Monthly Update || October 2023

Opening Remarks

Greetings from Ikigai Asset Management¹ headquarters. We welcome the opportunity to bring to you our sixty-first Monthly Update and hope these are helpful in better understanding some of what we’re doing and what we’re seeing. We have the privilege of deploying capital on behalf of our investors into a new technology and asset class that already has and will continue to fundamentally change the world – continuing to create trillions of dollars of value in the process.

We believe we are obligated to be shepherds of this technology – to help the world better understand the powerful potential of DLT and crypto assets, and to fund and be an ambassador for DLT projects that will change our lives forever.

To that end, folks got back from summer vacation and things were moving in crypto in September, even if prices didn’t do much of anything. Just check the Monthly Highlights below. There was movement on spot Bitcoin ETFs. Movement on a host of other regulatory situations. We got ETH futures ETFs. Tangible signs of technological adoption. Binance had another bad month. Multiple fundraises of meaningful size. Multiple hacks of meaningful size. The half dozen or so ongoing crypto bankruptcies all progressed. We had multiple significant positive events and multiple negative events as well.

For Q4, Alts are unlikely to do much in my opinion. Net inflows are non-existent, there aren’t compelling narratives and there’s too much regulatory uncertainty right now for Alts. For Q4, BTC price action will likely be a function of spot Bitcoin ETFs, which is a function of the SEC’s response in the Grayscale case. The response is due by mid-Oct at the latest. It’s hard to handicap what’s going to happen. It seems to me like the most likely outcome is the SEC figures out how to delay the conversion of GBTC to an ETF until sometime in Q1, perhaps as early as January, and simultaneously approves multiple other spot BTC ETFs alongside the GBTC conversion. I’m not super confident in that outcome though, it’s hard to get a read on the SEC here.

The FTX bankruptcy saw several major events and Sam’s criminal trial starts next week. One major event is AWS is investing at least $1.25bn and up to $4bn in Anthropic AI. That’s a big deal. Sam invested $500mm in the 2022 Series B and that investment now belongs to FTX creditors. We don’t know the valuation that Sam put $500mm in at, but we know Google came along earlier this year and invested $300mm and now AWS is throwing a ton of money at it. It’s hard to know what the FTX estate’s Anthropic position would be worth if sold today, but $2bn doesn’t seem like a stretch at all.

The other big piece of news from the FTX bankruptcy is the estate appears to be preparing to clawback withdrawals customers made in the period leading up to the collapse. The details around how exactly this will look are currently unknown, but much more will likely come to light by year-end. This event came as a surprise to pretty much everyone and there’s lots of conjecture about what eventual form the claw backs will take. How long will the lookback period be from 11/11/22? What will the standard settlement offer be? How many withdrawals were made by customers in jurisdictions like China and Russia, where legal action is likely impossible? Those questions and many others remain unanswered and matter a lot to eventual recoveries. One thing is certain, claims prices in the FTX bankruptcy headed meaningfully higher in September and are set to head higher still in the coming months.

I won’t harp on Binance anymore but just read the Monthly Highlights. It was another bad month for Binance. I had a tweet concerning Binance’s very bad stretch of news that went viral in September, and apparently rocked the boat enough for Changpeng that he felt a need to address it, despite having me blocked. The Binance situation continues to be a slow train wreck and it’s anyone’s guess when things will eventually come to a head there. The uncertainty around Binance has the entire market in limbo due to its prominence, and that uncertainty looks set to bleed into 2024.

Overall, September brought numerous events that spanned the full gamut of categories and good/bad. 2023 continues to be a year characterized by the hangover from the damage caused in 2022. I wish I could say that hangover will be wrapped up by New Year’s Eve, but it’s not looking like it.

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Contact us to see if you qualify.

September Highlights

• SEC Delays 7+ Spot BTC ETF Applications Due in October and November, All Eyes on SEC’s Response in Grayscale Ruling

• Su Zhu Arrested at Airport in Singapore, Sentenced to Four Months in Jail for Contempt of Court, Kyle Davies Is A Fugitive

• SDNY Judge Drops Class Action Lawsuit Against Uniswap in Significant Win for DeFi Protocols

• Visa Begins Settling Transactions with Stablecoins on Solana

• SEC to Allow ETH Futures ETFs

• Accounting Oversight Board FASB Rules for Fair Value Accounting of Bitcoin

• Binance’s Head of Product Quits

• Binance’s Head of Russia Quits

• Large Payment Processor PaySafe Deplatforms Binance for EUR Deposits

• BinanceUS CEO, Head of Legal and Chief Risk Officer All Abruptly Quit

• BinanceUS Fires 1/3 of Employees

• Binance Announces Sale of Russian Operations to CommEX, Which Appears to Be Run by Binance

