Rigid, bubble, crisis, breaking the ice

Author: YBB Capital Researcher Ac-Core

TL;DR

• Unlike the previous bull market driven by macroeconomic prosperity, this round of the crypto market is mainly influenced by macroeconomic uncertainty;

• ETFs are merely an "ibuprofen slow-release capsule," and the trend of crypto becoming more like traditional stocks has become a "tightening spell" for industry growth potential;

• The current bull market is almost limited to Bitcoin, with altcoins performing poorly mainly due to a lack of overall industry innovation, insufficient liquidity, and overvaluation in the primary market, resulting in limited overall capital momentum and difficulty in significant market increases;

• In the context of stagnant industry innovation, while traditional institutions like BlackRock entering the market can provide some incremental funds, they cannot change the trend of market internal competition, and old tunes are hard to play, making it difficult to support sustained growth;

I. The cyclical rise of halving every four years: Can it be achieved through a "carving the boat to seek the sword" approach?

1.1 The starting point of the bull market is completely different

Perhaps born out of resistance to the excessive issuance of national sovereign currencies and monetary policy interventions, Bitcoin coincidentally emerged against the backdrop of a global economic crisis. From a developmental perspective, before Bitcoin was largely banned in China in 2021, China was a major driver of the crypto industry, with domestic mining accounting for two-thirds of the global total at one point. Meanwhile, China's overall economy rapidly developed under the impetus of the real estate and internet boom, with a favorable macro environment before 2021, and the central bank's monetary easing policy stimulating market investment enthusiasm. However, with the cooling of the real estate market after 2020 and the overall economic downturn, some market liquidity has gradually been withdrawn.

Looking back at industry innovation, DeFi Summer propelled Ethereum's internal circular economy, becoming the main driving force for its explosion, followed by NFTs, MEMEs, and GameFi continuously breaking boundaries, attracting massive traffic resources and triggering a craze for digital collectibles. The rise in industry market capitalization drove a wave of development across the industry; however, this round of innovation is mostly "old tunes being played again," failing to bring substantial breakthroughs. It may also be that the bull market has not truly arrived, and new narratives have not yet stirred up enough waves.

If we consider the period from early 2019 to early 2021 as the starting point of the previous bull market, Bitcoin was in the price range of $4K-$10K, and Ethereum was in the range of $130-$330, with the overall crypto market being relatively small and having significant room for growth. However, according to CompaniesMarketCap data, Bitcoin's market capitalization is currently ranked 10th globally, second only to Facebook, with about three times the growth space compared to Apple and about 15 times compared to gold. However, compared to the previous bull market, the overall expected growth space has significantly shrunk.

The rise driven by halving is the core narrative of the previous bull market, and the cyclical growth of the crypto market has always been closely related to the macro economy. Since the creation of Bitcoin's genesis block in 2009, its market capitalization has been able to exceed $1 trillion, thanks to periodic monetary easing stimuli. However, the only constant in financial markets is "change," and even if one carves the boat to seek the sword, they cannot know the depth of the descent.

Data source: CompaniesMarketCap

1.2 What is Bitcoin's positioning and future growth potential?

Is Bitcoin's safe-haven attribute merely a consensus within the circle?

To this day, the US dollar still dominates the global economy through its pricing power, while gold serves as a "safe haven" for risk aversion and value preservation, with its historical price peaks often accompanied by major crises. The first frenzy began after World War II with the collapse of the Bretton Woods system, where the dollar decoupled from gold, driven by geopolitical factors and inflation. The second frenzy began in 2005, when massive funds flowed into gold as a safe haven after the subprime mortgage crisis, and geopolitical factors remained key after the end of the Libyan War in 2011. The third frenzy occurred after 2018, driven by the COVID-19 pandemic and regional geopolitical tensions that pushed up gold prices. Overall, gold has always been the preferred hedge against risk, while the Federal Reserve's quantitative easing and geopolitical factors are the main drivers of its price increase.

According to reports from Beijing time on Thursday (September 12), spot gold closed up 1.84% at $2,558.07 per ounce, reaching a historical high; spot silver rose 4.19% to $29.8792 per ounce. COMEX gold futures rose 1.78% to $2,587.6 per ounce, also setting a new historical closing record (data source: Qianzhan Network Research Selection News). The positioning of Bitcoin and gold as safe-haven assets seems to have been broken, with gold soaring while Bitcoin has failed to keep up, instead showing price movements more akin to US stocks.

