Author: YBB Capital Researcher Ac-Core
TLDR
Unlike the previous bull market driven by macroeconomic prosperity, this round of crypto market is mainly affected by macroeconomic uncertainty.
ETFs are little more than a slow-release ibuprofen, and cryptocurrencies following the trends of the U.S. stock market have become a limiting factor in the industry’s growth potential.
Currently, it is only a bull market for Bitcoin, and altcoins have not yet picked up. The main reasons include insufficient industry innovation, insufficient liquidity, and unreasonable valuations in the primary market, which lead to insufficient capital momentum and difficulty in achieving volume-driven growth.
Repeating old narratives cannot sustain market value, and with traditional institutions such as BlackRock entering the field and the lack of innovation in the industry, internal competition seems inevitable.
Can the four-year halving cycle still be the key to a bull market?
1.1 The starting point of this bull market is completely different
Bitcoin happened to be born in the context of the economic crisis, probably to resist the excessive issuance of national legal tender and monetary intervention policies. Looking back on its development history, before Bitcoin was completely banned in China in 2021, it is undeniable that China was the main driver of the industry's growth, and its mining operations once accounted for two-thirds of the global total. At the same time, the overall economy experienced significant growth, driven by the real estate and Internet booms. The overall macroeconomic environment is positive until 2021, with central banks continuing to inject liquidity into the market, driving investor optimism. However, after 2020, the cooling of the real estate sector and the overall economic slowdown depleted liquidity in some markets.
From an innovation perspective, DeFi Summer stimulated the internal economic cycle of Ethereum and became the main driving force for its explosive growth. Subsequently, NFT, MEME, GameFi, etc. continued to attract a large influx of resources, and even triggered a craze for digital collectibles. The rise in market value has driven the expansion of the industry. However, this time, most of the industry's innovations are remakes of old ideas, and perhaps the bull market has not yet arrived because the new narrative has not yet had a significant impact.
If we look back to the beginning of 2019 to the beginning of 2021, as the beginning of the bull run, the price of Bitcoin was between $4,000 and $10,000, while Ethereum was between $130 and $330. The overall size of the crypto market is relatively small, and there is plenty of room for growth. But according to CompaniesMarketCap, Bitcoin's current market capitalization ranks 10th in the world, second only to Facebook, and its market capitalization has about 3 times the growth potential compared to Apple's market capitalization, and about 15 times the market capitalization of gold. The growth prospects this time are smaller than in the previous cycle.
Halving-driven growth may be the final chapter of this story. Cyclical growth in the cryptocurrency market is always closely tied to the macro economy. Since Bitcoin’s creation in 2009, its market capitalization of more than $1 trillion would not have been possible without regular injections of liquidity to stimulate the economy. The only constant in financial markets is change, and even if you manage to hold your position, you don’t know how deep the recession will be.
Source: CompaniesMarketCap
1.2 What is the positioning and future growth potential of Bitcoin?
Is Bitcoin’s safe-haven status recognized only in the cryptocurrency space?
To this day, the US dollar still controls the world with its pricing power, and gold is regarded as a "safe haven" for hedging and preserving value. Every major crisis in history has set new highs. The first rise in gold prices began with the collapse of the Bretton Woods system after World War II, and the decoupling of the US dollar from gold. The driving factors included geopolitical tensions and inflation. The second rise began in 2005, and the price of gold soared. After the outbreak of the subprime mortgage crisis, a large amount of investment capital flocked to gold for safe havens. It finally ended after the Libyan War in 2011, and geopolitics once again became the main factor. The turning point of the third rise came in 2018. The global COVID-19 pandemic and central bank liquidity injections were the main driving factors, as well as local geopolitical conflicts. Gold has always been the first choice for hedging, and the Federal Reserve's quantitative easing and geopolitical factors are the main forces driving the rise in gold prices.