• Binance Warns They May Delist All Stablecoins in Europe by June 2024

• Binance Allowed to Resume Services in Belgium

• Binance Begins Delisting Privacy Tokens in Europe

• Huobi Appears to Have Significant Hole in Customer Deposits Based on Wallet Data

• Chase UK to Block All Crypto Payments

• MSTR Purchases 5,445 BTC for $147.3mm at Average Price of $27,053

• Mt Gox Bitcoin Distributions Appear to Be Mostly Delayed Into 2024

• Bybit Suspends Services in UK Due to Regulatory Changes

• Two Republican and Two Democrat Congressmen Write Letter Demanding SEC Approve Spot BTC ETF

• SEC Files Objection to Use of Coinbase as Brokerage and Trading Services in Celsius Bankruptcy Restructuring

• Coinbase International Receives Regulatory Approval to Offer Perpetual Futures to Offshore Retail Customers

• Ark Files for Spot ETH ETF

• Bankrupt Genesis Sues DCG for $620mm of Unpaid Loans

• DCG Under Criminal Investigation for Role in Genesis Collapse

• Ripple Announces the Acquisition of Collapsing Custodian Fortress Trust, Then Backs Out of Deal

• Mixin Hacked for $200mm

• Crypto Casino “Stake” Hacked for >$40mm

• Coinex Hacked for $28mm

• Huobi Hacked for $8mm

• Blockchain Capital Raises $580mm in Two New VC Funds

• Story Protocol Raises $54mm Round Led by A16Z

• CFTC Settles Charges Against DeFi Protocols Opyn, 0x and Deridex

• Coinbase to Implement Bitcoin Lightning Transfers

• FTX Estate Set to Claw Back Customer Withdrawals in 15-Day Window Before Collapse, Details Remain Unclear

• FTX Estate Hires Galaxy and Receives Court Approval to Sell, Stake and Hedge Some Crypto Assets

• Ryan Salame Pleads Guilty to Criminal Charges in FTX Collapse

• FTX Estate Sues Sam’s Parents for Millions in Claw Backs, Evidence Appears Damning

• Stanford Announces the Repayment of Entire $5.5mm of Sam’s Donations Back to FTX Estate

• AWS Invests Up to $4bn in Anthropic AI, Partially Owned by FTX Estate

• FTX Estate Sues Multiple Former Employees for $157mm

• RobinHood to Repurchase FTX Estate’s HOOD Shares for $606mm

• FTX Auditor Prager Metis Sued by SEC for Independence Violations

• Alex Machinsky’s Assets Frozen in DOJ Case

Source: TradingView. As of 9/30/23.

Narratives and Trends In crypto
By Guest Author Odette Wu

This report begins by defining crypto narratives and trends, followed by an overview of notable ones from the past 6-12 months. We'll delve into one narrative and one trend to explore stakeholder interactions and impacts.

What are narratives and trends?
A narrative in crypto refers to a purpose-driven story or account of events or ideas. Narratives serve to attract liquidity (e.g. liquidity provision) and flow (e.g. TVL vampire attacks), and these narratives are typically interpretive and often incorporate emotional or persuasive elements. On Crypto Twitter, there are a plethora of threads introducing and promoting various tokens, most of which are framed with a particular narrative arc. As an example, AI-themed tokens experienced a significant surge in value earlier this year, coinciding with the rise in popularity of ChatGPT. Some incorrectly label these tokens, which are only loosely related to AI, as the "ChatGPT of crypto."

It's important to note that many narratives in crypto fade over time, with only a select few gaining such prominence that they evolve into trends and influence the industry's builders. In some instances, narratives involve repackaging existing concepts, resembling more of a marketing campaign.

A trend is a prevailing direction or pattern of change and development within a specific vertical over time. For instance, in DeFi, recent trends have included the incorporation of more off-chain components and “intent-centric” mechanism designs. In GameFi, trends like Autonomous Worlds (AW) and Fully On-Chain Games (FOCG) have gained prominence. Crypto trends are typically characterized by continuous and sustained movements in a particular direction, often unfolding over extended time frames spanning months or even years, and they are frequently (although not always) driven by data and can be measured quantitatively.

