To be honest, I have been bullish since mid-2023, but my confidence has started to waver recently. This is actually a good sign, indicating that the market is recovering. I’ve also been receiving an increasing number of private messages from veterans of the cryptocurrency community expressing concerns about the market, especially Ethereum’s recent underperformance. This is another comedic reversal signal. Back in March, the market consensus was to follow a typical 4-year cycle. This seems too easy, and it turns out it is! But just how bad is the situation? I wanted to get out of the Twitter bubble and see the data for myself. So here’s a snapshot of some data points to help us understand where we are now and prepare for the changes to come.
U.S. ISM Manufacturing Index
This may seem like an odd place to start, but let me explain. A year ago, I shared Delphi Digital's catalyst for the upcoming bull market in a post . It makes sense to look back at previous forecasts to learn important lessons.
In their analysis, Delphi details the “heavyweight” and “lightweight” narratives that will dominate the cycle.
Heavyweight narratives include the Fed's liquidity cycle, war, and new government policies. Delphi accurately predicted that Grayscale’s court victory would lead to the emergence of a Bitcoin ETF, but they (and others) did not anticipate that an Ethereum ETF would follow suit.
They also successfully predicted $SOL’s surge, the emergence of AI Tokens, and the dominance of meme coins. Huge respect for that.
But there's one thing they seem to do better than others. Check out the chart below.
Source: Delphi Research Bloomberg
"The U.S. ISM, one of the best predictors of asset price trends, now looks set to be nearing the bottom of its two-year downtrend. The stock market is already starting to react..." they wrote.
“It’s amazing how precisely the ISM tracks the trajectory of previous cycles, including the timing of peaks and troughs. Every 3.5 years, it repeats like a clock.”
They correctly point out that ISM can predict the price of Bitcoin. The biggest problem, however, is that the U.S. ISM Manufacturing Index reversed its bullish trend in 2024 and began to decline.
Source: Delphi Research Bloomberg
U.S. manufacturing contracted for a fifth straight month, with the index falling to 47.2 points. The ISM Manufacturing PMI missed last month's forecast of 47.5 points. Source: The Kobeissi Letter.
The U.S. ISM index affects cryptocurrencies by influencing economic sentiment, risk appetite, and the strength of the U.S. dollar. A weak index can lead to reduced risk investment and selling, while a strong index can increase market confidence.
Additionally, it affects inflation and monetary policy expectations, with typically rising interest rates or a stronger U.S. dollar having a negative impact on cryptocurrencies.
If the US ISM is one of the best indicators for predicting asset prices, we need to pay close attention to the trend to take advantage of bullish reversals.
Cryptocurrency ETFs
Our new ETF is facing a tough time.
Bitcoin ETFs have seen outflows totaling $1 billion on eight of the past nine days. This is the longest period of negative outflows since the ETF was launched.
Source: Jim Bianco on X
The situation worsened.
Spot Bitcoin closed at $52,900 on Friday, leaving ETF holders facing a record unrealized loss of $2.2 billion, equivalent to a loss of 16%, according to Jim Bianco. As of this writing, the situation has improved slightly.
He also noted that ETF buyers are not institutions or baby boomers, but small "tourist" retail investors with an average trade size of $12,000.
According to crypto quantitative analysis, most inflows into spot Bitcoin ETFs come from on-chain holders transferring funds back to traditional financial accounts, so "new" funds entering the crypto market are very limited.
The participating institutions are mainly hedge funds that focus on basis trading (profiting through funding rates) rather than making directional investments. Wealth advisors have little interest.
So the baby boomers are not yet on board.
However, the situation is getting worse. Just look at the flows in the Ethereum ETF.
Source: Delphi Research Bloomberg
Did you notice those zeros?
The Ethereum ETF isn’t even attracting retail interest. Even Blackrock's ETHA has seen inflows on just two of the past 13 days. And cumulative flows were negative for all ETF issuers.
The sell-off by Ethereum’s biggest players has been another blow to the market since July.
Source: Delphi Research Bloomberg
The only good news is that Grayscale ETHE is not selling off Ethereum en masse. Grayscale still holds $5 billion in ether, but with daily inflows below $10 million, demand for the ETF is not enough to absorb those outflows.
Although the data looks unfavorable, I share my optimistic view on Ethereum below. Since that post, there has been increasing discussion about the Ethereum roadmap and the value enhancement of Layer2 over Layer1. I am optimistic that the community can finally start focusing on the value accumulation of Layer 1.
What exactly do venture capital firms do?
