Can Bitcoin continue to rise after the breakout failure?

Author: 0x1987, LK Venture

Abstract

Driven by the potential benefits of a Bitcoin spot ETF, BTC quickly rose to around $30,000, followed by three weeks of volatility, repeatedly failing to break through previous highs. We believe that the market will not end before a formal response on the ETF, and Bitcoin will continue to rise in a volatile manner. Ripple's victory has boosted market sentiment, and popular altcoins will also have opportunities to perform. At the same time, we are optimistic about the long-term positive impact of RWA on the crypto market. It is important to note that macroeconomic and regulatory risks may resurface, causing significant disturbances in the market, and we remain cautiously optimistic about the future.

1. Spot ETF Benefits Initiate a Mini Bull Market, with a Month Left for the Market

During the overall correction in June, the USDT de-pegging confirmed the short-term bottom for BTC, and the chips were exchanged during the decline, laying the foundation for a new round of increases. Traditional Wall Street institutions like Blackrock applied for a Bitcoin spot ETF, driving the market to rise rapidly, with BTC returning to near previous highs, expected to rise in a volatile manner over the next month. After Ripple's victory, XRP surged over 100%, significantly increasing market risk appetite, and popular altcoins will have opportunities to perform.

1. USDT FUD Marks Short-Term Bottom, Chips Have Completed Exchange

Since June, BTC has begun a brief downward trend, and Tether FUD reappeared in mid-June, leading to a slight de-pegging of USDT, with the USDC/USDT trading pair rising to a maximum of 1.0042. Last year, USDT experienced two de-peggings, one after the Luna collapse and another after the FTX incident, both of which were signals of a short-term bottom. This time, the USDT de-pegging occurred on June 15, after BTC bounced back from the important support level of $25,000, with chips shifting from weak hands to strong hands. The exchange of chips at the bottom has made the chip structure more solid, and the multiple pullbacks of BTC in this round have been quite limited, often stopping around $30,000.

Figure: BTC rose after testing the important support level of $25,000 in mid-June

2. Potential Benefits of Bitcoin ETF, with a Month Left for the Market

Several major U.S. asset management giants, including Blackrock and Investco, have submitted applications for a Bitcoin spot ETF, driving Bitcoin to rise strongly. The issuance of a spot ETF can provide traditional investors with a more compliant and convenient investment channel, potentially bringing hundreds of millions of dollars in incremental funds to the crypto market. Looking back at the bull market in the second half of 2021, the market rose due to expectations of a Bitcoin futures ETF, peaking and then declining after the approval of the Bitcoin futures ETF. Therefore, before the approval of the spot ETF, smart money is buying in advance, restarting a mini bull market.

Figure: Several Wall Street institutions apply for a Bitcoin spot ETF

The joint application for a Bitcoin ETF by established Wall Street institutions seems well-prepared, and some institutions may have received tacit approval from regulators. From a timing perspective, the SEC is expected to make a decision on the ARK Bitcoin spot ETF by August 13 at the latest, which means we may still have about a month of a hot market period. During this time, smart money is willing to buy Bitcoin on every pullback, making it difficult for Bitcoin to decline significantly. After experiencing volatility, it will continue to rise.

3. XRP Surges, Popular Altcoins Will Have Opportunities to Perform

On July 13, a U.S. district court ruled in favor of Ripple, stating that XRP is not a security token, leading exchanges like Gemini and Coinbase to relist XRP. XRP quickly surged, with a daily increase of over 100%, shifting market sentiment to optimistic. Although there is still room for further developments in the Ripple lawsuit, this has already shown the regulatory attitude, which is significant for altcoins that may be classified as securities. We are optimistic about the future performance of altcoins.

Figure: XRP surged over 100% within 4 hours

XRP's market capitalization has already reached hundreds of billions of dollars, and its rise in magnitude and speed is astonishing, reflecting that the market is in a "bullish sentiment" state. Although the market experienced a pullback on Friday night, strong altcoins basically recovered their losses over the weekend, with bulls still in control. Many altcoins remain at relatively low levels, and once new narratives emerge, they are likely to perform well. With the market's risk appetite recovering, as long as BTC maintains volatility, popular altcoins have a great chance to outperform the market.

2. Compliance Narrative is Thriving, RWA Expected to Bring Incremental Funds

Under the influence of the compliance narrative, RWA is gradually gaining market attention. We believe that RWA could be a strategic-level opportunity, expected to bring tens of billions of dollars in capital inflows to the crypto market, becoming an important driver of the next bull market.

1. DeFi Yields Decline in Bear Market, Funds Continue to Flow Out

Entering the bear market, DeFi yields have significantly decreased, with the APY of USDC on mainstream lending platforms falling below 3%, while the Federal Reserve's aggressive rate hikes have pushed risk-free rates above 5%. A large amount of capital has exited the market, and the total market capitalization of stablecoins has continued to decline for a year, dropping from $184.5 billion in April 2022 to the current $124.5 billion, with approximately $60 billion leaving the market.