Successful trends that achieve Product-Market Fit (PMF) have the potential to bring about significant shifts within their respective domains. Notably, we have the Constant Function Market Maker (CFMM) technology, which originates from research papers rather than mere storytelling. The success of Uniswap has made V2-style AMMs one of the most dominant flavours of DeFi, across both EVM and non-EVM chains. In comparison to narratives, trends closely resemble the process of research and development (R&D).

While different, narratives and trends can intersect when narratives are used to explain or contextualize trends, making them more relatable or understandable to a broader audience; just like a business venture that needs both R&D and marketing to succeed.

Narratives
Here's a list of narratives we observed since over the last year or so, along with their associated tokens. Some of these narratives have evolved into trends, such as Layer 2 (L2), while others have completed a pump and dump cycle, as seen with AI tokens.

1. Account Abstraction: BICO, EDEN, INST, KROM, WALLET

2. POW 3.0: KAS, DNX

3. AI: AGIX, ALI, FET, OCEAN, ORAI

4. Appchain: ATOM, AVAX, OP, ARB

5. L2 tokens: OP, ARB, MNT

6. DEFI Blue Chips: AAVE, COMP, CRV, MKR, UNI

7. Arbitrum Ecosystem:  GRAIL, JOE, GMX, MAGIC, RDNT

8. DEX Aggregator: 1INCH, COW, LON, PSP

9. Web3 Domains: ENS, ID

10. Gamble-Fi: BCB, BETU, FUN, RLB, WINR

11. Game-Fi: APE, AXS, GALA, MANA, SAND

12. LSD: LBR, FIS, FXS, LDO, RPL, SWISE

13. Meme 1.0: BONE, DOGE, ELON, FLOKI, SHIB, BOB, LADYS, PEPE, TURBO, WOJAK

14. NFT-Fi: BEND, X2Y2, BLUR, DOP, JPEG

15. Options: DERI, DPX, LYRA, HEGIC, ODDZ, PREMIA

16. Perp Dex: DYDX, GMX, GNS, VELA, MCB

17. Real Yield: CRV, GMX, GNS , RDNT, SNX

18. RWA: CFG, CPOOL, GFI, MPL, TRU

19. Telegram Bots: DUNG, EYE, MEVFREE, UNIBOT, YODAI

20. Wallet: TWT, SFP, C98, TGT, XDEFI

21. China: VITE, LINA, MDT, ACH, CFX

22. CEX: KCS, GT, OKB, MX, BGB

23. Socials: Friendtech, Farcaster, Lens, Friendzy

24. Solana Depin (Decentralised Physical Infrastructure): RNDR, HNT, HONEY

In the altcoin space, short-term price fluctuations are often a game of narratives. As an illustrative example, I will delve into the NFT-Fi narrative using BendDAO - $BEND to demonstrate how various participants' interactions can shape price dynamics. Additionally, I will explore a potential causal pathway.

BendDAO - $BEND

As evident from the graphs and charts, ETH reserve in BendDAO, collateral deposited, and the price of the $BEND token all peaked (almost) simultaneously, during the week of 2023-02-13 to 2023-02-19. It's noteworthy that this period coincided with heightened Twitter activity around and enthusiastic promotion of BendDAO and the NFT-Fi vertical. This alignment suggests a plausible causal pathway that may have unfolded in the weeks leading up to this timeframe and continued thereafter.

A causal path, in chronological order:

• BendDAO had a working product with a farmable token $BEND. Limited organic usage.

• With the organic usage of BendDAO increasing & NFT-Fi becoming a popular narrative, there’s more exposure on twitter with further amplifications in other social media.

• More organic users and mercenary farmers come to the BendDAO ecosystem.

• Metrics like TVL, DAU and APY go up hand in hand, creating a short-term and fragile flywheel effect.

• Speculators come in to pump up the price. Crypto Twitter continues to generate FOMO.

• TVL, DAU, APY and token trading volumes spike, creating a pocket of an overheated bull market.

• In a broad bull market, market participants would see this pocket of a bull market and immediately look around for “the next $BEND”, which then gets bid up in sympathy. Raging bull markets are characterized by the repetitiveness of this knock-on effect, and is often referred to as the “hot ball of money”. 

• In a bear market, the flywheel effect is fragile, and typically does not last as long as in the bull market. Broad risk appetite is low and thus the “hot ball of money” does not materialize.

• Assuming a tepid broader risk appetite, as early participants begin to retreat and take profit, attention shifts, and narratives fade.

• The token price drops, often precipitously, and most of those who stay are actual organic users (which may be a very small number) or those who are trapped in an underwater position.

