Market
The Market welcomed a cool down in inflation during October, as reported on November 14th.The overall Consumer Price Index slowed to 3.2 percent last month on a year-over-year basis, a decrease from the 3.7 percent reading in September and the lowest since July. While lower gas price played a significant role, declines in sectors such as Physician Service, Airline Fares, etc., contribute to the sustainability of this downward trend.
Small caps experienced one of their best rallies against the large caps in a century, reflecting the market's optimistic view on future growth potential. The 10Y treasury yield dropped by 20bps to 4.44% immediately after the news. The reduction in inflation and lower long-term interest rate, two indicators closely monitored by the Fed, if sustained, make another rate increase less likely. In fact, the futures market indicates a 0% chance of a rake hike before year-end and a positive chance of rate cut as early as May 2024. Global and US liquidity conditions have been improving since the beginning of October, coinciding with the subsequent BTC rally.
BTC and SOL briefly touched their post-FTX highs of $3800 and $68 during the week, and ETH briefly surpassed $2000 again last week. However, they ended the week either flat or slightly down.
In the broad crypto market, small caps (+0.38%) outperformed large caps (-2.02%) last week according to the Market Vector Index, indicating a continued risk appetite toward alt coins. Celestia, the Data Availability (DA) solution for the modular chain thesis, rallied ~82% last week since its debut on major exchanges at the beginning of November. It is now trading at a $7B FDV, comparable to Polkadot and Optimism.
According to Messari research, Celestia needs to provide service to 2X the current Ethereum roll-up DA demand to sustain such a valuation if valued at the same multiple as Solana, or 5-10X the current Ethereum roll-up DA needs if valued as one of the L2s. Clearly, the market is expressing high growth expectations for future DA needs and Celestia’s ability to capture the majority market share.
CeFi Update
Attention is once again drawn to the potential spot ETF approval, as Fidelity followed Blackrock’s footsteps by filing for an ETH spot ETF last week. This development strengthened the belief that a BTC spot ETF could be approved in January 2024, with an ETH spot ETF soon to follow. Of particular interest is the SEC's decision to delay Hashdex’s application for an ETH ETF that can hold both spot and futures. According to the filing, the SEC will need to decide to approve or deny the ETF by January 1, 2024, a date earlier than January 10, 2024, which was supposed to be the deadline for SEC to make a decision on the first spot BTC ETF filing. There is a possibility that a spot ETH ETF could come out simultaneously with a spot BTC ETF.
What possible reasons could the SEC still use to reject the spot ETF filing? One concern, as mentioned by the BitGo CEO, is the separation of exchange and custody provider, as Coinbase is the custodian for a few BTC ETF issuers. This concern could be addressed as there are qualified custodians around. Another concern is Authorized Participants’ ability to trade BTC when handling the creation and redemption of ETFs. There are rumors that SEC’s Market and Trading division is advising issuers to use cash rather than in-kind creation, putting the responsibility on issuers for the purchase and sale of BTCs when shares are created or destroyed. While SEC might aim to remain impartial, the suggested change could benefit crypto-native issuers or larger asset managers with resources to trade crypto. We anticipate issuers amending their 19b-4 filings between now and January as they race to the finish line.
Once the spot BTC and ETH ETF are launched, what would issuers do next? As mainstream adoption of crypto continues, risk-seeking investors may explore investing in digital assets with higher return potential. We believe asset managers will follow the playbook of offerings like Grayscale’s Digital Large Cap Fund (GDLC), Bitwise’s 10 Crypto Index Fund (BITW, constituents below) and Hashdex’s Nasdaq Crypto Index ETF (BSX) to provide basket products investing in liquid, largecap tokens traded on qualified exchanges. This could provide tailwinds for largecap tokens, especially those with a low risk of being deemed as a security by the SEC.
Source: Bitwise, 11/18/23
DeFi Update
Solana had a remarkable rally since October, boasting a one-month return of 146% and YTD return of 479%, surpassing both BTC and ETH. SOL has now reached the $55-57 price range, a psychological resistance level previously seen in May 2021 when it peaked around $55. Solana’s market cap is currently at 10% of Ethereum’s, approaching its ATH level of 14%.
So where can Solana go from here? Firstly, It’s important to note that Solana is still a relatively young chain, just shy of 4 years old. As the technology gets battle tested and demonstrates the potential to attract users and developers, the market is likely to reward it with the Lindy effect. Comparing the performance of ETH and SOL by age, SOL has just caught up with the price trajectory of a 4-year-old ETH. As the Lindy effect continues to build for SOL, there is room for further catch up.
Source: Decentral Park Capital, TradingView
Coincidentally, when ETH was 4 years old in July 2019, it represented around 10% of BTC’s market cap. As Ethereum solidified itself as the smart contract platform for decentralized applications, showcased by the DeFi and NFT summer, its market cap ratio to BTC grew to as high as 55% in 2021. We think the competition of blockchain adoption is far from over, and Solana, as the current leader for the monolithic chain, has the potential to increase its market share relative to ETH.
If the current crypto market rally is driven by exogenous factors such as the anticipated spot ETF approval, there are also endogenous factors for Solana growth that could excite investors. For instance, Solana DEX volume has surged almost 4X compared to the beginning of the year.
In the meantime, several leading Solana DeFi protocols have either announced or are expected to conduct airdrops in the next six months. According to Messari research, a 10% airdrop of the top Solana DeFi projects could be valued at ~$112.8M. This newfound wealth could be reinvested back to the Solana DeFi ecosystem, setting the stage for a potential DeFi summer on Solana.
ORCA, the largest DEX on Solana, is currently processing $1.8b in trading volume in November,a figure comparable to Uniswap’s trading volume back in July 2020, right at the beginning of DeFi summer. In less than a year, Uniswap’s trading volume skyrocketed 40X to $84b in May 2021, illustrating how rapidly volume can grow when capital pours in. While it remains uncertain whether ORCA will experience similar growth, given the attractive yield on some of its AMM pools and the influx of capital into the Solana ecosystem, we believe there are tailwinds propelling the DeFi ecosystem on Solana. As investors debate whether the next crypto summer may not come from DeFi sector again, we posit that DeFi could still lead the growth, albeit likely not within the Ethereum ecosystem.
Top 7d Gainers and Losers
Top 100 MCAP Winners
Celestia (+82.23%)
Kaspa (+57.56%)
RNDR (+35.61%)
AVAX (+33.83%)
RUNE (+28.93%)
Top 100 MCAP Losers
Gas (-33.98%)
FTx Token (-25.84%)
Cronos (-17.21%)
Neo (-16.32%)
Conflux (-15.80%)
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.