As of Thursday, September 12, Beijing time, spot gold closed up 1.84% at $2,558.07/ounce, setting a new closing high. Spot silver rose 4.19% to $29.8792/ounce, and COMEX gold futures rose 1.78% to $2,587.6/ounce, also setting a new high (data source: Forward Research Report). The claim that Bitcoin is a safe-haven asset like gold seems to have been debunked. Gold rose sharply but Bitcoin did not follow suit. On the contrary, the price trend of Bitcoin is very consistent with the trend of US stocks.
Bitcoin’s greatest value: a tool to resist economic sanctions and lack of trust in fiat currencies
In the context of economic globalization, all countries are eager for their currencies to be used for international transactions, international reserves and international settlements, but this desire is hindered by the "impossible triangle" of monetary sovereignty, capital flows and fixed exchange rates. From the "currency war", we can see that paper money itself has no value, and its value comes entirely from national credit. Whoever controls the right to issue currency can effectively bypass the country's legal framework. Even the powerful US dollar will find it difficult to maintain its huge credit support for a long time. Economic globalization itself contains the difficult-to-resolve contradiction between global currency dominance and national interests. For example, El Salvador has promoted the use of Bitcoin nationwide through "dual legal currencies" to weaken the influence of the US dollar; Russia will allow residents to trade cryptocurrencies and use them for trade settlements from September 2024 to circumvent sanctions.
Bitcoin's dilemma: its value comes from hedging against fiat currency trust risks, but its upward momentum still depends on powerful country policies, the adoption of monopoly capital and macroeconomic conditions.
ETFs are only a short-term pain relief, not a cure
2.1 The Post-ETF Era of Cryptocurrency: Failed Resistance to Power
Source: Guardian News
Bitcoin was born in the context of an economic crisis. The unique properties of blockchain can resist the excessive issuance of sovereign currencies and monetary policy intervention. Anti-authority, freedom, and decentralization used to be our beliefs and slogans. In the industry, various "players" have speculative motives, and the dream of getting rich overnight seems to be the main driving force for the industry's growth. But in the final analysis, Bitcoin ETF is just a one-time, inevitable stimulus.
Our belief in resisting authority has now turned into hope for authority. It seems that in our crypto utopia, we only care about profits, not direction. The market continues to cheer for good news around ETFs, hoping for more opportunities to bring in capital and exit as liquidity. The community that once resisted authority is now gradually giving the fruits of its labor to the same authority.
BlackRock, Vanguard, and State Street are the companies that dominate the world, and now BlackRock is gaining control of Bitcoin.
Who is the most powerful company in the world? Apple, Tesla, Google, Amazon, Microsoft? Actually, none of them. The real answer is the above-mentioned global asset management giants, with BlackRock maintaining the title of the world's largest asset management company for 14 consecutive years from 2009 to 2023.
The direct impact of the post-ETF era is that prices will be more aligned with traditional financial markets. Only those who hold the most tokens have the greatest influence, and the United States is gradually gaining ideological control over the crypto industry. According to a report by QCP Capital on September 10, 2024, macroeconomic uncertainty continues to dominate the crypto market, and the 30-day correlation between Bitcoin and the MSCI World Stock Index reached 0.6, the highest level in nearly two years.
There is no doubt that the crypto industry first sprouted in China, but now the "big players" have changed, and more professional players are on the way. In the future, not only the selection of brand IP and industry focus will be needed, but also strong trading and execution capabilities. The Matthew effect will penetrate every corner of the industry, and the crypto world is steadily evolving towards "Wall Street-level" transaction complexity.
2.2 The Gold Rush Metaphor
Looking back at the California Gold Rush more than a hundred years ago, hundreds of thousands of people from all over the world flocked to California for the dream of getting rich overnight, but most of them returned empty-handed, and some even died. However, Levi Strauss took a different approach and used the gold rush to sell a large amount of stockpiled canvas and made it into durable pants for gold miners. Because of its practicality, it became very popular. Later, he improved the pants and became the founder of blue jeans, and founded the world-renowned Levi's brand.
