January 2022, #1

We discuss the majors' limp into 2022 and upcoming token unlocks schedule for some crypto projects.

ecoinomics

Jan 14, 2022

This Week.

1. Bitcoin limps into the New Year.

2. Ethereum’s nasty price action.

2. The emissions dilemma.

Dear reader,

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It’s a reminder not to FOMO or be afraid to take a trade because we fear price might dump past what would have been a good entry. So in a way, that’s exactly what you get by reading eCoinomics.

We discuss macro technical and fundamental analysis away from low time frame noise that helps build a long-term trading mentality. You also get news and we discuss the projects we are looking at for the week in the Zoom-In section (sometimes.)

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Groovy and Oloye.

1. Bitcoin limps into the New Year.

Bitcoin partied a little too hard going into the New Year. Bitcoin’s price action looks like that drunk scene from E.T.

The only positive so far is the “decoupling” of some alts to some extent. We wrote in our crypto report and 2022 thesis about validation of use cases not tied to Bitcoin as a store of value and a little bit of that seems to be playing out now. Bitcoins market dominance is around 39% at the time of writing. What this tells us is that investors are taking more chances on alts with real or perceived fundamental strength. Maybe, more investors/traders are starting to denominate their portfolio in ETH or stables. Unlikely, but not impossible. Usually, when the red comes, it is followed by higher Bitcoin dominance as more investors take a risk-off approach.

Bitcoin has traded between $48000 and $39558 since the new year without showing any real directional bias. Our “max pain” support has held so far so that’s good. A weekly close below $38000 will signal more downside. A reclaim of $46000 signals more upside. These are the ranges that we are watching.

The equities market have also reacted to the possibility of the Fed sucking liquidity out of the system. The latest announced figure stands at 7% which means there continue to be real concerns over interest rate hikes and Fed tightening.

The Crypto market’s correlation to the wider markets may be the reason Bitcoin has continued to limp. We’ll see if “Bitcoin as a hedge against inflation narrative” holds up.

What to do? Buying support always makes sense especially for an asset that’s not a stranger to recovery and new highs post pull back.

Verdict: Buy $38000-$40000.

2. Ethereum’s nasty price action.

I’ll admit, the “nasty” adjective was a bit of a clickbait although there’s nothing for you to click.

I just really don’t like it. Why?

ETH/USD lost our 2021 max pain support. Hello, it’s called “MAX PAIN” for a reason.

The price action is also the most sketchy I have seen in a while. Every little bounce is sold into. Doesn’t matter how little. The result? ETH/USD chart is doing its best impression of the DOGE chart. A slow grind to hell!

Okay, maybe I’m being a tad hyperbolic.

Of course, ETH will survive, recover and make new highs (at some point) if the all-time chart is anything to go by.

Along with Bitcoin, ETH has crossed the chasm of “Too Big To Fail.” There are only two in that category. Ethereum as the tech powering decentralisation and Bitcoin as “money,” “store of value,” “digital gold.” Whatever your preferred pronouns are.

As far as technicals go. $2800-$2600 is the local support zone, this is where we’ll be looking to do business. A weekly close below that is invalidation. Above the current price, $4000 is resistance. We expect sellers to step in here. For us, ETH is bearish short term. The strategy for ETH is to DCA into it.

Most of this is low time frame noise anyway. ETH will power Web3. If it doesn't survive, nothing did!

Verdict: DCA, HODL for long term. Put it in you will.

3. The emissions dilemma.

Recently, Groovy sounded the token unlock/emission alarm warning about avoiding tokens with huge unlocks incoming.

From the feedback, we could tell that many do not understand unlock schedules and why we think unlocks are short term bearish.

We intend to use the first principles to explain why most unlocks are bearish based on historical crypto market precedence.

A lot of capital goes into launching a crypto project. Capital is needed to employ developers who will build the game, build community, gain traction and pitch their ideas to Venture Capitalists and Angel Investors. If their idea is considered valid enough, these VCs or Angel Investors invest some money into the project in seed or presale round and get some token allocation. According to industry practice, most of these tokens are often locked for a certain amount of time ranging from 3 months - 10 years depending on the agreement. Usually, a 1 - 2 years cliff is followed by linear, monthly or quarterly vesting.

These early investors pay a fraction of the price compared to what retail traders will pay for the tokens on the open market. This means they have no financial motive to hold on to the tokens as these tokens will have done multiple-x(sss) by the time the unlock period is reached. What then happens is they dump on retail traders who are forced to become bag holders.

This particular problem is mostly applicable to tokens that launched into the crypto market since late 2019 as the 1 or 2 years cliff on some of these projects has elapsed and they can now start receiving tokens on linear emissions schedules. Tokens which they dump on unaware retail traders the moment they get their hands on them.

