At first glance, although on-chain innovation has reached unprecedented levels and is constructive for the field in the long term, macro factors may play a significant role in the short term.
Highlights
While Bitcoin halvings have historically sparked bullish trends, these cyclical increases are often accompanied by other ecosystem catalysts that provide an additional boost.
Growing talent pools, mature development tools and increasing blockchain scalability make the broader industry vertical a catalyst for this cycle, although the liquidity channel for inflows appears to have shifted from venture financing to spot ETF inflows.
In the short term, we expect Bitcoin dominance to remain elevated as the broader macroeconomic environment becomes more risk-averse and liquidity injected through ETFs is less likely to shift towards higher beta assets.
In addition to the Bitcoin halving, which we have detailed before, the market is looking for new catalysts to sustain the Q1’24 rally triggered by the approval of a US spot Bitcoin ETF. The continued growth in stablecoin issuance and growth in the total value locked (TVL) of DeFi protocols indicates that on-chain activity continues to be strong.
At the same time, continued platform innovation at the first (L1) and second (L2) level, coupled with improved wallet tools to provide a better user experience, constitute what we believe will be the most relevant in the coming months. basis for some narratives.
That said, we believe short-term activity is more likely to be driven by macroeconomic factors, although cryptocurrency fundamentals generally remain strong. These factors are largely exogenous to cryptocurrencies and include rising geopolitical tensions, rising long-term interest rates, reflation, and rising national debt.
In fact, this is highlighted by the recent rise in Altcoin correlations with BTC, indicating BTC’s anchoring role in the space, even as BTC solidifies its status as a macro asset.
While cryptocurrencies have historically been largely viewed as a risk to the asset class, we believe Bitcoin’s continued resilience and the approval of spot ETFs have created a polarized investor base (particularly for Bitcoin) – among which One views Bitcoin as a purely speculative asset, while the other views Bitcoin as “digital gold” and a hedge against geopolitical risks.
We believe growth in the latter camp partly explains the smaller pullback we have seen so far this cycle, given broader macroeconomic risks.
Pattern after halving
Previous halvings are often thought to trigger cyclical bullish trends, although the immediate impact of the halvings appears to be largely unimportant in the short term. In fact, BTC fell by 19% in the month after the 2016 halving, while remaining essentially unchanged for more than two months after the 2020 halving (see Figure 1).
Likewise, we don’t expect the upcoming halving to be a transaction-heavy story, although we think its relevance in traffic is therefore being overlooked — at $63,000 in BTC, the halving equates to a reduction in BTC issuance per year $10.3B. U.S. spot BTC ETF net inflows to date are $12.4B, offsetting BTC outflows by a similar amount.
In fact, we believe Bitcoin's increased access to a broader capital base through spot ETFs, coupled with new supply-side dynamics, is constructive for the asset class in the long term.
However, if previous cycles are any indication, this may take months to fully materialize. The post-halving top occurs between 350 and 550 days after the event (see Figure 2), although this cycle time has changed.
Against the backdrop of spot ETF inflows, Bitcoin reached an all-time high more than a month before the halving, and we expect Bitcoin to deviate further from the previous time trend.
However, the halving isn’t just good for Bitcoin. As the industry matures, constructive narratives in parallel cryptocurrency verticals often occur post-halving as well.
Following the 2016 halving, the boom in initial coin offerings (ICOs) carried the market's exuberance into 2017. Likewise, the DeFi summer of 2020 kicked off the rise of decentralized applications (dApps) such as Uniswap and Maker, kicking off nearly two years of experimentation in DeFi primitives and other early products.
Sources of liquidity
The number of cryptocurrency verticals today has expanded tenfold as new tools and use cases emerge. Block space has never been cheaper, and the number of “things to do” on-chain has never been greater.
Social apps like Farcaster are expected to see early adoption, while a range of well-designed blockchain games are starting to come online. Wallet improvements enable developers to deploy a more seamless onboarding journey, and DeFi primitives continue to expand the suite into areas such as liquidity re-collateralization and novel on-chain derivatives.
At the same time, tokenization projects across different financial products and jurisdictions are making significant progress, and the overlap between on-chain financialization and off-chain physical assets continues to grow. This was driven in large part by the incredible growth in infrastructure infrastructure built during the bear market.
We believe this could lead to a different pattern this cycle, with more diverse sub-sectors outperforming simultaneously (rather than the industry concentrating on one or two main themes). Particularly in a world of standalone applications that abstract blockchain elements from users with increasing technical complexity, the differences between tokens and revenue models are becoming ever wider.
This breadth has given rise to new forms of revenue streams that were not typically available in previous cycles. For example, BonkBot, a Telegram bot that works with the BONK community, regularly generates more than $100,000 in fees every day (the peak single-day fee income is $1.4 million).
We further believe that the differences between cryptocurrency verticals this cycle may lead to a more pronounced rotation of capital between industries. In fact, we have seen some signs of this through the early focus on artificial intelligence (AI) projects and the subsequent excessive focus on meme coins and re-collateralization.
The depressed levels of cryptocurrency funding (relative to previous cycles) support this view. It reduces the main avenue for new liquidity for high-beta assets. Average fundraising in 2024 remains below $1 billion per month, even below 2017-18 levels and about a quarter of what it will be in 2021-22.
