When Will ICP Bottom?
A Supply/Demand Question
Two weeks ago I wrote about a lot of sell pressure (here). The price of ICP has decreased 35% since that article. So what do I think will happen next?
TL/DR
More sell pressure is coming
The ICP ecosystem is growing quickly
An inflection point will occur in the first quarter of 2022
First, two points: (1) I am not a financial advisor, nor an expert and these are just my thoughts and predictions. (2) I am extremely bullish for ICP and the Internet Computer in 2022. Anyone who found the easter egg in my 2022 Chose-Your-Own-Adventure article should know that I think the easter egg outcome is the most likely 2022 outcome. Despite the near-term price struggle in the next few months, I think the price of ICP will hit triple digits in 2022. Again, just my opinion.
Supply
I had written in this article that the supply of ICP coming to the liquid market is pretty accurately known because we can see when neurons are dissolving on the NNS. There’s a lot dissolving in the next few months (for reference, the average monthly dissolve in 2021 was ~2M/month).
With almost 6M ICP dissolving each month for the next four months, the price of ICP has no choice but to go down unless demand for ICP increases. The answer to the question “When will ICP bottom” is another question “When do you think new demand for ICP will be greater than new supply?”. Let’s get to demand later.
Supply Pool
The above supply/demand statements depend on relativity - an increase in new supply only matters if it is significant relative to existing supply. Currently there is 475M total ICP in existence. 220M of that (46.3%) is locked in dissolving or non-dissolving neurons on the NNS. An additional 105M ICP (22.1%) is in dissolved neurons (something discussed in my article here). That leaves 150M ICP that is not on the NNS and is most likely liquid within the market. Much of that 150M ICP will be on exchanges or could be easily moved to an exchange. The increase in liquid ICP by 5-6M ICP per month would represent a monthly increase of 3-4% in total liquid ICP, which would be considered significant in my opinion.
Demand
Demand for ICP is a little less predictable and will therefor be the driver of ICP’s price over the medium and long term. Let’s review sources of ICP demand:
Burning and Fees - Deploying and using a canister on the Internet Computer results in burning ICP. Transacting in ICP also requires the burning of 0.001ICP per transaction.
Staking on the NNS - New and existing NNS participants can stake ICP on the NNS and receive rewards for doing so. Throughout 2021, about 0.5M ICP has been staked on the NNS per month.
Liquidity Pools - Since ICP is a medium-of-exchange, some applications will absorb ICP liquidity to operate. For example, NFTs have become a quickly growing market on the Internet Computer. In order for that market to operate efficiently, ICP needs to be kept within the market. As the market grows, more ICP is needed to facilitate the ease of transaction. A good proxy of this could be the amount of ICP held in Stoic, Plug and Earth Wallets.
Price Speculation - This is my “other” bucket for any demand not listed above.
Demand Projections
Since new supply of ICP is known, answering the question about when ICP will bottom requires projecting demand for ICP. Demand for burning and fees can be ignored as these are currently measured in the thousands of ICP/month and is unlikely to increase to a significant driver of demand for the near and medium term future.
Staking on the NNS, which averaged about 0.5M ICP/month for 2021, could be a driver of new demand in 2022 if that average monthly staking increased by 4-10x (2-5M ICP/month). Already in December over 1M ICP has been staked, so that is one data point in the right direction. Also, staking ICP has recently been accessible to Ledger wallets, which will certainly improve the ease of staking for Ledger’s customers, potentially increasing the number of staking participants. Finally, staking should increase as the price of ICP decreases because it becomes cheaper to buy ICP. While I don’t think staking will 10x in the next few months, a 2-4x is possible within a few months, which would contribute to minimizing the downward pressure on ICP.
Liquidity Pools are the least predictable source of demand and perhaps the biggest driver of when the price of ICP will bottom. In terms of NFTs, Avocado Research recently tweeted that Entrepot did about 25k ICP in transactions last week. That figure has been growing rapidly in the past few months and I predict will grow to near six figures within the first quarter of 2022. That liquidity pool would remove hundreds of thousands of ICP alone. The wildcard is DeFi though. DeFi has the potential to absorb millions of ICP and I’ll be watching that space closely in 2022.
My Prediction
First, note in the chart above that a lot less ICP will be coming off the NNS starting in June 2022. If you are looking for a bottom in ICP, it most likely will be prior to June 2022. The question then is have we bottomed already?
I wrote two weeks ago that if demand remained constant then ICP would find an average price of $12-$16.5, at least in the first half of 2022. I don’t expect demand to increase significantly until DeFi ramps up on the Internet Computer. That might not be until late Q1 of next year. However, demand could also increase in the anticipation of DeFi (as investors front-run), particularly if firm dates for bitcoin integration get set. Therefore, my prediction is that January and February could be challenging months for ICP price, but anticipation in DeFi and NFT market growth will be enough to avoid the $12-16.5 average range prediction. Instead, I anticipate an all-time low for ICP in early-to-mid Q1 and, as mentioned early in this article, for the price of ICP to never look back.
I’ll write in a later article how to best monitor any changes in demand. In the meantime, I hope Santa leaves you an 8-Year Neuron under your tree :)