# Overview

It is highly probable to strictly execute a trading plan and make money during cycles, but we can also leverage cycles to gain profits in other financial markets. So why do we choose the crypto industry? What we seek in the crypto industry is not just a few times return; we expect profits in the tens or hundreds of times, which is hard to achieve in other areas of the financial market.

The development of the crypto industry is driven not only by technological advancements but also by the influx of capital during bull markets. We mentioned in "How to Earn Cycle Money (Part 2)" that the Federal Reserve's monetary easing is key to capital flowing into the crypto market. This article will guide you to understand how capital is attracted to the crypto market and which sectors we should be positioning ourselves in.

# Bull Market Triggers

1. Approval of Spot Bitcoin ETF

Why is the spot Bitcoin ETF so important for Bitcoin? Each time news related to the spot Bitcoin ETF is released, the price of Bitcoin tends to rise.

Historically, only two ETFs reached a trading volume of one billion dollars within the first three trading days after listing: one is gold, and the other is Bitcoin futures.

After the launch of the gold ETF in 2004, the price of gold rose by 420% within five years, which illustrates how crucial the approval of the spot Bitcoin ETF is for Bitcoin.

So, what benefits will come after the approval of the spot Bitcoin ETF?

• Lower Investment Threshold. With the spot Bitcoin ETF, investors can invest in Bitcoin through traditional brokerage accounts without needing to understand how to operate a Bitcoin wallet or exchange account. This undoubtedly lowers the investment threshold and complexity for investors who have never ventured into the cryptocurrency space.
• Increased Market Liquidity. ETFs are typically listed on mainstream stock exchanges, which not only increases liquidity in the Bitcoin market but also provides investors with more convenient trading channels.
• Legal and Regulatory Protection. Since ETFs are regulated financial products, investors enjoy a certain level of legal and regulatory protection when investing, which is quite attractive to those concerned about potential fraud and manipulation in the cryptocurrency market.
• Diversification of Asset Allocation. Investors can include spot Bitcoin ETFs in their broader investment portfolios, achieving diversified asset allocation to reduce investment risks. For example, family offices, private banks, and hedge funds consider spot Bitcoin ETFs as their ideal products.
• Reduced Custody Fees. Compared to Grayscale's GBTC, which currently has a 2% management fee, the custody fees for spot Bitcoin ETFs are around 1%. Moreover, multiple spot Bitcoin ETFs will emerge in the market, and the competition among them will further reduce fund management fees.

Therefore, once the spot Bitcoin ETFs applied for by financial giants like BlackRock and Fidelity are approved, they will bring a massive influx of capital and users to the crypto market, with funds from the traditional securities market continuously flowing into the crypto market through the "channel" of spot Bitcoin ETFs.

2. Two Major Benefits for the Crypto Market: Bitcoin Halving and Ethereum Cancun Upgrade

Looking at the crypto market itself, there are two major certainties in 2024: one is the Bitcoin halving, and the other is the Ethereum Cancun upgrade.

Although the impact of Bitcoin halving on price increases is diminishing from a supply-demand perspective, it still holds strong narrative and expectation value. We explained this in "How to Earn Cycle Money (Part 1)" using historical data and the reflexivity principle, and we won't elaborate further here.

While the Ethereum Cancun upgrade may not be as beneficial as the Bitcoin halving, every major bull market in the crypto space has relied on Ethereum's contributions. The latest Ethereum developer meeting minutes indicate that the developer testnet Devnet is expected to be released in December, with the public testnet launching in Q1 next year, although no timeline for the mainnet launch has been mentioned, likely not until late Q1 or Q2 next year.

The focus of the Ethereum Cancun upgrade is EIP-4844, which aims to achieve temporary off-chain data storage and retrieval through Ethereum nodes to meet the data and storage needs of blockchain applications. If successfully activated, EIP-4844 is expected to lower the costs of Layer 2 rollup solutions. The Cancun upgrade will make L2 faster and cheaper, benefiting not only the L2 protocols themselves but also accelerating the development of the ecosystem on L2. For an introduction to the principles of EIP-4844, you can read "Understanding the Major Benefits of Layer 2: EIP-4844".

3. Improving Regulatory Environment

In recent years, the crypto market has experienced rapid development and innovation, attracting more and more investors and innovators. Against this backdrop, some legislative bodies have begun to recognize the potential of the crypto industry and the importance of establishing reasonable and transparent regulatory frameworks.

