Translation: Blockchain in Vernacular
Summary of key points:
Unlike the previous bull market which was driven by macroeconomic prosperity, the current crypto market is mainly affected by macroeconomic uncertainty.
ETFs are little more than “slow-release ibuprofen,” and the trend of cryptocurrencies converging with U.S. stocks has become a limiting factor on the industry’s growth potential.
Currently, it is only Bitcoin that is in a bull market, and altcoins have not shown any signs of improvement. The main reasons include insufficient innovation in the entire industry, lack of liquidity, and unreasonable valuations in the primary market, which have led to a lack of capital motivation and difficulty in achieving growth driven by trading volume.
The repetition of old narratives cannot sustain market value, and with the entry of traditional institutions like BlackRock and the lack of innovation in the industry, internal competition seems inevitable.
1. Four-year halving cycle: Can it still be the key to the bull market?
1) The starting point of this bull market is completely different
Bitcoin was born in the context of the economic crisis, perhaps in response to the excessive issuance of national legal tender and the intervention of monetary policy. Looking back on its development history, it is undeniable that before Bitcoin was widely banned in China in 2021, China was the main force driving the growth of the industry, once accounting for two-thirds of the global mining share. At the same time, with the prosperity of real estate and the Internet, the macro economy has also developed significantly. Until 2021, the overall macroeconomic environment is improving, and central banks of various countries continue to inject liquidity into the market, driving investor optimism. However, a cooling housing market after 2020, combined with a broader economic slowdown, caused liquidity to dry up in parts of the market.
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 and GameFi continued to attract a large number of resources, sometimes even setting off a craze for digital collectibles. Growth in market capitalization drives industry expansion. This time, however, the industry’s innovations are mostly rehashes of old concepts, and perhaps the bull market is yet to come because the new narrative has yet to have a significant impact.
If we consider the beginning of 2019 to the beginning of 2021 as the beginning of the bull market, the price of Bitcoin was between $4,000 and $10,000, while Ethereum was between $130 and $330. At that time, the overall size of the crypto market was small, and there was plenty of room for growth. However, according to data from CompaniesMarketCap, Bitcoin's market capitalization currently ranks tenth in the world, second only to Facebook, and has about three times the growth potential compared to Apple, and about fifteen times the potential compared to gold. The growth expectations this time are smaller than the previous cycle.
Growth driven by halving may be the final chapter of this story. The cyclical growth of the crypto market has always been inseparable from the macro economy. Since the birth of the Bitcoin Genesis Block in 2009, its market value of more than one trillion US dollars has been achieved, which is inseparable from the stimulus of cyclical liquidity injection to the economy. In the financial market, the only constant is change. Even if you can hold your position, you can't predict how deep the trough will be.
Source: CompaniesMarketCap
2) What is the positioning and future growth potential of Bitcoin?
Is Bitcoin’s safe-haven status limited to the crypto community?
To date, the US dollar still controls the world through its pricing power. Gold, as a "safe haven asset" for risk aversion and value preservation, usually hits new highs during major crises. The first gold bull market began with the collapse of the Bretton Woods system after World War II, when the United States decoupled the dollar from gold, and geopolitical tensions and inflation were the driving forces. The second bull market began in 2005, with gold prices soaring. After the subprime mortgage crisis broke out, a large amount of funds flowed into gold for safe havens. The bull market finally ended after the Libyan War in 2011, and geopolitics was once again the main factor. The turning point of the third bull market came in 2018, when the global COVID-19 pandemic and the injection of liquidity by central banks became key driving forces, and local geopolitical conflicts also boosted gold prices. Gold has always been the first choice for risk hedging, and the Fed's quantitative easing policy and geopolitical factors are the main forces driving gold prices.
As of Thursday, September 12 (Beijing time), spot gold rose 1.84% to close at $2,558.07 per ounce, a record high. Spot silver rose 4.19% to $29.8792 per ounce; COMEX gold futures rose 1.78% to close at $2,587.6 per ounce, also a record high (data source: Prospective Research Institute). The claim that Bitcoin is a safe-haven asset like gold seems to have been overturned, because Bitcoin did not follow when gold soared, but its trend was closer to that of the U.S. stock market.
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 hope to internationalize their currencies and realize global use for transactions, reserves and settlements. However, this goal is subject to the "trilemma" between monetary sovereignty, capital liquidity and fixed exchange rates. Referring to the view of "Currency Wars", paper money itself has no intrinsic value - its value comes entirely from the support of national credit. Whoever controls a country's currency issuance can bypass the country's legal framework. Even the powerful US dollar faces difficulties in maintaining its huge credit endorsement for a long time. Economic globalization itself contains the contradiction between global monetary dominance and national interests. For example, El Salvador has implemented a "dual legal currency" policy to promote the use of Bitcoin nationwide and weaken the influence of the US dollar; while Russia will allow residents to trade in cryptocurrencies and use them for trade settlements from September 2024 to circumvent sanctions.
Bitcoin's dilemma: its value comes from hedging the risk of trust in fiat currency, but its upward momentum still depends on the policies of powerful countries, the acceptance of monopoly capital and the macroeconomic environment.
2. ETFs are just a short-term painkiller, not a permanent solution
1) Cryptocurrency post-ETF era: The struggle against power failed
Source: The 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, pursuit of freedom, and decentralization were once our beliefs and slogans. However, various "players" in the industry have speculative motives, and the dream of getting rich overnight seems to have become the main driving force for the growth of the industry. But in the end, Bitcoin ETF is nothing more than a one-time, inevitable booster.
