Insights and analysis for the professional investor
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Hi readers,
In today’s newsletter, Semir Gabeljic of Pythagoras Investments discusses why the current cryptocurrency market is distinct from previous ones and that despite the need for caution, there are significant opportunities for all investors as the new market cycle appears to be just beginning.
Then, Michael Nadeau of The DeFi Report provides a relative analysis to answer key questions: Should SOL be trading at a 70% discount to ETH? Is the market still dislocated?
Bitcoin saw explosive growth immediately after the recent U.S. presidential elections, rising and retaking the spotlight from former highs of $73,000 in March. Now the question is, will bitcoin (BTC) continue its uptrend, and at what point can a sharp reversal happen?
If we take a look at former BTC market cycles, which happen every four years, then we see that we are now just starting to go into new bitcoin price discovery areas, and BTC could top out at new all-time highs, which is practically anything greater than the current resistance of $92,000. Bitcoin could even potentially see highs of $140,000+ based on prior supply and demand — i.e. halving cycles. On the contrary, what makes this market cycle a bit different than others is the vanished principle of BTC being an inflation hedge or digital gold. In theory, it was supposed to be — that is, at least, likely what Satoshi intended since bitcoin was created after the 2008 financial crisis. From what we saw in the last cryptocurrency bear market cycle, BTC is not an actual inflation hedge and performs like all other risk-on assets, so sentiment could change once the inauguration happens in January.
As we’ve seen before, politics could potentially just be politics until we see actual regulatory rollouts and a more favorable U.S. stance on paper with policies and laws that the markets fully embrace. Things seem to be going in the right direction with the news of Gensler resigning come January 20, 2025. The question remains on who will be his replacement; the wrong person and the smallest sentiment change in the wrong direction could fully accelerate a drawdown in BTC. We’ve previously seen what every Fed meeting minute has done to the price action of crypto which has, up until recently, always been negatively perceived. In other words, we are not fully out of the woods just yet, especially until there is clarity on who could be Gensler’s replacement.
The BTC ETFs played a vital role this year in institutionalizing the cryptocurrency, which allowed for RIA and fiduciary investment in bitcoin, although in a turnaround market the same volumes that helped bitcoin get to the point it is at today can be the same volumes and outflows that present a downfall. This can lead to crippling sentiment as we all know the crypto bull market does not last forever and drawdowns of 70-80% can be expected.
Looking at prior BTC bull market cycles, BTC has seen drawdowns of 20-30%. Can the same be expected with all the new factors under the current and new market structure? Analysts assume less drawdown and volatility scenarios due to the BTC ETF options offered by iShares and others, although on the contrary, systematic strategies still seem to be sought after with investors taking bets on market volatility, which only recently (in 2022) saw an equity market-like expansion in the crypto markets where enough volume, market cap, and stability existed for the shorting functionality of some coins.
With more market participants and more avenues of shorting functionality across all crypto assets, including BTC, this can create more volatility in the short-term. Compared to the last market cycle, there are a lot more traditional finance (TradFi) players trading and market making in the space now, which in a way is offset by more institutional capital locked up (mostly in ETFs since the venture space in crypto dried up from the fast money of the last bull market). Although in a way, no matter how much institutional capital enters the space, the market cycle of BTC will follow volatility— it’s just in its decentralized nature.
Regardless of whatever outlook one has on the price of BTC, it’s important to realize that this is a different market than before. Gone are the days of quick “hot money” returns with the inevitable crypto risk factors ever present. One must remain cautious, but optimistic, on where things are going, if not bullish on the market cycle and structure alone. Regardless, for every type of investor, there is a huge opportunity due to the immense growth of the industry, and when that window will close is anyone’s guess — the only thing for certain is that the new market cycle is just getting started.
Solana was trading at 97% discount to ether’s market cap in January of 2023 – a clear market dislocation that has closed significantly over the last two years.
Today the gap has closed to a 70% discount.
However, solana is starting to challenge ether in terms of on-chain activity and important network usage KPIs.
Which begs the question: Is the market still dislocated?
In this short piece, we explore this key question with relative analysis across four key data points. Let’s dive in.
1. Network Fees
Data: Artemis, The DeFi Report, Gas Fees Only (does not include MEV). Please note that we’ve included the following L2s in the comps data: Arbitrum, Base, Optimism, Blast, Celo, Linea, Mantle, Scroll, Starknet, zkSync, Immutable, and Manta Pacific.
L2s create new demand for Ethereum L1 block space and increase the network effects of ETH the asset. Therefore, we include them in our comp analysis for solana.
In Q2, solana did $151M in fees: 27% of ether + the top L2s.
Fast forward to the last 90 days and the ratio has jumped to 49%.
2. DEX Volumes
Data: Artemis, The DeFi Report
Solana did $108B in DEX trading volume in Q2: 36% of ether + the top L2s.
Over the last 90 days, solana has done $153B in DEX trading volume: 57% of ether + the top L2s.
3. Stablecoin Volumes
Data: Artemis, The DeFi Report
Solana did $4.7T in stablecoin volume in Q2: 1.9x that of ether + the top L2s.
Over the last 90 days, solana did $963B of volume: 30% of ether + the top L2s.
Why the drop?
We think this drop is mostly due to bots/algorithmic trading that was juicing the numbers in Q2.
Furthermore, only 6% of Solana’s stablecoin volumes are peer-to-peer transfers per Artemis. On Ethereum L1, this figure is closer to 30% – an indication that ether is used more for non-speculative activity than solana.
In terms of stablecoin supply, solana has just 4.1% of ether + the top L2s on-chain value today, up from 3.5% at the end of Q2.
4. Total Value Locked (TVL)
Data: Artemis, The DeFi Report
Solana ended Q2 with $4.2b of TVL: 6.3% of ether + the top L2s.
Solana’s TVL is currently $8.2b: 12% of ether + the top L2s.
In summary, based on 90-day performance, solana now has:
49% of ether’s fees (up from 27% end of Q2)
57% of ether’s DEX volumes (up from 36% end of Q2)
30% of ether’s stablecoin volumes (down from 190% in Q2)
4.1% of ether’s stablecoin supply (up from 3.5% end of Q2)
12% of ether’s TVL (up from 6% end of Q2)
We think the on-chain data points to a fair re-pricing of solana’s valuation relative to ether.
With that said investors should consider qualitative differences between the two networks as well as potential upcoming catalysts as we head into year-end and 2025.
