Zooming Out
As we enter the annual Summer slowdown, it’s a perfect time to take a step back and evaluate the current state of the market. With significant elections on the horizon, crucial regulatory decisions looming, and millions of new participants entering the crypto space, this cycle promises to be more dynamic than any before.
Investment Outperformance: Timing and Asset Selection
To achieve investment outperformance, two key variables are essential: timing and asset selection. Let’s delve into both aspects to make informed, data-driven decisions for the next 18 months.
Cycle Analysis: Timing
This cycle began in Q4 2023 with the anticipation of the approval of the BTC ETF in the US. The launch of the BTC ETF resulted in $15 billion of net new flows into the asset over the first six months of the year. Initially, the rally was Bitcoin-led until the ETH ETF announcement on May 23rd, which caused ETH to surge over 30% within a few days. However, in recent weeks, ETH has given back all these gains. As we write this in early Q3 2024, we are witnessing a correction from recent highs, with BTC around $64k and ETH around $3k. The worst losses were in altcoins as the market shifted to a risk-off stance, culminating in a significant deleveraging event at the end of Q2, with nearly $1 billion in assets liquidated over a single weekend.
Current Market Conditions
With substantial leverage removed from the market, conditions appear relatively neutral as of early July. The MVRV Ratio, the most reliable pricing indicator for BTC, remains below 1.5, indicating slightly oversold conditions. Historically, an MVRV Ratio above 4 has been a clear sell signal, while below 1 has been a clear buy signal.
Positive Signs on the Horizon
Looking ahead, there are several positive indicators to consider. Historically, crypto has followed four-year cycles centered around the halving event. These cycles typically unfold as follows:
- Year 1: Rapid market acceleration post-halving.
- Year 2: Slower acceleration.
- Year 3: Sideways price action.
- Year 4: Sharp price decline.
Prices have historically peaked approximately 500 days post-halving. If this cycle follows the same pattern, we could see a broader market peak around October 2025. This cycle is closely linked to equity market performance around presidential elections, which occur every four years. During these times, there tends to be increased direct spending by incumbent campaigns and indirect spending through looser monetary policy. This generally results in a strong start to the year, a quiet Summer, and an even stronger finish in the latter half of the year.
By understanding these historical trends and their correlations with broader economic and political events, we can better anticipate market movements and position ourselves strategically for the future.
The Impact of Global Liquidity on Market Cycles
Global liquidity is a significant driver of market cycles. There is a nearly perfect correlation between stimulative actions by global central banks and governments and positive risk asset price movements. As the largest economy in the world, the US plays a crucial role in this dynamic.
The US liquidity landscape is intricate, with factors like the Treasury General Account and the Reverse Repo Facility adding complexity. However, the market is currently pricing in two interest rate cuts for the remainder of the year. Additionally, as the US government coffers are replenished post-tax payments (April 15th), we can expect increased government spending.
Crossborder Capital, a firm specializing in liquidity analysis, predicts a 20% annualized growth rate in liquidity for the latter half of 2024. Beyond the US, other significant economies like China, Sweden, and the European Central Bank (ECB) have indicated plans to start easing monetary policies.
Understanding these global liquidity trends is essential for anticipating market movements and making informed investment decisions. As central banks and governments continue their stimulative actions, we can expect positive impacts on risk asset prices, setting the stage for potential growth in the market.
Bringing It All Together: Understanding the Current Crypto Cycle
If we were to follow a “traditional” crypto cycle, we would still be in the initial months of the first year. Historically, this suggests a quiet market for July and August before entering a parabolic phase over the next 12 months. However, unlike past cycles, we have not yet witnessed the irrational exuberance typically seen in the first year, often referred to as “altcoin season.”
In previous cycles, Bitcoin dominance has significantly reduced in favor of altcoins during this exuberant phase. This time, however, we are observing the opposite trend, with Bitcoin maintaining its dominance.
By recognizing these deviations from historical patterns, we can better prepare for potential market shifts and adjust our strategies accordingly. As we navigate this unique cycle, staying informed and adaptable will be key to capitalizing on emerging opportunities.
