Market
It turns out the “Dress Rehearsal” rally we had last week due to the fake BTC spot ETF approval news turns out to be a real dance party, with BTC rallying approximately another 13% this week. The total crypto market cap has increased 12% since the fake news broke out on October 19th, with only 5 tokens in the top 100 token list experiencing negative returns in the past 7-day period.
BTC is currently trading at a price close to $35,000, returning to the level last seen in May 2022 when the Terra Luna debacle happened. The last two times when BTC's price crossed this level from below, it triggered the DeFi summer and the Alt L1 summer, a very encouraging coincidence. Now, BTC is in oversold territory, as indicated by the 14-day RSI. Are we ready to enter a crypto bull market yet?
There are several catalysts driving the crypto market rally. Let’s delve into them one by one.
BTC spot ETF Narrative
This has been running for a while now. The fake news doesn’t necessarily change the expectation of the ETF approval probability, but does indicate that there is capital ready to enter the market with bullish signals. It has drawn more attention to analyze the price impact once the ETF approval were to happen. We have estimated that even a mere 1% rotation from the US equity ETFs to the BTC spot ETF would generate $56 billion in inflows to the ETF. Galaxy has estimated a $14 billion inflow into the BTC spot ETF in the first year, based on the size of the US wealth management market and a potential price impact of 74%, similar to how the inflows into the gold ETF has impacted the gold price.
Furthermore, the official close of the SEC vs. Grayscale case and the fact that Blackrock has updated their filing, providing ticker and seed capital information, has enhanced people’s belief that ETF approval is likely to happen soon. It's important to note that seed capital information and ticker reservation are typical practices for ETF issuers and shouldn't be used as an indication of imminent approval. However, they do indicate that things are progressing in the right direction.
Just having a big TAM doesn’t guarantee flows will come. A solid investment rationale supporting a portfolio allocation to BTC will drive sustained flows. We have discussed the “Bitcoin Smile” theory on BTC’s dual role as a growth asset (a proxy for blockchain adoption) and an alternative storage of value (digital gold). We expect ETF issuers to build around this narrative when promoting BTC spot ETFs.
Macro
The US has just reported a very strong +4.9% GDP in Q3, the biggest gain since Q4 2021. Consumer spending contributes to more than half of the growth, while business spending slowed down to near non-existence, indicating a potential peak in economic growth. The market has reacted this week with a small selloff in equities (SPY -2.5%) and gain in fixed income (TLT +1.36%).
The Fed Fund Futures market is currently pricing in a greater than 50% chance of a rate cut in H2 2024. Even Bill Ackman has covered his bond shorts, citing concerns about excessive risk in the market and potential economic slowdown. Additionally, mounting concerns about escalating conflicts involving Hamas/Israel, Russia/Ukraine, and potentially China/Taiwan have driven capital to assets that serve as alternative storage of value,such as gold and BTC.
Moreover, the increased budget requirements for the US to provide military support to its allies will need to come from somewhere, making the current high-rate, tight liquidity environment unsustainable. We anticipate the demand for hedging against geopolitical risk and potential liquidity injections into the market will continue to provide tail winds to the crypto market.
Altcoins Catching Up
While ETH also had a solid ~15% rally since October 19th, its price still lags 16% behind this year’s ATH level at $2,127. ETH/BTC ratio is only 5.8% away from its lowest point since May 2021, demonstrating the continued weakness of ETH relative to BTC.
What’s encouraging, though, is that the recent rally is not solely focused on BTC. According to CoinDesk Indices, the “Computing” and “Culture & Entertainment” sectors have outperformed the overall market (+17.83%) and BTC (+18.89%) since October 19, while “Smart Contract Platform” and “DeFi” sectors have lagged behind. This suggests that the market is favoring newer narratives over what drove previous crypto summers.
Capital Flow
While US investors discuss the theoretical inflows into the BTC spot ETF, actual inflows are occurring in global ETP products. In October, we witnessed four weeks of sustained inflows, with the majority of these flows directed toward BTC and SOL related ETPs.
The Glassnode Altseason Indicator turned strongly positive for the first time this week, driven by positive net inflows into all three major crypto assets: BTC, ETH and stablecoins, which is a leading indicator for potential altcoin flows.
Furthermore, the acceleration of the Chinese capital exodus, prompted by Yuan’s depreciation and deteriorating domestic economic conditions, could potentially drive funds into crypto, the most censorship-resistant asset, despite capital controls.
Broadening crypto use cases enabled by infrastructure improvements
As much as we appreciate Bitcoin being called a “flight to quality” asset, the ultimate driver for a bull market must be growth. What distinguishes this cycle is the maturation of the blockchain technology and the potential for mainstream adoption, which will unlock real-world use cases with sustainable growth, rather than relying solely on unsustainable financial incentives.
For example, Solana’s Firedancer client implementation could improve its TPS from 2,000 to 1,000,000, and finality time to 500ms, making it better than most Web2 infrastructure. Chainlink, with its Decentralized Oracle Network (DON) and Cross Chain Interoperability Protocol (CCIP) could act as the infrastructure connecting Web2 systems with blockchain, and various blockchains with each other, simplifying the adoption process for many TradFi companies. Both SOL and LINK tokens have outperformed BTC in the recent rally, indicating the market’s recognition of the growth potential they offer.
We also believe we are on the verge of an explosion of consumer based dApps as the Web3 ownership becomes the preferred option, when the barriers of user experience, transaction speed and cost diminish.
Despite the encouraging signs of a new crypto bull cycle, there are still numerous risks ahead. The worst-case scenario could stem from macro, such as escalating geopolitical risks, uncontrollable inflation, or recession. We also anticipate consolidation within the crypto market, particularly in well-established use cases such as infrastructure and DeFi. The consumer dApp sector is still in its early stages, and we believe that investing in pixels and shovels would yield better results. Past winners in this sector may not count on network effects if they don’t offer compelling use cases. Even with the tailwind behind BTC, we believe skillful token selection skills will generate superior returns compared to passive beta exposure.
Top Gainers and Losers
Top 100 MCAP Winners
Pepe (+71.42%)
FLOKI (+62.46%)
MINA (+55.70%)
Conflux (+48.53%)
INJ (+47.5%)
Top 100 MCAP Losers
Bitcoin SV (-12.55%)
TON (-2.74%)
Trust Wallet Token (-0.91%)
Mantle (-0.03%)
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.