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Hello readers,
The crypto markets are at an inflection point.
Just as many market participants didn’t fully appreciate the impact of rate hikes on risk assets back in early ‘22, we think the market might be underappreciating the impact of rate cuts in ‘24/’25.
Our view for most of this year has been that the market would continue to climb a wall of worry before a blow-off top in ‘25.
In this week’s report, we share our thoughts on how this could play out and how you can position yourself for a risk-on environment.
Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice.
Let’s go.
Data: Token Terminal
We think the probability points to ETH/BTC having hit its cycle bottom.
6 reasons why:
ETH/BTC has been establishing higher lows since 2016. The ratio bottomed at just under .01 in early 2017. It bottomed at just under .02 late in 2019 and then again during the Covid crash in March 2020. Fast forward to Sept. 2024, and ETH just ticked below .04.
To me, this signals that the market is becoming more convicted on ETH over time. We’ll see if it holds at .04.
In prior cycles, when ETH/BTC capitulated, it established a low shortly thereafter. The ratio appears to have capitulated with the move from .057 to .038 over the last few months.
In past cycles, ETH bottomed just after rate cuts. The Fed started cutting a few weeks ago.
Same idea with the Fed balance sheet — as we moved from net tightening to net expansion last cycle, ETH/BTC bottomed. With liquidity conditions rising, we’re anticipating a similar dynamic this cycle.
Bitcoin dominance historically drops as liquidity conditions improve. It’s currently at 57% (near cycle highs).
From a sentiment perspective, ETH just went through a period of disillusionment we haven’t seen in some time (fees down due to EIP4844, “roadmap in shambles.”). This is market psychology and the impatience of crypto Twitter. The reality is that Ethereum continues to execute on its roadmap. Kyle Samani’s “Why SOL will flip ETH” talk at Token2049 looks like it might mark the bottom for ETH/BTC.
If we are correct that ETH/BTC has bottomed, that means alt-season has officially commenced.
It’s been fascinating to observe the sentiment over the last few months on crypto Twitter. It seems that crypto natives tried to front-run the liquidity cycle by jumping to the furthest end of the risk curve (memecoins).
I’m sure many did very well from Oct-March, but most were late, while simultaneously being early to alt season. After all, it’s after rate cuts that alt season historically commences. And so my sense is that most of the market round-tripped the gains in Q4-23/Q1-24. As the market chopped down, many capitulated. Others are reallocating as we speak.
“Retail is never coming back.”
This is exactly what we need to see from a sentiment perspective. And now that the Fed has commenced its cutting cycle, there are several catalysts that point to another blow-off top for the market:
Permission to ease. When the Fed cut, they essentially gave permission to every other central bank in the world to cut. And we are already seeing the knock-on effects in China — which is now aggressively stimulating its economy. It appears they were waiting for the Fed’s green light. To be clear, when the Fed cuts rates, it weakens the US dollar which reduces the risk of capital outflows from China to the US dollar — giving China more flexibility to cut rates itself while maintaining stability in its own currency. This dynamic can be applied to all Central Banks across the globe.
This is a big deal. The 4-year, global liquidity cycle has now commenced.
Politics. I hate talking about politics. But we have to address it because it just flat-out matters. At least in the short run. The key point here is that I believe it’s become obvious to the Democrats that crypto is not going anywhere. Just look at what happened in ‘23. The year commenced with Operation Choke Point — which was an unconstitutional attempt by the Biden administration to sever crypto businesses from access to banking. It failed. And Bitcoin went up 187% on the year.
Now. What happens if we get a crypto-friendly president? What happens if the banks are allowed to custody crypto? What happens if we get a stablecoin bill? What happens if the CFTC becomes the primary regulator of crypto assets as digital commodities?
Has the market priced this in? Probably not. And even if Trump loses, we expect to see progress on these fronts.
ETFs. Is this the cycle that your normie TradFi friends capitulate and buy some BTC/ETH? We think it’s possible. I remember having a conversation with my buddies back in 2020, who were adamantly opposed to Bitcoin. I recall telling them to stay open-minded, adding that I thought it was possible that it could actually become risky not to own any in the not-to-distant future.
It seemed like a preposterous statement at the time. But here’s my question: how many coping cycles does one have to observe before capitulating? If you consider yourself a serious investor, you’ve now watched BTC/crypto rally in ‘13, ‘17, ‘21, and now ‘24 (into ‘25?). How many times can one sit there and watch this before getting in the damn water?
Innovation. While crypto natives fight over whether Solana “extensions” are L2s, and whether we should be including L2s in Ethereum comps to Solana, if you zoom out, there is a lot of cool stuff happening.
Bitcoin is starting to look more like Ethereum, with DeFi and L2 ecosystems showing some promise.
Ethereum is scaling and executing on its roadmap. Blackrock has a money market fund onchain and Visa just announced a tokenization platform on Ethereum.
Solana’s Firedancer is now in testnet. Citigroup and Franklin Templeton announced plans to tokenize assets on Solana at Breakpoint. Paypal and Societe Generale have launched stablecoins on Solana.
Speaking of stablecoins — issuers are now the 16th largest holder of US treasuries. We now have permissionless, yield-bearing stablecoins.
Sentiment. Sentiment flipped to extreme fear in early August. That’s exactly what we needed to see before the next big move, which we think is now underway.
As noted, we think probabilities point to ETH/BTC having bottomed. That means alt-season may have officially commenced — when longer tail risk assets outperform the majors.
The market is already showing its hand. Below is the 7-day sector performance courtesy of Artemis, with memecoins leading the charge.
Data: Artemis
A few thoughts and/or predictions on how the cycle could play out from here:
ETH significantly outperforms BTC, with BTC dominance dropping well below 50%.
SOL significantly outperforms ETH with SOL infrastructure outperforming ETH infrastructure + Solana memecoins outperforming Ethereum memecoins.
TIA and SUI become the top-performing “new L1s” currently on the market (keep an eye on Berrachain and Monad — which are expected to launch later this year).
More than 10 memecoins will reach a $10b + valuation (there are 2 today). In fact, we may see a $100b + memecoin this cycle. *I’ll be sharing a full deep-dive with my thoughts on memecoins in November.
AI Coins and DePIN could perform like NFTs last cycle.
Stablecoins grow to $500b of supply ($160b today).
It goes without saying, but I’ll say it anyway: I don’t have a crystal ball. I’m just using pattern recognition as someone who’s been observing these markets for a while. Risk on = central banks easing = $ into risk assets. If that happens, outperformance should be at the furthest end of the risk curve (crypto). Everything else is instinct on identifying sectors, teams, communities, cycle dynamics, risks, etc.
Is it possible the market is offside to the idea that we get another frenzy similar to ‘21?
That’s the question I keep asking myself right now. Why? Because crypto is truly a unique asset class in that bull markets can be just as volatile as nasty drawdowns.
The nasty bear markets tend to leave market participants scarred. And so it’s easy to forget how volatile a potential bull run could be.
Of course, there are many bears out there as well. They’re calling for a recession. But we just don’t see it in the data. Credit spreads are low. Banks are lending. Central banks are easing. Inflation is dropping. The Treasury is spending. And unemployment dropped last month.
Nobody has a crystal ball. So please do your own research.
Thanks for reading.
P.S. Some readers have reached out due to the lack of written reports over the last few months. That’s on me. I’m not going anywhere. I’ve simply been swamped with some opportunities that have limited the amount of time I usually have for research & writing.
Stay tuned as I’ll hopefully be able to share some exciting updates soon.
Take a Report.
And Stay Curious.
Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.