Market View
Former President Donald Trump defeated Vice President Kamala Harris by a wide margin on November 5, claiming a strong mandate for his second term. According to Stand with Crypto, who mobilized 1.7M crypto advocates for the 2024 US election:
- the House of Representatives gained 263 pro-crypto candidates versus 118 anti-crypto candidates and
- the Senate gained 18 pro-crypto candidates versus 12 anti-crypto candidates
To be clear, crypto-supportive candidates were elected from both sides of the aisle, setting up strong expectations about a friendlier regulatory environment in the US next year. Some of the asset class’s biggest beneficiaries of this were tokens named as potential securities in previous SEC lawsuits. While the bitcoin macro story remains compelling – as evidenced by the $622M in US spot bitcoin ETF inflows on November 6 - sectors like decentralized finance (DeFi) also caught a bid from the many market players expecting a resurgence in liquidity here.
Beyond the US election, the Federal Reserve delivered a 25bps rate cut on November 7, while simultaneously distancing themselves from their previous statement about having “confidence that inflation is moving sustainably toward 2 percent.” During Chair Jay Powell’s press conference, he alluded to the idea of adjusting the pace of cuts, which we believe is related to the possibility of expansionary (read: inflationary) fiscal policies in the next administration. Nevertheless, we expect the Fed to deliver another 25bps cut in December, even if the path in 2025 is murkier now. Fed funds futures have started to price in fewer cuts next year, compared to the 100bps implied in the curve prior to the elections.
China’s meeting of the National People’s Congress (NPC) Standing Committee was the other major macro event this week, conveniently scheduled to finish after the US elections. This is happening alongside a People’s Bank of China symposium with foreign banks. The exact size of the fiscal stimulus package (approved by the group) came in at CNY10T ($1.4T), which was more or less in line with market expectations. We had thought that Chinese authorities would actually fulfill the higher end of forecasts due to the threat of potentially punitive tariffs on Chinese goods in 2025. Despite the disappointment, this could still offset some of our concerns around weaker global growth next year, which would improve the short-term outlook for risk in the months ahead.
Overall, we would still expect a supportive macro environment for crypto performance over the next 1-2 quarters, driven by stimulative US monetary policy and stronger US economic conditions. Meanwhile, the next administration’s projected deficit spending (if it materializes) should translate into greater risk taking as more USDs circulate in the economy.
The Profitability of Memes
Meme tokens have been a central part of this bull cycle’s core narrative and have been the best performing crypto sector by a wide margin this year (as measured by total market cap growth). Much of this activity has been on Solana, centered around the rising adoption of pump.fun as the dominant memecoin launcher. Indeed, more than three million tokens have been launched on pump.fun to date with more than 21,000 launched in the past day alone. The dominance of trading-linked activity on Solana is visible in its contributions to the network’s transaction fees – they account for more than 82% of all non-vote fees paid on the network.
Beyond pure network fees, however, incredible amounts of value are captured through Solana’s token issuance and trading processes, making Solana trading the third most profitable onchain sector in crypto behind stablecoins and layer-1 (L1) network fees. Chart 1 depicts the top crypto applications by protocol revenue over the past week with Telegram trading bots in blue and other Solana trading tools in purple (excluding stablecoins and L1s). These revenues are exclusive of other costs borne by the protocol. Uniswap revenue is zero (not shown), for example, because fees are currently distributed to liquidity providers rather than the protocol. On the other hand, Uniswap Labs (shown) directly earns fees from swaps executed via its interface.
The magnitude of revenue generated by Telegram trading bots is surprising, even exceeding that of pump.fun. The Photon, Bonkbot, Trojan, and SolTradingBot Telegram bots are only focused on the Solana ecosystem, and revenues for multichain bots like Maestro and Bananagun have also seen a majority of their revenue come from Solana-based fees in the past week. In our view, this suggests that a large number of traders on Solana are less sensitive to execution fees, perhaps due to the higher volatility (and also lower liquidity) of the underlying assets.
This fee insensitivity is reflected in the fee-to-volume ratios paid at the automated market maker (AMM) pool levels. In the past week, Uniswap did $14.2B in volume across all chains and users paid a total of $11.3M in fees at an average rate of 0.08%. Meanwhile, Solana’s leading decentralized exchange (DEX), Raydium, did $8.5B in volume (40% less than Uniswap), but collected $18.9M in fees (67% more than Uniswap) at an average rate of 0.22%. That is, users paid fees that were on average nearly 3x higher on Raydium pools than the fees they paid on Uniswap pools over the past week.
Although the highest volume pool on Raydium is still the highly liquid SOL/USDC pair with a 0.01% fee, there is a fat tail of other pools on the platform which constitute the majority of its volume (most of which have a standard 0.25% fee). Many of those tokens are not listed on any centralized exchange (CEX), which reduces CEX to DEX arbitrage opportunities and decouples volume correlations between the two. Chart 2 depicts the correlation of Ethereum and Solana DEX volumes against Coinbase exchange volumes, revealing Solana’s DEX volumes began to meaningfully deviate from the exchange in July, even as Ethereum DEX correlations have tracked upwards.
In our view, this suggests that the trading activity on Solana is relatively decoupled from CEX activity and appears to be forming its own distinct ecosystem. That said, debates around the long-term sustainability of (elevated) memecoin activity remain. Solana’s stablecoin market cap (a metric of sustainable onchain liquidity) has fallen somewhat from its August 22, 2024 highs of $4.1B to $3.8B today, and it’s not clear what percentage of the trading and launch fees are recycled back into the memecoin ecosystem. While a stronger SOL price does enable more purchasing power on many of its DEX pairs – which are primarily denominated against SOL – it may have a chilling effect in the reverse scenario, in our view.
