Market
The market conducted a full dress rehearsal in anticipation of the potential BTC spot ETF approval on Monday morning, driven by fake news that Blackrock’s BTC spot ETF had been approved. BTC immediately surged by 7.12%. Miners and BTC ecosystem tokens all rallied in accordance with this news. Among them, STX, the only L2 on the BTC network, exhibited the most significant gains, surpassing BTC in terms of return.
What’s interesting is the price action by the end of the week, as the market re-evaluate the timing and impact of the BTC spot ETF approval. BTC maintained most of its rally, confirming that when the spot ETF is approved, there is capital ready to flow in and boost the price. BSV experienced an impressive weekly rally of over 30%, largely driven by the trading activities in Upbit, the popular Korean crypto exchange. Data indicates that Upbit accounts for 61% of the CEX trading volume on BSV, and while the 24h trading volume is $171 million, the 2% depth is around $100K or lower, highlighting how thin liquidity can have a significant impact on prices.
Source: CoinMarketCap, 10/21/2023
As the market became more optimistic about the spot ETF approval, the ETH/BTC ratio continued to decline, entering the oversold territory this week at its lowest level YTD. It would only take another 8.54% decline for this ratio to reach a local trough last seen in 2022. We believe the BTC spot ETF narrative has taken oxygen from Ethereum’s as L2 growth stabilized and Dencun upgrade date remains unconfirmed. However, we anticipate ETH will regain momentum once the Dencun upgrade is implemented in early 2024. Additionally, there are two ETH spot ETF applications in the pipeline, likely to be approved around July 2024, unless SEC rejects the BTC spot ETF. This could result in increased inflows to ETH from mainstream investors.
Conversely, SOL continues to deliver remarkable gains this week, returning over 15% in just one week. SOL has reached a YTD ATH price of $29, while still being approximately 87% below its ATH price of $261, reached in November 2021. The narrative of Solana’s faster throughput, cheaper fees and parallel processing ability is supported by its YTD TVL growth, in contrast to the decline seen in Ethereum.
On the macro front, global net liquidity has received a 10% boost since October, with China ramping up its liquidity support to its banking system. Despite this, the US economy remains surprisingly strong, as Fed Chair Powell mentioned in a discussion at the New York Economic club this week, with growth above trend and strong jobs data. Although the 10Y yield has risen to nearly 5%, a level not seen since the Fed cut rates during the GFC, we do not anticipate a rate hike by the end of this year. In fact, the market is currently expecting a 20% probability of a rate increase by year end.
DeFi Update
The most notable DeFi event of this week is the activation of the “fee switch” by Uniswap Lab, though not for the token holders. Users who trade through Uniswap’s front end on 11 assets will be subject to a 0.15% fee paid to Uniswap lab. While this move is expected to generate approximately $22 million revenue for Uniswap Lab, based on the current accrual rate, it has raised criticism on the misalignment between equity and token holders for Uniswap, as well as renewed concerns on how governance tokens can accrue value.
DEXes have faced increased scrutiny from the regulators this year. Although Uniswap is not among the tokens that SEC has labeled as a security, enabling the fee switch on the token side could potentially result in legal and tax consequences. As Uniswap’s trading volume rivals Coinbase, and it captures about 65% of the total DEX spot trading market share, it has deliberately tried not to trigger SEC rule violation, going so far as delisting the token from its front end that is deemed as unregistered security by the SEC, as well as implementing a hook allowing KYC option in its v4 implementation.
To be fair, Uniswap’s transaction fee at the protocol level is highly competitive compared to CEXes. Additionally, most wallet front ends such as Metamask, and brokerage platforms charge a service fee, which is integrated into the overall trading cost. So Uniswap’s fee switch on the front end is not exorbitant. The good news is that users who directly interact with the protocol, bypassing the front end, won’t incur the 0.15% fee. Furthermore, anyone can develop an alternative front end to access the Uniswap protocol with lower fees. We believe that the fee switch on the front end could actually serve as a good experiment for Uniswap, as this fee is added to the LP fees rather than taking a cut in their profits. This addresses the concerns that led to the rejection of the protocol fee switch last year. If increased fees on the user side do not adversely affect Uniswap’s trading volume, then a fee switch on the protocol side is at least theoretically possible. In comparison, Uniswap’s competitors, such as Curve, Pancake Swap and Sushiswap, all have mechanisms in place to share trading fees with staked token holders.
The ratio of spot trading volume in DEX to CEX has decreased from a brief ATH of 21% in May 2023, driven by meme coins, to 13%. Uni token price has declined 91% from its ATH and by 19% YTD. We anticipate that DEX protocols will continue to face regulation challenges and an overall decline in crypto trading volume. However, should the crypto market turnaround, similar to what was observed in 2021, coupled with Uniswap’s v4 further solidifying its dominant position in DEX liquidity, this could potentially serve as a positive performance catalyst for UNI, unless the market significantly discount its FDV multiple, considering UNI token’s pure governance status.
Top Gainers and Losers
Top 100 MCAP Winners
Bicoin SV (+58.56%)
Solana (+31.38%)
MX Token (+25.50%)
Stacks (+22.86%)
LINK (+22.41%)
Top 100 MCAP Losers
Conflux(-6.94%)
SUI (-5.18%)
XDC Network (-4.77%)
Frax Share (-3.17%)
Trust Wallet Token (-2.76%)
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/