In order to set a realistic Bitcoin/Ethereum 2022 forecast we need to approach the matter from various angles including:

  • Inflation and inflationary expectations;
  • U.S. Federal Reserve Monetary policy guidelines;
  • U.S. Crypto regulatory oversight endeavors;
  • Personal and corporate debt requiring smooth repayment;
  • U.S. new tax code including new capital gain tax and so-called universal tax for corporations;
  • Current multiasset funds flows and projected change in shares and dollar values of the multiasset funds flows;
  1. Inflation and inflationary expectations. U.S. dollar core inflation approaches 7 percent per annum, but it is being constantly outpaced by another, more relevant from an ordinary investor’s standpoint indicator, the American Institute of Economic Research (AIER)-monitored Everyday Price Index (EPI). The latter has jumped 1.2 percent in October 2021, the largest monthly increase since a similar rise in March. October was the third increase of that magnitude since the start of the pandemic. The index has posted gains for eleven consecutive months and 16 of the last 18 months. Over the last 11 months, the monthly increases have been between 0.4 percent and 1.2 percent, putting the 11-month gain at 8.7 percent or an annualized pace of 9.6 percent. From a year ago, the Everyday Price Index is up 8.5 percent, the fastest pace since September 2008.

Real inflation approaching 10 percent does not imply a bearish scenario for the capital protection group of assets, including Bitcoin and other value comprising cryptos in 2022, so we must be assured and self-acknowledged that any ongoing episodes of price corrections will always be temporary by nature and self-resolving. The only realistic explanation to the currently ongoing market correction in the broad spectrum of asset classes is that many American investors are willing to sell their holdings to fit within the current taxation bracket since 2022 will be the first year under the new tax reporting rules (read below). Furthermore, since wage inflation won’t keep up with the real price inflation, workers will seek the offsetting for the ongoing basic spending increases in the form of basic bond investment yield equal to the difference between the effective EPI and the salary/wage increases, if any, with means medium risk corporate bonds will preserve positive yields even though benchmark bonds (USD10, Gilt10, Bund10 etc) may remain in the near-zero area. Corporate bond yield, equities and cryptos (as exemplified by BTC) will have the following yield multipliers:

This means, for example, if an average bond yield will be 5%, then equities are expected to perform with an indexed annual gain to the tune of 10%, while cryptos will be expected to arrive at a resulting (price-correction-and-spikes-deducted) 25% annual yield. Note: this is NOT a forecast.

Chart 1. History of U.S. Consumer Price Inflation vs. Federal Funds Rate

  1. U.S. Federal Reserve Monetary policy guidelines. Now, what’s very important in laying out cryptos forecast for next year is, of course, the overall global monetary policies outlook. The last minutes of the FOMC meeting in the U.S. dated November 2-3, 2021 stated: “Policy sensitive rates increased across most advanced economies. The central banks of Norway and New Zealand raised their policy rates early in the period, and policy communications from the Bank of England and the Bank of Canada pointed to the potential for an earlier policy shift towards tightening, contributing to the upward movement of global rates. The Reserve Bank of Australia ended its yield target for the April 2024 government bond. That central bank signaled that conditions for raising the policy rate could be met in 2023 but were unlikely to be achieved in the earlier timeframe implied by market pricing. Some European Central Bank communications also suggested that market rates were likely not consistent with the outlook for policy.

In the United States, the market-implied path of the federal funds rate rose, implying an earlier date for raising the target range for the federal funds rate and a faster pace of rate hikes than was the case in September. Option-implied volatility on short-dated interest rates increased, reportedly reflecting greater uncertainty over the path of the federal funds rate”.

The latter phrase perfectly depicts the complexity of the current situation. On one hand, rising inflation and an uneven path of post-Covid global economic recovery point to a high risk of premature monetary tightening. On the other hand, the commitment of the Fed to declare the official end to the extraordinary monetary measures means it will have to tackle the rising minimum Fed funds rate range – since reducing monthly asset purchases alone would not be sufficient and convincing.

In September 2020, the FOMC introduced – and since then has reaffirmed – outcome-based, threshold guidance specifying three conditions that the Committee expects will be met before it considers increasing the target range for the federal funds rate, currently 0 to 25 basis points. This guidance in September of last year brought the forward guidance on the federal funds rate in the statement into alignment with the new flexible average inflation targeting framework adopted in August 2020. To quote from the statement, these conditions are that «labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.»

Some well-known financial institutions forecast quite a robust pace of Fed’s rate hikes through 2022, up to three normal rate hikes. Although that possibility looks less than realistic, the very acceptance of such a scenario hints at an inflationary pressure accelerating in the next year. Once confirmed, that factor should add fuel to the full range of capital protection type assets, led by precious metals, Bitcoin and other cryptos.

