Original author | Ben Giove, Bankless Analyst
Compiled by | HYD & Cecilia, bfrenz DAO
2022 has been a brutal year, with the collapse of former giants like Terra, 3AC, and FTX wreaking havoc on the industry.
Sentiments were low and prices were falling sharply. The total cryptocurrency market capitalization is down more than 71% from its peak, wiping out more than $2.2 trillion in value in just over a year.
But could the worst be over?
Chris Burniske thinks so. A partner at venture capital firm Placeholder, Chris is a true crypto OG who has lived through multiple cycles. He wrote one of the earliest crypto investing books and was the first buy-side analyst to cover crypto.
He also predicted this bear market, having expected the bull market to peak in November 2021, and urged caution in the July-August rally.
Now, while many are questioning the future of cryptocurrencies… Chris is turning bullish and thinks we may have hit bottom.
Earlier David Hoffman (co-founder of Bankless) had a 50-minute conversation with Chris, where Chris laid out his bottom-call argument.
In this article, we’ll dive into the core reasons why Burniske believes the market has bottomed.
1. No forced sellers
A key reason Chris Burniske believes we have hit bottom is that there are no longer any large compulsive sellers.
Many believe that the collapse of FTX, following the Terra collapse, will kick off a second credit crunch, a massive contagion event following the Terra collapse from May to July of this year.
However, Chris believes that the FTX collapse did not create a new wave of forced selling, but instead it could be the “finale” of the massive liquidation and deleveraging we have seen since the UST collapse.
Who might be the next big forced seller? It's hard to say now. It was easier to tell in the summer, when it was easier to identify businesses that might go bankrupt.
The industry as a whole is also better positioned to weather the FTX storm relative to the Terra and 3AC debacles, as credit across crypto (and TradFi) is much more solid now than it was when those events occurred.
While we may see some bankruptcies, this will not add to the near-term selling pressure on the market as the assets held by bankrupt companies will be auctioned off at a later date.
Chris acknowledges that there is a risk of month-end sell-offs in fund redemptions, but he believes that the impact on the market may be reduced because most of the funds being redeemed may have already been destroyed.
2. BTC is in a deep value zone
Another reason Chris believes we have hit the bottom is that various on-chain, technical and quantitative indicators suggest Bitcoin is in deep value territory. (Deep value is a quantitative investment strategy that selects the cheapest stocks among a large number of stocks for investment based on their valuation multiples.)
BTC MVRV - Source: Glassnode
One metric Chris points to is the Market Value to Realized Value (MVRV) ratio, which, according to WooMetrics, “approximates the value paid for all coins in existence by summing up the market value of coins at the time of their last move on the blockchain.”
Chris believes that BTC is in value range when MVRV falls below $1 as it indicates that most investors are underwater and therefore unlikely to liquidate their positions.
BTC Daily Active Addresses — Source: Glassnode
Another on-chain metric is daily active addresses, which surged to 1.07 million on November 9, the current local bottom. This is the highest single-day total since the crash this summer. Chris believes that the increase in addresses indicates that new buyers are entering the market.
How else can we gauge whether Bitcoin has bottomed? One indicator is the 200-week simple moving average (SMA), which has consistently represented a bottom for BTC.
BTC Funding Rate - Source: Coinglass
Finally, Chris looks at the funding rate of perpetual futures to assess traders’ positions. In particular, he notes that he is looking for a sustained period of negative funding, or when short positions pay long positions (long positions expect the asset price to rise, while short positions expect the asset price to fall). While this will vary greatly between exchanges, on Binance, the annualized BTC funding is -9.8%.
One potential risk is capitulation among bitcoin miners, but he believes that while the industry is institutionalized, it may not be as impactful as in previous cycles.
3. ETH’s fundamentals are strong
Ethereum’s strong fundamentals also suggest that the bottom may have been reached.
Chris believes that the impact of the merger on ETH market structure and flow is beginning to emerge.
To support this claim, he noted that ETH’s bottom during the depth of the FTX sell-off on November 9th was higher than the bottom during the Celsius and 3AC breakouts. Chris attributes this to consolidation, which, as we know, removes miner selling pressure and pushes ETH to ultra-sound barriers because it has net deflationary issuance.
Combined ETH issuance — Source: Ultrasound.money
Chris also looked at the application layer to evaluate the fundamentals of Ethereum. He specifically pointed out that DeFi on Ethereum has never stopped throughout the crisis.
The major DeFi protocols are operating flawlessly, major lending markets remain fully solvent and executing liquidations, and DEXs have facilitated billions in trading volume. Chris believes that capital allocators who closely follow the space already realize and understand this.
ETH 200W SMA - Source: TradingView
ETH’s technical indicators suggest that it is in value territory as it is trading below its 200-week moving average. However, to sustain gains, ETH needs to reclaim this level.
4. Improvement of the macroeconomic situation
The last reason is the improvement of the macro environment.
Despite concerns about economic growth, Chris believes the changing macro backdrop is favorable for a bottom.
As the Fed hikes rates, risk assets have been hammered in 2022. The sharp rise in risk-free rates has led to multiple compressions in the stock market, as investors are no longer willing to accept breathtaking valuations now that there is a real cost of capital.
The result is that high-growth technology companies, especially those on the Nasdaq (with which cryptocurrencies show a strong correlation), have experienced brutal declines similar in scale to the dot-com bubble of the late 1990s.
However, a key difference is that fundamentals are strong for many companies, with businesses like Meta continuing to be powerful free cash flow machines with strong control over their verticals.
Inflation, the straw that stirred the camel's back for austerity policies, is also showing signs of turning around, with recent CPI and PPI data both weak.
As Chris said, the market cares about the concept of “marginal rate of change” or “slowing down bad things” which suggests things will improve in the future.
5. These factors are consistent
With the post-LUNA deleveraging coming to an end, bullish on-chain, technical and quantitative indicators for BTC and ETH, as well as an improving macro backdrop, are targeting a crypto bottom.
Chris expects 2023 to see sharp volatility similar to the last bear market. We may get a false bounce followed by a decline.
However, the confluence of factors noted above is enough to convince him that the worst (at least in terms of prices) is likely over.