Memorial day marked the start of summer. It’s the “Sell in May and go away” season. This summer is likely to be different as we are entering the election season and as the street eagerly anticipates the ETH spot ETF launch. The current implied volatility on both BTC and BTC are both higher than the levels seen last May.
The Open Interest for both BTC and ETH futures have climbed up to or exceeded the high levels reached in late March, indicating improved risk appetite for the crypto market.
It is reported that Blackrock has updated its S-1 for the ETH ETF, indicating progress is being made toward the ETF launch. Although the BTC ETF’s S-1 review took months, we expect the ETH S-1 review process to be shorter given there is precedence and the 19-b4 approval has already addressed major concerns regarding ETH liquidity and security definition. It is possible that ETH ETFs will be launched by the end of June or beginning of July.
The ETHE discount has further compressed to around ~1.55%, similar to the GBTC discount level the day after BTC spot ETF approval, although the ETH price has stabilized around $3810, a similar level as the ETF approval news broke out. We mentioned the supply crunch for ETH in the last weekly that could have a bigger price impact on ETH per dollar of ETF inflow, although we expect the actual demand for ETH ETF is going to be much smaller than for BTC.
According to Coinshares, the current AUM for global ETH ETP products is roughly ~20% of BTC ETPs, which serves as a good reference for ETH ETF inflows in the US. Despite high hopes for a Solana ETF, given CME has denied the rumors about them launching Solana futures, we do not see a Solana spot ETF coming soon in the US, at least following the same logic under which the BTC and ETH spot ETFs are approved.
On the macro front, we continue to see a slow down in the economy as shown in the revised down Q1 GDP data. The PCE inflation data has shown a mild slowdown, although at a level of 2.7%, it’s still above Fed’s target level. Even if rate cuts are further away from the US, it is widely expected that the ECB will cut rates in next week’s policy meeting. The dollar index is set for its first monthly drop, indicating the market is not anticipating a big divergence in monetary policy between the US and other countries.
On the regulatory side, we are taking two steps forward and one step back, with Biden vetoing the bill overturning SAB 121 as he promised. It’s yet to be seen how regulated banks and broker dealers custody crypto would “jeopardize the well-being of consumers”, we think it will do just the contrary by shutting down a safe channel for consumers to access crypto. The Uniswap foundation has also delayed the vote to turn the fee switch on last Friday, citing new issues raised by a stakeholder. While this is criticized as a violation of decentralized principles, we suspect it could be regulation related as well.
TradFi Update
One big takeaway from Consensus 2024 last week is the increased attention from TradFi institutions. We have learnt from firms and projects specializing in tokenization that demand has drastically increased from the issuer side to tokenize their money market or treasury funds, hoping to replicate the success of Blackrock’s BUIDL. Several blockchain ecosystems are also offering incentives to attract issuers to tokenize on their chain. The AUM of tokenized treasury products has doubled YTD, reflecting the growth in this sector.
Payment side is also making big strides as Paypal’s PYUSD just launched on Solana last week, in addition to Ethereum. What’s more interesting is the Solana version has a confidential transfer function which can keep the transfer amount confidential while maintaining visibility on the transfer parties for regulatory purposes. This is made possible by Solana’s Token Extension, which enables strong functionalities at the token level without having to modify the blockchain.
One could challenge TradFi companies’ true intention in adopting crypto as they do not want to lose their network of clients while showcasing innovation and reducing costs. TLDR, they don’t want to be disintermediated. We think these adoptions are also trojan horses for the crypto industry to show mainstream users the benefits they can bring. Once the mainstream gets comfortable with the technology and embraces the benefits, new business models can emerge and build networks at scale. We already see that being played out; for example, after Venmo raising transaction fees, it is cheaper to send USDC on Base than Venmo. We believe with the development of Base, Coinbase is no longer just an exchange, but a multifaceted company that could facilitate many financial activities on-chain. Brian Amstrong has told CNBC back in 2022 that he wants to diversify the revenue from trading fees to subscription services. In our view, TradFi adopting crypto is like renovating an old house with new plumbing, while Coinbase is building a new house with state-of-the-art infrastructure.
DeFi Update
Another take away from Consensus 2024 is the rise of Solana’s ecosystem. There were quite a few high quality Solana side events this year, and I met with Solana Foundation leads, engineers and founders. Here are my takeaways:
Solana has built a strong community of builders and users to sustain the flywheel effect:
Removing price effect, although TVL is still lower than the peak level seen in 2022, trading volume on Solana DEXex has sustained higher volume than last cycle.
Despite having high FDV and low float at launch, many leading Solana DeFi projects have recovered from their post TGE selloffs, backed by strong fundamental Growth and investor demand.
Source: TradingView
Solana projects are finding ways to collaborate with each other
The Solana ecosystem is still early enough to allow projects to collaborate to grow the pie together rather than fighting for market share. For example, Jupiter as an aggregator, serves as a great UI for traders to access liquidity from other DEXes. IO.net is partnering with Render to distribute Render’s GPU resources on the IO.net network. Helium is using Metaplex’s NFT standard to mint NFTs representing devices on their network.
Solana has a wide range of use cases suitable for the suits and the hoodies (h/t to Annelise’s book title)
We have seen Solana secure partnerships with big payment organizations and tokenization issuers. It’s also becoming the preferred destiny for meme coin issuance. In fact, Pump.Fun, the Solana meme coin launch pad has risen to be among the top 10 fee-generating protocols, rivaling large L1s and leading dApps.
Source: DeFillama as of 6/2/2024
The fact that Solana can attract a diverse user base is due to its performance and monolithic architecture, which enables a seamless user experience. Because it’s cheap and easy to deploy on Solana, it attracts projects of varying quality, which can cause congestion. The biggest risk for Solana is it becomes the victim of its own success, with low quality projects spamming the precious blockspace. We believe it’s an unavoidable problem for successful L1s given the permissionless nature of blockchains. While Solana is tackling this problem by upgrading its infrastructure to handle more transactions, we believe innovation is needed on governance and incentives to help attract high-quality projects and discourage low-quality ones.
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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.
