Bitcoin
Bitcoin’s price has been in a downtrend for the last ~couple of months, primarily driven by “higher for longer” interest rates and, more recently, increased sell pressure from the U.S. and German governments mass-selling previously seized BTC. Because of these factors, BTC is trading below most bull market trend lines, including the 200-day SMA.
With the halving now firmly behind us and the price dipping, miners are feeling the pressure. Lower BTC price + fewer daily BTC mined = less revenue for miners. This leads to miners selling the BTC they have just to stay afloat, and, once those run out, many go out of business or get acquired.
Historically, Bitcoin prices surge in anticipation of halvings, fueled by miner hoarding which delays the long-term benefits of reduced supply. This pattern, often referred to as the "post-halving hangover," sees prices recalibrate as excess inventory is gradually sold off. The current scenario, exacerbated by the significant release of Mt. Gox Bitcoin, amplifies this effect, yet market mechanisms should eventually correct for the surplus through price adjustments.
Supporting this outlook is the behavior of Bitcoin ETFs, which have continued to increase their holdings, albeit at a much smaller clip than ~two months ago. This institutional accumulation underscores a sustained investor interest in Bitcoin, reinforcing a long-term bullish perspective despite short-term supply shocks.
Macro Charts
Everyone is looking for rate cuts in the U.S. later this year. It looks like the U.S. won’t be the only country to do so.
Unemployment is slightly rising, inching closer to ~4%, while inflation is declining (second chart). These, in tandem, will give the Fed the justification it needs to cut rates
Risk assets, especially crypto, do well when global liquidity is rising rather than contracting. M2 is a measure of money supply that includes M1 (cash outside banks and checking account deposits) along with savings accounts, money market accounts, retail mutual funds, etc. Historically, changes in the global M2 money supply, which covers cash in circulation, deposit currency, and household savings, have been a reliable predictor for crypto market trends.
Increased global liquidity, as indicated by a rising M2, typically leads to higher investment in crypto, driving up market caps. However, since October 2023, while the year-on-year change in Global M2 has been declining, the crypto market has continued to grow, largely due to the excitement around crypto ETFs. This divergence raises questions about the sustainability of current crypto prices and whether they are overly optimistic in expecting new investments without the necessary liquidity support.
Ethereum
Following the success of Bitcoin ETFs, the approval and anticipated launch of Ethereum ETFs are set to reshape investment strategies and market dynamics. This summary delves into the key themes and takeaways from the recent report on Ethereum ETFs, highlighting the expected market impact, investor sentiment, and comparative analysis with Bitcoin ETFs.
The approval of spot-based Ethereum ETPs by the Securities and Exchange Commission (SEC) has generated considerable excitement. Initially, market analysts were skeptical about the SEC's approval due to regulatory uncertainties surrounding Ethereum. However, the approval of all 19b-4 filings on May 23, 2024, paved the way for the launch of Ethereum ETFs, expected to commence trading in July 2024.
Nine issuers are competing to launch ten Ethereum spot ETFs in the United States. Based on the performance of Bitcoin ETFs, Ethereum ETFs are projected to attract substantial net inflows. The report estimates that Ethereum ETFs will see net inflows of approximately $1 billion per month over the first five months, translating to about 30% of Bitcoin ETF net flows.
Market Dynamics and Investor Behavior
The introduction of Bitcoin ETFs provided a valuable reference point for predicting the market reception of Ethereum ETFs. Bitcoin ETFs have garnered over $15 billion in net inflows since their launch in January 2024. This success underscores the strong demand for cryptocurrency investment products among independent investment advisors and those affiliated with banks or broker-dealers.
Ethereum, however, presents a unique case. Its supply dynamics, with a significant portion locked in staking, bridges, and smart contracts, make it more price-sensitive to ETF inflows compared to Bitcoin. As of June 15, 2024, the total supply of Bitcoin held by ETFs amounted to 4.4%, driving notable price appreciation. Similar inflows into Ethereum ETFs are expected to have a pronounced impact on ETH prices due to the relatively lower supply available on centralized exchanges.
Challenges and Market Considerations
Despite the optimistic projections, several factors could influence the actual inflows into Ethereum ETFs. One critical aspect is the opportunity cost associated with non-staked ETH. Ethereum staking rewards, which provide inflationary rewards, priority fees, and MEV revenue to validators, are not available to non-staked ETH holders. This could make spot Ethereum ETFs less attractive to potential buyers compared to other investment products offering staking yields.
Additionally, the potential conversion of the Grayscale Ethereum Trust (ETHE) into an ETF could lead to significant outflows, similar to the experience with the Grayscale Bitcoin Trust (GBTC). This conversion may exert downward pressure on Ethereum prices in the short term.
