The current cycle of the crypto market: stagnation, bubble, crisis and breakthrough

Author: Ac-Core, researcher at YBB Capital

TLDR

• Unlike the last round of bull market driven by macroeconomic prosperity, this round of crypto market is mainly affected by macroeconomic uncertainty.

• ETF is nothing more than a "slow-release ibuprofen", and the trend of cryptocurrencies following the US stock market has become a constraint on the growth potential of the industry.

• Currently, it is only a Bitcoin bull market, and altcoins have not yet picked up. The main reasons include insufficient industry innovation, insufficient liquidity, and unreasonable valuations in the primary market, which have led to insufficient capital momentum and difficulty in achieving volume-driven growth.

• Repeating old narratives cannot maintain market value, and as traditional institutions such as BlackRock enter the field and the industry lacks innovation, internal competition seems inevitable.

Can the one- to four-year halving cycle still be the key to a bull market?

1.1 The starting point of this round of bull market is completely different

Bitcoin happened to be born in the context of an economic crisis, probably to resist the excessive issuance of national fiat currencies and monetary intervention policies. Looking back on its development history, before Bitcoin was completely banned in China in 2021, it is undeniable that China was the main driving force for the growth of the industry, and its mining business once accounted for two-thirds of the global total. At the same time, driven by the real estate and Internet booms, the overall economy experienced significant growth. Until 2021, the overall macroeconomic environment was positive, and central banks continued to inject liquidity into the market, driving investor optimism. However, after 2020, the cooling of the real estate industry and the overall economic slowdown exhausted the liquidity of certain markets.

From an innovation perspective, DeFi Summer stimulated the internal economic cycle of Ethereum and became the main driver of its explosive growth. Subsequently, NFT, MEME, GameFi, etc. continued to attract a large influx of resources, and even triggered a craze for digital collectibles. The rise in market value has driven the expansion of the industry. However, this time, the industry’s innovations are mostly rehashes of old ideas, and perhaps the bull run has not yet arrived because the new narrative has not yet had a significant impact. If we look back to early 2019 to early 2021 as the beginning of the bull run, Bitcoin was between $4,000 and $10,000, while Ethereum was between $130 and $330. The overall size of the crypto market is relatively small, with plenty of room for growth. But according to CompaniesMarketCap, Bitcoin’s current market capitalization ranks 10th in the world, second only to Facebook, and its market capitalization has about 3 times the growth potential compared to Apple’s market capitalization and about 15 times the market capitalization compared to gold. The growth prospects this time are smaller than in the previous cycle. Halving-driven growth may be the last chapter of this story. Cyclical growth in the cryptocurrency market has always been closely linked to the macro economy. Since Bitcoin’s creation in 2009, its market capitalization of more than $1 trillion would not have been possible without regular injections of liquidity to stimulate the economy. The only constant in the financial market is change. Even if you manage to hold your position, you don’t know how deep the recession will be.

Source: CompaniesMarketCap

1.2 Where is Bitcoin’s positioning and future growth potential?

Is Bitcoin’s safe-haven status only recognized in the field of cryptocurrency?

To this day, the US dollar still controls the world with its pricing power, while gold is regarded as a “safe haven” for hedging and value preservation. Every major crisis in history will set a new high. The first gold price rise began with the collapse of the Bretton Woods system after World War II, and the decoupling of the US dollar from gold, driven by geopolitical tensions and inflation. The second rise began in 2005, with gold prices soaring. After the subprime mortgage crisis broke out, a large amount of investment capital flocked to gold for safe havens, and finally ended after the Libyan War in 2011, with geopolitics once again becoming a major factor. The turning point of the third rise came in 2018, with the global COVID-19 pandemic and central bank liquidity injections as the main driving factors, as well as local geopolitical conflicts. Gold has always been the first choice for safe havens, and the Federal Reserve's quantitative easing and geopolitical factors are the main forces driving gold prices.