The entire process that played out with $BEND bears a striking resemblance to the GameFi P2E (Play-to-Earn) flywheel phenomenon we witnessed in 2021, albeit cut short by the bear market. This structural bear market naturally resulted in reduced activity and diminished volumes across the ecosystem. Because the market was in a bearish state, the NFT-Fi narrative failed to evolve into a full-fledged trend capable of attracting a larger influx of builders, users, and venture capital investments. Additionally, a unique constraint specific to the NFT-Fi sector is its heavy reliance on the traffic, attention, and overall activity within the NFT collectibles market. Unfortunately, the NFT collectibles market was not experiencing robust growth, which consequently limited the expansion potential of the NFT-Fi vertical.

In contrast to the simple and scammy pump and dump schemes witnessed in dubious centralized exchanges during the 2018-2019 bear market, narrative-driven price movements have evolved into a more intricate and decentralized process. Several factors have contributed to this shift:

• Diverse User Base: Unlike the past, on-chain products driven by narratives attract a broader range of users.

• Blockchain Advancements: Advances in blockchain infrastructure and new products introduced during the 2020-2022 bull market have made on-chain participation more accessible.

• Positive Impact: Unlike traditional pump and dumps, narrative-driven pump and dumps can yield positive results, including stress-testing product improvements and gauging user preferences, contributing to ecosystem growth.

Lastly, it's important to note narratives don't always move prices, it is neither a necessary condition nor a sufficient one. Examples would be tokens that are pumped and dumped by DWF labs in recent months. There was no narrative other than “a scammy market maker is pumping and dumping random tokens.”

Trends
Here is a list of trends we’ve seen over the last year or so:

• Tools for quickly spinning up L2 rollups: OP Stack, Arbitrum Orbit, ZK stack , Starknet App chains, polygon CDK (Chain Development Kit)

• Development in alternative L1 ecosystems: Cosmos ecosystem (app chains & interchain security), Solana (NFT, NFT-fi, depin, etc.), AVAX subnets, Move language blockchains (Sui & Aptos)

• Gamefi/Metaverse: Autonomous Worlds (AW), Fully On Chain Games (FOCG

• Defi: Off-chain components

• General: Intent-centric design

One of the most notable and influential trends is the release of multiple rollup building kits - facilitating the rapid proliferation of Layer 2 (L2) solutions (often referred to as "one-click launching L2s”). Several reasons drive project teams to build their own rollups:

• Scaling Ethereum: Rollups offer horizontal scalability, enabling numerous chains to settle transactions on the Ethereum network cost-effectively.

• Cost-Efficient Transactions: For Dapps with high gas consumption, developing their own rollups allows them to avoid competing with other DApps for limited gas resources, resulting in more cost-effective transactions.

• Revenue Generation and Control: Operating on Layer 2 provides the opportunity to collect L2 fees directly for the DAO, offering greater control over revenue streams and reducing reliance on external Layer 2 fees.

• Customization: Tailor solutions to specific needs and requirements, enhancing flexibility and adaptability.

The trend of many L2 rollup development companies releasing their own rollup building kit for app chains is currently gaining traction, with numerous projects actively building or considering the development of their own Dapp rollups. Implications for the Ethereum ecosystem could be substantial. On the positive side, we might witness a more scalable Ethereum network, translating to even cheaper transactions and improved execution quality for users. Project teams might also enjoy increased revenue for their DAOs and greater customization options. However, there are potential downsides, including concerns about increased centralization and liquidity fragmentation. It's too early to predict how this trend will evolve in the coming months and years. Nevertheless, one thing we can reasonably anticipate is that Layer 2 (L2) solutions and rollups will play a significant role in the next bull market, possibly akin to the impact of "SOLUNAVAX" in the previous bullish cycle.

Conclusion
This report aims to share some insights about the influence of narratives on price movements and how trends shape project development strategies.

If your primary focus lies in short-term price movements within the altcoin space, keeping a close eye on narratives is a prudent approach. Narratives often serve as leading indicators of capital flow and sector rotations. If your interest lies in the directions that new startups are likely to pursue, or in the upcoming iterations of existing Dapps, then closely following trends becomes indispensable.

At this point in the cycle, it is not particularly clear which narratives will emerge and capture significant market cap, even just temporarily, in the next bull market. Rollups certainly seem like they’ll play a meaningful role in whatever bull market may be coming, but the actual value accrual of that trend is much less clear. It may be fragmented and/or not all that big. There’s an argument to be made that the rollup trend will benefit ETH’s price more than anything else. It remains to be seen.

