It was a tale of two cities for the crypto and equities markets last week. The July CPI data came in as expected, bringing the 12-month CPI below 3% for the first time since March 2021. While inflation continues to show signs of cooling, last week’s economic data revealed unexpected resilience. Jobless claims fell for two consecutive weeks in August, and retail sales jumped 1% in July, marking the highest monthly increase in a year. The positive economic news has alleviated concerns of a hard landing, and the stock market reacted positively. However, the crypto market was unable to sustain an uptrend last week.
There are several reasons for the performance deviation between the crypto and equities markets.
Technical selling pressure remains for BTC
According to Glassnode, the Mt. Gox distribution recently completed a release of around 110K BTC to its creditors in the second half of July. Additionally, the U.S. government began moving its BTC holdings last week, amounting to approximately 20K BTC. Although it's unclear when or if these distributed BTC will be sold, lingering selling pressure may persist as BTC's price recovers.
Meanwhile, global ETF flows have been anemic for the past three weeks but show strong potential to absorb significant selling pressure as investors engage in bargain hunting.
Crypto market is more reflexive to changing liquidity conditions than equites
Global liquidity played a crucial role in the 2015-2017 and 2019-2021 cycles, with crypto drastically outperforming equities during periods of global liquidity expansion. However, it has been three years since we peaked in global liquidity, as central banks worldwide tightened monetary policy to combat post-pandemic inflation. Signs of liquidity improvement have only emerged since July. The better-than-expected labor market data reduced market expectations of a 50 basis point (bps) rate cut in September to 25%, down from 85% just a week earlier, contributing to this week's crypto selloff. Despite this, the market is still pricing in a 77% chance of a 75bps rate cut by year-end.
Monetary inflation appears inevitable due to the mounting U.S. government debt and unsustainably high interest burdens. According to CrossBorder Capital, the ratio between global debt and global liquidity fluctuates around an equilibrium ratio of close to 2.5 times. While all eyes are on the Fed's actions in September, we believe that the rising debt levels and the need for monetary inflation to service the debt will be the bigger driver of global liquidity increases in the long term.
Election odds are currently unfavorable for crypto
Last week’s Crypto4Harris town hall shed some light on what pro-crypto Democrats want to do to reset the relationship between the crypto industry and the Biden administration. Unfortunately, it wasn’t a "Harris for Crypto" event, as the presidential candidate was absent, and no concrete policy proposals emerged. Alarmingly, it was pointed out that Harris’s economic advisor picks include key anti-crypto officials from the Biden administration. With the prediction market indicating a tight race between the two candidates, the crypto market will have to navigate this uncertainty until November.
DeFi Update
Solana is bringing more yield opportunities to its ecosystem by following in Ethereum’s footsteps. Solayer, the re-staking marketplace on Solana, went live last week. Similar to EigenLayer on Ethereum, it uses SOL and liquid staked SOL as collateral to secure other Actively Validated Services (AVS). However, unlike EigenLayer, Solayer focuses on securing AVS that are endogenous to Solana, built as native dApps.
Thanks to Solana’s Staked-Weighted-Quality-of-Service mechanism, Solayer allows users to delegate their restaked SOL to help chosen dApps secure more blockspace. This opens new yield opportunities for SOL and SOL LSD investors, enabling dApps that lack the resources or sophistication to run their own validators to pay for blockspace through delegation. Since its testnet launch, Solayer has tripled its TVL in less than two months, outpacing the initial growth rate for EigenLayer.
Several high-profile stablecoins are also making significant moves into Solana. PayPal’s stablecoin, PYUSD, has accumulated more TVL on Solana than on Ethereum within less than two months of its launch, driven by the attractive yield it offers on Kamino.
USDe, the highest interest paying stablecoin issued by Ethena and backed by basis trades, also began expanding in Solana on August 7. It is capitalizing on Solana’s rising popularity as well as more favorable funding rates compared to ETH or BTC. Ethena is also partnering with Solana DeFi protocols such as Kamino, Drift and Orca to boost USDe yield and liquidity.
If Solana’s initial DeFi boom was fueled by memecoin trading, we now see sustained growth driven by a maturing DeFi ecosystem. Solana is replicating Ethereum’s playbook by expanding liquid staking and re-staking opportunities, integrating closely with lending protocols and DEXs, and attracting fiat on-chain through stablecoins. This growth in the DeFi ecosystem is creating a positive feedback loop for Solana, potentially helping it close the market cap gap with Ethereum.
Top 100 MCAP Winners
Helium (+26.19%)
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Top 100 MCAP Losers
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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.
