Weekly: Framing the Narrative

Release Date: February 9, 2024

Summary: Another positive week for spot Bitcoin ETFs; Frames on Farcaster; Sui enters the top 10 chains by TVL.

Authors: David Duong (Head of Institutional Research), David Han (Institutional Research Analyst)

Key Highlights

• The crypto market has begun to rebound, aligning with our optimistic forecast for the coming weeks.
• The recent introduction of Frames has increased daily active users on the decentralized social protocol Farcaster by 9-12 times.
• Sui has recently entered the top 10 chains by TVL, making it the only non-EVM chain in the Top 10 besides Solana.

## Market

The crypto market has started to rebound, consistent with our optimistic forecast for the coming weeks. We believe that the seasonal factors leading to declines will not emerge until early March. This view also reflects our perspective on the weakening dollar trend following the January rebound this year. This judgment is based on our expectations for Federal Reserve interest rate cuts and the economic slowdown factors mentioned in our report last week for the first half of 2024.

In the U.S. spot Bitcoin ETF, after attracting $819 million in the previous week (as of February 2), inflows are expected to record a net positive for the second consecutive week. One significant reason for this trend is that the "forced" redemption pressure from the Grayscale Bitcoin Trust (GBTC) has significantly eased from $494 million in the previous two weeks to an average of about $87 million per day.

Data from Bloomberg shows that globally, the shift from high-fee products in some jurisdictions to low-fee products in the U.S. has eased. In the past five trading days (as of February 7), the net inflow of global Bitcoin exchange-traded products was $314 million, bringing the total for the year to date to $1.34 billion. This means that a net outflow of $484 million from elsewhere has benefited U.S. ETFs, which have attracted a net outflow of $1.83 billion year to date.

This aligns with our intraday heat map of Bitcoin trading volume across four platforms (see Table 1). It indicates that most trading activity over the past four months has occurred on U.S. business days, concentrated between 9 AM to 11 AM and 3 PM to 4 PM Eastern Time, which is 2-3 times higher than other time periods.

However, we have previously stated that market participants should not focus on short-term capital flows, as a larger release of new capital will come later when more large securities dealers are approved and incorporate these funds into their typical portfolios. This takes time, as asset management firms are still conducting due diligence on these products. Furthermore, rebalancing funds have not yet been completed, as evidenced by Genesis Global Holdco's filing on February 2 seeking authorization from the U.S. Bankruptcy Court for the Southern District of New York for the sale of:

• 35.9 million shares of GBTC (valued at $1.4 billion at the end of January),
• 8.7 million shares of Grayscale Ethereum Trust (ETHE, $170 million), and
• 3.0 million shares of Grayscale Ethereum Classic Trust (ETCG, $38 million).

Nonetheless, we believe that market participants may miss other opportunities and themes related to spot Bitcoin ETFs, including (1) the resurgence of DeFi activity, (2) the market space for ETH's later rise, and (3) new selling pressure from Bitcoin miners post-halving. We discussed these themes in our latest monthly outlook: Post-ETF Trading Themes. Other notable news includes:

• The upcoming Dencun fork on Ethereum is expected to occur on March 13 and activate at block number 8626176.
• EigenLayer (a restaking protocol on Ethereum) has temporarily lifted the cap on liquid staking pools until February 9.

On-Chain: Social Movement

The recently introduced Frames on the decentralized social protocol Farcaster (think of a cross between Twitter and Reddit) has led to a 9-12 times increase in daily active users, reminiscent of the boom of SocialFi protocols like Friend.tech in September and October 2023. Frames make programmable Casts (social posts similar to tweets) interactive, allowing users to mint NFTs, play video games, subscribe to services, and more, all within the user's Feed without any redirects. We believe this represents a potential 0 to 1 new use case in decentralized social media, which is currently impossible on traditional social platforms. Most Frames are currently built on Base, an Ethereum L2 incubated by Coinbase.

That said, retaining and growing user networks has been a challenge faced by many decentralized social protocols in the past, even for existing Web 2 companies (like Threads). Currently, the long-term business and revenue models surrounding the industry are still being explored. What sets Farcaster apart is that it does not currently focus on a native token or points system, but rather on user experience and engagement. This indicates that growth on the platform is organic rather than driven by financial speculation (which we consider a net positive). Additionally, to register for Farcaster, users must provide a phone number or pay a registration fee to minimize bot interference in active data.

Alternative Layer 1 Networks

According to data from DeFiLlama, Sui has recently entered the top 10 chains by total locked value, making it the only non-EVM (Ethereum Virtual Machine) chain in the top 10 besides Solana. Sui's distinction from other blockchains (aside from its consensus mechanism) lies in its core focus on the Move programming language and an object-centric model (compared to UTXO or account models).