When examining the list shared earlier of 24 Narratives and their corresponding tickers, there is not a narrative on that list that we feel is a rock-solid bet right now. Things change quickly in crypto, and you could fast forward six or twelve months and the whole picture could look very different. That’s why we want to share our perspective on these narratives and trends periodically, because in crypto these sorts of views can have a pretty short shelf life. We’ll continue watching closely.

Note: Special thanks to Crypto Koryo for their excellently crafted twitter threads and Dune dashboards, from which I drew a lot of inspiration.

References
https://twitter.com/IamZeroIka/status/1702005775646761211
https://twitter.com/roger73005305/status/1702059265672741291
List of 20 important narratives and related resources
History of 2022-2023 narratives
https://twitter.com/muir_eth/status/1699432544121290878
https://dune.com/cryptokoryo/narratives
https://dune.com/benddao/benddao
https://twitter.com/TheBlock__/status/1626604996325244929
https://www.theblock.co/post/212861/nft-lending-experiences-resurgence-driven-by-benddao-and-yuga-labs-collections?utm_source=twitter&utm_medium=social
https://l2beat.com/scaling/summary

So if you ran a 2x levered Q’s position, you outperformed BTC over the last four years and you took a lot less risk. Obviously at the peak of the crypto market, the disparity between BTC and Q’s was very wide, and I would guess it’s going to open back up again in the coming years. That said, I would argue that a Bitcoin position is quite comparable to a levered Q’s position but with some nice kickers – potentially the next world reserve currency; sovereign adoption; un-confiscatable. You don’t get any of that with levered Q’s. But you also take all kinds of risks with a Bitcoin position that you don’t have with NASDAQ, so there’s a give and a take.

Outside of Bitcoin, no other crypto asset has that sort of relationship with macro factors right now. ETH or other stuff might have that relationship in the future, but not now. Both the blessing and the curse for ETH (and other L1 smart contract platforms) is that they need actual activity for number to go up. ETH is supposed to enable various use cases that entail blockchain activity. A lack of activity indicates a lack of use cases which in turn makes that blockchain less valuable. Same is true for Solana and Avalanche and Aptos and whichever other 20 L1’s – if you don’t have high levels of legitimate blockchain activity, the market cap of the L1 is in danger of collapsing. In years past, the market has been willing to assign very large market caps to projects with incredibly low levels of legitimate activity (looking at you ADA, EOS, DOT, XRP) – sell the dream, if you will. I get the sense that naivety will not be present to nearly the same degree going forward. After this many years and this many cycles and this many billions in VC funding, I would imagine the market will be more in “show me” mode this cycle than any time in the past. We should want and encourage this more sober approach. Collectively, we should demand more “show me”. It will help us increase the likelihood of not blowing up in even more spectacular fashion than the prior two cyclical blowups. This is a good thing.

Another aspect I want to bring up as it relates to “when do we run out of new ecosystem participants to burn” is the market cap of crypto that we’re starting this cycle with. You can argue when a “new cycle” begins. Is it the day a bear market ends? If that’s the case, then this cycle started after the FTX collapse, and the last cycle started in December 2018 after the BCH Hash War collapse. The December 2018 low for BTC was $3,100. ETH was $80. Aggregate market cap was $110bn. The November 2022 FTX collapse low was $15,500 for BTC, $1070 for ETH and $780bn for aggregate market cap. So we’re talking about a cycle starting position of 5x higher for BTC, 13.4x for ETH and 7x for aggregate market cap than in 2018. It’s going to take VERY significant inflows to pump the crypto market similar multiples as last cycle from these current levels. You will need the appetite for speculation to come back in a MAJOR way. It’s hard to imagine speculation returning with that kind of fervor without some major project innovations. Pepe, FriendTech and RollBit are unlikely to be sufficient. Up until this point, many crypto market participants have treated crypto like the horse track. Many believed it was the best horse track around. If that sentiment changes, a big rally where Alts broadly do multiples is challenging to imagine.

Over the last cycle, we saw tens of millions, potentially 100 million or more people come to crypto for the first time, so the increase in new crypto participants approximately matched the increases in market cap. But then look at the last 18 months. Luna. FTX. Celsius. BlockFi. Voyager. Babel. Gemini Earn. Genesis. Prime Trust. Dozens of project rugs. Dozens of hacks. Hundreds of vaporware projects. Let’s say the 2018-2022 cycle brought in 100mm new users to crypto in some capacity. What percent of those had a positive experience? What percent lost money overall? What percent were burned so bad they’ll never touch crypto again? How many took their own lives due to financial losses in crypto?