One of the most confusing issues of this cycle is the low amount of funding raised. While Bitcoin has rebounded, funding activity continues to lag, and I have been continuously updating the chart below to reflect this.
Source: Delphi Research Bloomberg
Venture capital companies may know some of the situation and are therefore not very optimistic about this industry, or they may be chasing the market at high points like retail investors. My conversations with some VCs suggest that VCs in the crypto industry are just like retail investors, only with more money.
While total funding was much lower than in 2021, the median pre-money valuation nearly doubled, rising from $19 million in Q1 to $37 million in Q2, putting it near an all-time high.
Despite limited funding availability, competition and FOMO have driven up valuations, especially among early-stage startups, according to Galaxy’s Q2 2024 venture capital report.
Source: Delphi Research Bloomberg
This phenomenon is understandable. As cryptocurrency prices rebound, VCs are rushing to invest in a handful of quality protocols. Paradigm, for example, failed to participate in Eigenlayer's investment, choosing instead to back rival Symbiotic.
Another interesting phenomenon is that despite low retail interest, Web3, NFT, DAO, Metaverse and gaming projects are leading the way in terms of funding, raising a total of $758 million in the second quarter, accounting for 24% of total venture capital capital .
Among them, the two largest transactions were Farcaster ($150 million) and Zentry ($140 million). Infrastructure, Layer 1 and Transaction categories follow closely behind. It’s important to note that the combination of cryptocurrencies and AI still attracts only a small amount of capital.
Source: Delphi Research Bloomberg
I feel like the market demand for games and the metaverse is low right now. At my DeFi creative agency, Pink Brains, we once hired someone to be responsible for the research and community building of GameFi and the Metaverse, but due to low interest in the game, we had to suspend this project.
Interestingly, Bitcoin Layer2 raised $94.6 million during the quarter, a 174% year-over-year increase, indicating that VC interest in the BTCFi ecosystem is increasing.
Investors are still full of expectations for the Bitcoin ecosystem, believing that more combinable block space will emerge, thereby attracting DeFi and NFT models to return to the Bitcoin ecosystem. ——Excerpted from Galaxy’s 2024 second quarter venture capital report.
Additionally, Galaxy reports that early-stage deals accounted for nearly 80% of invested capital in the first quarter, with pre-seed deals accounting for 13%. This shows that the market is optimistic about the future of cryptocurrencies.
Despite the challenges faced by later-stage companies, new innovative ideas continue to attract the attention of venture capital investors.
Source: Delphi Research Bloomberg
I personally feel that fundraising activity has decreased as I rarely get new DMs inviting me to participate in KOL rounds.
However, I usually don’t participate in KOL rounds of investment because I don’t think I have a special advantage in the private market. I prefer investments that are more liquid and want to keep my content independent.
Regarding the current situation of Layer2 - Base is the highlight, while the others are relatively inferior.
The good news is: activity on Layer2 is growing rapidly. The number of active wallets and weekly transactions are increasing, and the trading volume of decentralized exchanges has been on an upward trend for a year running.
Image source: Steakhouse on Dune
However, Base is growing much faster than the others. Look at the blue line in the chart that represents the number of active wallets per week.
Source: Steakhouse
Base continues to attract new users, while the other Layer2s are losing users. This growing dominance is particularly evident in the number of traders on decentralized exchanges, with Base accounting for a whopping 87% of the market!
Source: Steakhouse
So, what is going on?
Base debuted its smart wallet during the Onchain Summer event. While the ability to create a wallet through Passkeys is novel, I mainly minted multiple NFTs through the app just to experience it.
The real bright spot for Base this summer, though, has been the speculation surrounding meme coins, which has significantly driven transaction volume and wallet numbers to record highs. As you can see, Base and Solana are the main drivers for most new token issuances on decentralized exchanges.
Source: Archimed Capital
Surprisingly, even though the meme coin craze has subsided and summer is over, trading volumes have remained high.
This may also have something to do with airdrop activity: multiple crypto industry insiders I met during my time at KBW speculated that the launch of Base Token is very likely. So be sure to create your smart wallet and try out an app or two. Farcaster might be a good choice 🙂
About SocialFi
Despite some dissatisfaction with Racer and Friend Tech, SocialFi is another industry that is seeing significant user growth.
Source: Dune
Although Farcaster and Lens have higher attention on X, APAC's OpenSocial Protocol has recently reached 100,000 daily active users, exceeding the combined number of Farcaster's 65,000 and Lens's 25,000. However, few people on X seem to understand exactly what OpenSocial does. Solana-powered DSCVR also quietly reached 60,000 daily active users with little notice.
