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Inflation, regulation and uncertainty across markets. These are increasingly recurring themes in the final quarter of 2021. The week that concluded yesterday for the Rivemont Crypto Fund was no exception. Indeed, crypto market price action was closely tied to that of the traditional stock markets, itself directly affected by the words of Fed Chairman Jerome Powell. The latter mentioned on Tuesday that it was time to remove the term “transitory” to the inflation we are witnessing right now. The stock markets have been on a roller coaster ride ever since and bitcoin has been no exception. Despite the volatility, prices are now in the same zone as they were seven days ago.
While this is the case for bitcoin, the same cannot be said for Ether, the 2nd largest cryptocurrency by capitalization. Ethereum’s outperformance against bitcoin has continued throughout the year and looks set to end 2021 on a high note. In fact, the ETH/BTC ratio yesterday touched a level not seen since May 2018. At the same time, we see that bitcoin’s dominance of the overall cryptocurrency market continues its slide, currently showing a superior relative strength for altcoins. The trend over the past twelve months could not be clearer, with BTC’s dominance of the overall market now standing at just 41.5%.
Beware though. The last time we talked about a high ratio for ETH/BTC and record lows for the dominance index, bitcoin soon reminded us that it is not just another crypto asset. We appear to be near a possible support zone that could lead to a reversal. If it’s against the fund’s philosophy to go against the price trend, this is definitely a dynamic to watch closely.
Meanwhile, however, about two out of every three dollars of the fund’s capital remained invested in ETH all week, helping to beat the bitcoin index by several points.
What accounts for Ethereum’s rise? Without a doubt, its success in moving from a simple speculative asset to its true calling, a high-utility asset with commensurate adoption. As this analyst mentions, a large proportion of Ether is locked in smart contracts on the network. We are talking about 26.86% of the total supply, or 31,825,848 ETH for a value of more than 149.5 billion dollars. These Ethers are used through decentralized applications that power virtual economies, stablecoins, and numerous solutions using the ETH chain as a consensus mode.
Of these 26.86% of smart contracts, 77% are locked into decentralized finance applications. Moreover, just like BTC, ETH reserves on exchanges are at a three-year low. More than 7% of ETH supply is already in these 2.0 network contracts, a threshold that promises to rise rapidly. Furthermore, more than 50% of ETH’s supply has not moved from the wallets holding them for more than a year. In addition, since the London Hard Fork, 1,016,743 ETH have been burned in just three months. This is almost 1% of the total supply. The analyst quoted comes to the conclusion that more than 70% of the current supply is destined to be held instead of traded. With more than 13,500 decentralized applications to feed, all to say that the supply shock is starting to be felt. This could be just the beginning.
In the same vein, analytics firm Santiment adds that the largest ETH portfolios (holding 100k to 10M ETH) have accumulated 676k ETH in the last 12 days, 1.28M ETH in the last 45 days, and 1.46M ETH in the last 60 days. This is an excellent sign that the major players are maintaining their confidence.
On the news side, it is the turn of the giant Fidelity to launch an ETF based on the price of bitcoin in Canada. Unlike similar products in the U.S., the fund will hold an actual pool of BTCs, not future contracts. Such a product puts upward pressure on demand. “It should be embarrassing to the SEC that one of the biggest U.S. investment names is forced to go north to service its clients,” tweeted Eric Balchunas, senior ETF analyst at Bloomberg. Fidelity, a Boston-based firm, manages a whopping $4 trillion in assets.
In the U.S., discussions surrounding market regulation, particularly of stablecoins, continued this week. U.S. Treasury Secretary Janet Yellen said that stablecoins could allow for greater efficiency and help facilitate payments, but that they require appropriate regulation. “There are significant risks associated with them, including risks to payment systems and risks related to the concentration of economic power” she said. Interestingly, Yellen noted that in its updated guidance, the Financial Action Task Force clarified that its intent was not to regulate as virtual asset providers those persons or providers who “provide only ancillary services or products to a virtual asset network, including hardware manufacturers, providers of unposted wallets, software developers, or miners that are not otherwise engaged in covered activities.” In short, the intent is to focus regulation on market players who provide custody of their customers’ crypto assets.
What’s new on the MicroStrategy side? A massive new addition of bitcoins to its treasury, of course. Michael Saylor’s firm bought 7,002 bitcoins for about $414.4 million in cash, or $59,187 per coin, between Oct. 1 and Nov. 29. The company now holds 121,044 bitcoins, purchased for nearly $3.6 billion, or an average price of $29,534 per coin.
While the size of the purchase can’t compare, let’s also note that El Salvador’s president, Nayib Bukele, said the Central American country took advantage of bitcoin’s 7.7 percent drop on Friday to buy 100 more coins. “El Salvador just bought the dip,” Bukele wrote on Twitter.
Technically speaking, the picture is very similar to last week’s one for bitcoin. Upwards, a higher local high should be painted, closing a day above $59,500. The next bullish tests to really be able to make a statement about a continuation of the bull market would be the resumption of the 30 and 50 day moving averages, currently between $60,500 and $61,000. On the downside, the effect of the 100-day moving average is particularly clear. That indicator was the springboard for the bounce below $54,000. This moving average is still pointing around this area. It will be crucial to keep it below the price.
On the Ethereum side, it will be interesting to see if the ratio can stay above 0.08 and use that as future support, potentially allowing for a new push to highs not seen in nearly four years. In dollar terms, the price is already flirting with its all-time high at $4,870. A breakout area above $5,000 could be explosive if the trend continues.
Rivemont Investments, manager of the Rivemont Crypto Fund.
The presented information is as of December 1st, 2021, unless otherwise indicated and is provided for information purposes only. The information comes from sources that we believe are reliable, but not guaranteed. This statement does not provide financial, legal or tax advice. Rivemont Investments are not responsible for any errors or omissions in the information or for any loss or damage suffered.