Nuances of the Current Crypto Cycle
While we believe that aggregate price appreciation will follow previous cycles, the nuances of this cycle are expected to be different for several reasons.
Institutional Products
Since the approval of the BTC ETF, we have seen over $15 billion in cumulative net inflows since its launch, averaging $136 million in net inflows per trading day. The total amount of BTC held by these ETFs is approximately 870,000 BTC, which is about 5% of the current supply. This is occurring at a time when only roughly 25% of US financial advisors (who control around $8 trillion in assets) can recommend these products to their clients.
13F filings reveal that over 900 US investment firms hold bitcoin ETFs, representing about $11 billion in value. This list of institutional buyers includes prominent names from banks (JP Morgan, Morgan Stanley, Wells Fargo), hedge funds (Millennium, Point72, Citadel), and pension funds (the State of Wisconsin Investment Board). Historically, gold ETFs saw net inflows for five consecutive years after approval. We anticipate continued capital flow into the BTC ETF for several years, which will dampen volatility and smooth out boom/bust cycles.
More Available Tokens
In 2021, there were roughly 400,000 tokens available for purchase. Today, there are over 3 million tokens, with 100,000 new tokens being launched daily. While much of this surge is due to the recent memecoin frenzy, there are also many more legitimate projects than in previous cycles. Additionally, many tokens from previous launches are becoming unlocked. In July alone, $350 million worth of token unlocks are expected, including Worldcoin, Starknet, XAI, Arbitrum, Aptos, and more.
Backlog of Token Launches
Adding to the supply of public tokens is the increasing number of private projects ready to come to market. Many of these projects were unprepared for the early-year price appreciation and plan to have token generation events in the fall. Over 1,000 projects funded in 2023 and early 2024 have yet to launch their tokens. Collectively, these projects will introduce billions of dollars worth of supply that the market will need to absorb.
Macro Conditions and Their Impact on the Crypto Market
Economic Landscape
The current macroeconomic conditions in the US are showing promising signs. Unemployment remains low, inflation is continuing to fall, jobless claims are flat, and wages have stabilized. This favorable economic landscape is providing the Federal Reserve with the confidence to potentially ease off the high interest rates. Citi projects eight consecutive rate cuts starting in September. We are likely to see rate cuts in late 2024 and 2025, which would lead to a lower cost of capital for companies, reduced debt rates for consumers, and an overall increase in available capital for risk assets.
Venture Capital Dry Powder
In 2021 and 2022, several billion-dollar crypto-focused funds were raised with 3 to 4-year capital deployment timelines. However, these funds invested sparingly in late 2022 and into 2023 due to the FTX saga, during which numerous $50-$100 million funds were raised. The recent market run-up caught many VCs by surprise, resulting in billions of dollars in dry powder waiting to be deployed in seed and series A rounds. Conversations with colleagues indicate that many large funds had only allocated 30–40% of their capital, with much of this dry powder being aggressively deployed in Q1 and Q2 of this year.
Clearer Regulation
Clearer regulatory frameworks are emerging, reducing the risk of unexpected actions against protocols. The Markets in Crypto-Assets (MiCA) regulation has been launched in the EU. In the US, several bills addressing market structure, banking services, and stablecoins are poised for quick enactment, especially if the Republicans win the US presidency and Senate in the next elections. Clear regulations provide a more stable environment for investments and protocols.
By understanding these factors, we can better anticipate the unique dynamics of this crypto cycle and strategically navigate the evolving landscape.
Market Dynamics and Investment Strategies for the Current Crypto Cycle
The conditions we outlined suggest a significant dispersion of investment and performance across the long tail of protocols this cycle. With the increase in supply, attention will be almost as crucial as fundamentals in certain sectors. The “spray and pray” approach that worked in previous cycles is unlikely to be successful now. Careful asset selection will be more important than ever.
This dispersion of capital is expected to cause significant volatility among the smaller assets, while the top 20–30 assets will experience markedly less volatility. Many of these top assets are also likely to be included in institutional-grade products. Conversely, many smaller or nascent protocols may go to zero as competition for capital intensifies.