  1. U.S. Crypto regulatory oversight efforts. Another big issue that will affect crypto pricing will be the predetermined regulatory oversight tightening. Thus, U.S. SEC head Gensler recently requested lawmakers to grant his agency the legal authority to oversee crypto exchanges. The test to determine whether a crypto asset is a security is clear”. Gensler unequivocally hints at his agency’s ability to oversee this market only as long as it is positively identified as a part of the broader securities market.

Recently the Federal Reserve and other banking agencies released an agenda on how they plan to weigh custody, crypto-backed loans and the possibility of capital standards. Separately, the U.S. Office of the Comptroller of the Currency issued a memo saying that banks must get an additional sign-off from the regulator before engaging with “digital coins”. “Throughout 2022, the agencies plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible,” the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. wrote in its recent statement.

  1. Personal and corporate debt requiring smooth repayment; This is a very interesting, yet understudied and underreported issue. In fact, the Fed cannot carry out continuous and unrestrained serial rate hikes, because of the debt service impact.

Chart 2. U.S. Corporate Debt Prevents Fed from Quickly Rising Interest Rates

Corporate debt has surged $1.3 trillion since the start of 2020 as borrowers took advantage of emergency Fed action as the pandemic spread, slashing interest rates and backstopping financial markets to keep credit flowing. More debt held by more companies suggests potential risks as borrowing costs rise from currently low levels.

That could create financial stability concerns for Fed Chair Jerome Powell and his colleagues as they debate removing pandemic support in the face of what a report Friday showed were the hottest price rises in almost 40 years. And a tough task: Not since Alan Greenspan’s time has the U.S. central bank tried to navigate the economy back to price stability from too-high inflation.

  1. U.S. new tax code including new capital gain tax and universal tax for corporations; The Biden administration has proposed some new tax rule changes that we don’t want to miss. One of the targets of the administration of Joe Biden is the net investment income tax (NIIT). One of the most discussed propositions is the increase in income tax rates, bringing individual tax rates to 39.6% for ordinary income. We need to account for that, because the majority of U.S. citizens do report their digital holdings, in the same manner, they report their regular real estate and stock market investments. There will be an additional 3.8% surtax on net investment income (NII) that U.S. residents might have to pay on top of the capital gains tax. NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities and royalties.

The maximum capital gains tax would also increase, from 20% to 25%. The 3.8% Net Investment Income Tax under Internal Revenue Code Section 1411 would be changed to expand the definition of net investment income to include any income derived in the ordinary course of business for single filers with greater than $400,000 in taxable income ($500,000 for joint filers) effective January 1, 2022. Under current law, the 3.8% tax generally only applies to passive investment income (interest, dividends, gain on the sale of stock, etc.)

Furthermore, a global deal to ensure big companies pay a minimum tax rate of 15% and make it harder for them to avoid taxation has been agreed by 136 countries. The global minimum tax rate would apply to overseas profits of multinational firms with €750 million (currently about $868 million) in sales globally.

With investors continuing to wonder about proposed changes to the tax code to cover the ballooning U.S. fiscal deficit and newly proposed spending plan by Congress and the current administration, municipal bond funds have attracted some $93.7 billion YTD, just shy of the record set in 2019 of $96.5 billion, with a few weeks left to possibly break that high.

As with the taxable fixed income universe, investors continued their search for yield on the tax-exempt side of the equation, injecting the largest sum of net new money YTD into General & Insured Municipal Debt Funds ($31.9 billion) and High Yield Municipal Debt Funds (+$21.7 billion), which were followed by Intermediate Municipal Debt Funds (+$16.6 billion) and Short/Intermediate Municipal Debt Funds (+$13.2 billion). Digital assets, although being viewed as an alternative investment, still technically fall into that category.

  1. Current multiasset funds flows and projected change in shares and dollar values of the multiasset funds flows; Speaking about a price forecast of a particular asset or an asset class, we can’t manage without studying the flow of funds, because it is their demand that drives prices higher or lower. Looking at the below Chart 3.

As we see, investment funds started substantially increasing their crypto holdings beginning October 2021. We will account this phenomenon in the final scenario forecasting model:

Chart 3. Fund Flows by Key Asset Classes 2021 YTD (Source: Morningstar.com)

And finally: 2022 price forecast for S&P500, UST10 Yield and Bitcoin:

Scenario 1

Conditions: 1. No Fed rate increases + light regulatory oversight for crypto;

2. the U.S. new tax code

BTC average annual rate – $75000; UST10 average annual yield – 1.4%; average S&P500 annual rate – 5200

 

Scenario 2

Conditions: 1. One Fed rate increase + light-to-palpable regulatory oversight for crypto;

2. the U.S. new tax code

BTC average annual rate – $91000; UST10 average annual yield – 1.52%; average S&P500 annual rate – 4900

 

Scenario 3

Conditions: 1. Two Fed rate increase + severe regulatory oversight for crypto;

2. the U.S. new tax code, no forbearance

BTC average annual rate – $99000; UST10 average annual yield – 1.6%; average S&P500 annual rate – 4500