Original title: "Blowing the bull market horn, analyzing market vitality (2023 summary and new year outlook)"

Original source: Jocy@IOSGVC

Editor's note: This article is the 2023 summary and outlook published by Jocy, founder of the crypto fund IOSG Venture, on X. The rhythm BlockBeats organizes it as follows:

1. The scale effect growth brought by effective supervision

Binance's regulatory boots have landed, and many people regard it as negative news in the industry. It is "Crypto The biggest unicorn finally compromises with the regulators. However, in my opinion, this means that the biggest potential risk minefield has been removed, the overall risk of the industry is controllable, and it is moving towards a regulated market direction, which will also accelerate the promotion and implementation of ETFs.

We can imagine: Currently, CME's trading volume accounts for more than 25% of the entire BTC Futures (verifying the conjecture that traditional institutions have entered the market in large numbers). As US regulation weakens, BTC's trading volume on compliant exchanges (such as Binance/Coinbase) will occupy a major market share, and we may even see Nasdaq directly listing BTC and ETH. In this case, how big is the daily BTC trading market? Under the US debt crisis, the Federal Reserve and the Democratic Party seem to have reached a consensus on some kind of crypto governance, and they are likely to be playing a big game. The fact that regulation can shake hands with the crypto market is one of the factors that is good for the industry, which will allow the industry to move towards a broader market.

2. The data tells us that the bull market has begun to return (see Figure 1)

Currently, we can see that three events are getting closer and closer to alignment in the next few months:

The first is the accelerated approval of the ETF mentioned above (this will become an inevitable event, and Wall Street’s seizure of Bitcoin pricing power will also become a certain event);

The second is that the Federal Reserve has begun to take interest rate cuts when inflation peaks and falls (according to the current debt situation of U.S. bonds, interest rate cuts will also become a more certain event);

The third is the halving of Bitcoin production within our industry and the iteration of infrastructure Layer2 and application innovation in the Ethereum ecosystem.

These three things will happen simultaneously in the next six months, which means that the industry will start to pull back from the current market and have the opportunity to impact a stronger bull market.

We can analyze the historical bull-bear cycle rise and fall data (quoted from IOSG internal data analysts) to verify the current market situation. The median decline in the historical bear market cycle is -77%, and the average decline is about -75% (the recent bear market cycle just fell by 77%). The median price increase in the bull market cycle is 15 times, and the average increase is about 60 times.

As for the duration of the cycle, the median duration of the bear market cycle is 354 days, and the average duration is 293 days (the recent bear market cycle duration is also close to 354 days). For the bull market cycle, the median duration is 604 days and the average duration is 571 days.

Analyzing historical information is valuable for understanding the cyclical nature of the market. We are currently buying into the middle of a medium-length bull market cycle and are entering the climbing phase of this round of cryptocurrency bull market.

3. Continuous ecological innovation, Ethereum is too big to fail

Regarding Ethereum's ecological innovation, we have to mention the DevConnect conference in November. This is the grand event where the most crypto developers gather this year, and it is also the event where V God appears the most on different occasions. Can we sort out what happened at DevConnect?

Continuously strengthening infrastructure: New technologies and market segments have emerged. In L2Day, zkDay and zk Accelerator, we have seen many ZK and L2 protocols learn from each other and compete to appear on different stages. After the innovative protocols based on zkRollup, including Risc0/Nil Foundation, and Scroll/zkSync/Aztec, all begin to compete for the mainnet launch, a diversified ecological pattern will be presented.

1) ZK Coprocessor is a promising direction for us. This direction includes Axiom, Brevis, Lagrange and Herodotus. The application prospects currently described by Axiom are simple and easy to understand. One of the biggest differences between CEX and DEX is the Referral Program and loyalty program. The more users you attract, the more transactions you make, the more revenue you earn, and the more handling fees you can reduce. Axiom hopes that DEX can also have these plans, which can help Uniswap count all relevant interaction data on the chain. Calculate each user's new users and transactions in a trustless and secure way, and provide subsidies.