• In 2020, as the crypto market flourished, it inevitably attracted the attention of global regulators. Some countries took measures to completely ban it, while others adopted more cautious strategies, starting to formulate regulatory frameworks to monitor and manage the rapidly expanding digital asset space.
• In 2021, the development of U.S. regulatory policies, particularly regarding the stance of the U.S. Securities and Exchange Commission (SEC) on cryptocurrencies, became a core topic globally. Meanwhile, due to China's crackdown on cryptocurrency mining and trading, the market underwent significant adjustments, sparking discussions about decentralization.
• In 2022, the regulatory environment for cryptocurrencies began to change. After initial discussions, some countries established clear legal frameworks outlining rules regarding cryptocurrencies, initial coin offerings (ICOs), and DeFi platforms.
• In November 2022, Hong Kong issued favorable policies embracing Web 3.0. Following the collapse of FTX, which originated in Hong Kong, and the decline of BitMEX, Hong Kong has been distancing itself from the crypto market. To attract crypto institutions, Hong Kong has adopted more lenient regulatory policies.
• In 2023, several significant developments changed the landscape of the global cryptocurrency market. For example, the Thai Securities and Exchange Commission plans to relax retail investment restrictions related to ICOs to stimulate digital investment and promote market growth.
• In July 2023, a ruling by U.S. Federal Court Judge Analisa Torres confirmed Ripple's compliance in selling XRP on public exchanges, marking a significant legal victory for the cryptocurrency industry before U.S. regulators.
• In September 2023, four members of the U.S. Congress called on SEC Chairman Gary Gensler to immediately approve the listing of spot Bitcoin.

Despite Gary Gensler's conservative stance on cryptocurrencies, it is evident from cases involving the SEC and Ripple that an increasing number of legislators in the U.S. are beginning to support the healthy development of the crypto industry, and the SEC cannot unilaterally hinder its progress. This positive regulatory policy helps provide clearer and more predictable rules for the crypto industry, instilling confidence and stability for investors and related crypto enterprises, thereby promoting the healthy and orderly development of the crypto industry.

4. Complex Geopolitical Factors

In recent years, the expanding geopolitical risks have become a focal point of global attention. From the Russia-Ukraine conflict to the Israel-Palestine conflict, these geopolitical events have not only caused significant impacts locally but also brought uncertainty and volatility to the global economy and financial markets.

In such an uncertain environment, Bitcoin, as a decentralized digital asset, is increasingly recognized for its hedging role. Whether it is the Russia-Ukraine conflict or the Israel-Palestine conflict, such events typically lead to local currency devaluation and turmoil in financial markets. Bitcoin's trading and value do not depend on any specific country or region, allowing investors to hedge against the instability of local currencies and financial systems.

# Potential Explosive Sectors

The narrative of each bull market tends to change. Looking back at the last crypto bull market, various hot narratives such as DeFi, NFTs, Layer 1, and DAOs emerged, attracting a large influx of users and capital. What will be the leading narratives in the next cycle?

1. RWA

Introduction

Real World Assets (RWA) refer to traditional assets that are tokenized through blockchain technology, giving these assets a digital form and programmable characteristics. Within this framework, various types of assets (from real estate and infrastructure to artworks and private equity) can be transformed into digital tokens.

However, not every asset can be called RWA just because it is on-chain. For instance, tokenizing Zimbabwean government bonds, which even locals are hesitant to invest in, would likely attract very few buyers. Such assets would have no trading value once on-chain. Therefore, the criteria for determining the investment value of RWA are:

• Assets that can form a consensus globally, such as high-quality assets like U.S. Treasury bonds, can be recognized by the borderless crypto market.
• Compliance and regulation are essential; assets like government bonds require backing from state authorities for anyone to dare invest. Not to mention government bonds, even stocks must be regulated.

Reasons for Recommendation

RWA can bring the following benefits:

• Lower Investment Threshold: For example, tokenized real estate allows investors to purchase a portion of a specific commercial building or residence, differing from real estate trusts that invest in a portfolio of properties.
• Reduced Transaction Costs and Time: Traditional financial transactions often involve intermediaries, with complex processes that are time-consuming and labor-intensive.
• Facilitated Lending: Tokenization can promote lending by using tokens as collateral. For instance, using agricultural products directly as collateral can be costly or difficult to implement; tokenizing agricultural products resolves this issue. Additionally, the settlement of tokenized assets is more convenient compared to real-world underlying assets or financial assets.
• Enhanced Liquidity of Underlying Assets: Traditional physical assets sometimes face liquidity issues. For example, converting fixed assets like real estate into cash typically takes a long time. RWA can digitize and tokenize physical assets, significantly enhancing liquidity.

