Market View
Many US market players appear to be trimming risk upon their return from the summer holidays with ostensibly little to do until after the Federal Reserve meeting on September 17-18. Indeed, we think investors are more likely to deploy capital in October and November when we approach the final stretch for the US election season. Rate cuts and an improved liquidity environment forms part of our more constructive thesis for 4Q24. The Fed decision remains the key variable to watch for both traditional and crypto assets as investor sentiment remains muted while there are few other catalysts for either market. That said, we believe that the uncertainty regarding how the US election will affect the broader economy may be keeping many investors sidelined.
This week, JOLTS job openings came in at their lowest level since early 2021 at 7.7M in July, far below Bloomberg’s median survey forecast of 8.1M jobs. That said, while the net decline in this indicator was large, the absolute figure is still on the higher end of pre-pandemic data. Moreover, the US ISM services data that was reported yesterday (September 5) suggests that the economy appears to be otherwise resilient. But while this should be positive for markets, it hasn’t necessarily motivated many to take new positions (partly because participants are still waiting for nonfarm payrolls data, which will be out as we go to publish.) In fact, open interest in perpetual futures for BTC and ETH has been stagnant at around US$15.0B and $7.3B respectively since mid-August, with funding rates stuck in (positive) single-digit territory.
Meanwhile, onchain trading activity has continued to taper lower in the wake of the unwind in early August. The rolling seven day decentralized exchange (DEX) volumes for both Ethereum and Solana have reached levels last seen in February this year. Ethereum’s average daily DEX volume to start September is $1.25B, down 26% from an average $1.70B in the preceding three months. (Note that this is in line with last year, when DEX volumes dropped around 30% in September compared to previous months.) Activity on Ethereum layer-2s (L2s) have also moderated, with Base and Arbitrum DEX volumes down 15% and 31% respectively. Solana DEX volumes appear to be the most heavily impacted, retracing a full 50% over the same period from $1.51B to $752M.
We think Solana’s comparatively larger drop is due to fragmentation in memecoin activity, which up until recently had been primarily concentrated on Solana YTD. A proxy for this fragmentation has been Pump.fun revenues, the leading memecoin launch platform (and built on Solana). Pump.fun saw average daily revenues of $761K from June to August 2024. MTD this has dropped 48% to an average $414K – proportionally in line with the decrease in total Solana DEX volumes. At the same time, new competitor platforms like SunPump on Tron and Ethervista on Ethereum have each earned daily revenues between $50-100K in the past week.
The moderation in onchain activity also follows a series of US SEC enforcement actions that have refocused attention on the need for clear regulations in the space. The SEC sent a Wells notice to OpenSea, a leading NFT marketplace, suggesting they believe that NFTs may fall under their purview. Later, the SEC also warned the FTX estate against making repayments in digital assets or stablecoins, stating that it “reserves its rights to challenge transactions involving crypto assets” though it “is not opining as to the legality… of the transactions”. In our view, both of these actions potentially represent an attempt to expand the SEC’s oversight of crypto. NFT monthly sales volumes reached YTD lows in August.
Separately, the CFTC levied charges against Uniswap Labs for offering derivatives trading. The violation specifically targeted a “limited number of leveraged tokens” that were made available through the front end trading interface that Uniswap Labs operates. The $175K penalty is nominal relative to Uniswap Labs’ $10M cumulative revenue from their interface, though the CFTC noted that this “reduced civil monetary penalty” was due to “Uniswap Labs’ substantial cooperation”. It is worth noting that Uniswap in fact blocked access to these leveraged tokens after they were named in an earlier 2022 CFTC action, but Uniswap was nonetheless charged for the period in which the tokens were available.
A strong dissenting statement from CFTC Commissioner Summer Mersinger expressed concerns that this action “has all the hallmarks of… regulation through enforcement.” Mersinger pointed out that “Uniswap did not act as a liquidity provider, extend credit, actively trade leveraged tokens, or collect trading fees on transactions in the leveraged tokens at issue. Additionally, no harm to the market or to customers has been alleged in this matter.” She further asserted this action could “severely chill the launching of any DeFi protocol within the United States.” Similar sentiment in other dissenting statements have been made by SEC Commissioners Hester Peirce and Mark Uyeda, stating that such cases “intimidate innovators and entrepreneurs.”
In our view, this series of actions has slowed the enthusiasm around regulatory tailwinds encountered earlier this year (May 2024). Regulation remains a hot topic within the crypto community, and pundits may attempt to resurface the issue ahead of the November 5 presidential election. While the Trump campaign’s pro-crypto stance was affirmed at the Bitcoin 2024 Conference in late July, the Harris campaign has also taken encouraging steps by reaching out to the industry while one of its top super PACs (Future Forward USA) has enabled crypto donations. [1] Furthermore, we think that regardless of the outcome of the election, it’s possible that we could see a more favorable regulatory environment for crypto, particularly following the comments from Senate Majority Leader Chuck Schumer (D-NY) in mid-August that the upper house can pass a bipartisan crypto bill later this year.
