2022 Technical Outlook: Cryptocurrency

2021 has been a huge year for cryptocurrency, and 2022 is setting up to be just as big for this sector/asset class. A quick review of some major events this year: Bitcoin and Ethereum hit all time record highs, the Coinbase IPO, Dogecoin going crazy, Elon Musk tweets, institutions classifying cryptocurrency as an asset class, major banks opening crypto trading floors, the rise of NFTs, and the rise of Decentralized Finance. I am sure I may have missed some, but you get the point. For those invested in crypto’s properly, it has been a great year. My personal crypto portfolio has performed the best out of the bunch.

Before we look at the technical charts, let me rundown some fundamentals I am watching for in 2022.

First and foremost, I want to see cryptocurrencies diverge from the stock markets. When I say this, I mean the major crypto’s like Bitcoin, Ethereum, Litecoin etc. I don’t put the meme coins and DeFi here. They have a different kind of macro ecosystem.

A quick refresher on risk off vs risk on. A risk on environment is one where money flows into riskier assets. In the asset allocation model, this means primarily equities. When stock markets are performing well and rising, we call this a risk on environment. On the contrary, we have a risk off environment. Money flows into less riskier, or safety assets. Things such as the US Dollar but mainly US treasuries and bonds. I know it sounds crazy for money to run into government bonds which yield a low amount, but this is the asset allocation model followed by funds. As a fund manager, you are not paid to sit in cash. Money has to to be making returns, and the asset allocation model of allocating funds in stocks and bonds depending on the risk factor, has been the dominant model.

Regular readers and Equity Guru Discord members (if you haven’t joined yet, it’s free!) know I use the term risk off and on a lot. It is a great way to determine what stocks will do. Every morning when I wake up, I first look at the largest market in the world, the debt market, to determine where stocks will be moving. It is a habit worth creating for your morning market routine. Take a look at TLT or BND to determine if money is running into the safety of bonds, and compare the movement in the DXY and the VIX.

Where does cryptocurrency come into all of this? Well right now the major crypto’s are performing as risk ON assets. Meaning they move in positive correlation with stock markets. If the stock markets move up, Bitcoin and other major crypto’s move up. If the stock market moves down, Bitcoin and other crypto’s move down. Why is this important? Because traditionally, crypto bulls have been saying Bitcoin and other crypto’s are safe haven assets. Money will flow into them for safety, but we have been seeing something entirely opposite. Mind you, the same applies to Gold, although just recently, the precious metals are showing signs of diverging from stock markets. Even moving up with the US Dollar. Likely the inflation play, but metals are also at huge technical levels. In 2022 watch for cryptocurrencies to diverge as well.

Right now the Federal Reserve and the mainstream media is blaming the pandemic and supply chains for rising inflation. Truth is we are in a situation where there is more money chasing the same number of goods and services. The Fed’s money printing is largely to blame. In posts way back in the past, I have spoken about the currency war. Central banks will want to keep their currencies low in order to boost exports, and well, maintain the illusion the economy is doing well through inflating asset prices. But hopefully you all know that the stock market and the real economy are two entirely different things. The real economy seems to be dead, and will continue to do so with more restrictions and lockdowns, while the stock market will continue to move higher because there is nowhere better to go for yield.

If you want to bet against central banks and the debt, then precious metals and cryptocurrencies are where you want to be. I cannot stress the importance of holding these assets for the long term. You do not want to be holding fiat. I prefer the metals as hard assets just because…

Central bank digital currencies. We know they are coming, and when they do, central banks and governments may make it difficult to use private coins. It would make sense because central banks traditionally want no competition. This is why the definition of crypto’s being MONEY or an ASSET CLASS will be very important. If it is the former, then it will be in direct competition with the central banks. The latter would mean digital assets continue to act as risk on assets.

