amid the most significant global macroeconomic reset in a lifetime may be little surprise. It's the potential for a foundation akin to the internet-stock bear market of 2000-02 that we see for Bitcoin. Ethereum and the proliferation of crypto dollars. Part of the internet evolution, what cryptos are doing to traditional finance (TradFi), may be similar to futures and ETFs.

A nascent technology/asset at a steep discount is how we view the market as measured by the Bloomberg Galaxy Crvoto Index at the start of December. A year from now, it's likely the Fed will have transitioned toward easing, and cryptos appear ready to resume their propensity to outperform most traditional assets.

Rounding Error Maturation

Cryptos Still a Rounding Error- Dying or Gaining

Significance? The end of a fad or overcoming growing pains appear to be the crypto binary options for 2023.Our bias is the latter, notably due to the unfavorable risk vs. reward of not partially allocating to the revolutionary technology/asset class. A minor part of the global asset mix, cryptos are ripe to resume proliferating.

Dead or Growing Pains? Bitcoin vs. Crude Oil

If cryptos are dying, the listed futures market didn't get the memo. Our graphic shows two distinct trends that may portend where markets are heading--rising CME-traded Bitcoin futures' open interest vs. declining interest for crude oil. In the mainstream of listed, regulated futures for only about five years, cryptos may be considered in the infant stage vs. WTI crude since 1982. The juxtaposition shown in the graphic might portend the advancing technology of cryptos migrating into the mainstream vs. the energy transition.

Maturation- Rising Bitcoin Futures Open Interest

Technology is bearish for both sides of the crude

demand/supply balance -- creating more for less and reducing consumption. Bitcoin,on the other hand is becoming digital gold in a world heading that way and

Ethereum may be akin to the advent of futures and ETFs to traditional finance.

Bitcoin Has Never Been This Cold. For as long as a Bitcoin 100-week moving average could be calculated, the crypto has never been at a deeper discount than at the end of November. The collapse of FTX and other crypto firms is a good reason, but it's from similar ashes that bull markets typically emerge. Our graphic shows a key difference from previous Bitcoin bottoms in 2015 and 2018 -- the price has never dropped more than 58% below this mean reached in November. What appears to be enduring is the elongated upward price trajectory, despite the current relative discount.

Just Another Dip in an Elongated Uptrend?

The price may visit the next good support area around

$10,000-$12,000, and it could be a matter of time that the nascent fundamental value of the world's most significant decentralized digital asset prevails.

Is the Fastest Horse in the Race Dead? It's been one of the most severe drawdowns in crypto history, yet the Bloomberg Galaxy Crypto Index (BGCI) is still up about 200% since the end of 2019 vs. 20-60% for gold, the S&P 500, the Bloomberg Commodity Spot Index and US money supply to Dec.2. The question is how much worse things can get for the space, overdue to cleanse speculative excesses. Our bias is risk vs. reward, with the BGCI tilted toward resuming its propensity to outperform.

Ups and Downs of a Nascent Asset/Technology

About 70% of the BGCl is Bitcoin and Ethereum, which are notable for definable diminishing supply vs. increasing adoption and demand. Something has to reverse the demand side of that equation, or by the rules ofeconomics the price should rise over time. A significant dip within an elongated trend is how we expect history to view 2022 in cryptos.

How Might Cryptos and the Tide Change in 2023? That the drop in the value of the entire crypto market in 2022 to Dec.2-- about $1.3 trillion-- is roughly equivalent to the market-cap fall of two stocks, Amazon and Google, is indicative of cryptos' nascent stage. The most aggressive Fed tightening in 40 years is a good reason for the macroeconomic ebbing tide, but 2023 may be about which assets come out ahead as central banks pivot. lf they don't flip to easing, the world may tilt more deeply into recession, with repercussions for all risk assets. Our base case is for an elongated deflationary period, with the crypto market, as measured by the Bloomberg Galaxy Crypto Index, coming out ahead.

When Fed Pivots in 2023,What of Bitcoin?

The graphic shows the propensity for Bitcoin to bottom

relative to its 100-week moving average shortly after the one year fed funds future (FF13) shows a pivot to easing.

Bitcoin, Ethereum, Crypto Dollars

Three Crypto Musketeers in 2023- Bitcoin, Ethereum Dollars. The macroeconomic bear market may pressure Bitcoin toward $10,000 and breach Ethereum's $1,000

support, but these levels represent extreme discounts. Oun bias is the top two cryptos are backing up within elongated bull markets that may be as inevitable for resumption as the Fed shifting to easing.

Bitcoin 2023 - $10,000 Support, $40,000 Resistance.

The certainty of diminishing Bitcoin supply by computer code vs. the upward trajectory in demand and adoption should result in a rising price over time, if the rules of economics apply. A primary risk is the adoption side ofthat equation, and we believe 2022 will be looked upon as another bump in the road for the proliferation of the most significant digital property right globally. Bitcoin may drop to what would be a substantial discount around $10,000, but within the elongated upward trajectory could revisit $40,000 resistance.