We can see that RWA can serve as a bridge connecting the real world and the crypto world, providing higher liquidity and convenience for trading real-world assets while attracting more liquid capital and users to the crypto world. Furthermore, RWA will lead to the emergence of RWAFi, a decentralized layer project that does not require compliance, positively enriching the on-chain ecosystem.

Related Project Information

Current Challenges

Although RWA has great prospects, its development still has a long way to go and is constantly accompanied by regulatory scrutiny. Currently, assets like government bonds are still difficult to go on-chain due to regulatory factors. In existing RWA projects, users only hold the rights to the underlying asset's income; holding the tokens does not allow for redemption in the real world.

2. Bitcoin Ecosystem

Introduction

The Bitcoin ecosystem has recently gained widespread attention in the crypto circle due to the wealth creation effects brought by some asset issuance protocols. In the crypto space, which has strong speculative capabilities, prices can often diverge significantly from their intrinsic value driven by emotions. Historically, the development of the crypto industry has always been driven by speculation, especially when new concepts emerge. Setting aside the speculative aspects of the Bitcoin ecosystem, its current ecosystem construction is still in its early stages.

Reasons for Recommendation

Currently, speculation has a greater impact on prices than intrinsic value. However, as capital flows in, developers will gradually be attracted, and the factors supporting prices will transition from speculation to value, positively impacting the long-term development of the Bitcoin ecosystem. Bitcoin is the absolute leader in the crypto market, and if the Bitcoin ecosystem can be built up, new capital will inevitably flow into it.

Related Project Information

We have summarized the main projects in the Bitcoin ecosystem into a table for easier reading.

Current Challenges

• Limited Number of Developers. According to Developerreport data, the current number of BTC ecosystem developers is 340, ranking fourth in the industry, far below Ethereum, which has 1889 active developers—approximately 5.6 times that of the BTC ecosystem. This is just the difference in full-time developers; including part-time developers, the gap would be even larger.

• Sustainability. The Bitcoin ecosystem has gained attention mainly due to the exaggerated price increases of certain assets, which are certainly unsustainable. Whether developers' enthusiasm will wane alongside prices remains uncertain.

3. Rollup and Other Scaling Solutions

Introduction

The past few years in the blockchain industry have shown that it is nearly impossible to scale a complete blockchain with transaction execution, consensus, and data availability without sacrificing security and decentralization. From improving consensus algorithms to L1 sharding solutions, and now to the layered design of L1, L2, and L3, the most mainstream solution in the layered approach is Rollup.

Rollup is a scalable solution that bundles, compresses, and sends transactions to the consensus layer for verification. By validating multiple transactions at once, it greatly improves efficiency while allowing Ethereum to process over 15 to 3000 transactions per second (TPS) without sacrificing security.

Currently, there are two different types of Rollup: Optimistic Rollup and ZK Rollup.

Optimistic Rollup bundles hundreds of transactions and only publishes the minimum necessary information on-chain without any proof. It essentially assumes no fraud or malicious behavior, hence the name "Optimistic." Optimistic Rollup only provides evidence when transactions or states are challenged.

ZK Rollup differs from Optimistic Rollup as it integrates privacy using ZK technology. ZK refers to the ability to prove something (a transaction or state) to another party without disclosing necessary information.
Image source: Nervos

Reasons for Recommendation

• Strong User Demand: As the Ethereum ecosystem grows, more people are using Ethereum, and its performance issues are becoming apparent. Congestion occurs when many users interact with Ethereum simultaneously, increasing everyone's interaction time and gas fees, making the need for Ethereum scaling increasingly urgent.
• Official Recognition and Support: At the end of 2020, Vitalik Buterin published an article titled "Ethereum's Roadmap: Rollup-Centric," reaffirming the position of the Rollup route at the Ethereum Shanghai Summit in 2022.
• Facilitates the Construction of a Prosperous Multi-Chain Ecosystem: Regardless of the scaling method adopted, the ultimate goal is to provide a better experience for users and developers, thereby building a thriving ecosystem. We believe that the next generation of scaling solutions led by Rollup will continue to diversify, and diverse infrastructure will better support a flourishing array of applications and ecosystems.

Related Project Information

The representative projects of Optimistic Rollup, Arbitrum and Optimism, have already developed their ecosystems well, with many projects on them. Additionally, their exit characteristics have provided a good market for many third-party cross-chain bridges.