The crypto market in the past two years has witnessed immense and tremendous adoption from both retail and institutional investors. There has been growth in terms of total value locked, active addresses, the total number of protocols, total market capitalisation and every conceivable positive metric. The growth is reflected by the token prices. For instance, The Sandbox (SAND) has gone up 162x, Axie Infinity went up 161x (AXS), Fantom (FTM) up 130x-YoY. Amongst others.

Fast forward to 2022, we are entering a year where major global governments are sounding the alarm warning on interest rate hikes, increasing inflation numbers and the urgent need for a tighter fiscal policy. In the US The Fed is sounding hawkish with plans to increase the interest rate, end quantitative easing and start tapering.

From all indications, we most likely will witness a liquidity crunch where people will exit high-risk assets into safer ones.

In light of the expected macro outlook for the year, many seed stage or presale investors in the crypto market will be looking to exit some of their positions that have gone up several multiples by selling as tokens get unlocked now that there is enough liquidity in the market for them to realise their gains.

If precedences set by similar events within the last 2 years is anything to go by, we know that when tokens are released, early investors put selling pressure on the prices of these tokens ultimately hurting the project’s survival and the confidence of retail.

Token unlock is usually an insiders race to front-run each other on who is first to sell into a liquid order book.

This is not to vilify VCs and make them villains or the bad guys as we are not aware of what goes on behind the scenes. I am of the opinion that VCs or Angel Investor are important in the space and are huge catalysts for the innovation, growth and development we have witnessed in blockchain technology. Additionally, we think insiders have the fundamental right, freedom and sovereignty to sell their token when they please. However, their actions raise questions such as:

Are VCs value deployers or value extractors?

Why are insiders quick to sell immediately tokens are unlocked even though most claim to have long-term conviction in these projects?

Why you should care about emission schedules.

Emissions schedules are one of the most valuable insights we apply when buying or selling crypto assets. It is important to have a basic knowledge of who your counter-party/ies is/are in a trade.

For the next few weeks, your counter-parties on tokens hitting their unlock schedules will be insiders, whales and OTC desks that are selling into liquid order books.

Because of constant selling pressure on these tokens, they will most likely range in the same area for some time or go into perpetual downtrends v. the rest of the market. Leading to an opportunity cost loss to retail bag hodlers. In short, unlocks are short term bearish for price action. With very few exceptions.

The narrative or fundamentals on some of these assets may be strong but that won’t stop the prices from being impacted by constant sell orders from insiders who bought at much lower prices.

There is a video on Youtube from a few months ago featuring David Sacks and Chamath Palihapitiya giggling about how they have realised a billion-dollar profit on their Solana investment in the last year. You most likely bought the top of some of these assets or have a somewhat good entry, nevertheless, insiders bought the floor price (some at a discount) and are in huge profit compared to you.

Waiting out unlock emissions for a few weeks or months has proven to provide a better entry into some of these projects when insiders are done selling or exhausted.

Most of the VCs, Angel Investors and influential backers are trad-fi trained with a great understanding of investment cycles and macro markets. They are aware of the impending liquidity crunch due to the FEDS hawkish fiscal policy posture. They will rather exit their 10,000X positions while they still can without considering the impact it will have on the protocols long term survival.

A few examples of how token emissions affected the prices of select assets in 2021.

Graph protocol (GRT) - Insiders token got released in Q1 2021 and that marked the top. Currently down -78%.

Internet Computer (ICP) - Insiders tokens got unlocked in Q2 2021 with monthly linear vesting and it is down 95% from the top.

Anti-Matter (MATTER) - Differences between the team and VCs led the team to unlock all vested tokens allowing VCs to dump tokens and exit their position leading to months of downtrend. MATTER is currently down 91% from its top in 2021.

Akash Network (AKT) - Insiders tokens unlocked in Q4 2021 led to AKT downtrend for weeks and is currently struggling to reclaim lost levels on the charts.

On the other hand, there were multiple cases of bullish unlocks in 2021 where the prices of assets pumped as tokens got unlocked but they are unlikely in current market conditions.

Bullish unlocks in 2021 was mostly attributed to insider trading to pump the price of these tokens to trap retail investors for liquidity and gamma squeeze those who may be shorting the asset in anticipation of VCs unloading said assets on the market.

Where to find emissions schedules:

Project website
Project whitepaper
Coinmarketcal.com
Social media (Twitter, Discord, Telegram)

Here are some projects with token unlock scheduled for the next few weeks:

Sandbox, Illuvium, GALA, Axie Infinity, Solana, Syscoin, Oxygen, Star Atlas, MOBOX, TLM.

Do with this information what you want.