The Market
The much-anticipated FOMC meeting on July 31 brought a dovish Fed, as Powell mentioned that a September rate cut is possible if the U.S. economy follows its expected path. This follows the Bank of England’s decision to cut rates by 25bps from its 16-year high. However, be careful of what you wish for - a rate cut decision comes with the concern of economic slowdown, and we are indeed seeing signs of that from the July economic numbers. The PMI index is below 50 again, reaching the lowest level last seen in late 2023, indicating declining business activity. Furthermore, the unemployment rate for June has risen to 4.3%, both exceeding expectations and the Natural Rate of Unemployment level.
The market is currently indicating a higher chance of a 50 bps cut than a 25 bps cut by September, a significant increase from just a few weeks ago.
The broader risk market is not celebrating this increased probability and magnitude of a rate cut as recession worries suddenly kicks in. Both equities and crypto had a small rally anticipating dovish Fed statements heading into the FOMC meeting but quickly gave up the gains and ended the week with a selloff.
We believe the risk market has overreacted, with no clear evidence of the recession in the making. In fact, the yield curve has been trending toward the positive zone since July, indicating the market is not pricing in a recession just yet. Furthermore, the Global Net Liquidity Index has also reversed the downtrend around the same period.
According to the research by macro investor Michael Howell, the US monetary base is highly correlated with the global liquidity condition and the projected Monetary Base, according to Fed’s QT run off and Treasury’s Quarterly Refunding Announcement, is pointing to an upward trajectory for the next 12-month period.
On the ETF side, Grayscale’s ETHE has seen outflows at a faster pace than GBTC since the BTC spot ETF was launched. Over the 11 days since the ETH spot ETF launch, ETHE has lost about 30% of its ETH holdings, while GBTC has only lost about 11% during the same period. This is alarming as ETHE’s discount to NAV has already closed in May after the 19b-4 approval, giving ample time for the discount chasers to unwind.We believe ETH ETFs will take longer to gain demand than BTC ETFs, as BTC’s first-mover advantage has captured most retail interest in crypto. Furthermore, BTC ETFs are gaining momentum among institutions, with multiple pensions disclosing their investments. As we predicted, the real driver for institutional adoption would come after BTC ETFs gained six months of track record, and it has. Morgan Stanley, one of the world’s largest wealth management platforms, has announced the approval of the iShares and Fidelity BTC ETFs on their platform, enabling their army of financial advisors to offer them to wealthy clients. We expect more RIAs to follow suit, accelerating inflows to BTC as the sales process begins.
DeFi Update
One month into Q3 2024, what does the scorecard look like for crypto? BTC is up ~38% YTD, but after failing to surpass its mid-March ATH, it has fallen back to its end-of-February level. Ethereum has returned ~25% but hasn’t reached its November 2021 ATH. Altcoins outside the top 10 are down 10%, erasing any gains from Q1 this year.
We experienced a sharp selloff in April triggered by geopolitical tension in the Middle East and another in June-July caused by technical selling pressure. Since BTC fell from its ATH on March 13, only 62 tokens with market caps over $100M tracked by Messari have outperformed BTC as of 8/2. Only 45 of those 62 tokens established higher lows in July compared to April. The table below summarizes the top 5 sectors represented by those 45 names and largest tokens in each sector.
Source: Messari Screener
Selected memecoins showed strength during the Q2 selloff and the ability to outperform BTC. The memecoin frenzy as an important driver for Solana’s DeFi ecosystem, while not every memecoin will be a winner, memecoins with strong culture root and community could be this cycle’s dark horses. It’s also notable that the top 3 Smart Contract Platforms align with the three most recognized consumer chains, indicating the market values usage over just technology innovation.
According to the Alt Season Index, which measures the percent of top 50 coins that outperform BTC in the past 90 days, we are not far from bottoming. An important sign to watch is the stablecoin supply, which has shown signs of recovery since July.
We are not out of the woods yet given the macro volatility and the upcoming election. However there are positive signs to look forward to, and this might just be the darkest moment before dawn.
Top 100 MCAP Winners
Aave (+4.83%)
Tether Gold (+2.45%)
Top 100 MCAP Losers
dogwifhat (-36.42%)
Ethena (-31.82%)
Pyth Network (-28.51%)
Pepe (-27.87%)
Brett (-27.76%)
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.
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.