ZK Rollup networks launch much faster than Optimistic Rollup, but they are relatively weaker in EVM compatibility and support for general contracts, so current representative projects like ZkSync and StarkWare are still in the preparation stage.

Current Challenges

• Centralization: The smooth user experience of Rollup networks comes at the cost of security, with many components of the network being centralized.
• Economic Mechanism: Users cannot participate in protocol revenue as nodes; only Rollup developers can earn. Tokens cannot be used for value capture, gas payments, POS staking, etc., and are only used for governance.

4. Re-Staking

Introduction

Re-Staking refers to using liquid staked token assets to stake with validators on other networks and blockchains to earn more rewards while also contributing to the security and decentralization of the new network.

Reasons for Recommendation

• Huge Growth Opportunities: Currently, the largest market in the DeFi industry is Liquid Staking, with a total value of approximately $24 billion (TVL). Many blockchain platforms are under development, and the scale of the cryptocurrency market is continuously expanding. Therefore, the Re-Staking market will have numerous growth opportunities.

• Increased Earnings for Liquid Providers: Through Re-Staking, investors can earn double rewards from both the original network and the Re-Staking network.
• Unlocking Liquidity of LSD and LP Tokens: Staking LSD or LP tokens with validators can increase the staking amount of the original assets on the native network, providing more liquidity asset options for the DeFi industry.
• The Narrative is Not Limited to Ethereum: Cosmos has launched Replicated Security, where ATOM stakers lend their security to other blockchains, with Neutron being the first to implement this feature. We expect more blockchains to adopt the concept of re-staking, just as they did with liquidity mining rewards during DeFi Summer.
• Enhancing the Security of Networks Using Liquid Staking: As more assets are staked, the network's value increases, making it more resilient to attacks and becoming a trusted location for other decentralized applications, protocols, and platforms.
• Reducing Sell-offs: Re-Staking makes original tokens more useful, thus avoiding sell-offs and preventing significant value loss for the project and its investors.

Related Project Information

Currently, the leader in the Re-Staking sector is EigenLayer. For more information, you can read "EigenLayer: Reinforcing Ethereum Security, Igniting a New Era of Staking".

Tent: Tenet is an L1 in the Cosmos ecosystem, developed using the Cosmos SDK toolkit. This project is developed by the same team that created ANKR, the largest liquid staking project in the BNB Chain and Cosmos ecosystems.

Tenet and other blockchain platforms adopt the PoS consensus mechanism, integrating project governance Stake Tokens into validators to ensure network security. Compared to networks like Ethereum, BNB Chain, Cosmos, Cardano, Polygon, Avalanche, and Polkadot that accept LSD Token assets, Tenet is more advanced.

Current Challenges

• Risk of Asset Loss: If nodes engage in improper behavior, your assets face the risk of being seized or penalized, potentially leading to partial or total asset loss.
• Asset Bubble: The market may experience value inflation through new Wrap Tokens or Tokens, causing market value to no longer reflect its true value. Besides the platform, continuing to use assets representing locked value in validators to mint stablecoins increases risks, making the original assets' liquidity vulnerable.

# Conclusion

The crypto market has now grown into a market worth over a trillion dollars. The Bitcoin mining reward halving and the Ethereum Cancun upgrade may not be sufficient to trigger the next round of a cryptocurrency bull market. However, considering factors such as the introduction of spot Bitcoin ETFs, improving regulatory environments, and escalating geopolitical risks, the accumulation of numerous favorable factors is enough to ignite the next cryptocurrency bull market.

Which sectors will shine in this bull market? The crypto industry has experienced ups and downs for over a decade, from foundational ideas to underlying technologies, and now to the construction and improvement of applications. We believe we are on the brink of a comprehensive explosion in the blockchain industry. In addition to the sectors mentioned above, decentralized derivatives, GameFi, middleware, cross-chain foundational protocols, and more will also see promising projects emerge. Regardless of how economic models are designed, they cannot escape the cyclical nature of their financial attributes. As product maturity and innovative application narratives resonate, we will once again welcome the next major cyclical opportunity.

References:

1. Review and Outlook of the Blockchain Sector's Cycle Changes

2. Exploring the Potential of RWA: The Next Large-Scale Application Sector After Stablecoins?

3. In-Depth Analysis of the Re-Staking Sector: How It Works, Pros and Cons, and Potential Projects

4. Deep Dive into Blockchain Modularity: Introduction and Applications of Rollup

5. Overview of BTC Derivative Protocols: Who is the Most Promising Alpha?

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