Interestingly, Bitcoin’s PoW mining and Ethereum’s PoS staking are strikingly similar to this. The PoW mining craze allowed “gold diggers” to take their mining machines with them, while PoS staking allowed them to use their capital as a tool. However, behind this mining craze, miners are chasing the dream of getting rich, while Levi Strauss covets the miners’ capital. The 24/7 global crypto market provides these “gold diggers” with countless opportunities, but also makes the market extremely volatile. High risks are accompanied by high returns, and profits and risks constantly test everyone’s courage and diligence.
Fast-paced, non-stop trading, and volatile markets have both tempting traps and endless trading opportunities, which is the charm of cryptocurrency. The combination of strong financial attributes and low barriers to entry makes cryptocurrency a natural high-quality gold mine. We once cheered for ETFs and expected them to bring in more external capital, but the reality is that ETFs are opening the door for more "Levi's"-like people.
More Levi-Strausses Coming to Crypto
The launch of ETFs can not only introduce external capital as "exit liquidity", but also attract traders who hedge risks. The biggest innovation of blockchain so far is to put finance on the chain and establish a "self-sufficient economic cycle" within the crypto market, effectively preventing direct intervention from strong entities and "Old Money". However, the post-ETF era of the crypto market has, to some extent, handed over comprehensive financial derivatives to these forces, further attracting more arbitrageurs and big capital, which will squeeze the already limited market profit space.
3. Difficulty in breaking through the primary market
Low liquidity in the primary market and high FDV
Compared with the past, tokens issued in the primary market have generally shown extremely high FDV (fully diluted valuation) and low liquidity recently. According to Binance's "Observations and Thoughts on High Valuation and Low Liquidity Tokens" report data, the ratio of market capitalization (MC) to FDV of tokens issued in 2024 is the lowest in recent years. This shows that there are still a large number of tokens that have not been unlocked in the future. By the first few months of 2024, the FDV of issued tokens has been close to the sum of the FDV of all issued tokens in 2023.
Image credits: @thedefivillain, CoinMarketCap, and Binance Research, data published on April 14, 2024
In a market lacking liquidity, tokens will continue to be unlocked after the TGE, creating huge selling pressure. But did the VC really make money in this round? Not necessarily. In most cases, compliant and regulated project financing requires tokens to undergo a lock-up period of at least one year before unlocking and issuance. In the case of high FDV and low liquidity, projects may experience token unlocking leading to a price crash, although small VCs may still sell on the secondary market or pre-sell over the counter.
As shown in the chart below, the circulating supply of these tokens is below 20%, with the lowest being just 6%, highlighting the harsh reality of high FDV.
Image source: CoinMarketCap and Binance Research, data release date: May 14, 2024
Obviously, capital-driven momentum is currently ineffective. In addition to the above factors, there are other objective factors that lead to low liquidity and high FDV:
Market fragmentation and too many competitors: In the last cycle, domestic and foreign capital jointly hyped DeFi and Layer-1 chains. However, in this cycle, funds and participants are too scattered in multiple narratives, and Western and Eastern capital tend not to take over each other's projects. This leads to a situation where the number of buyers is not enough to meet the number of sellers.
There is no altcoin bull market, lack of speculation: EVM-based chain infrastructure is mature, and funds and projects are competing in the same direction. The "Ethereum killer" has not come up with anything new. In addition, in a market without an altcoin bull market, when a project succeeds in a particular field, imitation projects will soon emerge and become the next undervalued opportunity.
Complicate simple things, turn complex things into narratives: Pseudo-innovation that complicates simple things is everywhere. Repackaging old concepts is often just to sell bigger dreams to the market.
The Matthew effect is everywhere: the crypto industry has been developing for more than 16 years, and the top monopoly interests have basically solidified. Whether it is technology, projects or capital, the strong get stronger and the weak get weaker. Those who survived have strengthened their control over the narrative.
Challenges to sustainable growth: Lack of innovation and liquidity are the most pressing challenges facing the market today.
