Data Unraveling: ETFs are Delaying the Real Bull Market

Author: jk, Odaily Planet Daily

Since the cryptocurrency market shifted to a bull market this year, the emergence of ETFs has been seen by many as an important sign of mainstream financial markets accepting digital assets. The approval of Bitcoin ETFs and other cryptocurrency-related ETFs has undoubtedly opened the door for traditional investors to enter this emerging market, bringing unprecedented liquidity and exposure.

However, these seemingly positive developments may hide potential risks to the health of startup crypto projects and the small cryptocurrency market. As a large amount of retail funds flow into these heavily promoted financial products, funds that could have gone to primary and secondary markets are being absorbed, potentially leading to a lack of attention for new projects or a lack of follow-up support. This article will explore the "double-edged sword effect" of cryptocurrency ETFs and how it affects the capital distribution and market dynamics of the entire crypto ecosystem.

In short, is the popularity of Bitcoin and Ethereum ETFs at the cost of siphoning off funds that would have flowed into new projects, thereby stifling the future vitality of the cryptocurrency market? Are we truly in a bull market?

Viewpoint: Capital concentration may deprive new projects of liquidity

The logic of the above argument can actually be explained from two directions.

First, there is a healthier way for the cryptocurrency market: the approval and issuance of Bitcoin and Ethereum ETFs have actually brought new funds and new attention to the industry, leading more people to focus on the technological iterations and primary market projects in the crypto space, thus bringing more participants into the market to heat up the situation. This is also the logic of a traditional bull market, where new projects and narratives attract more funds and players.

But conversely: the issuance of Bitcoin and Ethereum ETFs not only brings in new funds but also affects investor behavior, siphoning off future liquidity from the market; many retail investors who are not well-versed in cryptocurrencies may, at the onset of a bull market, directly invest their funds into ETFs, leaving new projects facing the awkward situation of having no users and no recognized technological narratives.

In other words, if you are a novice investor who knows nothing about cryptocurrencies, you currently have a choice: either put your money into an exchange, read a lot of technical articles and information, and understand things clearly before trying to capture market alpha, or directly invest in ETFs to enjoy the beta of the cycle's dividends? It is evident that the latter is simpler for novices, but the former would allow the cryptocurrency market to develop in a more diversified manner.

Arthur Hayes actually touched on this topic briefly before the approval of ETFs, believing that one or a few large institutions holding the vast majority of Bitcoin in the market is fatal, as it may affect the consensus of Bitcoin becoming an unregulated decentralized currency, or lead to the centralization effects of miner groups being controlled. And today, just five months later, are we witnessing a negative effect of capital concentration into ETFs: depriving new cryptocurrency projects of liquidity?

The ETF whirlwind: some rejoice while others worry?

Since the logic can be explained both ways, let’s take a look at the actual data to see which side it leans towards.

The glorious achievements of Bitcoin ETFs

The achievements of Bitcoin ETFs so far are undeniable. Although there have been several ups and downs, overall, since the beginning of this year, not only has the price of Bitcoin risen sharply, establishing new support levels, but the funds in ETFs have also increased significantly. If we look at the overall amount of funds in spot Bitcoin ETFs from a macro perspective, the cumulative data has been on the rise:

Cumulative funds in spot Bitcoin ETFs, Source: The Block

This data has now reached a total circulation of $298 billion. This means that regardless of how much Grayscale sells or how much daily price fluctuations lead to net outflows, Bitcoin ETFs as a whole have been continuously absorbing funds. Part of this funding comes from new institutional participation, while another part may be funds that retail investors would have originally invested in primary/secondary markets. This funding was supposed to flow to new projects; the shift in this liquidity could very well become a nightmare for new projects.

Market data: Are we really in a bull market?

If we look at the data from another angle, we can find some interesting points. According to Coinmarketcap data, since the beginning of 2024, the total market capitalization of cryptocurrencies has fluctuated from $1.7 trillion to $2.4 trillion, which is quite a pleasing figure. However, if we break it down, Bitcoin and ETH account for the vast majority of this increase;

Market capitalization of various cryptocurrency sectors, Source: Coinmarketcap

At the beginning of the year, Bitcoin's market capitalization was $886.7 billion, and now this figure is $1.3 trillion, an increase of $413.3 billion, with a growth rate of 46.61%. For Ethereum, this data has risen from $287.4 billion to $427.5 billion, an increase of $140.1 billion, with a growth rate of 48.75%. Excluding the market capitalization of stablecoins (which will be discussed later), the funds allocated to all other altcoins, leading projects, and new projects have only increased from $441.5 billion to $527 billion, with a market capitalization increase of only $85.5 billion.