As of Thursday, September 12, Beijing time, spot gold closed up 1.84% at $2,558.07 per ounce, setting a new closing price record. Spot silver rose 4.19% to $29.8792 per ounce, and COMEX gold futures rose 1.78% to $2,587.6 per ounce, also setting a new high (data source: Forward Research Report). The claim that Bitcoin is a safe-haven asset like gold seems to have been debunked. Gold has soared but Bitcoin has not followed suit. On the contrary, Bitcoin's price trend is very consistent with the trend of US stocks.

Bitcoin's greatest value: a tool to resist economic sanctions and lack of trust in legal currency

In the context of economic globalization, countries are eager for their own currencies to be able to conduct international transactions, international reserves and international settlements, but this desire is hindered by the "impossible triangle" of monetary sovereignty, capital flows and fixed exchange rates. From the "currency war", we can see that paper money itself has no value. Its value comes entirely from national credit. Whoever controls the right to issue currency can effectively bypass the country's legal framework. Even the powerful US dollar will find it difficult to maintain its huge credit support for a long time. Economic globalization itself contains the difficult-to-resolve contradiction between global currency dominance and national interests. For example, El Salvador has promoted the use of Bitcoin nationwide through "dual legal currencies" to weaken the influence of the US dollar; Russia will allow residents to trade cryptocurrencies and use them for trade settlements from September 2024 to circumvent sanctions.

Bitcoin’s dilemma: its value comes from hedging against fiat currency trust risk, but its rising momentum still depends on strong country policies, the adoption of monopoly capital and macroeconomic conditions.

Second, ETFs can only relieve short-term pain, not a cure

2.1 The post-ETF era of cryptocurrency: failed resistance to power

Source: Guardian News

Bitcoin was born in the context of an economic crisis, and the unique properties of blockchain can resist the excessive issuance of sovereign currencies and monetary policy intervention. Anti-authority, freedom, and decentralization used to be our beliefs and slogans. Within the industry, various "players" have speculative motives, and the dream of getting rich overnight seems to be the main driving force for industry growth. But in the final analysis, Bitcoin ETF is just a one-time, inevitable stimulus.

Our belief in resisting authority has now turned into hope for authority. It seems that in our crypto utopia, we only care about profits, not directions. The market continues to cheer for good news around ETFs, hoping for more opportunities to bring in capital and exit as liquidity. The community that once resisted authority is now gradually offering the fruits of its labor to the same authority.

BlackRock, Vanguard Group, and State Street are companies that dominate the world, and now BlackRock is gaining control of Bitcoin.

Who is the most powerful company in the world? Apple, Tesla, Google, Amazon, Microsoft? Actually, none of them. The real answer is the above-mentioned global asset management giant, BlackRock, which has maintained the title of the world's largest asset management company for 14 consecutive years from 2009 to 2023.

The direct impact of the post-ETF era is that prices will be more aligned with traditional financial markets. Only those who hold the most tokens have the greatest influence, and the United States is gradually gaining ideological control over the crypto industry. According to a report by QCP Capital on September 10, 2024, macroeconomic uncertainty continues to dominate the crypto market, and the 30-day correlation between Bitcoin and the MSCI World Equity Index reached 0.6, the highest level in nearly two years.

There is no doubt that the crypto industry first sprouted in China, but now the "big players" have changed, and more professional players are on the way. The future requires not only the selection of brand IP and industry focus, but also strong trading and execution capabilities. The Matthew effect will penetrate every corner of the industry, and the crypto world is steadily evolving towards "Wall Street-level" transaction complexity.

2.2 Metaphor of the Gold Rush

Looking back at the California Gold Rush more than a hundred years ago, hundreds of thousands of people from all over the world flocked to California for the dream of getting rich overnight, but most of them returned empty-handed, and some even died. Levi Strauss took a different approach and used the gold rush to sell a large amount of hoarded canvas and made it into durable pants for gold miners. Because of its practicality, it became very popular. Later, he improved the pants and became the founder of blue jeans and founded the world-renowned Levi's brand.

