After seeing so many others write their 2022 predictions I decided to write my own. In the week it took to write this I’ve already seen some predictions come to light and go stale. Such is the way things go.
1. Macro runs the show
2. The need to be early
3. L2 Season
4. Value Wars (Curve, Convex, etc)
5. Alt-L1 outlook
Macro Runs the Show
I have a lot of thoughts on current crypto plays and trends but none of them matter if Bitcoin and Ethereum enter a bear market. A universe exists where there is so much VC money looking for an investment that altcoins can run despite Bitcoin entering a bear market but the probability of us currently residing in that universe is low.
I give reasonable odds, probably 35%, Bitcoin ends the year down. Bitcoin’s current overarching narrative is being a store of value hedge against reckless government monetary policy. This narrative drove Bitcoin’s price appreciation for the last 2 years but what was once a tailwind looks to have morphed into a headwind. Central banks have started talking tough on inflation with plans to curtail monetary stimulus. Fiscal stimulus has similarly been stalled. As such I think Bitcoin has a tumultuous year ahead with increased risk of significant price declines.
That said, I think there’s a 45% chance Bitcoin continues its bullrun. The Fed has yet to prove it can meaningfully taper and raise rates without crashing markets and being forced back into easing. I don’t want it, but The Fed is always one crisis away from printing. We’re one 20% drop in the S&P away from more easy Fed policy. We’re one bad COVID variant away from more fiscal stimulus. If it looks like the Democrats are gonna get run out of office in the midterms I wouldn’t be surprised if a new round of checks are sent out to the small folk in order to buy votes. Russia could invade Poland and then who knows what happens. Gasoline could go to $20/gallon forcing the government to hand gas stimmies or face a revolt.
Also, Bitcoin stalling here would be historically unprecedented for the asset. Prior bull runs have seen extraordinary multiples in price appreciation. A mere 3.5x from prior All Time High to new All Time High is incredibly ho-hum given prior bull runs and to me would indicate a major cause for concern.
I say all of this because crypto has repeatedly shown that there is no sustained bull market when Bitcoin enters a bear market. Entering 2022 I’m taking concentrated bets on high conviction plays but with smaller entries and will be quick to exit back to stables if Bitcoin can’t keep its head above water.
There is one more possibility and that’s for a boring chop market. I think people underestimate the likelihood of ranging between $35k and $60k for a year. In my opinion this would be the most painful for market participants as neither the bears nor bulls can claim victory and retail traders on leverage will get chopped up on every turn. Oddly Bitcoin chopping may be bullish for altcoins. In 2017 altcoin almost exclusively went up when Bitcoin was rangebound. We’ve seen this dynamic for the last 3 weeks and it will be interesting to see if it continues.
The Desire to be Early and the Desperate Generation
I want to take a quick aside to discuss something that stuck out to me in 2021. Meme investments were THE rage.
The macro factors for this are pretty well known: The Fed, easy monetary policy, and wealth inequality. With monetary policy the loosest it’s ever been it is no wonder fundamentals don’t matter. It’s no wonder a large retail cohort can push around the market on a select few investments. Nothing matters but liquidity. When there is too much liquidity we see things like AMC, GME, DOGE, Shib and NFTs run wild.
But what is the psychology of the retail herd or the “Apes” in these stocks? I think a lot of commentators, due to the fact that they are older and have already made it, miss some key psychological aspects of the meme stock trade. I talked with a few friends who’ve been part of the Ape crowd. They’ve all said things similar to what I’ve seen on social media: they want to be early and they feel like they can’t “make it” by traditional means.
I could write a whole article on the topic of wanting to be early and I’m sure there are stacks of literature on the topic. It’s ingrained in our human nature. We all want to be part of something “before it was cool” as at the minimum it gives clout and at its best it gives outsized financial advantages compared to those who are “late”. While being early generally refers to adopting a cultural fad before others (tv show, band, fashion, etc) the last 2 years have shown that retail traders also want to be early to a trend. A lot of people see Bitcoin at $40k+ and Ethereum at $4k and feel they’re too late. However LUNA, SOL, BNB, AVAX, etc offer the chance to be early and catch 100x gains.
I’ve also had friends express despair that they will never “make it” in the traditional sense. Young professionals with respectable jobs are priced out of buying a house in the town they grew up in. I’ve watched 2 friends make relationship choices not because a person is right for them but because it gives them stable housing. The millenials are at an age where traditionally humans have settled down and started families, an age where traditionally humans have begun to thrive. Instead I see a Desperate Generation. I see a generation that feels like the only way they can move up is to play the stock market casino. Their jobs just don’t seem to offer them upward mobility.
Lastly, a lot of my millennial friends continue to have a total lack of understanding of how markets work. Unit bias is the worst of their deadly sins. “I’m buying $DOGE because what if one DOGE goes to what one Bitcoin is worth?” “If I buy 1 million $SHIB and it goes to just $1 I’m a millionaire!” I’ve tried to explain Market Caps and that there is no way to get the liquidity for everyone to withdraw their millions should SHIB go to $1 but it is lost on my friends.
All of this is to try to explain why we’ve seen the crazy moves in meme stocks over the last 2 years. There’s probably a component of bored citizens on lockdown needing entertainment too. With people going back to work and tighter monetary conditions I suspect we’ll see less meme stock mania in the next year. I also suspect we’ll see significant wage inflation as despair gives way to resignation (figuratively and literally).