If we want to truly examine the indicators used to measure a bull market, especially the funds that have genuinely flowed into the cryptocurrency market rather than into ETFs, we need to look at the inflow of stablecoins. In terms of stablecoins, this indicator's performance has clearly not been as strong. Since the beginning of the year, the market capitalization of stablecoins has grown from $128.7 billion to $154.9 billion, an increase of $26.2 billion, with a growth rate of 20.36%. Although the growth is significant, if we compare it to the data from the last bull market, in March 2022, the market capitalization of stablecoins was $181 billion.

If we look more closely, the market capitalization of fiat-backed stablecoins has risen from $122.6 billion at the beginning of the year to $149.1 billion now, with an increase of only $26.5 billion, a growth rate of 21.62%. (In comparison, the peak market capitalization of fiat-backed stablecoins during the last bull market was $155 billion, which has already reached the peak scale of the last bull market, but this data is of limited significance because the last bull market had a considerable scale of algorithmic stablecoins represented by UST).

According to the argument of "Bitcoin at $100,000" in this bull market, the current on-chain funds from the perspective of stablecoins have not even reached the peak level of the last bull market. In other words, removing the impact of ETFs, it seems that not much funding has entered. So, are we really in a bull market?

"Triple Kill": The crowding-out effect of alternatives

From a macroeconomic perspective, the current cryptocurrency market belongs to the risk asset market, which is not particularly optimistic under the broader environment. The reason is that the high interest rate environment we are currently in will definitely reduce investment in risk assets. As interest rates rise, the borrowing costs for risk investors increase, leading to higher interest expenses, thus the scale of fundraising and investment in risk capital will inevitably shrink. Secondly, high interest rates will filter out projects that do not offer sufficiently high returns; projects that do not exceed the risk-free rate of return will not receive investment, and those that might have received funding in a low-interest environment may not get funding in a high-interest environment.

In short, if I can obtain a risk-free interest rate of around 5% from government bonds in a high-interest environment, why would I take the risk of entering a risk asset market that might decline by 20%?

Now let’s look at the alternatives facing the current cryptocurrency market:

1. In terms of interest rates, the most direct risk-free alternative for American investors is bank deposit rates. Currently, the interest rate for Goldman Sachs' Marcus savings account has reached an annualized yield of 4.4%. At the same time, the interest rate for one-year government bonds aimed at retail and institutional investors has reached 5.07%.

2. The second alternative is U.S. stocks. So far this year, the Nasdaq index has risen by 19.8%, while the S&P 500 index has grown by 14.52%. This growth in indices is directly aimed at dollar investors through ETFs. Additionally, if one had invested in stocks like Nvidia (+173.78%) or GameStop (+72.17%), the returns would have been even higher. (I must soul-search here: in 2023, everyone knows the AI boom is starting; why would you miss out on Nvidia in 2024?)

Performance of the three major U.S. stock indices. Source: Google Finance

3. Bitcoin and Ethereum ETFs themselves.

As a result, investors have plenty of alternatives to choose from, and the new funds that could have flowed into the primary and secondary markets of the crypto space are being diverted by traditional finance and ETFs, leading to a continuous decline in the enthusiasm for new projects in the secondary market.

Let’s list several new coins from this year’s leading exchanges (previously summarized by X user @silverfang 88):

Altlayer, Manta, Dymension, Pixel, Portal, Saga, Renzo, Polyhedra, Zeus, Merlin are all currently below their issuance prices. Most of these projects had high enthusiasm in the primary market, and many had very practical technological narratives, yet they have shown the current trends in the secondary market, which is not only influenced by the selling off of airdrop users but also closely related to the shift of most users' funds.

And what about the future?

Future ETFs?

From the news, we can see that there are still several ETFs in the pipeline;

XRP: Ripple CEO Brad Garlinghouse has stated that he expects a spot XRP ETF to emerge in 2025.

Solana: William Quigley, co-founder of Tether and WAX, has stated that after the approval of Bitcoin and Ethereum spot ETFs in the U.S., Wall Street's "greed" will bring about more such products. Quigley predicts that due to Wall Street's relentless pursuit of profits, ETFs for other mainstream cryptocurrencies like Solana and Cardano will also emerge in large numbers.

Dogecoin: BitMEX founder Arthur Hayes and Real Vision CEO Raoul Pal recently shared insights on the potential for a Dogecoin ETF in a Coin Bureau YouTube podcast. Arthur Hayes stated that a Dogecoin ETF could be launched by the end of this cycle, basing his prediction on the significant growth rate of dog-themed meme coins over the years, highlighting Dogecoin's status as the oldest meme coin in the cryptocurrency space, giving it an advantage over other meme-based cryptocurrencies.

If these ETFs are approved, will it be good or bad for the crypto market? From the data perspective, it may not be a good thing.

In summary, while cryptocurrency ETFs bring mainstream recognition and additional liquidity to the crypto market, they also raise concerns about increased market concentration. This trend of capital concentrating in a few large assets is very likely to suppress the growth of emerging crypto projects. In this context, we need to be extra cautious in our outlook and judgments regarding the future of the crypto market.