Bitcoin:Falling Supply,Risinig Adoption,Price

These are the wide levels we envision in 2023 for the world's most fluid 24/7 trading vehicle that's no one's project or liability. This unprecedented status gained accolades in 2022, but Bitcoin is likely to transition toward more of a risk off asset like US Treasury bonds and gold.

Cryptos in 2023 May Be About $1,000 Ethereum Support.

Moving past 2021's upgrade and this year's shift to proofof stake- known as the merge -- are milestones for Ethereum, with implications for its price performance. We see the No.2 crypto in an enduring bull scenario at a discount amid slumping global markets, and poised to keep outperforming Bitcoin and equities. Starting December at about the high from the last big bull run that peaked in 2018, $1,000 is a key Ethereum support/pivot. If this is breached, we believe it would likely bring out more stop-loss selling and represent part of the pain of a more elongated upward trajectory.

$1,000-$3,000 May Mark Key 2023 Ethereum Levels

Plenty can go wrong with new technology, but we see

maturation with an enduring downward slope in incremental supply that-- if the rules of economics apply -- are positive for the No. 2 crypto.

Ethereum and Crypto Dollars: What Stops Tokenization?

The fact that three of the top five assets listed on CoinGecko are crypto dollars when sorted by volume may be indicative ofthe value of Ethereum. Whether stable coins or dollar tokens(crypto dollars, as we prefer to call them), the bottom line is Ethereum's technology is making it possible to trade greenbacks 24/7 with near-instant settlement and at low cost. Our bias is that there's little in the long term to stop this advancing technology from doing similar to what the futures and exchange-traded-funds markets did. Non-fungible tokens and decentralized exchanges are additional advances made possible by Ethereum.

The Dollar Is Gaining Dominance in Cryptos

It's likely a matter of time and adjusting to the new

technology. Tokenization will probably involve regulatory hurdles, but so did futures and ETFs, and not adapting risks falling behind.

Calm Before Storm Shows Rough Seas Ahead. The fact that volatility is mean-reverting and may be in an early recovery stage vs. the stock market has implications for cryptos and most risk assets. October marked the lowest ever 30-day volatility of the Bloomberg Galaxy Crypto Index vs. the S&P 500, and our graphic shows that's changing fast Typically when this risk measure has bottomed from similar evels it marked a resumption of the crypto index beating equities.The sharp breakdown in crypto assets starting on Nov.8 seems to be more of a leading indicator that may be a catalyst to trigger sell-stops in most other risk assets, notably stocks and commodities.

Crypto Index Relative Risk Bottoming vs. Equities

Our bias is that the great risk-asset reversion of 2022 is unlikely to go out like a lamb, and cryptos are a leading indicator. A lower plateau appears necessary to curtail Fed tightening.

Identifying Bottoms as Market Structure Evolves

Jamie Douglas Coutts, the primary analyst for this report.

Bitcoin Trends Lower as Realized Losses Approach Max Bearishness. As contagion spreads across crypto financial intermediaries, pushing realized losses to levels consistent with capitulation lows, price -- which reflects pure supply demand and is the ultimate arbitrator of truth -- requires a trend change in multiple timeframes to confirm a cycle low.

Approaching Historic Capitulation Levels. Despite the non-stationary behavior of markets, prices have followed a pattern of starting and ending bear cycles on extremely-high selling volume visible in on- and off-chain metrics.

Bear cycles usually have two or more big spikes in realized losses (RL) that each totals more than 0.005% of market cap In previous cycles, the first spike signaled the end ofthe speculative bull phase (purple circles) as latecomers and leverage longs are wiped out (see 2013, 2018). Then, 12 to 18 months later, capitulation and a more significant RL spike occurs, coinciding with a bear-cycle low (2014, 2018, 2020). Interestingly, there was no distinct RL spike after the tops from May to November 2021. The spike came much later in June, which saw the second-highest RL. The current selloff matches the 2014 lows and exceeds the 2018 troughs.

Realized Losses as % of Market Cap at 5^th Highest

Futures Long Liquidations Rang the Bell in 2021. With the growing dominance of derivatives trading in terms of total volume, futures liquidation has become as important as RLin mapping bottom and top price structure.

Institutional preference was likely the reason why RL didn't spike in the aftermath of the April 2021 peak as they had in previous cycles. Glassnode data don't go back to 2019, when the offshore perpetual futures market started to take off. However, we can see that long futures liquidation jumped hitting a record $500 million in the aftermath of the April peak. Since then, open interest has sunk more than 60% to$5 billion. As the bear market extends, open interest should continue to dwindle. Therefore, RL, as in previous cycles, is better placed to indicate capitulation or cycle lows while futures best captures a speculative bull-market peak.

BTC Futures Ol, Liquidations & Realized Losses

Technicals Will Have Final Say in BTC Bottom. Despite realized losses approaching maximum bearishness and resilient fundamentals in the face ofan extended bear

market the best determinant of a bottom formation remains a trend change in the price chart.