Figure: DeFi yields decline in bear market, approximately $60 billion has left the market

Funds still in the market are continuously seeking new avenues, and staking ETH has become a popular choice. Based on ETH, LSD-Fi can provide around 5% in coin-based returns, which can be considered a crypto-native risk-free yield, with the current TVL reaching $45 billion. However, staking ETH in a bear market requires bearing the risk of price decline, and hedging incurs high costs, so LSD-Fi cannot fully meet the needs of low-risk investors. The market urgently needs an investment product that offers relatively low risk and relatively high returns to retain funds within the market.

2. RWA Projects Based on U.S. Treasuries Can Bring Incremental Funds to the Market

The emergence of RWA is expected to change the ongoing outflow of funds from the crypto market. RWA tokenizes real-world assets, such as bonds and stocks, bringing real returns to the crypto world. Currently, the yield on short-term U.S. Treasuries exceeds 5%. If it can provide DeFi users with exposure to U.S. Treasuries, that is, offer a channel for global investors to invest in U.S. Treasuries, this single asset could potentially bring in hundreds of billions of dollars in capital inflows.

Figure: Yields on short-term U.S. Treasuries such as 1-month, 3-month, 6-month, and 1-year exceed 5%

From another perspective, USDT and USDC are the largest RWA projects, with a total market capitalization close to $110 billion, but the profits generated from their dollar reserves have not flowed back into the market. RWA projects that provide U.S. Treasuries effectively take a share of the market from Tether, Circle, and other dollar stablecoin operators, charging lower fees and returning most of the profits to the market, bringing incremental funds.

3. Existing RWA Projects Have Made Progress, but Challenges Remain

Several projects in the crypto space are already moving towards the RWA field, such as MakerDao introducing U.S. Treasuries as collateral and distributing interest to DAI holders. The founder of Compound has also started a new venture to tokenize U.S. Treasuries, bringing real returns to DeFi users. Benefiting from developments in the RWA field, $MKR and $COMP have recently performed very well.

Figure: MakerDao introduces RWA as collateral to earn real returns

Of course, we must also recognize that current RWA projects are not mature, and DeFi users find it difficult to smoothly obtain yields of up to 5% from U.S. Treasuries. RWA assets still have a long way to go to achieve safety, efficiency, and accessibility. MakerDao's exposure to U.S. Treasuries exceeds $1 billion, but it also faces compliance risks, high costs, and insufficient investment efficiency. Its scale will face significant challenges in further expansion in a short time. Areas such as compliance, channels, on-chain processes, costs, and promotion require solid investment from the team, and RWA projects still have a long way to go.

On the other hand, this also means that existing RWA projects are far from reaching their ceiling and still have enormous growth potential. As more RWA projects successfully operate, RWA-Fi will become an investment direction similar to LSD-Fi. MKR and COMP are akin to LDO and RPL, rising first in the early stages of RWA development. As the scale of RWA continues to expand, future upper-layer DeFi projects based on RWA assets will emerge, becoming Alpha investment opportunities in the mid to late stages of RWA. We believe that RWA has long-term strategic significance and will become an important driver of the next bull market.

3. Beware of Macroeconomic and Regulatory Risks, Maintain Cautious Optimism

Although the pullbacks of BTC during this rise have been small, and the current situation is favorable for bulls, we must also note that macroeconomic and regulatory risks cannot be ignored, as they may cause unexpected disturbances in the market. Therefore, we remain cautiously optimistic, as BTC's rise may not be smooth, and the period of volatility may be longer than expected.

1. The Federal Reserve May Continue to Raise Interest Rates, Marginal Liquidity Tightening

Federal Reserve officials have repeatedly emphasized that there is room for two more rate hikes in the second half of the year, and that there will be no rate cuts this year, which has led to a rebound in long-term U.S. Treasury yields, unfavorable for risk assets. At the same time, the Fed's balance sheet reduction is ongoing, with total assets already below the levels before the March banking crisis, and it is expected to continue to decline. In the context of persistently high interest rates and liquidity being withdrawn, it may be difficult for U.S. stocks to maintain the strong performance of the first half of the year. If a significant decline occurs, it will also negatively impact the crypto market.

Figure: The Federal Reserve continues to reduce its balance sheet, with total assets below the levels before the March banking crisis

2. Binance Executives Depart, BNB Performance Weak

In early June, after the SEC sued Binance, BNB plummeted, rebounding after hitting the key support level of $220, and then began to consolidate and oscillate. Although BTC has risen from low levels to near previous highs, BNB has not risen in tandem, oscillating between $220 and $250. Binance has also attempted to boost BNB prices through Launchpad, Launchpool, and other means. Recently, several Binance executives have left, and public opinion is quite unfavorable for Binance. Since BTC has already risen to relatively high levels, if regulatory events resurface, it may cause significant disturbances in the market.

Figure: BNB's performance is relatively weak, still oscillating at low levels to build a bottom

4. Conclusion

BTC is facing resistance near previous highs and needs to consolidate for a period to digest selling pressure. With the potential benefits of a spot ETF, bulls still hold the upper hand, waiting for a good opportunity to push the market up. After Ripple's victory, market risk appetite has rebounded, and popular altcoins will have opportunities to perform. RWA is expected to bring incremental funds to the market in the long term, but short-term development still faces many challenges. At the same time, macroeconomic and regulatory risks may still disturb the market, and Bitcoin's rise may experience twists and turns. We remain cautiously optimistic about the future, looking forward to Bitcoin's volatile upward movement.