Market View
The recent lackluster performance of the broader crypto market can likely be attributed to a dearth of crypto-specific catalysts on the immediate horizon, besides the anticipated launch of spot ETH ETFs. But while those ETFs may launch potentially as early as next week, many already expect the flows to largely disappoint, leaving the ether price to move directionally in sympathy with bitcoin. In the meantime, we've been left with a market that's being driven more by technicals than fundamentals, such as the sale of bitcoin by the US and German governments and outflows from US spot BTC ETFs (although that $1.1B streak broke as of June 25). But we think those factors wouldn’t be such a large drag on performance were it not for the announcement by the Mt. Gox Rehabilitation Trust on June 24 that repayments of up to 142k BTC will begin in the first week of July.
Meanwhile, USD strength has been unwavering over the last month, also putting pressure on crypto. This was evidenced by the JPY move above 160, its weakest level in almost 40 years. Largely that’s been due to relative interest rate differentials, which is happening against the EUR, CAD and CHF as well due to ECB, BoC and SNB cuts, respectively. Fed hawk Michelle Bowman was also on the tape this week suggesting that she’s still open to hikes. Geopolitical factors may be relevant too with elections underway in the UK and France. The US had its first debate of the electoral season on Thursday night (June 27). Although crypto didn't come up as an issue during the 90 minute session, it's noteworthy that the super PAC Fairshake has raised $169M for campaigns in this election cycle. This could make the November elections an important potential catalyst for crypto performance in 2H24.
Elsewhere on the regulatory side, there is an upcoming ruling by the US Supreme Court on two cases that could potentially overturn Chevron deference. This doctrine grants deference to an administrative agency’s interpretation of federal laws, when those laws are ambiguous as written. If overturned, this could have significant implications for the crypto industry and administrative agencies like the SEC, who are seeking to regulate it. A change may impact the SEC's authority and decision-making processes going forward, possibly acting as an important market driver.
Positive seasonality could be relevant in July, as both bitcoin and ether historically seem to do better during this month than others, particularly after sell-offs in June like one we just witnessed (BTC was down 8.6% and ETH down 8.7% MTD). Indeed, the current market setup looks supportive, as a lot of excess length has been cleaned out following the Mt. Gox announcement. Moreover, liquidity could improve after daily average volumes for BTC and ETH (spot and futures) across global exchanges declined by 16.7% between May and June from $90B to $75B.
That said, token unlocks remain an overhang for this space with the Token Unlocks platform listing 120 projects with an estimated total market value of $58B left to be unlocked this year. With the market cap of stablecoins plateauing near $162B over the last few weeks, we believe there hasn’t been enough new capital in this space to help absorb the sheer size of the unlocks coming onto the market. Exacerbating the problem is that the new Virtual Asset User Protection Act in South Korea could lead to the delisting of almost 600 altcoins on the country's exchanges starting July 19 if they fail to meet the Financial Service Commission’s standards.
The correlations between BTC, ETH, and SOL returns have come down in the past month, breaking away from the common historical pattern of increasing correlation to BTC during market chops and downturns. The rolling 60 day correlation of ETH and SOL against BTC peaked in mid to late May (at 0.90 and 0.83 respectively) before falling in the past month (to 0.74 and 0.72) amidst the rising importance of protocol-specific factors. Previously in 2021 and 2022, following BTC price peaks, altcoin correlations to BTC dropped for several weeks (in “altcoin season”) before trending upwards as market euphoria waned. (See Chart 1.)
We observed a similar pattern throughout March and April this year, but the recent correlation drop in late-May to the present differs from previous trends – it was not led by a period of BTC price appreciation. In our view, this change can be partially attributed to the growing acceptance of the crypto asset class and a better understanding of the fundamental differences between the tokens. (Although ETH ETF approval headlines could have catalyzed the recent correlation drop, historically major Ethereum events like the Merge or Shapella upgrades only resulted in one to three weeks of decreased correlation, well below the ongoing six week trend.) This also underscores our belief that we are still in the mid-growth cycle as attention remains well diversified across the space. We think that the growth of this asset class, its increasing regulatory clarity, and rising institutional adoption may support a trend of lowering cross-crypto correlations in the long term.
Spotlight on Solana
SOL has outperformed peers this week, trading up 9% (as of writing) even as BTC and ETH retraced -5% and -3% respectively. This performance has been buoyed by a number of endogenous catalysts specific to the Solana ecosystem including major technological releases and VanEck’s filing of the first spot Solana ETF in the US.
On the technological front, ZK Compression offers a new developer primitive for minimizing onchain state, potentially reducing the cost of certain onchain actions (like creating a large number of token accounts) by three orders of magnitude. We think that this offers a powerful new tool that can further reduce costs on Solana, particularly for large scale token distributions (e.g. airdrops) and other batched actions performed by protocols. Although there has been some debate around the loaded usage of the term “compression”, we nonetheless think that the core technology could have an important long term impact on minimizing developer and protocol costs as well as possibly slowing onchain state growth. That said, this primitive is still in testnet and will take time to reach market adoption.
The separate announcement of Blockchain Links (and the associated Solana Actions APIs) also represents a major step forward for an improved and more universal user experience for Solana applications, which is already live on mainnet. Blockchain Links, or “blinks” for short, enable the embedding of Solana specific actions into any website user interface (UI), sharing some similarities to Farcaster Frames. With the appropriate setup, blinks enable users to engage in a variety of onchain actions – NFT mints, USDC transfers, DEX swaps, governance proposals, and more – without leaving a website (e.g. the X news feed).
It is important to note, however, that the UI embedding is performed by a browser wallet extension, not by the website directly. That is, a Phantom or Backpack browser extension (the currently supported wallets) is required. These extensions search the loaded webpage for blinks and injects the underlying HTML elements to render the Solana action UI. This limits the in-app UI rendering to desktop users with supported browser extensions for now. On mobile, the link redirects to a separate page where users need to connect their wallets, closer to the traditional user journey. Despite these limitations, however, we think this is yet another powerful primitive for Solana developers. (Blinks can also be directly shared via URL or QR code too.)
Finally, on June 27, VanEck submitted an S-1 filing for a VanEck Solana Trust. Although there is still regulatory uncertainty around SOL (which is named as an unregistered security in ongoing SEC lawsuits), we think this development is promising regardless of its outcome. By submitting the application to US regulators, any approval or denial will need to be underscored with a rationale for the decision. The precedent set by spot ETH and BTC ETF approvals, which relied on their uncontested commodity status as well as correlations with CME futures as an indication of sufficient market surveillance, is not applicable for SOL. Any decision on these filings should thus give the industry regulatory goalposts, at the very least. That said, there are no timelines for S-1 approvals (in contrast to 19b-4 filings), so it is unlikely that there will be a decision on this in the near future.