3. Prediction 1: 2022 is Ethereum L2 Season
2021 was the year of Alt-L1s. Ethereum became too congested causing gas prices to rise. Meanwhile the price of ETH went up 10x making the cost of transacting on Ethereum even more expensive. I felt this pain quite acutely and was often paralyzed in small positions waiting for gas fees to go down so I wasn’t forced to lose >50% of the position in gas fees.
Ethereum needed scaling solutions last year. The Ethereum roadmap has always included shardingand more recently has added L2 rollups to the roadmap as well. Unfortunately these were not ready for prime time and retail users suffered. Looking for more affordable places to gamble and trade NFTs the masses flocked to Binance Smart Chain, Solana, Fantom, Avalanche, and others. The base tokens of these ecosystems saw massive price gains in 2020 and 2021 with some going up 11,000%!
The Alt-L1 trade may be played out (I’ll talk more about this later on) but I think the Ethereum Layer 2 trade is just beginning. I will say that originally I thought I was ahead of the curve with this view but as I read more and more 2022 predictions it appears to be consensus amongst most analysts. When something is so expected it often doesn’t occur.
L2s are scaling solutions that greatly reduce transaction costs while having minimal trade offs in security. L2s borrow the security of the underlying L1 through various mechanisms, the details of which I won’t go into but here is an excellent overview.
As there are numerous Alt-L1s for users to choose from there are also numerous ETH L2s. Below is a snapshot taken from www.L2beat.com on 1/10/2022 of the various ETH L2s and their TVLs at that time.
Currently only about half of all L2s even offer tokens. The conspicuous projects who haven’t yet released a token are Arbitrum, Optimism, and zkSync. Of the L2s that do have a native token Metis and Loopring are the clear outperformers. Starting from 1/1/2021 Metis is up at least 2,500% and LRC is up 713%. The other L2 tokens have struggled this year with the majority having actually gone down in price.
I am writing a deep dive into L2s as it is a vibrant space with many nuances but I’ll summarize my thoughts here. Whichever L2 can obtain the highest TVL while also delivering EVM compatibility will win. Optimism has already delivered this however they have no token (yet) and are still requiring protocols to be whitelisted before being allowed to deploy. Arbitrum, Loopring, and zkSync are expected to roll these features out with their next upgrades however, only Loopring currently offers a token. I am most excited about zkSync potentially offering a token as zk tech appears superior to optimistic rollups. However, Optimism and Arbitrum are both working on transitioning to zk tech. Metis also offers an interesting L2 play but given its already high FDV and price rise caution must be exercised.
The safest play is to try to bridge to Arbitrum, Optimism, and zkSync in hopes that they will do an airdrop for early users. This is a strategy I have been heavily employing. LRC, BOBA, and METIS are potential buys but may get the wind sucked out of their sails if any of the other major L2s launch a token. Buying the airdrop may make sense depending upon the tokenomics.
Lastly, I think L2 performance will be quite muted if there is no support from exchanges. LRC and METIS are likely doing as well as they are precisely because they are listed on exchanges. I suspect Optimism, which has heavy insider ties, will be immediately listed on major exchanges if and when they release a token.
4. Protocol Yield Wars Continue
The DeFi space continues to move at breakneck pace. Early protocols focused on attracting individual users via incentives: governance tokens in return for liquidity. DeFi 2.0 is focused on attracting a completely different liquidity provider: protocols themselves.
Visionary protocols have realized they can obtain higher yields on their protocol by gaming the system. The dominant provider of yield currently is Curve. Yield is like Spice in Dune. Arakis is the source of Spice, the necessary fuel for interstellar space travel. Economies without Spice collapse in the Dune universe. “He who controls the Spice, controls the Universe” and He who controls Arakis controls the Spice. In DeFi yield is Spice and as the majority of yield currently comes from Curve “He who controls CRV controls the Universe.”
I expect the first half of 2022 to be defined by a war between protocols to lock up as much CRV as possible in order to vote for favorable gauge weightings on their own liquidity pools. Convex, a protocol, has more or less already won this battle having accumulated almost 50% of all CRV currently in existence.
Fortunately for other protocols $CVX, the governance token of Convex, can be used to sway the voting of the underlying veCRV owned by Convex. If a protocol controls Convex then they can direct a large portion of yield from Curve to their own liquidity pools. The race is on to obtain as much $CVX as possible. Current leaders are TIME, Badger, and Frax but other protocols like Redacted are quickly catching up.
For at least the first half of 2022 picking the winner of the CRV wars will net investors bigly on a relative basis. Macro factors may dampen returns as discussed above and if that is the case then the winner of this war may not go parabolic until later in the year. The easy but less levered play is to own $CRV and $CVX. Riskier plays would be buying $BTRFLY (Redacted Cartel), $TIME, and others that employ the (3,3) bonding mechanics of OHM.
5. Alt-L1 outlook
Finally, while 2021 was the year of the Alt-L1 I suspect 2022 will be much more difficult for this class of crypto, especially if Eth-L2 season runs as hot as I expect. Alt-L1s saw meteoric rises in 2021 with many big holders likely now fine selling their bags into much lower prices than we currently see. I think this cycle will see more “ETH Killers” survive than previous cycles (remember Neo, QTUM, Stellar, EOS, Zilliqa, etc?) but many will face the same fate as their predecessors. Tracking onchain volumes, unique wallet addresses, and roadmap progress will separate projects that survive from projects that won’t.
I don’t want to bear post too hard on Alt-L1s as any crypto bounce will likely see Alt-L1s bounce as well. I just think on a relative basis there are other areas of crypto that offer better opportunities (like Eth-L2s and the Curve/Convex war).