Market View
Crypto markets have started to retrace higher, consistent with our call for a constructive outlook in the weeks ahead. We think weaker seasonal factors won’t kick in until early March. This perspective also speaks to our view of a weaker USD trend this year following the January bounce. This is based on our expectations on the path of Federal Reserve interest rate cuts and a more concerted economic slowdown in 1H24, which we covered last week.
Among US spot bitcoin ETFs, flows are on track to record a net positive figure for the second consecutive week, after the prior week (ended February 2) attracted $819M. A big reason for this is that the “forced” redemption pressure in Grayscale Bitcoin Trust (GBTC) has slowed sharply to around an average $87M per day, down from $494M in the first two weeks.
Globally as well, Bloomberg data suggests that there’s been some respite in the rotation away from higher fee products in some jurisdictions to the lower fee products in the US. Over the last five business days (up to February 7), there have been net inflows of $314M across global bitcoin-only exchange-traded products adding to YTD flows of $1.34B. That means $484M of net outflows elsewhere have benefited US based ETFs, which have attracted a net $1.83B YTD.
This is consistent with our intraday heatmap of bitcoin trading volumes across four platforms (see table 1). This suggests that the majority of trading activity has been taking place during US weekday (work) hours by a margin of 2-3x versus other times over the last four months, concentrated between 9-11am ET and 3-4pm ET.
However, we’ve previously said that market players shouldn’t be fixated on the near-term flows, as the bigger unlock for new capital will come later when wirehouses approve and asset managers include these in their model portfolios. That takes time as wealth managers are still carrying out their due diligence on these products. Moreover, the rebalancing flows are not yet done, as evidenced by the filing from Genesis Global Holdco on February 2 seeking authorization from the US Bankruptcy Court in the Southern District of New York to sell:
- 35.9M shares of GBTC (worth $1.4B as of end January),
- 8.7M shares ($170M) of Grayscale Ethereum Trust (ETHE) and
- 3.0M shares ($38M) of Grayscale Ethereum Classic Trust (ETCG).
Nevertheless, we think market players may be missing out on other opportunities and themes that could be relevant in the post spot bitcoin ETF environment, including (1) the resurgence of DeFi activity, (2) room for ETH performance to catch up to peers and (3) increased selling pressure on bitcoin miners after the halving. We cover these topics in our latest Monthly Outlook: Post-ETF Trading Themes. Some other related news of note:
- The upcoming Dencun Fork on Ethereum will likely happen on March 13, 2024, to be activated at slot number 8626176.
- EigenLayer (re-staking protocol on Ethereum) has temporarily removed the caps on liquid staking pools through February 9
Onchain: Social Movements
The recent introduction of Frames to decentralized social protocol Farcaster (think a cross between Twitter + Reddit) built on Optimism (an Ethereum layer-2 or L2) has driven a 9-12x increase in daily active users, reminiscent of the activity surge in SocialFi protocols like Friend.tech back in September and October 2023. Frames enables programmatic casts (i.e. social posts akin to tweets) to be interactive – allowing users to mint NFTs, play video games, sign up for subscription services, and more, all without ever leaving their feed. We think this represents a possible zero-to-one new use case in decentralized social media that is not currently possible on traditional social platforms. A majority of Frames are built on Base, the Ethereum L2 incubated at Coinbase.
That said, retaining and growing a network of users is a challenge that many decentralized social protocols have faced in the past, and one which even incumbent web 2 companies (e.g. Threads) struggle with. Currently, the long-term business and revenue generation models around this sector are still being developed. What distinguishes Farcaster is that it currently lacks a native token or point system, and instead focuses on user experience and engagement. This suggests that growth on the platform has been organic and not driven by financial speculation (something we view as a net benefit). Moreover, to sign up for Farcaster, users need to provide either a phone number or pay a registration fee, which prevents activity data from being polluted by bots.
Alternative layer-1 networks
Sui has recently entered the top 10 chains by total value locked, according to DeFiLlama, making it the only other non-EVM (Ethereum Virtual Machine) based chain on the list besides Solana. Part of what differentiates Sui from other blockchains (besides its consensus mechanism) is its core focus on the Move programming language and its object-centric model (in contrast to UTXO or account models).
Move is a domain specific language tailored for blockchain usage. It's received favorable feedback from the developer community. Not only does Solana have plans to enable smart contract development in Move, but there are also Ethereum L2s that plan on being Move-centric as well. Move aims to provide a more secure and concise means for creating smart contracts, while also enabling stronger security testing via formal verification.
Although many smart contract platforms are migrating towards enabling different developer languages (e.g. Solidity and Rust can both be used on Solana), Sui does not appear to have any expansion plans to integrate additional languages. While that may seem restrictive, it also means that users only interact within a full end-to-end Move ecosystem. That can improve security with cross-contract calls and possibly allow better end-to-end testing and verification. This also has the potential to improve development times while reducing unintentional bugs.
Coinbase Exchange & CES Insights
The market continued its grind higher this week albeit on lower volume. “Cautiously optimistic” is a phrase we keep hearing from traders. And although there seems to be some consensus around the overall market direction, the debate is around where market players should overweight portfolios. Some believe BTC will continue to outperform as we get closer to the Bitcoin Halving and ETFs become more widely accessible. Others are positioning for an ETH catch up trade, counting on the Dencun Fork as a possible catalyst and potential spot ETH ETFs to create outperformance. Still others are betting on SOL to continue its charge higher.
The bear case is one of supply. For example, Mt. Gox repayments, various entities working through bankruptcies, and a consistent stream of token unlocks could pressure any bids. Although everyone seems to know these risks exist, few seem to be letting them get in the way of long positions, in our view.
