Market
The Hamas surprise attack on Israel this Saturday caused immediate reactions in the market. Both gold and long-term treasuries rallied, reflecting the risk-off sentiment. The stock market ended the week with a slight positive gain, indicating that the market is still assessing the potential escalation of the conflict. BTC sold off by 4.29%, and ETH by 6.16%, reflecting the risk-off sentiment in the crypto space.
The supply of BTC has decreased to a level last seen in 2018. On-chain data shows that the BTC long-term holder supply is at a historical high, indicating the reluctance of long-term holders to sell at these price levels. This could provide support against further price deterioration.
The 14-day RSI for the ETH/BTC ratio is close to 30, indicating an oversold condition for ETH relative to BTC. In fact, the supply of ETH on exchanges has dipped further than BTC, reaching a level last seen in 2016-2017.
So where do we go from here? The futures market now indicates a ~30% probability of rate hike by year end, much lower than the ~46% level merely a month ago. The term premium, i.e. the risk premium market assigned to the uncertainty of 10Y rate, has risen above zero for the first time since 2021. This indicates the market is already doing part of the rate rising job for the Fed. A former Hawkish Fed official commented that there might be less need to raise rates if long term yield remain elevated.
History has shown that the Fed started to add liquidity when the ISM Purchasing Manager Index, a well-known leading economic indicator, dipped below 50, indicating a potential contraction in the economy. We are in a dangerous zone around 50, indicating a potential reversal of the tight liquidity conditions, which could be positive for risky assets.
CeFi Update
Fed chose not to appeal against the Grayscale case. As we mentioned in the last weekly, this means the court will issue an order detailing next steps for the SEC. They could approve Grayscale’s spot BTC application, or come up with new reasons to reject it. Regardless, the verdict for the first spot filing ETF inline is going to come out on Jan 10, 2024. Issuers are very swift in responding to SEC’s comments on their S-1 filings; ARK and Invesco have already updated their filings to reflect the change. It seems progress is being made in the right direction. In fact, Bloomberg analysts have estimated a 90% chance of ETF approval by January 2024.
The real question is, how much inflow can the ETF attract and how would that affect the BTC price, if at all? To put things in context, the size of the US equity ETF market is $5.6 trillion. Assume investors would rotate 1% of their equity ETF holding to the BTC spot ETF, that’s a $56 billion TAM. According to recent NYDIG research, there is about $7B AUM in spot BTC funds (excluding GBTC), which we think will likely flow into spot ETFs given their better liquidity and cost structure. There is also a strong possibility that some of the $1 billion AUM in the BTC futures ETF will flow to the spot ETFs too. It’s not unrealistic to assume a $10-30 billion inflow to the spot BTC ETFs, although the actual pace of the flow is a function of the market condition and investor preference.
The narrative on the Bitcoin investment thesis has evolved from a growth asset that serves as a proxy to the growth of the blockchain technology to a macro asset that acts as an alternative storage of value. We expect Bitcoin to have a similar effect as the “dollar smile” theory, where it performs well in both a strong growth environment and heightened geopolitical risk situations , coupled with concerns regarding US inflation. TradFi giants such as Fidelity and Pual Tudor Jones have recently expressed support for BTC’s function as alternative storage of value. Envision major institutions endorsing this narrative with their substantial sales force once the spot BTC ETFs are live, akin to their support for the Gold ETF in the past. Despite the suppressed bitcoin price level, this might not be a bad time to launch a BTC spot ETF at all. In fact, the global crypto ETF/Trust inflows has turned positive for two consecutive weeks since October, indicating a pick up in interest from mainstream investors.
DeFi Trends to Watch
RWA has become the fastest growing trend in DeFi. According to Galaxy Research, the Total Value Locked in RWA has nearly doubled in 2023, growing from $1.44 billion to $2.5 billion. Many participants aim to replicate Maker’s success in their RWA strategy, resulting in a 400%+ increase in earnings and ~180% return on the MKR token YTD. However, not all RWA strategies are the same. There are three main business models, each with distinct risk profiles and growth drivers.
Use RWA as collateral to back stablecoins:
Maker, the largest DeFi stablecoin issuer, has executed this strategy effectively. By introducing RWA as collateral for DAI, they diversify the collateral pool, earn attractive interest thanks to high real-world interest rates, and use them to enhance yield on DAI through DSR.
The primary risk of using RWA as collateral is their potential credit loss that could threaten the DAI peg to USD. Maker currently partners with third-party managers to source and manage the RWA collateral pool, exposing Maker not only to the credit and duration risk of the collateral but to the counterparty risk of the manager. Currently 75% of Maker’s RWA collateral are in short-term treasury bonds, with the rest subject to various degrees of credit risk.
Bring private credit deals on chain (uncollateralized or using RWA as collateral):
This is similar to private lending, facilitated by a protocol on-chain and accessible to crypto native investors. Protocols like Centrifuge, Maple and Goldfinch serve as platforms enabling crypto native lenders to access borrowers on-chain through third-party asset originators (aka. delegates). Borrowing activities range from uncollateralized lending to crypto native/fintech companies, to collateralized lending financing real estate, receivables, inventory, treasuries, etc. The yield and risk can vary considerably depending on the delegate’s credit underwriting capability and structure of the deal. While most lending protocols aim to be a technology platform, they inadvertently become gatekeepers for asset originators. The bad loans to FTX by Orthogonal credit on Maple and the recent defaults on pools on Goldfinch underscores the risks these protocols face as they grow their TVL in RWA related lending activities.
Tokenized real world assets
Many TradFi companies see tokenization as the blockchain’s killer app, as it can bring liquidity to illiquid assets through tokenized format and attract new investors, especially those without access to existing fund vehicles. The TAM for tokenized assets is nearly unlimited, encompassing any real assets or funds if there is an investment appetite for them. Currently most tokenization assets are centered around US treasuries or gold, given their ease of implementation and demand from crypto native investors. Efforts exist on tokening private funds and real estate, but they are trading in walled gardens and rely on existing fund structure to ensure legal ownership. For tokenization to truly scale, we need legal and regulatory developments to ensure proper ownerships on chain and tradability on eligible venues, as well as interoperability to ensure unified liquidity on-chain.
Given the attractive yield offered by RWA vs. DeFi native yield, we anticipate that CDPs and DeFi borrowing and Lending platforms will continue to expand their presence in the RWA space. It is crucial to evaluate the quality of the delegates on their platforms and the credit quality of the deals they originate to ensure organic growth. The tokenization of broader assets will take longer to materialize and will mainly be driven by TradFi institutions. However, the blockchain they use and interoperability solutions would benefit from the continued growth of tokenized assets.
Top Gainers and Losers
Loom’s surge is possibly influenced by a whale purchasing $6 million tokens on Upbit, far exceeding its average daily trading volume of ~$150K. The investor now owns 50% of the total circulating supply. Additionally, two tokenized gold assets are also experiencing a rally in response to geopolitical concerns.
Top 100 MCAP Winners
Loom Network (+76.34%)
Tether Gold (+5.33%)
Trust Wallet Token (+5.12%)
Klaytn (+4.89%)
Pax Gold (+3.81%)
Top 100 MCAP Losers
Mantle (-17.28%)
Rocket Pool (-13.76%)
Avalanche (-12.02%)
Conflux(-11.20%)
Polygon (-9.56%)
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.www.reuters.com/technology/vaneck-launches-etf-tied-ether-futures-2023-10-02/