Regarding use cases with real traction stablecoins are undeniable. In 2022, stablecoins settled $11 trillion in value. Visa processed $11.6 trillion. PayPal processed $1.4 trillion. MasterCard $6.6 trillion. Some very meaningful portion of those stablecoin transactions were basically for speculation in crypto – moving stables to and from CEX’s and DEX’s and DeFi for trading and staking and lending. But even if you assumed 80% of stablecoin dollar volume was for this “meta use case” of crypto speculation, that still leaves a couple trillion dollars’ worth of stablecoin transactions in 2022 for various other sorts of economic activity. That’s a massive use case. However, it is worth considering this use case in the context of regulators. In the US, stablecoin regulations have been tightening and are set to tighten further still. The value proposition of a KYC-free global Venmo with no transaction limits is undoubtedly attractive, but is it actually sustainable? Will regulators allow it? My guess is no, and in the coming years we’ll see stablecoins fall increasingly more in-line with traditional banking rails and their requisite AML/KYC procedures.

It’s not just a lack of compelling narratives within crypto –the “micro” if you will. The macro is also challenged. Crypto has never existed in a high rates environment. We have no playbook for how this asset class will act with Fed Funds at 5%+. And the macro landscape is continuing to digest that the Fed is not going to cut early. We could easily be 12 months out from a rate cut today, and perhaps even longer. Can crypto rally with that backdrop? Once the Fed starts cutting rates from levels not seen since 2007, will the rate of change be sufficient to pump crypto? Or will you need lower absolute levels of rates? Does crypto just not work unless Fed Funds is sub-3?

So What?

Two random guys on Crypto Twitter tweeted out messages that were in alignment with topics I’ve been writing about here. The tweets can be summarized as – “Crypto feels like it’s in a winter. There’s nothing exciting going on other than maybe spot ETFs and pump & dumps. Enthusiasm has waned. Crypto is still likely to succeed, but it’s less likely than it was 18 months ago, and it will continue to be less likely to be successful in the future.”

I generally agree with that sentiment, and it leads me to believe that there is a significant chance this coming “cycle” may be crypto’s last legitimate chance to “screw it up”. We screwed up pretty hard last cycle and if we screw up that hard again, we may run out of people willing to get screwed over – crypto could slip into relative obscurity. Fighting against this outcome is a multipronged effort – I laid out some of those vectors of improvement in last month’s letter, but there are numerous others. We need to take these efforts seriously. I’m not being hyperbolic and it’s not just “bear market talk” when I say the crypto industry is potentially facing a do-or-die scenario in the coming years. Let’s act accordingly.

Market Update – Liquid Crypto Asset Investing

Source: CoinMarketCap and CoinGecko. As of 9/30/23. BCH includes SV.

Pricewise, BTC was up small in September and most everything else was about flat. That relative uneventfulness of the price actions belied a very active month of news events. Those news events just didn’t provide enough additional clarity to cause meaningful price volatility this month.

A month ago, I shared the chart below and there’s not much point in updating it because price is in about the same spot a month later. I believe the colored arrows still apply as they were presented a month ago. By this time next month, we should have a better sense of which of these arrows is materializing.

Below is another chart I first included in last month’s letter. I still think it’s the right lens to look at 2024 through-

Simplistically, a spot ETF approval should carry us higher (first yellow X), and then the halving and the Fed starting to cut rates should carry us higher still (second yellow X). There’s certainly a host of risks (e.g., Binance, macro) that could hamper that outcome, but the above chart would be the simplistic rosy outcome.

The ETHBTC chart is now a full year into its downtrend within a broader range that has lasted nearly 2 ½ years, spanning ~60%.

Honestly that’s a pretty tight price range for such a long period of time for such two different assets. And when I think about the fundamentals underneath this chart, it makes sense to me that ETHBTC would have been in a downtrend over the last year. The fundamentals of ETH have weakened vs BTC over the last year. ETH is confronting regulatory battles, whether directly or peripherally, that Bitcoin is not. ETH is confronting a slowdown in blockchain activity, whether directly or peripherally, that impacts its valuation in a way that Bitcoin’s valuation is not impacted.

To be sure, Bitcoin is not winning the Method of Exchange competition within crypto assets. It’s losing badly to stablecoins.

The above slide is from Nic Carter’s recent presentation at Token2049 on stables. You can watch it here and see the slides here. It’s worth your time.

