Thread by @RealNatashaChe

2021 was good to crypto.

Next year things will look different b/c of changes in macro environment & tech adoption cycle.

Here are top 3 crypto investment themes I’m bullish 📈 & bearish 📉 about for 2022 👇

First, a word on 2021.

Loose fiscal / loose monetary conditions since pandemic floated boats for all risk assets—> total crypto market cap increased 300% y/y.

Hyper growth in valuation was also fueled by crypto finding real use cases, for the 1st time ever, in DeFi & NFT.

Total DeFi TVL increased 1600% y/y.

NFT market cap on Ethereum alone increased 16600% y/y.

2nd-generation smart contract layer 1 blockchains w/ proof of stake consensus algos provided crucial infrastructure for these use cases, and saw valuations go up too.

But as inflation rises, Fed is pressured to “do something”, even though current inflation is mostly driven by supply bottleneck, not demand overheating.

https://twitter.com/RealNatashaChe/status/1466065448835985417?s=20

2022 will likely see flat growth of Fed balance sheet & attempts to raise rates. Drastic rate hikes are unlikely given heavy debt burden of both public & private sectors, and the fact that inflation is still mostly a supply story.

Regardless, it’s near certainty that monetary conditions will be tighter in 2022.

Purchasing power reduced by inflation + withdrawal of monetary stimulus = worse economic growth.

By end Q1 next yr, macro analysts may be busy revising down growth projections.

On crypto side, mass adoption of web 3 tech is only starting.

Experiences from previous two waves of exponential tech— internet and mobile— show that mass-market applications start to get major traction once underlining tech reaches 1 billion users.

In contrast, there are merely 180 mn Ethereum addresses rn. Using that as proxy for web 3 adoption, at current growth rate it’ll take another 5 yrs to reach 1 billion users.

Outperformers at this stage of adoption will likely be infrastructure plays & niche applications w/ high value add.

Against these macro & tech cycle backdrops, these 3 crypto sectors are likely winners of 2022.

1. Blockchain gaming

On demand side, gamer demographic has high overlap w/ early crypto adopters. There’s ready demand for player-owned in-game assets, which are natural use cases for NFT & build on success of the latter. A weak(er) economy increases appeal for players to make $ from games.

On supply side, 2nd gen L1s & L2s w/ cheap & fast transactions have made infrastructure more feasible for high performance games.

The catalyst we need for this sector to explode is high quality blockchain games that real gamers actually want to play, to make their tokeneconomics sustainable.

https://twitter.com/RealNatashaChe/status/1468649154985476105?s=20

Good thing is crypto hype has drawn many game design talents into the space. At least some of their work will start bearing fruit in 2022. Watch out for serious players like Gala Games.

2. Proof-of-stake layer 1 / layer 2 platforms

2021 was the year of alt L1s. That’s not a fad.

Mass adoption of web 3 hinges on scalable public blockchains. It’s no accident that 2nd gen L1s that enable massive growth of on-chain applications are reaping most values created in current wave of crypto boom.

This trend will continue in 2022 (we’re barely started), w/ newer L2s on Ethereum joining in the competition.

From investment risk/reward perspective, I expect alt L1s w/ traction > L2s w/ traction > Ethereum L1.

https://twitter.com/RealNatashaChe/status/1469762575571161088?s=20

At current stage alt L1s allow better composibility / liquidity within own ecosystem, while Eth L2s can leverage existing Eth user base & liquidity, plus they start from a smaller base & thus may grow faster in ST.

However, L2s compete on more of the same metrics & may have harder time differentiating from competition than alt L1s. And an Eth L2, if successful, would be where most of the new added-value accrues, instead of Eth L1.

https://twitter.com/RealNatashaChe/status/1465036440413380614?s=20

3. Cross-chain solutions

There was little need for cross-chain asset transfer / interoperability when Bitcoin & Ethereum made up entire blockchain universe. That reality is changing fast.

As multiple alt L1s & eth L2s flourish, plus new chains created by web2 enterprises, transportation among crypto “nations” & “cities” becomes the next infrastructure challenge.

This sector is destined to grow. But there’s no mature/dominant players yet & it’s uncertain where the value-added will accrue. (similar to the DeFi situation, which I’ll explain in a sec.)

Watch for promising projects such as Quant & LayerZero.

In contrast, here’re 3 sectors that may underperform next year.

(BTW, like this so far? I write about ideas on investment, macro and human potential. Subscribe to my newsletter for updates 👉 taschalabs.com/newsletter .)

1. DeFi

Sector as a whole will continue to grow. But so far DeFi moat has proven hard to defend for individual application, w/ select exceptions. As a result, underlining L1 protocols have been the largest beneficiary of DeFi growth, instead of DeFi apps themselves.

Plus, progress in bringing off-chain collaterals on-chain remains slow & creates major bottleneck of sector’s mid-term growth.

Thirdly, tightening monetary conditions may be especially damaging to DeFi projects that are semi financial ponzis w/o underlining token use case, since part of their token valuation derives from discounted future revenues from protocol-owned-assets.

https://twitter.com/RealNatashaChe/status/1469458409133002755?s=20

2. Creator/community tokens, web3 Amazon, Uber etc

Creator tokens were much hyped in early 2021. I believe they’ll eventually break out but rn we’re a few yrs too early. Other projects that try to create web3 2-way marketplaces like Amazon & Uber are in the same camp.

As mentioned b/f, mass-market applications get major traction when underlining tech reaches 1 billion users. Crypto adoption is still far from being able to support tens of thousands of individual creators issuing their own mini currencies.

https://twitter.com/RealNatashaChe/status/1465516941758578695?s=20

Plus in most cases utilities of these creator tokens are not yet strong, i.e. still finding product market fit. Thus in ST, gaming, NFT & DeFi will remain the use cases that carry the load of user adoption for crypto.

If adoption for creator/community token projects will be further down the road, any increase in interest rate today will hurt their valuation more than projects that have cashflow rn, similar logic to growth stocks.

3. Meme coins

Like GameStop, these tokens disproportionately benefited from stimulus checks / monetary loosening. As those forces reverse & inflation lowers discretionary cash spend for small retail investors, market cap rankings for Doge & Shiba may have to drop.

TLDR: Crypto asset allocation game plan for 2022--

1. Hold on to alt L1s

2. Increase exposure to high-quality gaming & performant Eth L2s

3. Lower exposure to DeFi, memecoins, creator platforms & web2 marketplace clones

4. Watch for cross-chain interoperability projects

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