Move is a language specifically tailored for blockchain, receiving positive feedback from the developer community. Solana plans to implement smart contract development in Move, and Ethereum L2 also plans to center around Move. Move aims to provide a safer and more concise way to create smart contracts while achieving stronger security testing through formal verification.

While many smart contract platforms are shifting to support different developer languages (for example, both Solidity and Rust can be used on Solana), Sui appears to have no plans to expand to integrate other languages. While this may seem restrictive, it also means that users can only interact within a complete end-to-end Move ecosystem. This can enhance the security of cross-contract calls and potentially lead to better end-to-end testing and verification. It may also shorten development time while reducing bug rates.

Market Performance of Crypto and Traditional Assets

(As of 4 PM ET on February 8, 2024)

| Asset | Price | Mkt CapMkt | 24 hour change | 7 day change | BTC correlation | |-------------|----------|------------|----------------|--------------|-----------------| | BTC | $45,420 | $870B | +3.21% | +5.60% | 100% | | ETH | $2,425 | $291B | -0.27% | +5.44% | 67% | | Gold (Spot) | $2,033 | - | -0.07% | -1.07% | -25% | | S\&P 500 | 4,997.91 | - | +0.06% | +1.87% | 23% | | USDT | $1.00 | $96.2B | - | - | - | | USDC | $1.00 | $27.1B | - | - | - |

## Insights from Coinbase Exchange and CES

Despite lower trading volumes, the market continued to rise this week. "Cautiously optimistic" is a phrase we keep hearing from traders. While there seems to be some consensus on the overall market direction, the debate centers on where market participants should increase their portfolios. Some believe that as the Bitcoin halving approaches, BTC will continue to outperform, and ETFs will become more widespread. Others are preparing for ETH's later performance, looking to the Dencun fork as a potential catalyst and a possible spot ETH ETF to deliver strong performance. Some are betting on SOL's future continued rise.

Supply issues are significant factors in the bear market. For example, Mt. Gox repayments, various entities working through bankruptcy, and ongoing token unlock flows could pressure any bids. While everyone seems to be aware of these risks, it appears that few are curbing their bullish sentiments as a result.

## Funding Rates

| 2/8/2024 | TradFi | CeFi | DeFi | |-----------|--------|----------------|-------| | Overnight | 5.35% | 5.00% - 10.75% | 4.96% | | USD - 1m | 5.50% | 5.25% - 11.00% | | | USD - 6m | 5.70% | 5.50% - 11.50% | | | BTC | | 1.50% - 5.00% | | | ETH | | 3.00% - 8.00% | 1.25% |

## Notable Crypto News

Institutional

• A judge approved the settlement agreement between BlockFi and 3AC, but details remain confidential (The Block).
• BitGo aims to kickstart the RWA tokenization space through acquisitions (Blockworks).

Regulatory

• The U.S. Securities and Exchange Commission has expanded the definition of "securities dealer" to include DeFi market makers (The Defiant).

General

• Ethereum developers deployed the Dencun upgrade on the Holesky testnet (The Block).
• The Dencun upgrade is expected to introduce "blobs" to the Ethereum mainnet on March 13 (The Block).
• Currently, 25% of the ETH supply is staked on-chain (The Block).

Coinbase

• Saving over $74 billion: How crypto makes everyday finance fairer, cheaper, and easier (Coinbase Blog).

## Global Outlook

Europe

• DZ Bank (Germany's third-largest bank) has begun a pilot phase for Bitcoin trading this year (Bloomberg).
• 17 Russian banks have officially joined the "second phase" of the digital ruble pilot (Cryptonews).
• German police seized $2.1 billion worth of Bitcoin in an infringement crackdown (Yahoo Finance).

Asia

• China's anti-money laundering law framework will undergo significant updates targeting cryptocurrency transactions (bitcoin.com).
• Hong Kong financial firm VSFG plans to apply for a spot Ethereum ETF in the second quarter (The Block).
• Hong Kong will release opinions on regulating over-the-counter cryptocurrency trading venues (The Block).
• Hong Kong has set the final deadline for cryptocurrency exchange license applications to February 29, or they will face closure (CryptoSlate).
• India announced a temporary budget in an election year, imposing high taxes on cryptocurrencies (CoinDesk).

## Major Events in the Coming Week

| | Feb 11 | Feb 12 | Feb 13 | Feb 14 | Feb 15 | Feb 16 | |------------------|------------------------|--------|--------|--------------------------|-----------------|--------| | Notable Macro | | | US CPI | UK CPI | UK GDP | | | US Retail Sales | | | | | | | | Notable Earnings | | | | | Coinbase Global | | | Crypto | APT token unlock (25M) | | | SAND token unlock (205M) | | |