Bitcoin's greatest value: A tool to resist economic sanctions and a lack of trust in fiat currencies

In the context of economic globalization, countries hope to achieve the international circulation, reserve, and settlement of their own fiat currencies. However, the trilemma of monetary sovereignty, free capital flow, and fixed exchange rates still exists. As I read "Currency Wars," I feel that paper money itself has no intrinsic value; it relies solely on the backing of national credit. Those who control the issuance of currency can, in fact, override the law. Even the strong dollar hegemony cannot sustain such a large-scale credit backing for the long term. Behind the globalization of the global economy lies an unresolved contradiction between monetary globalization and national interests. For example, El Salvador's adoption of "fiat currency dualization" to promote Bitcoin's use nationwide aims to weaken dollar hegemony, while Russia will allow residents to trade cryptocurrencies and use them for trade settlements starting in September 2024 to evade sanctions.

The awkwardness of Bitcoin lies in the fact that its value comes from hedging against the risks of fiat currency trust, but its upward momentum relies on the policies of powerful nations, the adoption of monopolistic capital, and the influence of the macro environment. This dual dependence makes Bitcoin, while challenging the traditional financial system, still subject to its rules.

II. ETFs are just a short-term painkiller, not a cure-all

2.1 The post-ETF era of crypto: Failed resistance against power

Image source: The Guardian-News

Bitcoin coincidentally emerged against the backdrop of a global economic crisis, and the unique attributes of blockchain have the potential to resist the excessive issuance of national sovereign currencies and monetary policy interventions. Anti-authoritarianism, a pursuit of freedom, and decentralization were once the beliefs and slogans of the industry. However, most "players" in the industry harbor speculative mindsets, and the dream of getting rich overnight seems to have become the primary driving force for industry development. The launch of Bitcoin ETFs, while a positive development, is ultimately just an unavoidable one-time event that cannot support the market in the long term.

Once, most of us held onto the belief of resisting power, but now we place our hopes on the strength of power. In our utopia, we seem to care only about profits and not about direction. The market is filled with cheers for the benefits of ETFs, with everyone hoping for more funds to flow in to take over. However, that part of us that once fought against power is now gradually handing over our achievements to power. This transformation reflects a profound contradiction between ideals and reality.

BlackRock, Vanguard, State Street, and other giants control the world, and now BlackRock is controlling Bitcoin.

The most influential companies in the world are not Apple, Tesla, Google, Amazon, or Microsoft, but rather the largest asset management companies globally. BlackRock is a representative of this, having been the largest asset management company in the world for 14 consecutive years from 2009 to 2023, managing trillions of dollars in assets. Compared to tech giants, these asset management companies wield far-reaching economic influence through the global flow of capital.

The immediate impact of the post-ETF era is that crypto asset prices will align more closely with traditional financial trends, and only by holding more chips can one have a greater voice in the industry. Currently, the US is gradually controlling the development of the crypto industry through ideological means. According to QCP Capital on September 10, macroeconomic uncertainty has become the dominant factor in the crypto market, with the 30-day correlation between BTC and the MSCI World Stock Index reaching 0.6, close to a two-year high. This indicates that Bitcoin's price movements are increasingly influenced by the performance of global stock markets.

The crypto industry did indeed sprout in the domestic market initially, but now the "big players" have changed, and more professional competitors are rising. In the future, in addition to selecting brand IPs and track segments, one will also need strong trading and transaction capabilities. The Matthew effect will permeate every corner of the industry, and the crypto world is gradually facing "Wall Street-level" trading difficulties.

2.2 The metaphor of the gold rush

Looking back at the California Gold Rush over a century ago, hundreds of thousands of prospectors with dreams of getting rich overnight flocked to California from all over the world; however, most returned empty-handed, some even paying with their lives. In contrast, Levi Strauss took a different approach, using the gold rush to sell the large stock of canvas he had accumulated to miners, which became popular due to its practicality. He then improved the pants, becoming the founder of jeans and establishing the globally renowned Levi's company.