Interestingly, Bitcoin's PoW mining and Ethereum's PoS staking are strikingly similar to this. The PoW mining craze allowed "gold diggers" to take mining machines with them, while PoS staking allowed them to use capital as a tool. However, behind this mining craze, miners are chasing the dream of getting rich, while Levi Strauss covets the miners' capital. The 24/7 global crypto market provides countless opportunities for these "gold diggers", but also makes the market extremely volatile. High risks are accompanied by high returns, and profits and risks constantly test everyone's courage and diligence.

The fast-paced, non-stop trading, and volatile market have both tempting traps and endless trading opportunities, which is the charm of cryptocurrency. The combination of strong financial attributes and low barriers makes cryptocurrency a natural high-quality gold mine. We once cheered for ETFs and expected it to bring more external capital, but the reality is that ETFs are opening the door for more "Levi's"-like figures.

More "Levi Strauss" will enter the cryptocurrency market

The launch of ETFs can not only introduce external capital as "exit liquidity", but also attract traders who hedge risks. The biggest innovation of blockchain so far is to put finance on the chain and establish a "self-sufficient economic cycle" within the crypto market, effectively preventing direct intervention by strong entities and "Old Money". However, the post-ETF era of the crypto market has, to some extent, handed over comprehensive financial derivatives to these forces, further attracting more arbitrageurs and big capital, which will squeeze the already limited market profit space.

3. Difficult breakthrough in the primary market

Low liquidity and high FDV in the primary market

Recently, compared with the past, tokens issued in the primary market generally show extremely high FDV (fully diluted valuation) and low liquidity. According to the data from Binance's "Observations and Thoughts on Highly Valuable and Lowly Liquid Tokens" report, the ratio of market capitalization (MC) to FDV of tokens issued in 2024 is the lowest in recent years. This indicates that there are still a large number of tokens that have not been unlocked in the future. By the first few months of 2024, the FDV of issued tokens has been close to the sum of the FDV of all issued tokens in 2023.

Image source: @thedefivillain, CoinMarketCap and Binance Research, data released on April 14, 2024

In a market lacking liquidity, tokens will continue to be unlocked after the TGE, creating huge selling pressure. But did VCs really make money in this round? Not necessarily. In most cases, compliant and regulated project financing requires tokens to undergo a lock-up period of at least one year before unlocking and issuance. In the case of high FDV and low liquidity, projects may experience token unlocking leading to price crashes, although small VCs may still sell on the secondary market or pre-sell over the counter.

As shown in the figure below, the circulating supply rate of these tokens is less than 20%, with the lowest being only 6%, highlighting the harsh reality of high FDV.

Image source: CoinMarketCap and Binance Research, data release date: May 14, 2024

Clearly, capital-driven momentum is currently invalid. In addition to the above factors, there are other objective factors that lead to low liquidity and high FDV:

• Market fragmentation and too many competitors:In the last cycle, domestic and foreign capital jointly hyped DeFi and Layer-1 chains. However, in this cycle, funds and participants are too scattered in multiple narratives, and Western and Eastern capital often do not take over each other's projects. This leads to a situation where the number of buyers is not enough to meet the number of sellers.

• No altcoin bull market, lack of speculation:The EVM-based chain infrastructure is mature, and funds and projects are competing in the same direction. "Ethereum killers" have not come up with anything new. In addition, in a market without an altcoin bull market, when a project succeeds in a particular field, imitation projects will soon emerge and become the next undervalued opportunity.

• Complicate simple things and turn complex things into narratives:Pseudo-innovation that complicates simple things can be seen everywhere. Repackaging old concepts is often just to sell the market a bigger dream.

• Matthew Effect is everywhere:The crypto industry has been developing for more than 16 years, and the top monopoly interests are basically solidified. Whether it is technology, projects or capital, the strong get stronger and the weak get weaker. Those who survive have strengthened their control over the narrative.

• Challenges of sustainable growth:Lack of innovation and liquidity are the most pressing challenges facing the market today.