Market View
Takeaways from Token2049
The Token2049 (September 17-19) and Solana Breakpoint (September 20-21) conferences took place in Singapore last week. Key figures in the industry discussed important themes, new projects and/or significant protocol updates on multiple stages, including our own “Coinbase House” which served as the central hub for Coinbase activities. We hosted panels on tokenization, stablecoins and the pulse of crypto markets as well as a conversation with Rune Christensen (founder of Sky, formerly MakerDAO) regarding the formal launch of governance token SKY and stablecoin USDS (which is also being deployed on Solana).
Overall, our impression from the conference is that crypto investor sentiment seems fairly positive, albeit this may have had something to do with the event coinciding with the Federal Reserve’s 50bps rate cut on September 18. However, although many market players were bullish on BTC, we encountered a few skeptics on ETH, as the token appears to not have benefited from the launch of spot ETH ETFs in the US over two months ago. (Note that many attribute this to the recent surge in Ethereum layer-2 activity, but we’ve previously explained why we believe this is an incomplete reckoning behind ETH’s underperformance relative to peers.) Additionally, some argued that there are more higher beta vehicles (such as L2 tokens) benchmarked to ETH today than there were in the last cycle, which has contributed to a crowding out effect.
Meanwhile, we haven’t seen a major shift in the themes occupying the crypto community, aligned with the outlook we laid out at the end of 2023. That said, there seemed to be a greater focus on emerging alternative layer-1 networks over Ethereum layer-2s, as well as the potential for Bitcoin L2s to offer enhanced programmability to the network and possible new revenue sources for miners. There was also a greater urgency in the demand for general consumer applications over crypto infrastructure protocols, which corresponds with an increased scrutiny of crypto fundamentals more broadly.
Finally, there were a number of announcements made at both events including:
- Sui’s announcement of a partnership with MoviePass and the incorporation of USDC on the network. Sui is also now taking pre-sale orders for its SuiPlay0X1 handheld gaming console, previously teased in April.
- The Open Network (TON) continued to attract attention at the conference, after unveiling its collaboration with ride-hailing application Tada (prevalent in Southeast Asia) a few days before the event. This highlights the potential utility of Telegram Mini Apps and TON’s expansion among L1s in the crypto ecosystem.
- Solana Mobile introduced its second-generation mobile phone Seeker as the successor to the Saga phone, which is scheduled for a 2025 release and is now open for pre-orders.
- Contrary to a build-up in expectations ahead of Breakpoint, Jump Crypto did not announce when new Solana client Firedancer will go live on mainnet (it’s currently on testnet), but they did confirm that an early version known as Frankendancer is already live.
- WisdomTree announced the creation of WisdomTree Connect, a platform for tokenized real world assets (RWA) that “enable[s] customers over time to interact with any WisdomTree-issued token, in any wallet, across supported blockchains.”
- Solana also seems to be courting more RWA projects to its platform with Franklin Templeton announcing plans to launch a money market mutual fund on the network akin to its offerings on Stellar, Arbitrum, and Polygon.
- Tokenization-as-a-service provider Securitize also announced native support for Solana via the integration of Wormhole, which is intended to offer cross-chain capabilities to the assets tokenized on its platform.
- Coinbase announced that cbBTC (wrapped bitcoin) will soon be available on Solana, after launching on Ethereum and Base earlier in the month. Note that the Sky community formally voted to jettison wBTC as collateral from its platform starting October 3.
Macro Outlook
Looking ahead, we retain a constructive outlook for 4Q24 mostly predicated on our favorable view of the current macro environment, alongside the idiosyncratic factors listed above. For example, just last week, we argued that one of the more significant implications of the Fed decision to cut 50bps is that this provides cover for other monetary authorities to take more stimulative measures. This has been followed with China revealing a massive double fiscal and monetary stimulus package that includes a record breaking rate cut, liquidity support for stocks, and a drop in the banking reserve requirement ratio – all in an effort to both “boost lending and reduce the existing loan burdens.” The decreased banking reserve requirement in particular should be beneficial for market liquidity, which we have previously found to be positively correlated to BTC performance. That said, we anticipate a possible lag in the positive effect that these measures could have on crypto performance.
In the US, the economy remains resilient despite the labor market concerns raised at the previous FOMC meeting. 2Q24 GDP figures have come in above expectations at 3.0% (vs a median 2.9% Bloomberg survey estimate), reaffirming our view that near term recession risks remain low. That said, we are watching the potential US East (and Gulf) Coast port strikes that could start next week (October 1) as a possible drag on the economy in 4Q24. JP Morgan estimates the supply disruptions resulting from the strikes could cost the economy around $5B per day. However, we think concerns about the strikes’ possible effect on inflation are overstated, as shipping still represents a fairly small part of the cost of goods. For now, this doesn’t change our view on macro conditions for the crypto market.
Wen Spot BTC ETF options?
The US Securities and Exchange Commission (SEC) officially approved options on spot bitcoin ETFs, specifically BlackRock’s iShares Bitcoin Trust (IBIT), although these contracts cannot trade until the Options Clearing Corp (OCC) and Commodity Futures Trading Commission (CFTC) approve them as well. That timeline is still uncertain. But what this means to the asset class, in our view, is likely greater liquidity and volumes as this product may expand bitcoin adoption primarily among institutional investors (and perhaps retail investors to a lesser extent.) Although CME does have options on bitcoin futures, these have been cumbersome for US institutional investors from a management perspective.
Options on IBIT, however, will allow this cohort to trade the options on the underlying bitcoin directly as well as help minimize credit risks as investors will face the clearing house as counterparty. This offers institutions a new entry into this space that could lead to new derivative-based / yield-enhancement strategies, which were previously not possible. Simply put, we could see more market players entering this space, drawing in even more liquidity. On the other hand, we think the effect on BTC spot price will likely be minimal (at least initially), while the effect on volatility is probably lower. (Note that the effect on implied vol ultimately depends on whether most end users are option sellers or option buyers.)
Onchain Activity
Ethereum transaction fees have ticked upwards over the past week amidst a widespread resurgence in onchain activity. Although absolute transaction counts and active addresses have remained flat, the average gas price in the past 10 days (Sept 16-26) has risen 498% above the preceding 30 day average. The median transaction on Ethereum now costs $1.69 compared to $0.09 at the start of the month. (For reference, average fees were $6.45 and $0.59. They are skewed higher by a subset of high priority and complex trades.)
There has been no single driver of increased activity. Ethereum decentralized exchange (DEX) volumes are up slightly, +9% week-on-week (WoW). USDC deposit rates on lending platform Aave have also moderately increased from 3.5% to 4.5%, suggesting a slight increase in leverage. Meanwhile, total ETH transfer volumes have risen 17% WoW in line with increased fees.
That said, the increase in mainnet Ethereum activity is proportionally less than the WoW changes in L2 and Solana activity – though the latter have not seen similar fee increases. DEX volumes on Base and Solana have increased +28% and +35% WoW, respectively, without changes in average transaction costs. (In fact, the average Base gas fee fell 10% WoW.) In our view, this is due to the sensitivity of blockspace constraints on mainnet Ethereum and is a testament to the success of scaling blockspace via both integrated networks and L2s.