The decline in funding is both a by-product of the severe impact of previous cycles and part of a macro-windback. The private equity market generally shrank in 2023, with the total amount of capital raised by venture capital funds hitting its lowest level in six years, down 60% since 2022.
The relative lack of financing in Bitcoin raises questions about how to inject liquidity into the space. Spot ETFs are certainly one of the main avenues we've discussed before. They have access to a broader pool of capital, ranging from registered investment advisors (RIAs) to potential allocations from other managed funds. BlackRock, for example, has laid out plans to add a spot Bitcoin ETF to its global allocation fund.
However, these capital inflows are limited to BTC (and possibly ETH in the future) and are unlikely to flow further down the risk curve. If this market structure does not change significantly, we believe Bitcoin’s dominance will remain elevated for some time.
Bitcoin on the other hand, we believe the primary means of injecting liquidity into Altcoin(besides leverage) will come from the net growth of stablecoins. Stablecoins participate in the majority of 65% of the $2.6B daily average trading activity on decentralized exchanges (DEX), and are further used as trading pairs on many centralized exchanges (CEX).
Although the total market capitalization of stablecoins is still below the peak in 2022, the total issuance of USDC and USDT has exceeded all-time highs and continues to rise. If we exclude the impact of the now-defunct TerraUSD on total market capitalization, stablecoins as a whole are actually close to their previous all-time highs.
Bitcoin Macro Thoughts
While we anticipate the rise of endogenous catalysts for cryptocurrencies in the future, we believe the macroeconomic situation will play a more important role in the short term. In fact, after the previous halving, tailwinds were also important, perhaps even more important than the cryptocurrency's native catalysts.
The main impact of the 2012 halving was the impact of the US Federal Reserve’s quantitative easing program and the US debt ceiling crisis. Likewise, in 2016, Brexit and the contentious US election may have triggered fiscal concerns in the UK and Europe. The COVID-19 pandemic in early 2020 also resulted in unprecedented levels of stimulus, driving a sharp rise in liquidity.
We believe this cycle is no different and today’s macroeconomic environment is equally important for Bitcoin and the broader cryptocurrency. The recent sharp decline in leverage following the intensification of conflict in the Middle East has reset funding rates to near zero levels. The ongoing war on the Ukrainian and Russian fronts and tensions in the South China Sea also paint a global picture of uncertainty.
We believe that the rising importance of global geopolitics within the broader trend of deglobalization and reshoring may be a defining macroeconomic feature of this cycle. This is especially true in risk-off environments. Correlations between Bitcoin and most other cryptocurrencies have consolidated upward after decoupling somewhat during the Q1’24 rally amid uncertainty over market direction.
Bitcoin’s correlation with gold continued to rise in March and April amid concerns about rising inflation, also signaling Bitcoin’s role as a sensitive asset in the absence of crypto-specific catalysts such as spot ETF approval. The status of visual assets continues to increase.
This behavior is promising given Bitcoin's claims as a store of value, although we believe this claim has actually been reinforced by the recent bear market.
Bitcoin saw strong bids during the uncertainty surrounding the U.S. debt ceiling in January 2023 and the ensuing regional banking crisis in March of that year. Compressed price appreciation (like what has been experienced over the past 6 months) can distort this signal to some extent as it introduces an element of speculation and excitement.
Nonetheless, we still believe that Bitcoin’s value as a geopolitical hedge has prompted more aggressive bargain hunting so far, with maximum retracements limited to 18% (compared to the retracements of previous cycles). The withdrawal range is more than 30%).
Separately, rising levels of U.S. national debt are another theme of concern for Bitcoin supporters. The Congressional Budget Office predicts that $870 billion will be spent on repaying the national debt in 2024, up from the $658 billion recorded in 2023.
Of course, we think this is concerning and is driving an inversion of the bond yield curve - higher rates in the longer term may not be fiscally sustainable as US Treasuries need to be refinanced.
That is, even as the pace of the U.S. debt burden continues to increase, it is possible that the U.S. will grow out of debt (or balance the budget by reducing spending or raising taxes, although this seems unlikely in the short term) by the middle of the upcoming election.
Stronger-than-expected GDP growth and high employment figures are likely to boost overall tax revenue. While we don't think current growth rates can fully offset the increased debt load, it's unlikely to be fully discounted either. Risks such as geopolitics, inflation and national debt together constitute the macroeconomic background of this cycle.
in conclusion
All else being equal, the Bitcoin halving is an inherently constructive event, although we believe the macro environment and tangentially breaking crypto verticals have historically played a significant role in catalyzing cyclical bull markets.
While this process has historically taken several months, it will vary from cycle to cycle - we believe changing market structures as major ETF inflows and venture capital investment decline may contribute to some of the uniqueness of this cycle.
We further believe that the last cycle solidified Bitcoin's sensitivity to global liquidity in the wake of COVID-19-induced stimulus. However, global liquidity no longer appears to be increasing at the same magnitude and has taken a back seat to more substantial instability both at home and abroad.
With this in mind, we believe that the upcoming cycle will focus on testing the Bitcoin store of value narrative, supported by more broadly dispersed crypto catalysts across different verticals.