Our faith, which once resisted authority, now relies on that authority. In our crypto utopia, it seems that we only care about profits, not direction. The market continues to cheer for good news related to ETFs, hoping to bring in more funds as exit liquidity. The community that once resisted authority is now gradually handing over the fruits of its labor to this authority.
BlackRock, Vanguard, and State Street are the companies that rule the world, and today, BlackRock is moving toward controlling Bitcoin.
Who is the most powerful company in the world? Apple, Tesla, Google, Amazon, Microsoft? Actually, none of them. The real answer is the global asset management giant mentioned above. Blackrock has maintained 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 similar to traditional financial markets. Only those who own the most tokens will have the most say, and the United States is gradually gaining ideological control in the crypto industry. According to a report by QCP Capital on September 10, 2024, macroeconomic uncertainty still dominates the crypto market, and the 30-day correlation between Bitcoin and the MSCI Global Equity Index has reached 0.6, the highest level in nearly two years.
There is no doubt that cryptocurrency first sprouted in China, but today's "big players" have changed. More professional competitors are coming. In the future, it is necessary not only to choose brand IP and industry focus, but also to have 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) 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 with the dream of getting rich overnight. However, most people returned empty-handed, and some even lost their lives. In contrast, Levi Strauss took a different path. He took advantage of the gold rush to sell a large amount of canvas inventory and made it into durable overalls, which were popular among gold diggers because of their practicality. Later, he further improved the pants and became the founder of blue jeans, creating the world-renowned Levi’s brand.
Interestingly, Bitcoin mining through proof of work (PoW) and Ethereum staking through proof of stake (PoS) have striking similarities to this. The PoW mining craze prompted "gold diggers" to carry mining machines, while PoS staking allowed them to use capital as a tool. However, "Levi Strauss"-like characters can be seen everywhere in this gold rush. Miners are chasing the dream of getting rich overnight, while "Levi Strauss"-like characters are eyeing the miners' funds. The global 24/7 crypto market provides these "gold diggers" with countless opportunities, but it also makes the market highly volatile. High risks are accompanied by high rewards, and profits and risks constantly test everyone's courage and diligence.
The fast pace, non-stop trading and highly volatile market are both tempting traps and endless trading opportunities, which is exactly the attraction of cryptocurrency. The combination of strong financial attributes and low barriers makes cryptocurrency a natural high-quality "gold mine". When we cheered for ETFs and expected them to bring more external funds, the reality is that ETFs are opening the door for more "Levi Strauss"-type figures.
More Levi-Strauss types will enter the crypto market
The launch of ETFs will not only bring in external funds as "exit liquidity", but will also attract risk hedging traders. The biggest innovation of blockchain so far is to put finance on the chain, establish a "self-sustaining economic cycle" within the crypto market, and effectively avoid direct intervention by powerful forces and "old capital". However, cryptocurrencies in the post-ETF era have, 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. It is difficult to break through the primary market
Primary market liquidity is poor and fully diluted valuation (FDV) is high
Recently, compared with the past, tokens issued in the primary market generally show extremely high fully diluted valuations (FDV) and low liquidity. According to data from Binance's report "Observations and Reflections on High Valuation and Low Liquidity Tokens", the ratio of market capitalization (MC) of tokens issued in 2024 to fully diluted valuations is the lowest in recent years. This indicates that a large number of tokens have not yet been unlocked in the future, and by the first few months of 2024, the fully diluted valuation of issued tokens has been close to the total FDV of all issued tokens in 2023.
Source: @thedefivillain, CoinMarketCap, and Binance Research, data published on April 14, 2024
In a market with low liquidity, tokens will continue to unlock after the TGE (initial token offering), creating huge selling pressure. But did the VC (venture capital) really make money in this round? Not necessarily. In most cases, compliant and regulated project fundraising requires tokens to go through a cliff period of at least one year before unlocking and releasing. In the case of high FDV and low liquidity, projects may cause a price crash due to token unlocking, although small VCs may still sell in the secondary market or OTC pre-sales.
As shown in the figure below, the circulating supply of these tokens is less than 20%, with the lowest being as low as 6%, highlighting the harsh reality of high FDV.
Source: CoinMarketCap and Binance Research, data released on May 14, 2024
4. Summary
Obviously, capital-driven momentum is not working well at the moment. In addition to the above factors, there are other objective factors that lead to low liquidity and high FDV:
1) Market fragmentation and too many competitors: In the last cycle, domestic and foreign capital joined forces to hype DeFi and Layer-1 chains. However, in this cycle, funds and participants are scattered across multiple narratives, and Western and Eastern capital often do not support each other's projects. This results in insufficient buyers to meet the number of sellers.
2) No altcoin bull market, lack of speculation: EVM-based chain infrastructure is mature, and funds and projects are working in the same direction. The so-called "Ethereum killer" has not brought new breakthroughs. In addition, in a market without an altcoin bull market, when a project succeeds in a certain field, imitation projects will quickly emerge, claiming to be the next undervalued opportunity.
3) Complicate simple problems and turn complexity into stories: Pseudo-innovation is everywhere, and the phenomenon of over-complicating simple problems is common. Repackaging old concepts is often just to sell a bigger dream to the market.
4) The Matthew effect is everywhere: The crypto industry has been developing for more than 16 years, and the monopoly interests at the top have basically solidified. Whether in terms of technology, projects or capital, the strong get stronger and the weak get weaker. Those participants who have survived to this day have further consolidated their control over the narrative.
5) Challenges of sustainable growth: Lack of innovation and liquidity are the most pressing challenges facing the market today.
