Market about to launch post-mass deleveraging
In the fourth quarter of 2023, the anticipated approval of a Bitcoin ETF in the United States sparked a wave of enthusiasm, marking the beginning of this cycle. In the first half of 2024, the market attracted approximately $15 billion in new capital inflows. Particularly, the Ethereum ETF launched on May 23 caused prices to soar by over 30%, despite recent weeks seeing some pullback, which is normal volatility within the cycle. Simultaneously, we’ve also experienced a significant deleveraging event. At the end of the second quarter, nearly $1 billion in assets were liquidated over a weekend. While this may seem alarming, it actually helps the market shed the burden of excessive leverage, making it healthier and more stable.
Macro-economic conditions
U.S. macro-economic conditions also play a crucial role in the market. Currently, unemployment rates remain low, inflation continues to decline, unemployment claims are steady, and wage growth is stagnant. These factors provide grounds for the Federal Reserve to consider rate cuts. It is expected that rate cuts will occur in 2024 and 2025, reducing corporate capital costs, lowering consumer debt rates, and injecting more funds into risk assets. Global liquidity is a critical driver of market cycles. Stimulus policies from global central banks and governments, especially in the United States as the largest economy, have profound effects on the market. Currently, the market expects the Fed to cut rates twice this year, while Citigroup even predicts up to eight rate cuts within the next 12 months. This will significantly increase market liquidity, undoubtedly positive news for the cryptocurrency market. Institutional-focused on liquidity crossbordercap has already called for a 20% increase in liquidity growth in the second half of 2024. In addition, the Riksbank and the European Central Bank have also indicated they will start easing monetary policy. Such policy changes will inject more funds into the market, driving up prices of risk assets.
VC’s reserve funding
Between 2021 and 2022, multiple cryptocurrency-focused funds successfully raised over $1 billion each. These funds typically have a capital deployment timeline of 3-4 years. Due to FTX’s impact, many funds were cautious at the end of 2022 and early 2023. However, the recent market uptick has surprised many venture capital firms, resulting in a large reserve of funds waiting to be deployed in this cycle. Much of these reserve funds were actively deployed in the first and second quarters of 2024.
Impact of election cycles
The impact of election cycles on the market is also significant. During election years, government spending tends to increase, which is a positive signal for the market. Particularly, incumbent governments usually increase direct and indirect expenditures during campaigns, which typically leads to strong market performance early in the year, a relatively calm summer, and a resurgence in the market in the latter half of the year. The 2024 election cycle is no exception, and a strong market performance is expected in the second half of the year.
Additional purchasing power from FTX
According to the revised reorganization plan and disclosure statement submitted by FTX to the bankruptcy court of Delaware in May this year, it is expected that the total value of assets collected and converted into cash and available for distribution will be between $14.5 billion and $16.3 billion, and more than $11 billion will be paid to customers and other non-government creditors. Additional surplus cash will be used to pay interest to more than 2 million clients of the company. At present, FTX has obtained court approval for creditors to vote on the compensation plan for cryptocurrencies in cash or in kind. Creditors must vote by August 16, and Judge Dorsey will decide whether to approve the plan on October 7. Once approved, FTX will repay creditors within two months, expected between the fourth quarter of 2024 and the first quarter of 2025. Although the final payment method has not been determined, cryptocurrency analyst Ash Crypto believes that, given that most of FTX’s clients are cryptocurrency enthusiasts, this $16 billion cash inflow will enter the cryptocurrency market and become a major catalyst for price increases. Bitcoin is expected to exceed $120,000 and Ethereum will exceed $12,000, with other altcoins rising 10 to 50 times.
Halving Cycle Bullish Factors
When it comes to this, we cannot ignore the lessons of the past. Historically, the cryptocurrency market often follows a four-year cycle centered around Bitcoin halving. In the first year after halving, the market rapidly rises; in the second year, the growth begins to slow down; in the third year, prices generally stabilize; and in the fourth year, prices sharply decline. Typically, prices reach their peak around 500 days after halving. If this cycle follows the same pattern this time, the market could peak around October 2025. Following this “tradition,” we are still in the early stages of the cycle, with July and August expected to be relatively calm before a rapid rise in the next 12 months.
