Key Takeaways
What’s happening with the crypto market? Why does it seem like we are running out of steam? We aim to shed some light by examining both short- and long-term drivers.
Most are well aware of the market events that have contributed to the recent sell-off, but we believe there are also structural factors at play, acting as undercurrents that influence market dynamics.
We delved deeper into these structural factors, introducing our CPT framework, and analyzed the current state of the market.
Overall, we remain optimistic about the market's outlook. Several upcoming catalysts position the market positively for the rest of the year.
Recent Market Performance
The past couple of months have undoubtedly been challenging for the crypto markets. Despite a rapid rise during the start of the year, it seems that we have been trading in a range for a while now. June was especially brutal, with total crypto market capitalization down about 11.4% month-on-month. While there has been some relief in the past couple of days with a market rebound, we are still down about 14.0% from the peak in March.
Figure 1: Following a strong Q1, the crypto market has shown signs of fatigue
Drivers of Market Weakness
The decline in crypto prices across the board has coincided with several market events in recent weeks. We have witnessed somewhat of a perfect storm, with a few entities reportedly offloading their Bitcoin around the same period, contributing to selling pressure and stirring negative sentiment.
Mt. Gox: Repayments to creditors started on July 5. Around 140K BTC (~US$9B) will be distributed. So far, over a third of the Bitcoin owed to creditors has already been distributed.
German Government: 50K BTC (~US$3.2B) was transferred to centralized exchanges and market makers between June 19 and July 13.
U.S. Government: 3,940 BTC (US$248M) was transferred to Coinbase Prime on June 26. The U.S. government remains the largest holder of crypto at the nation-state level, holding around US$12.8B in cryptocurrency.
While the disposal of large supplies of Bitcoin does not look good, there are a few mitigating factors:
Fears of Large-Scale Selling by Mt. Gox Creditors May Be Overblown: Creditors can reportedly choose to receive BTC or fiat. Those who choose to receive BTC may hold at least some portion rather than selling it in the market.
German Government Has Sold All its Bitcoins: The German government sold 100% of its BTC holdings in the past month. Similar to ripping off a band-aid, the impact was felt but short-lived.
Upcoming U.S. Elections May Turn the Tide: Crypto has become a key election topic, reflecting its growing significance in the economic landscape. While the election outcome may not directly affect government BTC holdings, a supportive stance towards crypto could enhance the development of clearer regulations and promote greater adoption of digital assets in the U.S.
Overall, the worst of these events may likely be behind us. The incremental negative impact appears to be limited. We have also observed an uptick in market performance in the past week.
Structural Drivers Should Not Be Overlooked
Most are well aware of the market events that have contributed to the sell-off we have observed in the past month, but we believe that there are also structural factors at play, acting as undercurrents that influence market dynamics. We address the latter in this section.
Introducing Our CPT Framework
Market events tend to have an immediate impact on asset prices and generate the most media headlines. However, multiple forces are usually at play. Some forces may not be immediately evident but can have a similar or even longer-lasting impact on the market. These structural factors take longer to play out but form the core of the crypto market's health.
We have categorized these structural factors into three distinct but non-exhaustive areas, along with some questions for consideration. Capital, People, and Technology, form the basis of our “CPT” framework.
Figure 2: The CPT Framework
Analyzing the State of the Crypto Market with the CPT Framework
1. Capital
The influx of new money into the crypto ecosystem has slowed. In a stagnant market with no new capital flows, it becomes a zero-sum game: when one market participant profits, another must incur a loss. In other words, we are in what is colloquially known as a “Player vs. Player” (“PvP”) market.
Some indicators we have observed include a stagnation in stablecoin supply, a slowdown in funds raised by projects since the market peaked in March, and outflows from spot BTC ETFs.
