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Welcome to Crypto Long & Short! This week, Delphi Digital's Kevin Kelly and Jason Pagoulatos unpack why Bitcoin and Ether have far outperformed "alt-coins" this cycle.
Then Sygnum Bank's Lucas Schweiger explains how banks can start to benefit from blockchain and digital asset technology. As always, get the latest crypto news and data from coindeskmarkets.com. – Ben Schiller, head of Consensus Magazine at CoinDesk
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Narrow Boom: The Mismatch of Token Supply and Demand in the Current Cycle |
The consensus used to be that a rising BTC price resulted in a trickle-down wealth effect for ETH, and eventually would spillover into the long tail of "altcoins" — an endearing term commonly used to describe all the other crypto assets outside the Big Two "majors." We saw this dynamic play out last cycle. When BTC and ETH were up, so was everything else. Right now, the majors feel more disconnected than ever from the rest of the market, especially BTC. Despite its ~130% rise over the last 12 months, we haven't seen the "Everything Rally" many were anticipating by now. We've seen small pockets of outperformance — Solana, AI, memecoins — but a majority of the crypto market has largely underperformed. Dispersion has been the tale of the tape this cycle — and it may very well continue. |
- For context, during the 2017 cycle, the total crypto market cap grew from around $40 billion to nearly $740 billion (~18x). The market cap of "altcoins" went from essentially zero to over $400 billion — with 90% of that growth occurring in 2H 2017 alone.
- In the 2020-2021 cycle, the total market grew from a base of ~$280 billion to nearly $2.8 trillion (~10x), while the market cap of "altcoins" surged from ~$70 billion to $1 trillion (~15x).
- But this cycle, the total crypto market has barely grown 2x — and the market cap of "altcoins" has grown even less. Even at the market's March 2024 peak, total altcoin market cap was still ~$200 billion short of its November 2021 prior high.
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All markets are simply a function of supply and demand. Crypto markets have grown considerably over the last several years, but so too has the aggregate supply of new tokens, and the crypto market is currently suffering from a substantial supply-side imbalance. Today, the supply of new tokens is growing at the fastest pace this market has ever seen. The rise of DIY token launchpads (like pump.fun) has sparked a surge in new tokens being launched, most of them memecoins. |
At the same time, we've seen a growing number of token unlocks from large protocols and dApps start to flood the market, as vesting dates come due from the wave of VC investments a couple years ago. Private investment comes with the expectation of a return, and in crypto, that exit liquidity often comes in the form of selling tokens. Meanwhile, we've seen a 50% year-over-year increase in the number of $1 billion market cap coins. More tokens at higher valuations means more capital is required to support their prices. But so far and so far demand has not kept pace. For example, trading volumes on major exchanges have yet to recover back to last cycle's prior highs. |
Another major difference compared to last cycle is the lackluster growth in crypto credit and lending, which helped fuel the buying frenzy we saw in 2021. Crypto lending markets peaked in 2021-2022 amidst a backdrop of low interest rates and insatiable risk appetite. For context, Genesis' loan book peaked in Q1 2022 at ~$15B after surging 62% year-over-year (total loan originations peaked at $50B the quarter before). However, the collapse of many key institutional lenders (e.g. BlockFi, Celsius, Voyager, Genesis) hampered the speculative demand these same lenders helped fuel. Though we've started to see signs of a recovery, with new entrants like Coinbase's institutional financing business, this area remains tepid compared to just a few years ago. In addition, today's higher rate environment offers less incentive to move money on-chain into a choppy market, especially when the alternative is getting paid 5% on your cash or stablecoin holdings to wait and see. As the almighty Fed starts to cut rates — the market unanimously expects — we'd expect to see risk sentiment and credit conditions improve as the risk-reward of bringing capital on-chain turns more favorable. Lower rates can also reignite growth in total stablecoin market cap, which is a decent proxy for rising demand as on-chain activity picks up. |
This could light a fire under demand that the crypto market desperately needs right now. Whether or not this will be the spark that ignites the "Everything Rally" many are hoping for though remains to be seen. |
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Crypto Is Now a Non-negotiable for Traditional Banks |
Traditional banks have long been wary of crypto and DeFi, but thanks to increased regulatory clarity, endorsements from TradFi heavyweights and growing client demand, it's clear that crypto is here to stay. But simply "accepting" crypto might not be enough to stay relevant. Banks need to fully engage with the right partners to help develop next-generation financial infrastructure, otherwise the fintech and blockchain sectors will move on without them. While some believe that DeFi models are destined to supplant the traditional ones, it's an unlikely scenario. Current market infrastructures and regulatory safeguards are there for handling institutional liquidity and customer protection. Instead, we believe that the real opportunity is where the two worlds will enhance each other. What can banks do? Many banks are realizing that crypto is more than just a new asset class. For them, it's an opportunity to retain and attract clients who are drawn to crypto's higher returns and diversification opportunities. Here's a few things to consider: |
- Diversify product offerings: Banks can defend their current assets under management, diversify their offerings and win new business by attracting the next generation of crypto-native clients.