Trump Shooting Incident Sparks Safe-Haven Capital Flight
On July 13, 2024 local time, a shooting incident occurred during a campaign rally in Pennsylvania, where former U.S. President Trump was delivering a speech. Trump was hit in the upper right ear by a bullet, and the suspect was fatally shot by the Secret Service, with one rally participant also dying. Recently, factors such as uncertainty in U.S. monetary policy direction due to the 2024 presidential election turnover and the warming expectations of Fed rate cuts have intensified fluctuations in various financial market asset prices. Among them, gold has once again surpassed the $2400 per ounce mark. Following the Trump shooting incident, Bitcoin, touted as “digital gold,” also broke through the $60,000 mark.
Clearer Regulatory Environment
Finally, changes in the regulatory environment have also had a significant impact on the market. Although upcoming regulations may be controversial, clear rules can reduce market uncertainty. The EU’s MiCA has already been initiated, and the U.S. has multiple bills regarding market structure, banking services, and stablecoins. If the Republican Party wins the presidency and Senate, these bills will quickly come into effect in the first quarter of 2024.
In December of last year, the Financial Accounting Standards Board (FASB) published the initial version of cryptocurrency accounting rules, requiring companies holding Bitcoin or Ethereum to record their value changes at fair value and reflect them in net income. The new rules will take effect from the fiscal year beginning December 15, 2024, and apply to both listed and unlisted companies for the fiscal year 2025. For crypto assets, this accounting standard change means that companies like MicroStrategy, Tesla, and Block will be able to record the highs and lows of their cryptocurrency holdings. This will further promote the compliance of the crypto market and inject liquidity from mainstream financial markets.
How Should We Navigate This Bull Market?
While we believe that the overall market will follow previous cyclical rises, there are indeed some subtle differences in this cycle. In this cycle, we have seen some new factors. First, the influence of institutional products is increasing. Since the approval of Bitcoin ETFs, the market has attracted more than $15 billion in funds. Moreover, only about 25% of U.S. financial advisors can currently recommend these products to clients, indicating significant growth potential in the future. After the approval of the Gold ETF, there has been five consecutive years of net inflows, so we can expect Bitcoin ETFs to continue attracting funds. This will help reduce market volatility and extend the duration of the cycle.
Secondly, the number of tokens available for purchase has increased significantly. In 2021, there were about 400,000 tokens on the market, but now the number has exceeded 3 million, with 100,000 new tokens added daily. In addition, there are large amounts of tokens unlocked from previous issuances; in July alone, tokens worth $350 million were unlocked. Such supply increases will undoubtedly impact the market. There are also many private projects preparing to go public. These projects are expected to conduct token generation activities in the fall. More than 1,000 projects funded in 2023 and early 2024 have yet to issue tokens, with a total supply expected to reach billions of dollars. The issuance of these new tokens may have a significant impact on the market.
We expect large assets to lead the market in this cycle, while the volatility of long-tail assets will be greater. Many top assets may be included in institutional-grade products. Compared to previous cycles, many small or emerging protocols will reset as competition for capital intensifies. In this cycle, asset selection is more important than ever before. The “cast a wide net” approach of the past no longer works. Due to increased supply, attention is almost as important as fundamentals (even more so in some verticals). Investors should focus on verticals and protocols in the seed and Series A stages.
Overall, we believe this cycle is likely to be longer and less volatile than previous cycles. Large assets will lead, and the substantial reserves of venture capital firms will support a range of new projects, but we still need new net buyers to support more assets. Although we have gained many buyers through ETFs, these buyers are unlikely to be on-chain users who support valuations of other tokens.
The post first appeared on HTX Square.