As you can see, stables are dominating on-chain value transfer, this benefits L1 market caps to some extent, but the ugly truth is that the most-used L1 for USDT, which is the most used stablecoin by a wide margin, is Tron – very centralized and very scammy. Bitcoin’s market cap would be higher if its blockchain was the main avenue for stables transfer, but it has been able to retain very significant value ($570bn at time of writing) despite being used less and less as a Method of Exchange. That’s what I was referencing earlier when I mentioned ETH’s value declining because ETH blockchain activity was declining. Bitcoin’s value is increasingly centered around its Store of Value of characteristics, so the blockchain doesn’t necessarily have to have a lot of transaction to have a lot of value…for now. This may eventually come back to bite BTC down the road, as “security budget” concerns become top of mind for miners in a world of increasingly smaller block rewards. For now, BTC can be losing the MoE battle to stables run on scammy L1’s and still be worth a lot.

Going back to ETHBTC, I think eventually that chart breaks higher out of its long range, but it may take some time. ETH futures ETFs will begin trading next week. And assuming spot BTC ETFs get approved eventually (TBD on exact timing), it should open the door for spot ETH ETFs. I could imagine the launch of spot ETFs driving ETHBTC back to the top of that range, and assuming we get an activity-driven new bull market based on new interesting use cases for smart contracts, then break out to the upside. TBD on timing, but I wouldn’t expect that to be 1H-24 as my base case, and may not be until 2025.

As for the rest of the Alts market, I think it will remain challenged through year-end and at least the first part of 2024. Below is Aggregate Alts Market Cap.

Alt Market Cap has been ranging (red) since Luna collapsed in spring of 2022 and is potentially coiling into a wedge since FTX collapsed (yellow). I struggle to imagine how this breaks up in the next six months. I don’t see the fundamentals materializing in a way to produce inflows into Alts in the near-term that would drive that sort of price action. It’s also impossible to have a view on the direction of this chart without having a view on how the Binance situation eventually resolves. If this range collapses downward, the most likely culprit will be Binance in a lot of trouble. If it breaks up, that will likely be a world where Binance is reasonably ok. TBD there.

Macro stress picked up in September, as is so often the case, driven by a hawkish Fed meeting where Powell continued to espouse a “higher for longer” future.

This drove US 10yr yields to the highest level since immediately proceeding the global financial crisis.

The market continues to be eager to price in rate hikes into 2024 and Powell has continued to reset those expectations at every opportunity as economic data remains stronger than expected. The below chart visualizes this perfectly-

It’s been this resetting process that has been the source of so much pain in the bond market – a completely unprecedented decline in modern times –

While September brought in increase in volatility in both stocks and bonds, those current levels of volatility are yet to reach alarming levels –

While some are calling for a near-term implosion in asset prices, I don’t really see it. The market is throwing a bit of a “higher for longer” tantrum at the moment, but it doesn’t seem to be associated with the types of skeletons that will fall out of closet near-term and cause a meltdown.

Sure there’s a big commercial real estate problem-

Sure the consumer is getting squeezed -

And job openings are falling precipitously –

Which usually precedes an increase in unemployment –

But the Fed is still expecting positive economic growth next year (1.5%) and subdued unemployment (4.1%)-

Eventually the labor market and in turn the consumer is going run into real trouble. And eventually the CRE goblins will be a real problem. But neither appear to be a Q4-23 problem and probably not a Q1-24 problem.

In the meantime, we have a very strong setup for stocks in Q4 –

If stocks are higher in Q4, that means DXY is probably topping out around here –

DXY topping is generally a boon for BTC prices, all else equal. Not that I think macro has too much to do with crypto price action right now. I don’t think it does. We have idiosyncratic issues driving price action right now, both up and down and I think that will continue into Q4. But if the S&P 500 is up 5%+ in Q4 and DXY retraces back towards its local low, that should be supportive, all else equal.

The #1 bullish factor for Q4 will be an idiosyncratic one – spot BTC ETFs. And the #1 bearish factor for Q4 will be an idiosyncratic one as well – whatever happens with Binance and its knock-on effects of Justin Sun, Huobi, TUSD and TRX and potentially USDT. The interplay between those factors will likely define price action for the rest of this year.

Closing Remarks

You may recall a tweet thread I wrote in July calling out Opnx, the scammy bankruptcy claims trading platform launched by Su Zhu and Kyle Davies. You may recall I did not mince words –

Well, on Friday Su Zhu was arrested at the Singapore airport trying to leave the country (can’t believe he was stupid enough to go in the first place). He was sentenced to four months in jail, essentially for contempt of court for refusing to cooperate in the ongoing investigation and bankruptcy of Three Arrows Capital. His partner Kyle Davies is now an international fugitive for the same reason.

