Bitcoin and Ethereum have been trending to the downside in Q4, 2021. The current price action for these top cryptocurrencies goes against the general expectations in the market as this time has been usually bullish for the crypto industry.
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At the time of writing, Bitcoin trades north of $47,000 and has been moving sideways during the week after a failed attempt at reclaiming higher levels above $50,000. In the short term, a massive options expiry on the 31st could bring more volatility into the market.
Ethereum might be splash by that volatility, yet to be decided in favor of the bulls or the bears. The second crypto by market cap trades at $3,786 with a 1.4% loss in the past day.
Former Goldman Sachs fund manager Raoul Pal analyzed the reason for the current price action in Bitcoin, Ethereum, and other cryptocurrencies and the possible scenario for 2022. Pal presented data on trading volumes for BTC and ETH, claiming they have been “stagnant since the run-up in 2020”.
This statement mostly applies to Bitcoin which has seen little growth during this year except for large investors or institutions jumping into the network. These investors took profit in the first half of 2021 and have “barely returned”, as seen in the chart below.
Pal believes Bitcoin and Ethereum benefit from Metcalfe’s Law, which states that a “network’s value is proportional to the square of the number of nodes in the network”. In other words, the law claims network benefits from adoption and Pal said that these metrics have been slow in 2021, thus the current PA.
Ethereum has managed to outperform Bitcoin with a 4x increase, according to data provided by the former hedge fund manager, due to decentralized finances (DeFi), NFTs, and other “stronger narratives” revolving around this network. This has helped ETH to maintain its transaction volume.
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Conversely, the number of addresses on Ethereum has been on the rise during all 2021 and recently reached 71 million. Active addresses on the other hand tell a different story, Pal said because people “rotated into different opportunities” as the price action turned sideways.
The implementation of EIP-1559 has added an extra bullish factor for the price of ETH. The ETH burning mechanism contributes to the supply reduction for this asset. However, Pal said:
But with no net real new capital flowing into the space, attention moves to other chains which also have PoS but earlier network adoption, taking volumes away from both BTC and ETH.
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The rise in inflation in the U.S., Pal said, and the stagnation of wages could be pricing out new users for entering the space. Thus, why hedge funds and institutions will continue to play a big role next year as they will have enough firepower to drive a new rally.
New capital will flow in over time and a broader rally, when it arrives, will bring retail investors and a reflexive loop of institutional investors FOMO'ing in.
That day will come. You just have to not over extend yourself, don't use leverage and sit tight. Play the long game.
— Raoul Pal (@RaoulGMI) December 28, 2021