- Staking-as-a-service: Banks can leverage their trusted infrastructure to offer customers new revenue streams. By working with the right technology partner, staking can be offered to both institutional and retail clients.
- Tokenization: Tokenized products backed by real-world assets can offer new revenue streams and unlock markets that were otherwise limited.
- Blockchain-powered settlement: Blockchain-powered, multi-asset settlement networks can help banks meet and exceed the T+1 settlement standard that many major players struggle with.
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Trust – a bank's most valuable asset In a crypto market where many services lack the much-needed stability and security that traditional investors seek, banks can use this to their advantage. When FTX crashed in 2022, we saw many investors flocking to regulated entities in desperate need for a safe haven, including our own. It was a powerful reminder how trust trumps everything in times of turmoil. As crypto regulations take further shape, we're likely to see many more investors continue to move their funds into entities they can trust. Naturally, they want to feel safe and get all the upside, even if these entities are pricier. CeDeFi – a likely scenario For now, DeFi products will continue to compete with traditional products, but it is likely that the two will blend at some point. By leveraging DeFi's technical components and CeFi's KYC and AML requirements, we are looking at "CeDeFi"-based models becoming the most appropriate form that will be the underlying infrastructure of future finance. Banks should take advantage of DeFi's features, offering flexibility, more efficient systems and innovative financial products that can offer customers new opportunities for yield. At the same time, TradFi or CeFi, brings hundreds of years of experience in financial systems governance and customer servicing, providing the necessary protection and guardrails needed to bring institutional clients and a new wave of customers onboard. That said, we think that financial institutions – like banks – able to bridge both worlds, and are prepared to do so, will find many exciting opportunities in the evolving future finance landscape – but they must act sooner rather than later. Disclaimer: sygnum.com/disclaimer-2/ |
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Here's some news worth knowing, from Nick Baker, CoinDesk's deputy editor-in-chief: |
- BINANCE 2.0: CoinDesk journalists met with new-ish Binance CEO Richard Teng in New York last week to discuss a wide range of topics, including Nigeria detaining one of its executives, Tigran Gambaryan. Beyond that, Teng said Binance has no need for an IPO – the company is making enough money that it doesn't need to raise capital, he said. This is a striking contrast to the hopes many in crypto seem to share, which is that Donald Trump will loosen U.S. restrictions on the industry if elected, creating an opening for crypto IPOs in the world's largest economy. He acknowledged that Binance has screwed up in the past. Teng, after all, has his job because founder Changpeng Zhao was forced to resign last year as part of a $4.3 billion settlement with the U.S. government. Binance boosted compliance spending by 36% last year versus 2022, he noted. As my colleague Cheyenne Ligon noted in her coverage, Binance's efforts to be more transparent are "about having better relationships with global regulators and, thus, steering the company in more future-proofed direction." Teng said: "It's really about building a sustainable enterprise that will not only succeed over the next few years, but continue to prosper for the next 50 to 100 years. … That's certainly our aspiration."
- KAMALA HARRIS: Kamala Harris officially became the Democratic candidate for U.S. president last week. As noted above, much of the crypto industry has pinned its hopes on Trump letting crypto loose in the U.S. But there are signs Harris is more amenable to crypto than the Biden administration in which she currently serves. A Bloomberg story last week quoted a campaign official on her crypto stance. "She's going to support policies that ensure that emerging technologies and that sort of industry can continue to grow," said Brian Nelson, senior adviser for policy for the Harris campaign, speaking Wednesday during a Bloomberg roundtable at the Democratic National Convention in Chicago. The giant pile of money the industry has raised to support pro-crypto candidates and defeat anti-crypto ones no doubt factors in here.
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