A Longer, Less Volatile Cycle
Overall, we anticipate that this cycle will be longer and less volatile than previous ones, with major assets leading the way. The substantial amount of dry powder held by venture capitalists should continue to fuel an array of new projects. However, to support the longer tail of assets, we still need new buyers. While many buyers are coming through ETFs, they are unlikely to be the on-chain users needed to support other token valuations.
We are hopeful and plan to aggressively invest in areas that will onboard these new users and token buyers, particularly in decentralized physical infrastructure networks (DePIN) and consumer applications. We’ll delve into the areas we find promising in the second half of our next section.
Sector Analysis: Asset Selection
Prediction Markets
One sector gaining significant traction is prediction markets. Polymarket, for instance, has seen a spike in user activity leading up to the US Presidential election. Recently, Polymarket reached an all-time high for active users (over 3,500 at peak) and weekly trading volume ($43 million) following the first presidential debate. Polymarket serves as a real-time sentiment gauge, providing more immediate insights than lagged and often unreliable polling data. It has been featured in multiple major news outlets and is part of President Trump’s morning brief. The best part? Even though Polymarket runs on Polygon, the crypto aspect is completely abstracted from the user experience, making it more accessible.
Decentralized social networks like Farcaster and Lens Protocol are seeing a notable increase in user numbers. Farcaster has reached nearly 750,000 users, while Lens has surpassed 400,000 unique handles. Ethereum founder Vitalik Buterin now exclusively posts on Farcaster instead of X.
Additionally, Zora, an on-chain content NFT minting and social platform, boasts close to 400,000 monthly transacting users, including about 70,000 monthly creators. In June alone, nearly $2 million in Creator Rewards were paid out.
For social networks to succeed, massive network effects are essential. While decentralized social platforms still have a long way to go, these numbers indicate the first real signs of traction.
Emerging Trends in Social Chains and DePINs
Social Chains: The Rise of TON
One of the standout performers in Q2 has been social chains like The Open Network (TON). As a Layer-1 blockchain designed for high performance and scalability, TON’s key advantage lies in its integration with Telegram, which boasts around 900 million monthly active users (MAU). This integration allows TON to leverage Telegram’s extensive user base effectively.
TON features an integrated wallet bot within Telegram, facilitating seamless payments over the messenger. Additionally, it utilizes Telegram Mini Apps, with 360 million active users interacting with Bots and Mini Apps every month. Numerous popular applications, such as Notcoin and Hamster Kombat, have been launched, with many more exciting developments underway. By meeting users where they are, TON could be the chain that finally unlocks true user adoption.
DePIN: Decentralized Physical Infrastructure Networks
Decentralized Physical Infrastructure Networks (DePINs) are revolutionizing the way real-world physical infrastructure networks are built by using token rewards to crowdsource their development. DePINs have two main sub-sectors: physical resource networks and digital resource networks.
- Physical Resource Networks: Incentivize participants to leverage hardware for services like wireless, energy, geospatial, and sensors.
- Digital Resource Networks: Incentivize participants to utilize software for digital resources such as compute, storage, AI, and bandwidth.
Here are some key examples:
- Helium: Provides connectivity for IoT devices and 5G. Since launching its $20/month unlimited phone plan nationwide in December 2023, Helium Mobile has added over 65,000 subscribers, bringing the total to over 90,000.
- Hivemapper: A decentralized mapping project using dashcams to capture street-level imagery. They offer APIs delivering imagery and map features, with drivers earning $HONEY tokens. Hivemapper covers 21% of the global road network with 143,000 contributors.
- Dimo: A vehicle platform that provides insights into car health and driving habits, rewarding users with $DIMO tokens. Since its launch in Q4 2022, Dimo has added 90,000 vehicles and over 30,000 unique drivers.
- IoNET: The world’s largest decentralized computing network, offering affordable access to distributed clusters for machine learning engineers. Customers can save over 50% compared to centralized services, with IoNET generating $500,000 in revenue in Q2 alone.
Layer-2s (L2s): The Next Frontier
While activity on the Ethereum mainnet has stagnated, Layer-2 (L2) activity has surged. Daily active addresses have grown from around 500,000 in late 2023 to over 2 million on numerous occasions in 2024. The biggest success story is Coinbase’s Base, which is onboarding 50,000 users per day and is nearing a total of 20 million users.