Institutional and Retail Demand
The demand for Bitcoin ETFs has been predominantly retail-driven, with institutional interest gradually picking up. A similar trend is anticipated for Ethereum ETFs. While the largest wealth management platforms have yet to fully embrace Bitcoin ETFs, there is potential for significant inflows once these platforms begin offering Ethereum ETFs to their clients.
Institutional buyers, including banks, hedge funds, and pension funds, have shown increasing interest in Bitcoin ETFs, and a similar pattern is expected for Ethereum. The adoption of Ethereum ETFs by institutional investors could serve as a catalyst for broader market acceptance and increased investment in Ethereum.
Stablecoins
Blockchain technology's utility is evident in the rise of stablecoins, which have seen their market cap soar to $160 billion over the past decade, making them the third-largest segment in the crypto market after Bitcoin and Ethereum. Their primary value lies in providing a seamless means of transferring globally desirable assets, with tokenized USD exemplifying this function. Recent developments highlight the increasing mainstream acceptance of stablecoins. Circle's achievement in securing an Electronic Money Institution license marks it as the first MiCA-compliant stablecoin issuer, while Tether's new payment option in the Philippines allows 115 million citizens to pay their Social Security contributions with USDT. Additionally, new entrants like Ethena's USDe (new article here) continue to innovate in the space with its unique quasi-decentralized, delta-neutral stabilization technique. Despite their impressive growth, stablecoins still represent just 0.76% of the M2 money supply, indicating significant room for expansion.
Telegram
The Open Network (TON) is a next-generation blockchain ecosystem originally developed by Telegram. Designed to seamlessly integrate with various blockchain networks, TON aims to make digital asset and information exchange as straightforward as exchanging messages between different smartphone platforms. Despite facing regulatory challenges, which led Telegram to step back from the project, the open-source community has continued its development, creating a comprehensive blockchain platform with ambitious goals and functionalities.
The genesis of TON lies with Telegram, a widely-used messaging app founded by Pavel Durov. Initially named the Telegram Open Network, the project was envisioned to enhance Telegram’s functionalities by enabling fast and secure transactions within its ecosystem. However, regulatory pressures forced Telegram to relinquish direct involvement, passing the baton to the open-source community. This shift has not deterred the project’s momentum; instead, it has broadened its scope and community support.
Key Features and Functionalities
Scalability: TON addresses the scalability issues plaguing many existing blockchains. Utilizing sharding and a unique architectural design, TON can handle millions of transactions per second, ensuring that it can scale effectively as demand grows.
Interoperability: One of TON's most significant features is its interoperability. It can interact seamlessly with other blockchain networks, enabling cross-chain compatibility that enhances its utility and integration potential across the blockchain ecosystem.
User-Friendly Services: TON provides a variety of decentralized services aimed at enhancing user experience. These include:
TON Storage: Facilitates decentralized file sharing.
TON Proxy: Enhances user privacy.
TON Services: Supports decentralized applications (DApps).
Fast Transactions: With a unique consensus mechanism, TON achieves faster transaction speeds compared to many traditional blockchains, making it suitable for applications that require rapid and secure transactions.
Toncoin: The Native Cryptocurrency
Central to the TON ecosystem is Toncoin, its native cryptocurrency. Toncoin plays multiple crucial roles within the network:
Transaction Fees: Used to pay for transaction fees, ensuring smooth and efficient processing within the network.
Staking and Validator Rewards: Validators who secure the network are rewarded with Toncoin, incentivizing participation and maintaining network security.
Governance: Toncoin holders can participate in the network’s governance, voting on critical proposals and decisions, thereby influencing the future direction of the platform.
Incentivizing Development: Developers building and maintaining DApps on the TON network receive incentives in the form of Toncoin, fostering a robust and innovative development community.
Tokenomics and Market Performance
Toncoin has a maximum supply of 5.1 billion tokens, with a current circulating supply of 2.46 billion. It reached an all-time high of $8.25 on June 15, 2024. This performance highlights both its potential for significant growth and the volatility typical of cryptocurrencies.
Our Take
At Event Horizon Capital (EHC), we believe select cryptoassets will outperform all other asset classes over the next five, ten, and possibly even twenty years due to their superior qualities as new money/assets for the internet age. Because of this, we seek the best risk-adjusted exposure to protocols that personify the blockchain benefits outlined above. With crypto markets being one of the world’s most dynamic markets, our agile and active management provides the flexibility required for swift, decisive action while also never compromising on security.
EHC’s multi-strategy approach is built upon:
Qualitative fundamental research,
Quantitative tools and valuation metrics
Narrative and sentiment-driven market swings
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