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Current crypto prices are "at a steep discount" - Bloomberg Intelligence

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(Kitco News) -  2022 has been one of the most volatile years for the crypto industry as a pair of contagion events roiled the market, caused liquidity crises and led to multiple high-profile bankruptcies that have shaken the faith of many involved in the sector.

While multiple mainstream analysts and news outlets have once again called for the death of Bitcoin – which has been declared on 467 separate occasions – Mike McGlone, Senior Macro Strategist at Bloomberg Intelligence, thinks that the nascent asset is “at a steep discount” based on the Bloomberg Galaxy Crypto Index at the start of December.

“A year from now, it's likely the Fed will have transitioned toward easing, and cryptos appear ready to resume their propensity to outperform most traditional assets,” McGlone said in his “2023 Cryptos Outlook.”

The analyst went on to say that the events of 2022 and the significant declines witnessed across the crypto market were akin to “growing pains” and highlighted “the unfavorable risk vs. reward of not partially allocating to the revolutionary technology/asset class.”

According to McGlone, cryptos play only “a minor part of the global asset mix,” and are “ripe for proliferating.”

When comparing the nascent asset class to oil, McGlone noted that while cryptos have only had a regulated futures market for five years, the current trend shows a “rising CME-traded Bitcoin futures' open interest vs. declining interest for crude oil.”

“Technology is bearish for both sides of the crude demand/supply balance -- creating more for less and reducing consumption,” McGlone said. “Bitcoin, on the other hand, is becoming digital gold in a world heading that way, and Ethereum may be akin to the advent of futures and ETFs to traditional finance.”

The Bloomberg strategist also noted that Bitcoin has never been at a deeper discount than it was at the end of November based on its 100-week moving average. He pointed to the collapse of FTX and other major bankruptcies that have occurred in the crypto space over the course of 2022 as the main culprit for the poor performance, but added that “it's from similar ashes that bull markets typically emerge.”

While it's possible that there is still more downside ahead for Bitcoin in the near term, McGlone suggested that the long-term outlook remains quite positive.

“What appears to be enduring is the elongated upward price trajectory, despite the current relative discount. The price may visit the next good support area around $10,000-$12,000, and it could be a matter of time that the nascent fundamental value of the world's most significant decentralized digital asset prevails,” he said.

Despite the fact that 2022 has seen one of the most severe drawdowns in crypto history, the Bloomberg Galaxy Crypto Index (BGCI) is “still up about 200% since the end of 2019 vs. 20-60% for gold, the S&P 500, the Bloomberg Commodity Spot Index and US money supply to Dec. 2.”

McGlone said that he anticipates the BGCI will resume its “propensity to outperform,” adding that “about 70% of the BGCI is Bitcoin and Ethereum, which are notable for definable diminishing supply vs. increasing adoption and demand.”

Staked Ether withdrawals are to be opened in March, following the Shanghai hard fork

On the topic of how historians will view the crypto market’s performance in 2022, McGlone said it will likely be seen as “a significant dip within an elongated trend.”

“‘The code committed no crime’ may be how history looks back upon cryptos in 2022,” he said.

Looking ahead to 2023, the Bloomberg strategist noted that the performance of all assets may depend on moves by the Fed, which has been on the most aggressive tightening schedule in 40 years.

“If they don't flip to easing, the world may tilt more deeply into recession, with repercussions for all risk assets. Our base case is for an elongated deflationary period, with the crypto market, as measured by the Bloomberg Galaxy Crypto Index, coming out ahead,” he said.

It's possible that the macroeconomic bear market could cause Bitcoin to drop toward $10,000 and break Ether’s support at $1,000, “but these levels represent extreme discounts,” according to McGlone. “Our bias is the top two cryptos are backing up within elongated bull markets that may be as inevitable for resumption as the Fed shifting to easing,” he added.

Once the market does eventually turn around, McGlone highlighted resistance at $40,000 for Bition and resistance at $3,000 for Ether as the levels to watch in 2023.

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