The month of May has been a whirlwind for the NFT market. Shortly after Yuga Labs‘ Otherdeeds drop, tumbling crypto prices as well as the $LUNA debacle have led all NFT projects to suffer from severe price corrections as investors reinforce their risk-off approach.

Last month, we documented how the liquidity seemed to redistribute itself away from Small Caps and into Blue Chips in a ‘flight to quality‘ phenomena, but this month it seems that very few were spared from widespread selling. Optimistically however, institutional adoption has seen an increase along with the added byproduct of a surge in Solana user activity. We investigate the catalysts surrounding these events as well as TA predictions for the future.

Market analysis

The spike in traded volume on May 1st was due to the aforementioned Otherdeeds land sale as liquidity inflows from DeFi and venture capital brought a large number of sales during the mint and secondary market. Profit taking from flippers and swing traders trickled down into other Blue Chip collections before returning to normal levels of around $130M USD. On May 5th, the 50 bps rate hike announced by the Federal Reserve, combined with existing worries about rising inflation, supply chain disruptions and geopolitical instability had crypto continue its medium term downtrend with NFT traded volume following suit. This was exacerbated by the $LUNA and $UST death spiral on May 7th and volume bottomed on May 15th at ~$33M USD.

It is worth noting that this 76% retracement in traded volume is somewhat distorted as the denomination is in USD. Since Ethereum‘s price contracted from $2.8K to $2K, this would have led to a reduction in total volume regardless of other factors.

With another anticipated 50 bps interest rate hike on the horizon and a further reduction of holdings on the Fed‘s balance sheet, investor sentiment still remains low as there is conceivably more volatility to the downside in the coming months.

Sector breakdown

To calculate the average performance of different NFT niches over the past month, we will be using the following indexes provided by Nansen:

• NFT-500: a broad index tracking the top 500 collections weighted by market cap
• Blue Chip-10: an index of 10 market-leading projects, rebalanced manually
• Game-50: a niche index tracking the top 50 P2E blockchain games by market cap
• Metaverse-20: a niche index tracking the 20 virtual land projects by market cap
• Art-20: a niche index tracking the top 20 generative art projects by market cap

Liquidity inflows skewed heavily into Blue Chips at the end of April, but things seem to have swung the other way over the course of this month. The Nansen Blue Chip-10 was the worst performing index this month with a -69% correction. We speculate that the reasons were twofold:

• ‘Flight to quality‘ narrative led buyers flocking to perceived ‘safe havens‘ even at overvalued levels.
• Selloffs in the MAYC (-47%) and Azuki (-52%) collections exaggerated negative performance compared to other constituents. This was due to the end of the Otherdeeds mint and (now resolved) founder allegations respectively.

Surprisingly, the Art-20 index saw a rise of 23% largely due to the outperformance of Damien Hirst‘s “The Currency”, whose floor price rose from 3.1Ξ to 5.8Ξ this month.

Our take is that the price drawdown on Blue Chip projects now puts it into oversold territory as the teams of these projects are ones with a proven reputation and executional capacity. When examining the cost denominated in fiat value, these prices are further discounted by the reduction in crypto prices.

A new DAU leader:

User adoption for Solana NFTs has continued to increase to the degree that Magic Eden has overtaken Opensea in terms of daily user traffic since the start of May. The confluence of factors between Solana‘s cheap token price ($45 at the time of writing), the growing popularity of STEPN as well as not having to worry about gas fees have all contributed to this, but the blockchain still remains throttled in terms of the amount of transactions per second and the frequent network outages.

Future adoption: Institutions & Ethereum 2.O

Many retail investors are currently focused on the short term as they position themselves for the impending bear market. However the more experienced institutional investors are poised for both organic and acquisition growth.

KPMG recently announced that they would be expanding their Digital asset team by 3,500 over the next three years. This expansion of its internal capabilities sets them up to deliver as their clients’ industries are disrupted by technological advancements.

CNBC highlights that some of the larger, more capitalized crypto firms are actively looking for acquisition targets to compliment their suite of product offerings.

FTX has expressed an interest in companies that will contribute to growth in their user base or their regulatory licenses. They recently opened up talks with Goldman Sachs to partner through their derivatives trading platform. This is a similar approach taken with their acquisition of the Blockfolio trading platform in 2020.

Ripple has suggested there would be an uptick in acquisitions, while also highlighting that they had a strong balance sheet.

It’s become increasingly apparent that many small NFT projects held their treasuries in Ether which would lead to a reduction in runway to execute on their roadmaps as the price of Ether falls and secondary sales royalties dry up in a low volume environment. The projects with strong value propositions but low runway now become prime targets for takeovers.

We’ve already seen NFT M&A activity commence with the recent acquisition of Cryptopunks and Meebits by Yuga Labs. This won‘t be the last, especially as venture capitalists start deploying capital into projects with promising prospects, which will become even more apparent during an economic downturn.

PWC highlighted that crypto M&A activity increased from $1.1B in 2020, to $55B in 2021. This is likely to increase further as the asset class and the use case for the underlying Blockchain technology is discovered across multiple industries. NFT utility is diverse and will inevitably provide a solution to many industry problems.

The short term outlook appears grim but there are signs that the industry is growing. With the hype and investor pressures removed from the market this will enable builders to focus on creating projects with valuable utility and real world applications.