Interestingly, PoW Bitcoin mining and PoS Ethereum staking are somewhat similar in this regard. The PoW mining craze has led "prospectors" to shoulder mining machines, while the PoS staking wave allows them to invest their own capital. However, roles like "Levi Strauss" are everywhere—behind this game is your desire for overnight wealth, while I am focused on the capital you possess. The 24/7 global trading of blockchain brings countless opportunities for "prospectors," but it also leads to extreme market volatility, with high risks accompanying high returns, constantly influencing everyone's courage and diligence.

The fast-paced, uninterrupted trading and highly volatile market conditions present both enticing traps and infinite trading opportunities, which is the greatest charm of crypto. The strong financial attributes combined with low entry barriers make crypto a naturally high-quality gold mine. We once shouted that the benefits of ETFs would bring more off-market funds, but after the ETFs, they also opened the doors for more Levi Strausses, creating more opportunities for arbitrage and indirect profits.

The crypto market will see more "Levi Strausses" involved

The arrival of ETFs brings not only the "takeover" of open funds but also more risk-hedging trades. The biggest innovation in blockchain currently lies in bringing finance on-chain, creating a "self-sustaining economic cycle" in the crypto market, successfully blocking direct interventions from power and traditional capital. However, in the post-ETF era, the crypto market will, to some extent, hand over complete financial derivative tools, which will only attract more arbitrageurs and large funds into the market, further compressing the already limited profit space and weakening the driving force and freedom of innovation within the market.

III. The hard-to-break ice of the primary market

Low liquidity and high FDV in the primary market

Recently, the financing situation in the primary market has changed significantly compared to the past, with newly listed tokens generally showing extremely high FDV (Fully Diluted Valuation) and low liquidity. According to data provided by Binance in "Observations and Thoughts on Overvalued, Low Liquidity Tokens," the ratio of market capitalization (MC) to FDV for tokens launched in 2024 is at its lowest in recent years. This indicates that a large number of tokens will still be unlocked in the future, and the FDV of tokens issued in the first few months of 2024 is already close to the total of 2023.

Image source: @thedefivillain, CoinMarketCap, and Binance Research, data release date is April 14, 2024

In a market that generally lacks liquidity, tokens gradually unlock after the TGE (Token Generation Event), bringing significant selling pressure to the market. However, did VCs really make money in this round of the market? Not necessarily. Typically, for compliant and regulated projects, token unlocks require at least a one-year cliff period. However, when projects have high FDV and low liquidity, they are prone to breaking below par after unlocking. This does not rule out the possibility of some small VCs profiting through secondary market dumping or early off-market sales. As shown in the data below, the circulating supply ratio of these tokens is generally below 20%, with the lowest being only 6%, indicating a significant phenomenon of high FDV.

Image source: CoinMarketCap and Binance Research, data release date is May 14, 2024

At this stage, the capital-driven effect has clearly temporarily lost its effectiveness. In addition to the reasons mentioned above, there are some objective factors that have led to the current low liquidity and high FDV market situation:

1. Market fragmentation, with too many wolves and too little meat: In the previous bull market, global capital was collectively speculating on DeFi and public chains, but in this round of the market, funds and participants are too dispersed, with diversified narratives, and Eastern and Western capital not taking over from each other, often resulting in newly launched tokens lacking sufficient buyers, leading to a fragmented market;

2. Lack of altcoin bull markets, insufficient speculation momentum: The infrastructure of EVM-compatible public chains has become relatively mature, with funds and projects competing in the same direction, and Ethereum killers have not brought new breakthroughs. In the absence of an altcoin bull market, once benchmark projects emerge, similar projects quickly follow, exacerbating the value gap effect;

3. Simplifying simple matters and complicating complex matters: Pseudo-innovation is everywhere in the market, with simple matters being artificially complicated just to tell the market a bigger dream, essentially changing nothing;

4. The Matthew effect is becoming more pronounced: The crypto industry has developed for nearly 16 years, and the monopolistic benefits of leading players have basically formed. Those that have survived until now, whether in technology, projects, or capital, have become stronger, while the weaker become weaker, and the market voice of leading enterprises is becoming increasingly solid;

5. Lack of innovation and liquidity: The primary challenge facing the current market is the lack of innovation and insufficient liquidity, making it difficult for the market to rise significantly, and overall development is stuck in a bottleneck.