This year we have seen China ban cryptocurrencies and the trading of them. Meanwhile El Salvador adopted Bitcoin as money. 2022 will be a big year for regulations imposed (or not imposed) by governments. Not many people believe the US government will come down hard on them, as they don’t want to follow the CCP’s footsteps. But as someone investing in this space, you always need to be wary about this. Even Ray Dalio, who owns some Bitcoin, warns that governments may act to dissuade money from flowing into Bitcoin.

This leads to another trend, which will be Decentralized Finance (DeFi). This sector is quickly becoming what cryptocurrencies were supposed to be: currencies away from big government, big banks, and big corporations. With Bitcoin being held by corporations and funds now, Bitcoin is becoming a bit too mainstream for hardcore crypto enthusiasts, and regulations surely will be coming. Saying this, I expect DeFi tokens to continue to do well, and even diverge away from what Bitcoin and the other major crypto’s are doing because it is a whole different marketplace.

With DeFi comes the term citizen banking. One company I am going to be keeping an eye on is Square. Well, now they are called Block, which probably gives a good hint to the direction they are going. Jack Dorsey has been a fan of crypto’s. He recently has warned about hyperinflation (applying my definition, you want to hold metals and crypto’s because they are NOT fiat). And of course, he stepped down as CEO of Twitter. It looks like Mr. Dorsey will be focused more on Block, and I think in 2022 they will make a major move/announcement into crypto payments and even DeFi.

The stock is currently testing a major fibonacci level on the weekly chart. We are seeing some buyers here, evident by the large wicks on the last two weekly candles. Getting a close back above $187.36 would be huge for the stock going forward. Square could be one of those stocks to hold for the long term. It still only has a market cap of $77 Billion in comparison to PayPal’s $225 Billion, Visa’s $470 Billion, and Mastercard’s $354 Billion.

I know that has been a big chunk of things to digest, but I am really excited about this space going forward. Albeit, I am more bullish on this space as a way to get out of fiat, rather than a major adoption of crypto’s as money. In terms of major outside influences for 2022, it can be summed up by these words: government, central banks, and Block inc.

Above is the Bitcoin Daily chart. As I have said, crypto’s move in tandem with stocks. I expect stocks to continue higher, so naturally, I am expecting Bitcoin and the other major crypto’s to move higher as well. Just for some near term price action, Bitcoin is indicating a reversal. Price has crossed over my moving average, right on the last day US stock markets were open before closing for Christmas. All we need is a daily close above $51k and we are good to go!

But you all are here and still reading for the 2022 price levels. For this, let’s zoom to the weekly chart. Bitcoin remains in an uptrend as long as the weekly higher low is held. This comes in at the $40,500 zone. You can see how this zone acted as a flip zone, being both support and resistance. Just recently, buyers stepped in close to this zone. If we remain above this zone, new record highs in 2022 are realistic. The next major resistance zones above would be $60,000 and then previous all time record highs at the candle close of $65,500.

If we do the opposite, and close below $40,500, then the $31,600 zone becomes our make or break level. A close below this zone, would take Bitcoin back below $20,000. Not fun for crypto bulls, but for this to happen, we would either need a stock market sell off OR governments come in with some harsh regulations.

I think Ethereum will have a big year in 2022. Ethereum 2.0 and other updates will hopefully address the gas fee and speed issues, although gas fees aren’t nearly as bad as they once were. The Ethereum ecosystem is vibrant with NFTs and also for staking DeFi tokens. However, there are tokens and projects promising to bridge into the Ethereum ecosystem allowing users to use that token or even Bitcoin. Speed and costs are going to be huge for Ethereum, and if that is not addressed, crypto traders might look at the ‘Ethereum killer’ Cardano and other tokens. The current ETH ecosystem is huge, but if we get that bridge then people may just use other tokens.

Technically, Ethereum is at a major support zone right as I am writing this 2022 outlook. If Ethereum holds, we will be making new record highs in Q1 2022. A close above $4640 confirms this, and the higher low higher high uptrend just continues. Ethereum’s higher low by the way comes in at around the $2800 zone. The cryptocurrency presents a great dip buy opportunity here and if stock markets continue higher, Ethereum will follow.