The recent sell-off was largely driven by concerns about the Federal Reserve of the United States' quantitative tightening and projections of higher interest rates, but crypto fundamentals are stronger than ever.

2022 crypto markets did not get off to a good start, with asset prices falling sharply since the new year, a trend that began in November last year. Bitcoin (BTC) and ether (ETH), the two most valuable cryptocurrencies by market capitalisation, have fallen 45 and 48.2 percent, respectively, since their all-time highs. The overall market lost $757 billion in market capitalisation over the last 30 days.

In a new report from American crypto asset managers Bitwise, authored by Chief Investment Officer Matt Hougan and Director of Research David Lawant, the authors blame the downturn on market sentiment. "Weak sentiment is driving the market lower, even as fundamentals remain strong," the report says. The Bitwise 10 Index has fallen more than 20% in the last week.

"The market is likely to continue experiencing short-term volatility as it works through macro challenges," the report reads. "However, our experience with previous crypto pullbacks (along with the space's strong fundamentals) leaves us optimistic about the long-term outlook."

There has been a significant shift in the sentiment of the financial markets.

Over the last three months, the most significant driver of the crypto market's decline has been a broad shift in capital market sentiment away from risk-on assets, such as tech stocks and crypto, and towards risk-off assets, such as sovereign bonds. "This movement is being fuelled by an emerging consensus that the Federal Reserve will soon begin tightening monetary policy in order to combat inflation."

The Nasdaq Composite Index is down more than 10% from its peak in November 2021, and many technology stocks are down 20% or more as a result of this shift in sentiment.

"The recent sell-off is reminiscent of the market's discomfort with a more hawkish Fed in Q4 2018," says one analyst. The Fed's stance then, as now, sent risk assets tumbling across the board: the Nasdaq Composite fell 18% during the quarter, and the Dow and S&P 500 had their worst Decembers since the Great Depression. "Bitcoin fell 44 percent in the same quarter," according to the report.

Though weak sentiments are most likely to blame for the recent drop, crypto's fundamentals remain strong.

2021 will be the best year for cryptocurrency fundamentals ever.

According to the report, crypto's fundamentals were strengthened more than ever last year:

* In 2021, venture capital investors will have invested more than $30 billion in cryptocurrency startups, more than in the previous five years combined.

* In 2021, the number of developers working in the crypto ecosystem increased by 75% over the previous year, setting a new all-time high.

* The number of people who use cryptocurrency applications increased dramatically last year. For example, from 1 million to 21 million monthly active users of MetaMask in 2021, the number increased more than 20 times.

* Crypto will cross the mainstream divide significantly in 2021, according to a new study, with the majority of the world's largest banks now investing in crypto and/or blockchain projects.

* In 2021, public markets opened up to cryptocurrency in a big way, led by Coinbase's debut at a $80 billion valuation, the largest debut in the public markets in any industry last year.

* Prior to 2021, cryptocurrency was primarily concerned with bitcoin and digital gold, at least among mainstream investors. However, it has added numerous new markets in the last year, including DeFi, NFTs, DAOs, the Metaverse, and Web3.

All eyes are on the executive order issued by the Biden administration.

Markets will closely monitor both potential changes in Fed policy, which are unlikely in the short term, and the release of the Biden administration's executive order on cryptocurrency in February.

According to Bitwise's report, the market "currently expects a fairly bearish directive, with a strong emphasis on systemic risks, investor challenges, and criminal activity issues."

"Any indication that these concerns are outweighed by the positive effects that crypto can provide—whether it is technological innovation, economic competitiveness, or more efficient access to capital—would be welcomed by the market."

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