Base could be a major hub for breakout crypto consumer apps. As the leading exchange, Coinbase will direct hundreds of millions of users to Base, similar to how Binance Chain grew during the last bull market. While the apps on Binance Chain weren’t always great, the chain’s growth was driven by Binance directing its users there. Coinbase not only has a vast user base but also numerous great applications and developers, positioning Base for significant growth.
Memecoins: Memecoins dominated crypto returns in the first half of 2024, with the top 10 tokens posting an average of over 10x gains year to date. Solana memecoin launchpad and marketplace pump.fun emerged earlier this year and is already responsible for deploying over 1.1M memecoins. The platform has generated over 340k (~$50M) in protocol revenue to date. Moonshot, another memecoin launchpad has enabled the launches of over 26k coins since, generating 3k SOL (~$400k) in protocol revenue.
What gets adoption from here?
DePIN: We think DePIN is one of the most compelling verticals in crypto today because: 1) It provides a clear solution to the cold start problem for resource-intensive networks 2) Token utility is apparent for both the demand and supply side 3) It solves a range of real-world problems today of Web2 and traditional systems. Multicoin Capital estimates that DePIN projects can build infrastructure 10–100x faster than traditional business models. Messari and EV3 forecast that all those use cases will add $10 trillion to global GDP over the next decade. One of the areas we are most excited about in DePIN is the sub-vertical supporting AI.
Bitcoin L2s: Bitcoin is the largest settlement layer by economic weight. It is the hardest to attack because of this economic might and most battle-tested over time; therefore if some of the existing timing challenges can be solved it should be the most attractive place for financial transactions. Ethereum’s aggregate L2 FDV is roughly $50B. BTC’s market cap is 3x that of ETH. if we assume Bitcoin L2s just match Ethereum L2s that is $50B in potential protocol value that needs to be created. Currently, the circulating market cap of Bitcoin layers is $8 billion or not even 20% of our conservative estimate. The most popular projects being funded here today include SatoshiVM, BOB (Build on Bitcoin), Merlin Chain, and Bison Labs.
Real World Assets (RWA): Real-world assets are simply off-chain assets put in physical form on-chain. These can be equities, private credit, private equity, real estate, or treasuries. To date, the only type of RWA that has found product-market fit are stablecoins. Almost $4T in stablecoins were transferred in April, up from less than $1T in January. The circulating supply of stablecoins is approaching $200B.They currently account for over 70% of transaction volume across all blockchains. Over 1.5M people use stablecoins daily. Stable coins are often backed by treasuries or provide a native yield through treasuries providing an olive branch to politicians who want to see more buyers of US debt. We continue to believe this will be the primary use case for RWA’s throughout this cycle. Investible avenues for stablecoins center around protocols that help get these assets in the hands of more users and businesses, particularly in emerging markets. As for other RWAs such as tokenized real estate, private credit, private equity, and equities, there isn’t enough demand to facilitate a robust marketplace. In our view, these assets are uninvestable for this current cycle.
Alternative Layer-1s (Alt L1s)
Solana
Solana has significantly outpaced Ethereum in several key metrics, including active addresses (approximately 1.5 million vs. 400,000), daily decentralized exchange (DEX) trading volume ($3 billion vs. $2 billion), revenue (when including MEV), and daily transactions (over 40 million vs. less than 1 million). Solana boasts several competitive advantages, particularly in user experience (UX) and distribution channels, such as the Solana Saga.
Solana continues to enhance its technology to improve the user experience. Recent additions include “actions” and “blinks.” Blinks create clear developer frameworks that bring crypto directly to any site, similar to Farcaster Frames but more versatile. Actions are APIs that enable on-chain transactions to be customized and integrated into various formats, such as links, QR codes, buttons, and widgets, facilitating seamless interaction with the blockchain from any front-end application.
At 75% of the market cap of Ethereum, we believe Solana has substantial room for growth in this cycle.
NEAR
Launched in 2020, NEAR is a Layer-1 smart contract platform focused on scalability, end-user experience, and developer friendliness. Recently, NEAR has regained attention with its focus on “chain abstraction,” which includes services like simplified onboarding, eliminating the need for initial funds, and controlling accounts on other chains. This development could address one of the key issues in Web3 and significantly increase real-life adoption.
