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The Market
Last week was packed with macro events. August CPI data confirmed the ongoing slowdown in inflation, and the first presidential debate reset Trump’s early lead. BTC rallied ahead of the CPI data release but sold off after the debate. Fortunately, the selloff was short-lived as the market turned its focus to the September FOMC meeting, anticipating the first rate cut since March 2022. Notably, the probability of a 50bps cut, instead of 25bps, surged from under 20% to 50%, as more Fed insiders advocate for a larger cut. Risky assets ended the week reversing their losing streak, with the S&P 500 up ~4% and BTC up ~7.5%.
Altcoins have also rebounded from their lows, with the Altseason Index bouncing off its end-of-July bottom. Meanwhile, BTC dominance has slightly decreased from its post-FTX ATH of 58%, reached last Friday. The open interest-weighted funding rate for BTC finally turned positive in September, as did ETF inflows.
Given that BTC dominance levels reached around 70% during the last two cycles, and BTC has yet to regain ATH, we believe there is still room for BTC to grow before altcoins take the lead. However, there are reasons for optimism. According to the latest 13F filings, over 1000 institutions now hold BTC, making an unprecedented record for new ETF launches in the TradFi world. With more TradFi institutions following Morgan Stanley’s footsteps by approving BTC ETFs on their platforms, we see increased buying potential once risk appetite returns.
Despite the choppy market, BTC miners continue to demonstrate confidence in the network by investing in additional capacity, driving the hash rate to new all-time highs, which sets a positive foundation for a potential BTC rally.
CeFi Update
Last week, we saw two encouraging developments in TradFi’s adoption of crypto tools. Venmo and PayPal, the two largest payment networks, integrataed ENS into their platforms, allowing users to send crypto to human-readable addresses. This blurs the line between Web2 and Web3 user experiences, accelerating the mainstream adoption of blockchain technology. These payment companies are taking full advantage of the growing blockchain payment business. PayPal, in particular, is actively incentivizing DeFi adoption to promote PYUSD usage. If blockchain is the inevitable infrastructure for future transactions, why be disrupted when you can participate in its development and stay competitive?
Another noteworthy use case is Morpho’s integration of TradFi products. Morpho, a DeFi 2.0 lending protocol, enables a permissionless yet curated lending experience through Morpho Vaults. Risk experts and credit managers can create vaults with specific asset or risk profiles to attract lenders. SwissBorg, a European fintech firm, is launching a USDC vault on Morpho, available to users of the SwissBorg app, providing Web2 users with access to DeFi yields. As competition in TradFi intensifies, we see more opportunities for businesses to embrace DeFi by offering curated DeFi yield products to their clients while addressing regulatory and risk management considerations.
DeFi Update
The BTC ecosystem welcomed a potentially game-changing new entrant last week: Coinbase launched cbBTC, a wrapped BTC on the Base and Ethereum networks. This launch comes at a strategic time, as BitGo’s transitioned its sole custody of wBTC to a multi-custoridian solution in partnership with BIT Global, a custodian linked to the controversial figure Justin Sun, is facing trust issues. MakerDAO is even considering dropping wBTC as collateral due to these concerns.
On its first day, cbBTC attracted ~$100M, or 729 BTC, while wBTC experienced a net loss of ~8 BTC. Multiple DeFi protocols, including the Base-native DEX Aerodrome and the lending protocol Moonwell, made cbBTC available on day one. cbBTC currently trades only on DEXes, with a 24-hour ADV of $25M, about a quarter of wBTC liquidity, which is notable given the difference in market caps. cbBTC is fully backed by BTC custodied at Coinbase, allowing users to wrap and unwrap BTC with a 1:1 peg.
Like wBTC, cbBTC relies on a centralized party (Coinbase) to custody BTC and maintain the 1:1 peg. Although it requires trust in Coinbase, the company’s strong reputation and its efforts toward regulatory compliance may provide users with greater confidence. cbBTC is a test case for the BTCFi thesis. In theory, given that BTC is the largest crypto asset and has gained mainstream adoption through the ETF launch, bringing more utility to BTC could unlock a large DApp ecosystem, potentially surpassing Ethereum’s success. However, several challenges remain. Firstly, the Bitcoin network is not Turing complete, meaning it cannot execute smart contracts without significant changes to its design. Secondly, there’s a philosophical divide between OGs and newcomers on BTC’s role—should it maintain its PoW consensus mechanism as a secure store of value, or should it upgrade to expand its utility?
Source: Stacks Foundation
We see two approaches to addressing these challenges: Various versions of wrapped BTC and the rise of Bitcoin L2s. Wrapped BTC leaves the BTC network untouched, creating a synthetic BTC on Ethereum (or other networks) to tap into their utilities. Bitcoin L2s, however, aim to expand the Bitcoin network’s utility by developing function-rich sidechains or rollups that still settle on the Bitcoin network for security. Below is a summary of the pros and cons of each approach.
As a BTC holder, would you be willing to wrap your BTC into cbBTC to unlock DeFi opportunities? If wBTC’s limited adoption stems from security or centralization concerns, the growth of cbBTC will soon test that thesis, as the demand for yield on BTC encounters the ongoing ideological debate about improving the Bitcoin network.
Top 100 MCAP Winners
Nervos Network (+77.81%)
Popcat (+40.08%)
Bittensor (+34.01%)
Artificial Superintelligence Alliance (+28.13%)
Mantra (+27.38%)
Top 100 MCAP Losers
Starknet (-7.52%)
Helium (-6.95%)
SATS (-6.44%)
TRON (-2.65%)
Arweave (-1.78%)
About Decentral Park
Decentral Park is a founder-led cryptoasset investment firm comprised of team members who’ve honed their skills as technology entrepreneurs, operators, venture capitalists, researchers, and advisors.
Decentral Park applies a principled digital asset investment strategy and partners with founders to enable their token-based decentralized networks to scale globally.
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.
About the Author
Kelly is Portfolio Manager and Head of Research at Decentral Park Capital. Investing across sectors with a thesis driven, deep research approach.
Prior to this, Kelly has led research and product efforts at CoinDesk Indices and Fidelity Digital Asset Management. Kelly has been a TradFi investor for 15 years before joining the crypto space.
You can follow Kelly on Twitter and LinkedIn for more frequent analysis and updates.