The Market
We experienced another choppy market last week, with the BTC price oscillating between the $60K and $65K price range. Since the Iranian drone attack induced selloff on April 13, the Fixed Range Volume Profile has shown volume concentrated around $64K. For BTC to re-establish upside momentum, we need to see sustained price levels above $64K.
Macro data continues to show conflicting signals, preventing the Fed from establishing any conviction for rate cuts. The weekly jobs report shows a slow down in the labor market, as jobless claims rose to 8-month high. However, the Consumer Sentiment Survey shows an uptick in the inflation outlook to 3.5% from 3.2% last month. We expect the economy to continue on the cool down trajectory, but how quickly inflation catches up with the downward trend, or whether it does at all, will impact Fed’s rate decision. The risky market is not pricing in any near term volatility just yet, given the muted level in VIX and BTC implied vol, but the Fixed Income vol has remained at elevated levels since the Fed started hiking rate in 2022.
On the positive side, the long term BTC holders have stopped selling since April, and the spot ETF flows have turned positive again last week. We continue to believe BTC faces positive supply dynamics with reduced supply from halving and pending demand from institutional ETF inflows.
As we approach the election date, crypto is becoming THE partisan issue with the two parties drawing a clear divide on where they stand. Just as we expect Congress to do the right thing by repealing SAB 121, which assigns punishing capital requirements for banks to custody crypto, Biden claims he plans to veto it. Given Biden has only vetoed 11 bills in his tenure, it is clearly a signal of where the Democrats stand on crypto. If that’s not clear enough, SEC made a surprising last minute decision to delay crypto wallet provider Exodu’s uplisting from OTCQX to NYSE, one day before their planned date when the team has already arrived in NYC for celebration. The republicans are taking advantage of this opportunity and made a pro-crypto stance, although there are few policy details supporting this. According to the Blockchain Association survey, 20% of the voters in the swing states consider crypto a major issue for the 2024 election. Whether Jeo Boden or Donald Tremp wins the election, the crypto industry still needs to fight an uphill battle to achieve mainstream adoption. This is common for innovations with the power to disrupt incumbent industries, and it's especially challenging for crypto, as it could disrupt the most powerful financial industry.
DeFi Update
There has been a lot of discussion about the low float high FDV lately, which is prominent in this cycle. According to Arca, the top projects that are launched in 2023 have an average float of 13.6%, while in the last cycle, this number is usually higher than 20%.
Source: Arca, as of May 6, 2024
There are several reasons for this phenomenon: Regulatory - projects are cautious about raising money through an ICO due to the risk of being classified as securities offerings; User acquisition - projects aim to attract users by offering them “free tokens” as airdrops. Competition - projects want to retain a larger portion of their supply for future user acquisition and retention purposes. For the same amount of money invested in tokens, investors are getting less ownership because of the low float dynamics. As Cobie famously put it in 2021, circulating market cap represents market demand while FDV is a meme… until it has a real impact when unlocked token supply meets low investor demand.
To illustrate, consider a startup project that initially raised 5% from seed investors for working capital. These investors typically have a ~1-year cliff and a 1-2-year linear vesting period. After developing the product, the project offers another 10% of its supply to attract users through an airdrop. These airdropped tokens can be freely sold upon token launch.
Imagine this project initially raised $2.5M for a $50M valuation from seed investors, but by the time it’s ready for TGE, there is $100M in the market willing to buy the 10% airdropped tokens, indicating a $1B FDV. The seed investors, now seeing a paper gain of 20X, may be willing to sell their tokens at a discount when they unlock. For example, an investor targeting a 5X return is willing to sell at a 75% discount from the TGE price.
This dynamic could have a non-trivial impact on the token price once the unlock happens. How much of an impact depends on the amount of token unlocked, the seed investors’ return expectation, and the condition of the market. In short, if a project receives a hyped TGE valuation with low float, it is susceptible to negative price impact once investor unlock happens.
Similar dynamics exist in the traditional venture world, as seed investors seek high returns by taking on startup risk. However, what sets the crypto world apart is the significantly shortened go-to-market cycle, with many projects rushing to TGE before having a mature product, in a bull market where investors are willing to pay high prices for tokens. Seed investors may also accept lower return multiples as they can recycle their capital sooner. This could lead to a cycle that contributes to the boom and bust of the crypto market.
For crypto investors, identifying promising projects with established product-market fit and sustainable growth potential remains crucial. However, understanding valuation and tokenomics is equally important, as they can significantly impact your return.
Top 100 MCAP Winners
Akash (+31.00%)
Render (+22.42%)
Toncoin (+19.67%)
AIOZ Network (+14.06%)
Worldcoin (+13.80%)
Top 100 MCAP Losers
CORE (-21.84%)
Wormhole (-19.33%)
Bonk (-17.43%)
Bittensor (-16.09%)
Stacks (-15.67%)
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.