Ethereum 2.0 (“ETH 2.0”)

Ethereum‘s move to proof of stake (“PoS”) is one of the most anticipated events despite several delays. It’s expected to be more secure, faster and energy efficient. The PoS mechanism will randomly select validators relative to the total amount and time their ETH has been staked.

Many are concerned that a significant amount of ETH will unlock once ETH 2.0 goes live. This increase in supply on the market could lead to adverse price pressure in a market that is already struggling due to recent rate hikes and other adverse macro economic conditions.

While it is hard to predict the price action post merge, we do know there are several additional variables that could counter this and create a bullish outcome for Ethereum.

ETH 2.0 staking commenced in November 2020 when the price of ETH was around $415. There is approximately 12.7MΞ ($25B USD) locked up in the ETH 2.0 staking contract (according to Dune Analytics), which equates to 10% of the total fully diluted market cap.

While there is a possibility that some investors will take profits upon unlock, it is also possible that they will continue to stake their ETH to secure the network and receive a yield for taking on this risk. In fact those that locked their ETH up in the ETH 2.0 staking contract for a possible two year period are bullish ETH long term and hence would be counterintuitive for a huge selloff to occur, particularly in the mid to long term.

The ETH 2.0 shift to PoS will have a positive impact on the environment given the reduction in energy required to run the network. This has been a contentious issue raised by many governments in discrediting cryptocurrencies. This upgrade undermines this argument and therefore could facilitate more regulatory acceptance and institutional adoption.

It is anticipated that there will be a reduction in daily ETH emissions once ETH 2.0 is live. Compounding this with the deflationary mechanism from the EIP-1559 upgrade (which went live in August 2021) means that we could see further reductions in supply.

So what does this mean for NFTs? Well if the price dumps then it’s likely we will see a double hit on NFT floor prices as investors attempt to exit the illiquid assets and convert back to fiat.

Conversely, if we see ETH price increase then there could be a return to a crypto bull market and ultimately new money flowing back into both crypto and NFTs in search of these returns. There may also be the first decoupling and could see independent price action from ETH, separate from the wider crypto market.

NFTstatistics.eth makes an insightful observation that NFTs and ETH are positively correlated in a bear market.

In a bull market, the negative correlation may return as investors are less concerned about converting their NFTs back into ETH and then fiat.

As a caveat, these observations are based on limited historical data given how nascent NFTs are. The impacts are not yet fully known and this could shift as the demographic of investors develops over time.

Technical analysis

Dollar Index (DXY)
To understand the macro picture one needs to understand that crypto is in general an "anti-fiat "asset class. Therefore, it has a very high negative correlation with the dollar index. A dollar uptrend means risk-on or anti-fiat assets trend downwards.

Currently, we are breaking out of a 100 year channel, which last happened in 1984. There will likely be a revisit of this channel and ultimately touch the lower end of the channel at some point in the near future. This will be the time to sell risk-on assets. Either way, breaking this macro channel is very bullish for fiat and very bad for crypto and the majority of assets for the short to mid-term until there is a trend reversal.

Dollar Index (Daily)
We are currently in a strong uptrend with a target range of 111-112. There is also an over performance target possible, which we are retracing slightly on as of May 27th, 2022, but still within an acceptable range for these targets to be met.

For the macro trend to change, we need to revisit the channel and ultimately break 94.5 support in order to turn bullish. Until then, we will monitor the structure that forms after reaching these targets, which could result in more selling pressure for crypto.

Ethereum (ETH)
The recent all time high (ATH) is likely at wave three of the of the macro trend cycle. The current bear market we are witnessing is the wave four correction with a view to see a new ATH at wave five. This could likely occur between September 2022 and March 2023.

Ethereum (9 hour timeframe)
The last failed bullish formation topped out at $3,583. This created a lower high on the high timeframe chart resulting in breaking key support levels of $2,490 and falling to a low of $1,725. If the bulls are unable to achieve a significant bounce the next open target will be $1,515 which could then see a retest of the previous ATH - a reasonable place for a macro swing-low.

Ethereum: Bitcoin
ETH:BTC has its ups and downs like any relationship. There are clear signs of distribution with likely underperformance of ETH versus BTC on the mid-term. This could mean ETH falls more or increases at a lesser rate relative to it’s BTC counterpart.

There is an expectation that there will be lower prices for ETH:BTC in the coming weeks, probably closer to the mid-range. It’s worth mentioning that this depends on the market reaction and structure and as further adoption happens means a smarter market. There is also the possibility of a decoupling post the ETH2.0 merge which may not be taken into account from a pure TA perspective.

Bitcoin (BTC)
It’s important to monitor the DXY (Dollar Index) when looking at BTC. As soon the bull trend on the DXY finishes we will likely see an uptick in crypto asset prices, but until that point it’s a survival period.

The Central Bank Digital Currency (CBDC) money system will likely arrive around 2026. Crypto is a part of this system and hence will compliment the wider crypto asset class once this has been implemented.

At the time of writing we are trading at $28,988, after hitting the lower price target of $27k. We are setting a historical precedence by seeing the ninth red weekly candle in a row.

There will likely be a significant bounce soon, but with $37,735 as strong resistance. If the current pattern breaks down and we lose the current trading range then we could see a bearish downside target of $24,100.

We turned bearish on May 2, 2022 and expect uneventful accumulation for BTC until Feb 2023.