Our beloved internet money is at a crossroads. On one side, we have bull highway; on the other, we have bear street. We all know what path we want to take. Sign us up for bull highway, man, and let’s have ourselves some red-panty nights. The only problem is, as people whose size is not size, we don’t have any influence on which road crypto takes. All we can do is try to predict which way it’ll go and adapt our plans accordingly.
It’s often pretty easy to tell if the market is bullish or bearish. Once in a century pandemic? Probably bearish. Money printer turned on like never before? Probably bullish. Hottest inflation in a generation and a war involving some of the world’s most important food and oil producers? Probably bearish.
But sometimes, it’s not nearly as easy to tell which way the market is leaning or might lean in the future. For example, bear market rallies are notoriously challenging to read because they come with credible arguments on both the bullish and bearish sides. Unfortunately, this is what we’re experiencing right now. The result is that people are split on whether our bear market rally is the start of a new bull run or just a temporary move up before resuming goblinburg.
Nobody really knows, and everybody is chilling at neutral while they wait for confirmation of a move one way or the other.
Waiting is not a bad strategy. However, as Margin Call taught us, there are three ways to make money in this game: “Be first, be smarter, or cheat…and it sure is a hell of a lot easier to be first”. Doing nothing until you have conviction in a move is good. But, gaining that conviction before other people is better. That is how you make your most significant gains.
In this article, I’ll provide you with both the bullish and bearish arguments. Then, you can make a decision on what to do.
What I’m not going to do in this article is attempt to sway you one way or the other. Even if I definitively knew the answer, it’s better for you to think critically and come to your own conclusions. The beautiful thing about crypto is you’ll know without a shadow of a doubt if your conclusions were correct or not. If they weren’t, you can go back, assess what was wrong in your thinking, and improve for next time. Can’t do that if you blindly follow “influencers.”
This is starting to go off on a tangent, so let’s drop it here. You get the point. DYOR.
Without further adieu, let us begin.
Up-Only?
Let’s start our analysis with the bullish case. Why start with the bulls over the bears? Easy answer: it’s simply more fun to be a bull.
Fortunately for us, there’s a decent amount of things to be bullish about.
The Merge
By far, the most cited argument for bullishness is The Merge. The long-anticipated Ethereum upgrade to proof-of-stake is now scheduled for around September 15th. To say people are excited would be an understatement. Some are even calling it the most bullish crypto catalyst ever. I don’t know if I’d go that far, but it’s definitely bullish.
The main reason for people’s bullishness with The Merge is the 90% reduction in ETH issuance, commonly referred to as the “triple halving.” Korpi and DeFi Surfer have some great threads explaining the positive consequences of this, but I’ll quickly recap here.
Basically, ETH’s new supply and demand structure results in millions of dollars of sell pressure being replaced by buy pressure. It doesn’t take a genius to see how this would lead to number go up.
#RealYield
I published an article on Real Yield last week, so I won’t drag this section on for too long.
The fact remains that the real yield movement is very bullish for crypto. Its bullishness doesn’t come from the current real yield projects, even though those are still chugging along just fine. It also doesn’t come from the projects moving toward a real yield model, such as Redacted and Synthetix, although it is cool to see DeFi stalwarts focusing on real yield.
Its bullishness comes from what it forces projects to do: make products that people actually use. That is what we ultimately need to scale DeFi, and that is what real yield is inspiring projects to do.
L2 Szn
The Merge and the consequent renewed focus on Ethereum have shifted the meta-narrative from alt-L1s to Layer-2s. Optimistic rollup Optimism and Arbitrum have been the big winners so far. Optimism is now the #8 chain by TVL. Arbitrum is right behind them at #9, and they don’t even have a token yet. Both are full of exciting protocols, including Velodrome, Synthetix, Dopex, Radiant, GMX, UMAMI, and Tracer.
Sheeesh
Looking beyond the big two and you find multiple bullish narratives waiting in the wings. Metis, another optimistic rollup, has a $100 million ecosystem fund and numerous interesting projects. Modular blockchains such as Celestia have many a smart person very excited. Finally, although it’s still early, our lord and savior Vitalik believes that zk-rollups will be the eventual L2 king.
In any case, the L2 narrative is already gaining steam that will only increase over the coming months and years.
The Institutions Are Coming
If there was any doubt that the institutions were coming, then the recent Blackrock news puts those doubts to bed.
For those unaware, Blackrock is the world’s largest investment management company, with $8.5 trillion currently under management. That is a lot of dough, and because of their Coinbase partnership, their institutional investors can now invest in spot Bitcoin. That’s an insane amount of new money exposed to crypto. If Coinbase can land such a massive partnership during a market downturn, imagine the endless possibilities in a bull market.
End of Forced Selling
There’s a case to be made that the forced selling is over, and we’ve already seen capitulation. Proponents of this argument point out that we haven’t seen any new large-scale liquidations since the Luna, Celsius, and 3AC collapses in May/June. We have also already purged the DeFi protocols that relied on unsustainable liquidity mining programs, a la OHM. This has led some to believe that the worst has already passed.