After a short-lived bullish signal in our medium-term

indicator at the beginning of November, our trend indicators remain firmly bearish. With all timeframes declining, there is likely to be more downside in the short term. This analysis doesn't take into account the impact of the macro environment, which has improved in the past several weeks and will be the subject of future notes. Although we see sentiment at capitulation levels, this hasn't been confirmed by the price.

Bitcoin Trend Down as RL Hits Historic Levels

An ETF Fixes This

Blocking Spot Bitcoin ETF in US Likely Cost Investors Billions

Contributing Analysts Eric Balchunas(Strategy)&James Seyffart(Strategy)

SECChairman Gary Gensler's refusal to allow a spot Bitcoin ETF to come to market in the US likely cost investors billions ofdollars, we calculate. Without a secure ETF, many were left with riskier options to gain exposure to the cryptocurrency such as unregulated offshore exchanges like FTX or the discount-riddled Grayscale Bitcoin Trust.

FTX Impact Worsened by Lack of Spot ETF. The downfall of FTX highlights for us the advantage of having an approved spot Bitcoin ETF in the US. Such an ETF would have been regulated under the 1933 Act and held its Bitcoin in storage at a custodian such as Fidelity. Though an ETF wouldn't have sidestepped Bitcoin's price decline, withdrawals wouldn't have been halted. Despite the implosion of a major crypto exchange, the ETF's price would likely have continued to track Bitcoin's closely given the capacities of US market makers.

Bitcoin ETF Would Have Sidestepped FTX

Spot Bitcoin ETFs outside the US have maintained fairly tight premiums and discounts amid heightened volatility.

GBTC Divergence From Bitcoin Contrasts With ETF.

Approving a spot Bitcoin ETF also would have saved investors from using the Grayscale Bitcoin Trust(GBTC),a private trust that trades over the counter. Unlike an ETF

GBTC's shares can't be created or destroyed, so there's no ability to arbitrage the trust with Bitcoin's price. This causes the price to move independently from Bitcoin's, allowing for steep premiums and discounts. GBTC has swung from a100% premium to a 50% discount, potentially damaging investor returns. For example, GBTC shares bought five years ago have fallen 21%, even as Bitcoin has doubled.

GBTC Went From 100% Premium to 50% Discount

The SEC approved Bitcoin futures ETFs,but they use derivatives and can incur roll costs.

Overseas Spot Bitcoin ETFs Stayed Close to NAV

Athanasios Psarofagis(Strategy)

The performance of spot Bitcoin ETFs in other countries

indicates how one might have fared in the US. Following the news of FTX's bankruptcy, the worst Bitcoin ETP discount reached only 6% to NAV. The spread between maximum premiums and discounts increased slightly on the heels of more volatility yet remains small compared with structures such as the Grayscale Bitcoin Trust(GBTC) where the discount stands at 40%.

Daily Ranges of Spot Bitcoin ETFs

We believe a US ETF's gap to NAV would be even narrower than in Europe or Canada, given the US market is so much more liquid.

GBTC's Record Discount Fueled by Genesis Concerns,ETF Delay

Contributing Analysts James Seyffart(Strategy)

The widening of the Grayscale Bitcoin Trust's discount to a record 50% on Nov. 21, tied to concerns over sister company Genesis, allowed investors to buy Bitcoin for half the market price.The bankruptcy of crypto exchange FTX, though likely to further hinder near-term SEC approval of GBTC's conversion to an ETF, may spur regulation that promotes the switch.

Stalled ETF Conversion Leaves GBTC Further Behind.

GBTC already had a slim chance of converting to an ETF anytime soon, based on statements by the SEC and

Chairman Gary Gensler, but we believe the likelihood of quick approval has dwindled further due to FTX's collapse The prolonged inability to convert amid competition from cheaper futures-based Bitcoin ETFs and other alternatives worldwide continues to erode demand for GTBC. Its widening discount may be a sign of diminished expectations for the possibility of conversion. Yet FTX's failure could bring about regulations that satisfy the SEC's conditions for ETF approval.

GBTC Discount Heads Down Beyond 50% Intraday

GBTC launched in September 2013 as a grantor trust structured akin to gold ETFs such as GLD. It holds $10.5 billion in Bitcoin but trades at a market cap of $5.5 billion due to its discount. At its peak, the fund held $43.5 billion in assets.

GBTC Discount Does Have Some Benefits.

GBTC's discount offers investors Bitcoin exposure at below-market prices.When it traded at a premium, investors paid as much as twice the market price to gain access to the cryptocurrency through the fund. That benefited existing GBTC holders, who could sell at inflated prices.GBTC's discount sank to 50% intraday on Nov. 21 -- equivalent to buying Bitcoin for $7,900 while it traded around $15,800.The discount will disappear if the SEC allows Grayscale to convert GBTC to an ETF, but we don't expect that to happen until mid-2023 at the earliest, and likely later.

Hypothetical Gains Solely From Closing Discounts

The potential compression return would be larger than the discount: Eliminating a 43% discount would be analogous to asecurity appreciating to $100 from $57 -- a 75% return. This scenario excludes the risks and price movements of the underlying asset.

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