NEAR’s Blockchain Operating System (BOS) enables cross-chain interactions without traditional complexities, such as token swaps or managing multiple identities. It allows developers to build on any blockchain using familiar languages and a broad set of components, simplifying the process of building decentralized applications and reducing the entry barrier for developers.
NEAR has seen strong growth in daily active addresses and the number of transactions, with increases of 45% and 43% respectively compared to three months ago. Total Value Locked (TVL) also provides a positive signal. We expect this growth to continue as the platform is further developed.
TON: Accelerating Growth
TON has experienced rapid growth in early 2024, and we believe this momentum is just beginning, given its substantial user base. The launch of the Telegram wallet and the recent announcement of the TON Layer-2 solution, which promises faster transaction speeds, are poised to further bolster this ecosystem’s expansion. TON’s integration with Telegram positions it uniquely to tap into a vast and engaged audience, potentially driving significant user adoption and ecosystem development.
Chain Abstraction: Simplifying Blockchain Interactions
As highlighted with NEAR, chain abstraction is a critical factor that will drive the growth of on-chain users. This approach involves simplifying the complex aspects of blockchain technology that often create user friction. An easy analogy is how we interact with computer applications today; most internet users don’t need to understand concepts like HTTP, TCP/IP, or other behind-the-scenes nuances.
Several investible avenues exist within this space, but we are particularly excited about verticals focused on interoperability across chains and account abstraction. These innovations aim to make blockchain technology as seamless and user-friendly as the internet is today, thereby significantly increasing user adoption and practical applications.
Pulling It All Together
While there are many challenges ahead, our analysis shows that crypto has found product market fit in several key areas. We continue to believe that DePIN, stablecoins, alternative Layer-1s (alt L1s), and themes around chain abstraction (including account abstraction, liquidity aggregation, interoperability, and next-gen front ends) will play crucial roles in onboarding new users. This, in turn, creates some very attractive investment opportunities.
We believe this cycle has the potential to extend through the end of 2025. As a firm, we plan to build and invest accordingly, capitalizing on these promising developments and trends.
Final Thoughts
As we look ahead to the rest of 2024 and beyond, the cryptocurrency market stands at a pivotal juncture. The past few months have been marked by significant regulatory developments, market corrections, and an evolving investment landscape. Despite recent volatility, the approval of institutional products such as the BTC ETF has introduced substantial capital inflows, stabilizing major assets like Bitcoin and Ethereum while shifting market dynamics.
Key macroeconomic conditions, such as low unemployment and potential interest rate cuts, coupled with clearer regulatory frameworks, create a promising environment for the growth of risk assets. The emergence of decentralized physical infrastructure networks (DePINs), the rise of Layer-2 solutions, and the increasing traction of alternative Layer-1 blockchains highlight the diverse and innovative opportunities within the crypto space.
It is important to remain vigilant and adaptable, recognizing that this cycle might deviate from traditional patterns. With a longer and less volatile cycle anticipated, careful asset selection and a strategic approach to understanding market trends will be crucial. As we navigate these dynamic conditions, leveraging data-driven insights and staying informed on regulatory trends will enable us to appreciate the transformative potential of blockchain technology.
The MV Global team remains committed to providing in-depth analysis and guidance as we traverse this rapidly evolving market.
Stay tuned for more updates and insights as we continue to explore the opportunities and challenges ahead.
Disclaimer
The views expressed here are those of individual MV Global personnel quoted and do not represent the views of MV Global or its affiliates. The content is for informational purposes only and should not be considered investment advice. It does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be relied upon in evaluating the merits of any investment. Consult your own advisers for legal, business, tax, and other related matters. MV Global makes no representations about the accuracy or completeness of the information provided. All content is subject to change without notice.
About MV Global
Established in 2019, MV Global has emerged as a force in the Web3 landscape focused on early-stage investments and venture building. Our mission is clear: to partner with mavericks, visionaries and free thinkers to leverage blockchain-enabled technologies to build for the future.