Good Vibes
Yes, the headline isn’t very technical, but some argue we are primed for a turnaround. There definitely is a credible case to be made. Inflation looks to have topped. The S&P 500 and Nasdaq have been green for the last 4 weeks. ETH has been green for the last 6 weeks. We’ve survived the blowups. Projects are innovating. Reddit is launching a token. Sidelined people are frustrated.
Nobody can say for sure if the bottom is in, but to some, it at least feels like it.
Goblintown?
Now that we’ve covered the bullish argument, let us (unfortunately) turn our attention to the bearish viewpoint.
Regulatooors
The Tornado Cash debacle has been a rude reminder of regulators’ power to shut down our online casino. In my view, it is undoubtedly the most worrisome bearish argument.
I’ll give a quick TLDR just in case you’ve been living under a rock the last few days and you don’t have a clue to what’s going on. The U.S. Treasury Department put Tornado Cash on its naughty list. This means that it is now illegal for any U.S. Citizen to use Tornado Cash in any way. Why? Because criminals sometimes use it.
It’s a really stupid reason considering that everything law-abiding citizens uses is also used by criminals, but whatever. It’s also a grotesque government intrusion into privacy, and it’s only been made worse with the arrest of a developer in Amsterdam.
We can talk about the political ramifications of this move until we’re blue in the face, but for this article, let’s talk about how this affects DeFi and our beloved bags.
The short answer is that it’s not good. The long answer is that it’s really not good.
The Tornado Cash situation shows that DeFi is at the mercy of the government in its current state. If Janet Yellen and her underlings wake up and decide to nuke crypto, it’s over for us. Of course, we all knew this in the back of our minds, but it was always an abstract thing. It existed only in hypotheticals. Now it’s real, and it’s scary.
The primary concern right now is USDC, the second largest stablecoin. A good amount of DeFi is built under the assumption that USDC is solid. If USDC was to collapse because of a move by the government, it would probably be gg’s for DeFi. This is obviously unsettling, and it’s something that protocols reliant on USDC (most notably MakerDAO) are now actively planning for.
However it all turns out, possible death by regulation is not the most reassuring foundation for the next move up.
Where’s The Volume?
Although crypto has been rallying the last few weeks, it’s been kind of a strange rally. It feels like there’s been no volume behind it. Like all feelings, that feeling is subjective, but it shows itself quantitatively in a couple ways.
It shows up first in gas fees. As I’m writing this at 7:30 EST on Saturday Night, gas fees on ETH are four gwei. Four. After a 2021 in which gas fees were regularly greater than 100 gwei, to see a four is almost incomprehensible. If you think I’m cherry-picking data here, think again, as gas fees haven’t been this low since 2020. Low gas fees obviously don’t point to a rally fueled by on-chain activity.
The second way it shows itself is in trading volume. Although derivatives trading is holding on strong, spot and total trading volume is way down from 2021. Needless to say, low trading volume usually isn’t the best way to sustain up swings.
Add it all up, and you have a rally with almost no on-chain activity and depressed trading volumes. It’s easy to see why many believe this isn’t sustainable and that this current rally is just PvP between the 10,000 people on CT.
Macro
Although “ThE MaCrO sUcKs” is now a meme, like all memes, there is truth in it. The macro really does still suck.
Inflation is hot for reasons that a few months of rate hikes can’t fix. It’s possible the Fed is not particularly close to pivoting anyway. The U.S. is technically in a recession. Russia and Ukraine are still fighting. China is still fighting Covid, and Taiwan might be just around the corner. TradFi indicators are still quite bearish.
While bulls can definitely argue that the vibes are good, bears can just as easily argue that the vibes are off.
Merge Risks
Galois Capital recently set off quite the debate on Twitter with their thoughts on The Merge and a possible ETHPoW chain. Although these fears have been quieted by USDC and USDT publicly supporting the PoS chain, the core point of The Merge having more risk than many like to acknowledge remains valid.
There is a non-zero chance that The Merge fails. Or gets delayed for the millionth time. Or that it’s a “sell the news” event. Or that regulations kill demand for ETH through censoring dApps in the U.S. Or anything else you can think of that might go wrong. The point is that although The Merge appears to be bullish, there still exists some potential for deep disappointment.
Conclusion
There you have it, the current bullish and bearish arguments for crypto. I may be missing some, but I promise, these are the main ones.
If I had to guess, I would bet that we still have some time left in goblinburg. However, as I said in the introduction, I don’t definitively know if we are going up or down. If the bear market has taught us anything, it’s that nobody does. All you can do is examine the situation the best you can and come to a conclusion that you have conviction in.
Regardless of short-term price action, there are many reasons to be excited about and worried about crypto. A bunch of cool projects are gaining momentum, and their renewed focus on product-market fit bodes well for the future of the space. However, the regulatory Elephant in the room is not going anywhere. To truly build a better future for finance, we need to become more resilient to government intrusion.
It’s going to be an action-packed finish to 2022, folks. Strap in.