I took Su’s arrest as an opportunity to try and clean house a bit –

In particular, the “Flow Horse” account, which has 182k followers, and I had a few choice words -

“Flow Horse” and I went to DM’s after this exchange, and talked for a while. He saw my point. A few hours later, he posted this –

I bring this to your attention as a real-world example of all the self-regulation talk I’ve been going on about in these letters for the last 10 months. It’s not some impossible task. It’s not some pie in the sky ideal with no practical application. Good actors can be louder and if you get enough people chipping away in little ways like this, it adds up to a big difference.

Any system that needs to improve needs a feedback loop mechanism in place that drives improvement. New things are tried in the system. Some of those “succeed” and some of them “fail”. Some of them are “good” and some are “bad”. Some are “right” and some are “wrong”. I put those words in quotes because each system is different and it’s up to the system’s participants to define those terms.

Once a new thing is tried and the outcome is labeled by the group, then the system must gain insight from that experiment about what to do the same or what to do different. Those actors that are operating in good faith change their actions going forward based on those insights.

Sometimes things are done that are deemed very bad. Those actions may be so bad that the ecosystem collectively decides that the person or group that committed the actions must be expelled from the system entirely. There must be a mechanism in place for collective judgement and expulsion, where necessary. If that mechanism is lacking, the entire system is at grave risk of ceasing to improve and it may even collapse entirely. This feedback loop mechanism is not some far-fetched concept. It’s literally the foundation of civilization.

The idea that crypto would allow Su Zhu and Kyle Davies to launch a bankruptcy claims trading platform after what they did to this system is a CLEAR BREAKDOWN OF THIS VERY SIMPLE FEEDBACK LOOP MECHANISM. And when you have large voices publicly supporting these efforts, it’s evidence of the feedback loop mechanism being further broken still.

We all make mistakes. I certainly make mistakes all the time. In the context of crypto, when you have a public presence and a voice that reaches many people, there is oftentimes a need to take public responsibility for mistakes that you make-

This is a crucial aspect of the feedback loop mechanism I described above. It goes hand in hand with the statement of - “those actors that are operating in good faith change their actions going forward based on those insights.” Taking public responsibility for mistakes that you make and vowing to learn lessons from those mistakes signals to the rest of the system that you have the best interests of the system in mind with your actions. It also serves to plant a stake with your name on it next to that mistake. That way, if you keep making that same kind of mistake or enough other serious mistakes, the system can identify that deficiency and collectively decide whether to expel you entirely. Again, this process is crucially important to the overall wellbeing of the system.

For example, what if Flow Horse tweets positive sentiment around the next three scam projects launched by criminals (no doubt there will be others)? Well then, the system needs to think hard about whether this is an individual that deserves the influence that he has.

But I don’t think that’s going to happen in this case. I think he got the point and it’s going to shape his actions in the future, and likely the actions of some of the people that witnessed the whole ordeal that unfolded publicly. Perhaps 100 people that saw this exchange were impacted by it enough to change their actions for the better in the future. And perhaps of those 100, 10 will be willing to say something publicly in the future in a similar manner. Then for each of those 10, perhaps another 100 will see their actions in the future, and so on and so forth.

See where this can go? See how necessary it is? No one can honestly examine this feedback loop mechanism in place for crypto right now and say that it is operating effectively. No one can look back on the last 18 months, or the last decade plus, and make a case that we don’t need to change the way this ecosystem sorts these things out. There must be change, or the whole system is at risk of stagnation at best, and collapse at worst.

“What you owe your father is higher than the mountain, what you owe your mother is deeper than the ocean.”

– Japanese Proverb

Travis Kling

Founder & Chief Investment Officer

Ikigai Asset Management

P.S.

Included below is an incomplete list of memorable tweets from the last month. Twitter is not investment advice and my views could easily be wrong. That being said, like it or not, Twitter matters for crypto. I have no interest in being a talking head for a living and babbling about on Twitter is a long way away from being a good steward of investor capital. However, this is a community with open-source software in its DNA, and participants want to crowd-source the truth. We are shepherds of this technology. Answers to fundamental questions about this asset class are not currently clear, so having a public platform to share your views with the community is important. After all, you’re helping shape the future :)

1. Ikigai Asset Management is the trade name for a collection of advisory and consulting businesses operated by Travis Kling, Anthony Emtman, and their team.

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