Figure 3: Growth of stablecoin market capitalization has barely increased since late April
Figure 4: Amount of funds raised by projects has been on a decline in the last few months
Figure 5: Spot BTC ETF net inflows have slowed slightly
Overall, the charts above indicate a slowdown in new capital flows into the crypto ecosystem. Notice the stark change in the pace of capital flows when comparing the first and second quarters of the year. The first quarter saw a rapid increase across all three charts, whereas growth tapered off in the second quarter. Similarly, it may not be a coincidence that the crypto market experienced significant growth in the first quarter of 2024, while the following quarter saw a general decline.
Key Takeaways:
New capital is essential for the broad-based, sustainable growth of the crypto market. Without new inflows, market participants must compete with each other for returns, resulting in a zero-sum game that benefits some while being detrimental to others.
Attracting new capital involves appealing to investors across all segments of the market: primary (e.g., venture capital funds, angel investors), secondary (e.g., institutional players, retail traders), and traditional finance (e.g., ETFs).
While the general macro environment plays a strong part in driving flows, having easily understandable and strong narratives, sound fundamentals (e.g., valuations, user traction, product-market fit), and tangible use cases are beneficial in attracting and retaining investor interest, ultimately fostering a healthier and more robust crypto ecosystem.
2. People
Generating sustainable returns and profits is a key motivation for many market participants, not just in crypto but across other asset classes as well. Historical performance, and the belief that it will continue, is a key reason why many investors remain invested in traditional asset classes like stocks and bonds despite the ups and downs.
However, on this front, market participants have had a challenging time in the crypto market in recent months. Apart from the market events highlighted in the previous section, we believe it is also contributed by the prevalence of tokens with high valuations and sell pressure from vast amounts of token unlocks. It has become increasingly difficult to make profits in the current market environment. We examine the situation from the perspective of a few market participants:
Retail Users: With the broad market and altcoins taking a hit, newly launched projects are mostly down year-to-date.
Institutional Investors (Primary Market): Most venture capital funds may likely be still sitting on paper gains, but deal-making activity has decreased. Upcoming tokens that will be vested are subject to lower valuations, thereby reducing profitability.
Project Teams: Given that part of the team’s compensation is usually in the project’s native tokens, lower valuations reduce overall compensation. Teams that have not had their token generation event (“TGE”) may stay private longer while waiting for a market upturn. Overall, lower token valuations reduce financial strength and may disincentivize talent from building.
Market Makers (“MMs”): MMs play a crucial role in providing liquidity for newly listed tokens. In a sideways or bear market, profitability for MMs is more challenging as trading volumes are lower, and newly launched tokens may not take off significantly.
Regulators: Clear regulations pave the way for mass adoption. Circle's announcement that it has become the first global stablecoin issuer to achieve compliance with the European Union's Markets in Crypto-Assets (“MiCA”) regulatory framework is a positive development. As one of the top stablecoins and a regulated stablecoin, USDC will play an important role in facilitating trust and adoption of crypto assets.
Over time, as portfolio values stagnate or decline, market participants leave or reduce their trading activity. We have observed this taking place in the past couple of months, with trading volumes falling since the market peaked in March.
Figure 6: Trading volume has declined following the intra-year price peak in March
As mentioned earlier, we believe the challenging market environment is contributed by structural challenges. In our previous report, “Low Float & High FDV: How Did We Get Here?”, we highlighted the issue associated with the prevalence of tokens with low circulating supplies and high valuations. The general idea is that such a market structure leaves little sustainable upside for the broader market after the TGE. This is especially evident when we compare the tokens launched in the past few years - the market capitalization (“MC”) to fully diluted valuation (“FDV”) ratio of tokens launched in 2024 is the lowest, suggesting that a significant value of tokens will be unlocked in the future.
Figure 7: Tokens launched in 2024 have the lowest MC/FDV by a fair margin
Notably, it is estimated that approximately US$155B worth of tokens will be unlocked from 2024 to 2030. Without a corresponding increase in buy-side demand and capital flows, the substantial amount of tokens coming onto the market poses selling pressure.
Key Takeaways:
The prevalence of tokens with high valuations and low initial circulating supply poses a structural challenge for sustainable gains over the long-term.
