Statista published its 2021 Crypto Year in Review for 2021. Since 2020, institutional investors (companies with investments of $1 million or more) have become the leading investment force for the cryptocurrency market. ETFs for spot and futures Bitcoin appeared, the number of public mining companies and investment funds increased. Even Western state pension funds did not disdain investments in Bitcoin and some of them – even to Ethereum.

Back in January this year, we wrote that crypto holdings and crypto investments tremendously gained popularity in 2021 thanks to the cryptos’ enhanced reward/risk metrics. Although thereafter the main decision-making indicator apparently lost its former luster, it still appears a winner across other classic asset classes – in particular, stocks and bonds. It remained the case up until now, when further Fed’s monetary tightening plans became less clear while all types of investments began suffering from the unrestrained ascension of USD. Divergent strength vs. the stock market and underpinnings from the sharp drawdown in 2021 may set the stage for further appreciation of cryptocurrency asset prices in 2022 down the road, all other things being equal. Compared with broad equities, which haven’t had a 10% correction since the 2020 swoon, the crypto market is often pointed by market experts as still retaining a relative advantage in 2022 despite the heavy headwind in the form of the anticipated further strengthening of the U.S. dollar bolstered by the hawkish Federal Reserve.

The truth is that over a third of new dollars were printed in two years, and the Fed’s balance sheet doubled to $9 trillion. Investors poured money into all sectors of the economy, from real estate to cryptocurrencies, which certainly contributed to inflation in the U.S. growing well above acceptable levels. Although thereafter, as we already mentioned, as rapid U.S. dollar ascension diminished mutual discorrelation of nearly all types of dollar-denominated assets, crypto holdings and crypto investments continued to gain traction in 2021 thanks to the cryptos’ enhanced reward/risk metrics.

Graph 1. Mutual Bitcoin-Nasdaq 100 Correlation Became Too Obtrusive

One of the most mind-boggling questions asked by investors these days is why is the mutual crypto-to-stock market correlation so rapidly increasing. The truth is that if we pick a dozen other correlating pairs across all asset classes nominated in USD, we will see exactly the same picture. At times when the U.S. dollar appreciates on the back of the Fed’s changing monetary policy, rather than when the U.S. economy getting stronger, we contemplate a concerted correction of nearly all assets nominated in USD, which is hardly surprising. The trick here is to find which assets demonstrate the “contrarian growth” despite the USD’s artificial strength. In the current situation, these are energies (oil&gas), many agriculturals – such as wheat and other grains, along with certain growth phase cryptos such as Tron (TRN) or XinFin Network (XDC). As to Bitcoin and Ether, they are apparently trading in a narrow range while consolidating to accumulate further momentum. The reason why the second- and third-tier cryptos are outperforming now is quite simple and obvious: there is not much happening around both BTC and ETH.

Fast-forward, according to Statista, major countries were the front-runners of both crypto adoption and total funds raised through crypto investments. With estimated profits of $8.2 billion, $5.8 billion, and $5.8 billion, respectively, countries like the United Kingdom, Germany, and Japan were upstaged by the United States. Chinese investors also made the top 5 with estimated annual gains of $5.1 billion. However, that advantage is now gradually diminishing: as we remember, at the end of September 2021, the People’s Bank of China banned all trading in and mining of cryptocurrencies pursuant to the China government’s contradictory order issued earlier in the year.

Russia on the other hand, which is currently still in seventh place with $4.3 billion in profits, could benefit from the current sanctions imposed by the countries with developed economies. While its central bank is still unsure about whether to ban trading with Bitcoin, Ethereum and other cryptocurrencies at the beginning of the year, the government wants to rely more on corresponding means of payment in the future in order to obtain more alternative payment channels amidst intensifying foreign sanctions. In Europe, too, financial institutions and lawmakers are concerned with Bitcoin: according to reporting by German platform Netzpolitik, the EU may be considering harsher restrictions concerning the Bitcoin mining and trading with domestic currencies, not least because of Bitcoin’s enormous energy requirements.

Further segmentation in order to identify the greatest crypto beneficiaries poses a bigger challenge, because, according to the analysts at Chainalysis, it is almost impossible to precisely specify the profits generated by trading in cryptocurrencies for individual investors or wallets due to the decentralized nature of the blockchain. Due to this, the transaction data of the observed crypto exchanges was analyzed to determine the estimated values, converted to U.S. dollars, and attributed as a percentage to the web traffic of the countries that accessed said crypto exchanges. According to this model, a total of around $163 billion in gains was generated from cryptocurrency trading in 2021, $130 billion more than in 2020.

Again, looking ahead, it is the soaring inflation that caused the change in the Fed monetary policy which must be viewed as the single most important study factor. Initially, before the U.S. central bank turned to serial rate hikes, the Yield/Volatility Diagram for major asset classes and their segments looked more traditionally:

Now, in order to cool the markets, the Fed is forced to turn its policy around 180 degrees – to raise the key rate and sell some assets off its balance sheet. This will inevitably lead to a fall in the value of most risky assets. Thus, the stock market (S&P500 index) has already sank by 13% since the beginning of the year.

 

As a result, the Yield/Volatility Diagram somewhat changed:

These trends could not but affect the cryptocurrency market. As a result, the net outflow of investments from cryptocurrency funds reached an all-time high of 14,327 BTC. The greatest flight is demonstrated by the U.S. investors – precisely the ones who previously led the game, but now reduced the volume of investments by 11% in a month. Bitcoin, like the stock market, is trading at a discount this year, however, when adjusted for volatility, it is showing a much smaller drawdown. This is due to the activity of small investors who continue to believe in the power of crypto, which is great, because not all of them simultaneously believe in the power of the Fed to tame inflation without hurting the economy.

Thus, a group of investors with wallets from 0.1 BTC to 10 BTC doubled their positions in April alone, bringing the total stock to 2.5 million BTC. If small players were the leading force in the Bitcoin market, we would now see the price rise instead of correcting. However, this is still the institutional investors, whose strategies are built with an eye on the actions of the Fed. The continuing sharp rise, coupled with the planned unloading of the Fed’s balance sheet, will most likely lead to an increase in the outflow of large capitals from Bitcoin, but not necessarily from many other cryptos, like in the above examples.