Despite my losses on Friend.tech, I'm still bullish on SocialFi. SocialFi is one of the few industries in the crypto industry that goes beyond mere speculation. Vitalik Buterin mentioned in an AMA that he is most optimistic about the decentralized social media industry.
Yano noted that OpenSocial has been overlooked because crypto news media and
Image source: OpenSociallabs
OpenSocial is committed to building a decentralized social platform that gives creators and communities full control over their social networks and data. Users can build and manage their own social applications, communities and assets without relying on large platforms such as Facebook or Twitter. This provides users with more control, ownership and opportunities to profit from content interaction, making social media more open and fair.
Similar to Lens and Farcaster, OpenSocial is a platform that hosts multiple applications and interfaces. Among them, Social Monster (SoMon) leads in terms of daily active users. You can try it here, although the current experience still has a lot of bugs...
The point to emphasize here is that cryptocurrency discourse tends to be dominated by Western audiences, but in reality, real users around the world may use cryptocurrencies in different ways than what the crypto OGs on X describe.
Understand current market conditions with quick charts
I want to share some data points to help everyone understand the current state of our market.
According to the IPOR Stablecoin Index, on-chain leverage has subsided as lending rates have returned to levels seen before the market surge in 2023. During the period of active airdrop activity, lending rates rose sharply, but due to poor airdrop results, many investors chose to close their circulating positions.
Source: DeFi Research
We can also clearly observe a leverage reset in Bitcoin’s open interest rate.
Source: DeFi Research
Note that funding rates were higher in March, turned negative in April, and became negative again in July and August. Negative rates mean shorts need to pay longs, which usually indicates traders expect the market to fall. However, open interest (OI) is now back in positive territory.
Another bullish indicator is the selling behavior of miners. Miners appear to have stopped selling and started accumulating Bitcoin again.
Source: DeFi Research
Perhaps the more bullish chart is the supply of stablecoins: their total supply continues to grow.
Source: Allium
The biggest difference, however, is that USDT’s supply is increasing, while USDC’s supply has decreased from $55 billion to $34 billion. Why is this happening?
First, the collapse of Silicon Valley led to the decoupling of USDC, which symbolized the peak of USDC supply. Nic Carter proposed another possible explanation: U.S. policies are driving investors toward less regulated offshore stablecoins, so USDC’s growth is stalling while USDT is expanding.
If this is the case, then pro-crypto regulatory policies in the United States could be a tailwind for USDC.
Regarding regulation, the U.S. Securities and Exchange Commission (SEC) collected $4.7 billion from crypto companies in 2024. This is a 30x increase from 2023.
Source: DeFi Research
These funds, which could have been used for cryptocurrency investments, instead went to government officials instead of the real victims of the crypto industry.
Most of that, of course, was the $4.47 billion settlement with Terra. The good news is that Social Capital’s report states that “the SEC is reducing the number of fines but increasing the amount, focusing on high-impact enforcement actions that set a precedent for the entire industry.”
This is not a good sign. We need the current government to change its negative attitude towards cryptocurrencies or be replaced by new policies.
Summary: Will the market go higher or lower?
The current situation does not seem optimistic.
A falling ISM index, weak demand for Ethereum ETFs, and cautious venture capital investors are not ideal market conditions. However, this is how markets repair themselves. In fact, when everyone is panicking, it often means we may be closer to a market bottom than we think.
While there is a lot of bearish data, there are also many positive signals. Layer2 solutions are performing well (especially Base), social platforms like Farcaster and OpenSocial are growing, and market leverage has been cleared. Although market popularity has declined, some key industries remain active.
The current regulatory environment is quite confusing. The SEC has been putting pressure on the cryptocurrency industry. We need a change in U.S. regulatory policy, or a change in leadership, to curb this. Regulatory policies that support cryptocurrencies could be a catalyst for market gains. Until then, the pressure remains. Even if the Democrats take power, though, they may need to make good on their promise by increasing the money supply. In such an environment, Bitcoin is the most advantageous asset.
Ultimately, markets don't move in a straight line. We're in a phase of volatile market sentiment, but that's not a big deal. Stay focused, follow the data, and don't get distracted by market noise.
Bullish trends are often not obvious until they are obvious. In short, I am still optimistic about the market prospects.
Of course, I could be wrong.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "Deep Wave TechFlow"
Original author: Ignas | DeFi Research