Following the publication of our previous report, we have observed increasing awareness and discussion of this phenomenon, which has contributed to more investors doing their own research on tokenomics and avoiding any jarring red flags.
To further foster a healthy and sustainable market environment, Binance has also committed to supporting projects that are of high quality and small to medium market capitalization.
3. Technology
There have been significant technological advancements in blockchain and crypto in the past year. Some have a positive long-term impact (e.g., scaling solutions), while others address immediate needs (e.g., improving user experience). They are all crucial in making it easier to onboard more users into crypto.
User-focused developments such as features that make on-chain transactions more seamless (e.g., Solana’s blockchain links, intent-based architectures), tools that streamline processes (e.g., account abstraction, trading bots), and dApps that appeal to a broad group of users (a few decentralized social dApps have seen some success) are just a few examples that simplify the user experience and reduce the barriers to entry for less crypto-native users.
Admittedly, we still have some way to go to onboard the next billion users. Currently, capital is still flowing primarily into infrastructure projects by a large margin. Infrastructure projects are critical for the ecosystem and form the foundational building blocks. However, many infrastructure projects tend to be developer-facing platforms (e.g., blockchains), whereas dApps are the consumer-facing front-ends that users interact with and care about. The burgeoning number of layer-1s and layer-2s fragments liquidity and is likely unhelpful in terms of attracting mindshare.
Figure 8: Infrastructure projects receive a disproportionately large amount of funds in private markets
Key Takeaways:
Technological advancements and innovations play a crucial role in attracting a broader and more diverse audience to the crypto ecosystem. By providing tangible use cases and real value, we can engage individuals who are interested in more than just financial gains.
While infrastructure projects are important, they receive a disproportionate amount of focus and funding. Redirecting some resources to develop useful, diverse, and innovative dApps may help amplify the reach of the crypto ecosystem and attract more users.
Catalysts for the Road Ahead
Despite structural challenges, we remain optimistic about the outlook for the rest of the year. There are several upcoming catalysts that could propel the industry forward.
Spot ETH ETF Approvals: Several media outlets have cited sources estimating that this could happen sometime around July 23. New capital inflows will drive demand for ETH, and a rising tide has the potential to lift all boats, driving broad-based recovery. Note that the impact may not be immediate (similar to what we saw following the BTC ETF approvals in January).
Macro Environment: With inflation showing signs of tapering (the latest CPI data fell for the third consecutive month and below expectations), traders are now pricing in an interest rate cut in September. Interest rate cuts, which lower the cost of money, tend to stimulate many different markets and could be a potential tailwind for equity and crypto markets.
U.S. Presidential Election and Bitcoin Conference: Polymarket is now assigning a 70% probability for Donald Trump to win the upcoming presidential election in November. The Trump campaign accepted crypto donations in May and has become increasingly positive about the future of digital assets. Trump has also announced pro-crypto senator J.D. Vance as his choice for vice president, who has disclosed between US$100,000-250,000 in BTC holdings and has previously spoken positively about blockchain technology. Trump is scheduled to speak at the Bitcoin Conference in Nashville on July 27, and it will be key to watch what he says.
Bitcoin Halving Impact: Bitcoin prices have tended to be higher 6 to 12 months after the halving. While past performance is no guarantee of future results, the timing would roughly coincide with the Fed’s September meeting and the U.S. Presidential Elections.
Figure 9: Bitcoin prices have historically increased in the following 6 to 12 months after halving
Source: Coinmarketcap, Binance Research. Data as of July 17, 2024.
Closing Thoughts
Market cycles consist of periods of ups and downs. Pullbacks are a common phenomenon and may even serve as a healthy reset when there are excesses in the market.
It may be beneficial to zoom out, think long-term, and revisit your conviction. Do you believe that crypto still has a place in your portfolio in the long term? Perhaps you think that crypto has the potential to address gaps in traditional systems, introduce new ways of doing things, or serve as a key asset in your investment portfolio. If so, market corrections can act as opportunities to add to your portfolio. For those who are more risk-averse, evaluate your investment horizon and liquidity needs; holding is also a strategy.