The three big factors driving the crypto market
User adoption, investor fund flows and macro factors are currently the three big factors driving the crypto market. In this article, we will take a look at each of them.
This is part of our Crypto market update Q4. Download the report here.
User adoption Although declining prices and market stressors have negatively impacted user growth in some sectors such as DeFi (Decentralised finance) and blockchain based gaming, user growth continued in other areas of the crypto ecosystem, even in the face of the bear market. Meanwhile, the consensus — which we share about the medium-to-long-term growth outlook for the technology — remains intact.
The build-out for using cryptocurrencies in payments has continued throughout the bear market. Major payment service providers such as Visa, MasterCard, American Express, PayPal and Stripe are all continuing to build their cryptocurrency payment services offering. Several studies of merchants and retailers found that many of them intend to accept crypto payments (a recent US study from Deloitte found this to be 75 percent), citing customer demand.
Despite the bear-market-related lower transaction volumes, the net number of entities using Bitcoin has continued to grow.
Central banks’ actions over the last two years, printing trillions to avoid a recession and then likely causing a recession to fight the inflation this caused, have strengthened the narratives of decentralised money despite the steep price falls. Unlike during the 2018–2019 crypto winter, the share of long-term Bitcoin holders reached an all-time high, signalling continued confidence in Bitcoin as a long-term store of value.
Although sectors where business models have been challenged have, for now, seen a reversal in user growth, other application sectors such as Web3 continued to grow their user bases even during the difficult second quarter.
Investor fund flows The bearish trend in crypto has not slowed the interest from major financial institutions to enter the crypto market and/or grow their presence.
Many major banks and asset managers such as Goldman Sachs, JPMorgan, Fidelity, BlackRock continue making positive statements about the medium to long-term outlook for the crypto market, and continue to invest, hire and build. As with payment providers, they reference strong customer demand as the driver.
Macro factors In an environment of inflation, rising rates and recessionary trends, investments in durable physical assets and companies or projects with real growth are the only way to preserve value.
The current macro environment is fundamentally negative for most assets. Negative real rates mean that cash only provides the illusion of value preservation. Meanwhile rising rates hurt leveraged companies, real estate and bonds. Indeed, government bond portfolios have seen a drawdown of “black swan” magnitudes recently, shocking 60/40 balanced portfolios. When it comes to productive assets, a recession hurts earnings and increases defaults except for recession-proof sectors and companies — which are the relative safe havens preserving value.
Real rates are currently in strongly negative territory, even when using the official CPI figures which understate the true extent of price rises.
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