Digital Assets Morning Call: April 21, 2022

Written by Robert Lynch
on April 21, 2022

Crypto investors reaped large gains last year; Eurozone outlook and the implications for crypto

Shorter term price action in major crypto assets remains constructive

Chainalysis details large realized gains by crypto investors in 2021

Eurozone outlook complicated by high inflation, slowing growth and anticipated ECB tightening

Major crypto assets continue to trade constructively. Bitcoin (BTC) has pushed marginally above its 50-day moving average at $42,150 which, if sustained, can help keep shorter term momentum positive. Ether (ETH) is grinding higher with its third consecutive session holding above support at the $3,000, defined by its 50-day moving average as well as a psychological threshold.

2021 was a very good year for crypto investors

Blockchain analytics firm Chainalysis estimated that crypto investors realized $162 bln in gains during 2021, up markedly from $32 bln in 2020. The vast majority of the gains were in bitcoin and ether, and between the two ether gains were modestly larger than those in bitcoin. Chainalysis said the higher demand for ether was probably boosted by increased popularity in decentralized finance (DeFi) last year, as most DeFi protocols are built on the Ethereum network. More broadly, the overall increase in profits is consistent with greater participation in the crypto space by both institutional and individual investors.

European developments and outlook can impact crypto prices

The macro outlook continues to be a key focus and input for financial asset prices broadly, including crypto assets. While the lion’s share of attention has been on the United States given accelerating inflation and the associated shift to tighten monetary policy by the Federal Reserve, the European outlook is also a critical input as it represents roughly 15% of global GDP. Accordingly, there are several recent developments to highlight.

High inflation…

Eurozone Consumer Price Index (CPI) hit 7.4% y/y in March and while much of that rise is energy related (CPI rose 2.9% y/y excluding food and energy), the reality is that price gains do not look consistent with the European Central Bank’s (ECB) current policy stance, which includes negative interest rate policy (-0.5%) and asset purchases (quantitative easing) which are slated to total EUR90 bln this quarter.

…and downside risks to growth…

Complicating matters is the downbeat outlook for the economy, as the war in Ukraine is expected to weaken growth going forward, due to factors such higher energy prices (a tax on growth), potential energy rationing (shutting down parts of the economy) and the added fiscal burden of absorbing millions of Ukrainian refugees into Eurozone countries.

…complicates the choices for ECB policy

Nonetheless, the inflation backdrop may well force the ECB to begin to tighten policy despite economic stresses. Those sentiments were highlighted by comments from several ECB board members in recent days, and markets are now anticipating that policy rates could begin to rise this summer and move into positive territory by the end of this year.

For crypto investors, a key question is how the economy will handle the ECB’s anticipated shift to tightening. Just as a stronger Eurozone economy will be positive for global growth and, by extension, financial market returns, a weaker Eurozone economy has negative implications on both fronts. Accordingly, crypto investors will need to factor in the outlook and risks in Eurozone growth as an input to the overall macro impact on crypto assets.

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Robert Lynch

Robert Lynch

Head of Research and Strategy | Robert Lynch is an experienced financial market strategist, focusing on macro markets including currencies, interest rates, commodities and cryptocurrencies. He is trained and practiced in the analysis of economic developments, monetary and fiscal policy, political events and technical indicators in order to generate actionable investment solutions.