Market View
The macro environment has been a key driver for crypto performance in recent weeks due to speculation around how the Federal Reserve will react to a spate of recent US economic data. This week, Fed Chairman Jerome Powell himself affirmed at the FOMC press conference that “it’s unlikely that the next policy rate move will be a hike” – thus tempering concerns that the Fed would pivot towards a more hawkish direction. That’s marginally supportive for long duration risk assets like crypto, even if rate cuts are unlikely in the near term. The Fed’s stance is also in line with our views that the economy may be peaking despite fears that inflation could remain sticky for another few months.
This is not the same as suggesting that the US is facing a stagflation scenario (slowing GDP growth and high inflation), which we reject, despite the growing rhetoric surrounding this idea as of late. In fact, we remain committed to the notion that the US may yet encounter the start of a technology-led, disinflationary productivity boom in the second half of this year. If that materializes, we think that should be positive for both stocks and crypto.
Meanwhile, the Fed said it will amend the tapering speed of its balance sheet runoff from $60B per month to $25B per month starting on June 1, a much bigger reduction than many had expected. Note that the lower cap on the tapering of the Fed’s quantitative tightening (QT) program should help improve liquidity in the market by moderating the withdrawal of money from the financial system. In the interim before the tapering begins, we think that the announcement should help support a recovery in investor sentiment.
Finally, concerns about a more hawkish Fed have supported USD strength since the March US CPI print was released in mid-April. But we believe that the FOMC’s more dovish-than-expected statement has signaled the peak in the USD’s upward momentum against both FX and crypto pairs. In fact, CFTC data suggests USD positioning is already extremely heavy (to the tune of $32.6B), so we expect the unwinding of these positions to benefit crypto in the short term.
More broadly, it’s important to note that bitcoin’s recent downturn has not been isolated to crypto, and is thus not indicative of a sector-specific capitulation in our view. Both risk-on equities and store-of-value gold have been trading lower since their peaks in early to mid-April amidst the strengthening dollar. What leaves us optimistic in this pullback is that BTC’s maximum drawdown from peak is at 23%, below its historical range. Although this is larger than the record small drawdown of 20% seen in 2023, it is relatively muted compared to the next smallest intra-year drawdown of 33% in 2016 (and far from the 36% and 53% drawdowns of the 2017 and 2021 bull markets).
We believe that this trend of overall reduced drawdowns will persist, in part because of the legitimization of BTC as a macro asset. This has been reinforced not only by spot ETFs in the US, Canada, and Europe, but also by recently launched ETFs in Hong Kong on April 30th and new applications in Australia. While inflows and volumes of ETFs overseas may not be as large as those in the US, we think they represent an important signal for regulatory engagement with the asset class globally.
That said, there has been attention on the recent outflows from US spot ETFs. The iShares Bitcoin Trust (IBIT), the largest spot bitcoin ETF by volume (and second largest by AUM), ended its 70-day inflow streak and saw its first ever outflow on May 1. While this indicates a slowdown of capital inflows to the asset class via the ETF product, we think that ETF flows (while important) only drive a portion of BTC price discovery given the global and deeply liquid markets on centralized exchanges (CEXs). The average weekday spot volume on CEXs during 1Q24 was $18.8B, more than eight-fold the $2.3B daily volume of US spot ETFs over the same period. This discrepancy in activity leads us to believe that bitcoin’s price discovery still remains rooted in global demand trends.
The shortfall of utilizing US ETFs flows as a proxy for global price discovery is perhaps clearest with gold. SPDR Gold Shares, the largest gold ETF in the US, has had a net outflow of $3B in 2024, even as gold traded up 12% YTD. Outflows from US gold ETFs have been offset by purchases from central banks and other institutions around the world. The People’s Bank of China, for example, has reported 17 consecutive months of gold purchases as of March 2024.
Similarly, we think that the supranational justifications for owning bitcoin have never been clearer amidst deglobalization, elevated geopolitical conflicts, and growing government debts. At the same time, Bitcoin’s overall resilience as both a robust technology and financial asset class have been well demonstrated. We think this will continue to contribute to bitcoin’s strong price floors relative to previous cycles.
Onchain: Restaking Realizations
Meanwhile, EigenLayer announced details regarding its upcoming EIGEN token and airdrop on April 29. EigenLayer has been one of the most anticipated protocols of 2024, with its total value locked (TVL) rapidly growing to become the second largest in crypto at $15B, behind only liquid staking itself. Its core restaking functionality promises to expand the crypto-economic security of ETH to secure new use cases via onchain fault proofs.
The newly introduced EIGEN token further expands this set of use cases into services with “intersubjectively attributable faults”. In other words, services whose correct behaviors cannot be fully proven onchain (e.g. data oracles or cross-chain bridges). The token itself will serve as a new form of slashable collateral in these scenarios, with the slashing itself performed via a novel slash-by-forking mechanism.
There have been some surprises regarding airdrop details such as a firm geo-restriction and VPN-blocking of airdrop claims as well as a plan to make tokens non-transferrable for up to several months post-claiming (which start May 10). However, we think the allocation figures themselves could be considered fairly generous. 15% of the total EIGEN supply will be airdropped over 2 seasons, more than the 11% of Ether.fi, the 5% of Ethena, and in line with the 17% of Wormhole.
The non-transferability of claimed tokens is also not a new mechanic. The SAFE token underlying Safe DAO, a provider of multisig wallets that secures more than $100B in value, was non-transferable from its claim in late 2022 until April 23, 2024 after meeting certain milestones. Although the milestones for unlocking EIGEN are not yet fully concrete, they will center around the principles of (1) improved social legitimacy via community discussions, (2) better understanding of payment and slashing mechanisms, and (3) enhancing decentralization of the token.
EIGEN’s functionality as collateral within the protocol further introduces a new dynamic to the token that differentiates it from traditional DeFi governance tokens. Given that the token’s price could have implications on the economic security of the services that it backs, understanding long term token demand will be important. Certain pre-listing perpetual futures markets like Aevo currently estimate approximately a $10 value per EIGEN at a $16B fully diluted valuation. However, liquidity and volumes are extremely thin on these protocols, and the figures should be taken with some reservation. In our view, real price discovery of EIGEN will not occur until tokens are made transferable, though it may take additional time for the market to better understand the complexities of EIGEN’s role in securing restaking services.