2) Different protocols on the Layer3 and Raas tracks are also beginning to compete, including Conduit/Caldera/Gelato, etc., and are beginning to launch different application chains based on games/social/Defi. Due to the Israeli-Palestinian conflict, many developers with Jewish backgrounds did not attend this conference. Even so, you can still see countless developers and founders constantly promoting their Rollup as service solutions to the market. This is a valuable early market! For a moment, I was sitting in a coffee shop, surrounded by L2/L3 founders from different backgrounds. They kept pitching their solutions on how to better help applications deploy on the chain and provide industry application experience equivalent to Web2. This is a bit like the early Web1.0 market around 2000 and the eve of Saas preparing for a large-scale outbreak around 2012.

Many people say that the Ethereum network is very slow to innovate, and many modules are subcontracted to technical teams in different developer communities, but in fact, it also verifies its strong network effect. The mainstream L2/L3/DA projects mentioned above are all helping Ethereum to better solve performance and use case problems. Under the wave of competition in technology development, it seems that the entire crypto ecosystem, whether infra/dapps/vc, has become an employee of the Ethereum network. Everyone does not receive a salary but works together to contribute to the growth of this network.

3) Some recent new development directions are also inseparable from the hotly debated technologies, such as distributed GPUs and ZKML. Bittensor's narrative and increase shocked many people, and in the same field, Gensyn, which has a seed round valuation of $500 million, has also attracted attention. They are all committed to bringing decentralized AI computing to users.

This hot field is not a castle in the air, and there are no application scenarios. A game developer once showed me how they combined Crypto and AI. Their demonstration surprised me with the natural close connection between Crypto and AI. Based on ZKML technology, they developed a full-chain football game platform for 5 players to play autonomously. Every pass and goal is supported by ZKML, and the game results are automatically uploaded to the blockchain. Players can set different strategy models (ZKML) to play against each other (similar to the previous practice of using Bot/AI strategies in Dark Forest).

Although there are still differences in discussion and user acceptance around on-chain LLM and ZKML use cases, I believe that we will soon witness more AI-centric crypto platforms. Recently, Vitalik also mentioned "d/acc" (decentralized acceleration), and we will see new projects from Unibot and former Flashbot founder Stephant in the future, which will attract more new users to change their trading habits and start using Bot-based trading methods.

The last direction is to return to fully on chain gaming. I have mentioned this direction before. I want to share with you a young game genius developer Small Brain I have seen - Word3, Drawtech, and Gaul, who designed exquisite full-chain games. The designers behind them not only developed many outstanding gameplays and created games with blockchain characteristics, but also called on a group of like-minded developers to quickly iterate on mud with their unique opinions in the AW community. They are moving towards the goal of launching a new full-chain game every six weeks and have made many interesting experiments.

I think Ethereum's skeptics have overlooked the compatibility and evolutionary capabilities of Ethereum itself, especially when new application products encounter bottlenecks, Ethereum can absorb new technologies the fastest, solve bottlenecks (tps, gas fees), and provide solutions to the problems encountered by most applications. The new alt L1 has no obvious advantages in the segmentation of application scenarios.

In this cycle, Ethereum has two particularly typical network expansion modes that are different from the past.

The first is currency and "security" output, through LSD assets, this extension similar to the US dollar, output to various Layer2, altchain, restaking protocol, DA protocol; With the spillover of Ethereum LSD, Ethereum currency expansion will greatly enhance the network benefits of Ethereum, which also makes the characteristics of ETH's moneyness and store of value more obvious;

The second is technology absorption and mergers. In each cycle, Ethereum absorbs new technology paradigms based on the failure of new platforms in the past. Whether it is POS, after four or five years of observation and summary, it was finally implemented; or expansion, from Plasma, sharding to various rollups, all are lessons learned from many failed projects. In an open source system, this ability is equivalent to the tens of billions of US dollars of R&D sunk cost invested by most competitors in the past few cycles, and this is all Ethereum's investment capital. I don't think any platform (including Bitcoin) has benefited as much as Ethereum in this regard. Fortunately, after this cycle, Ethereum has not stopped absorbing and merging.

What reasons do we have to question Ethereum? Even in a bear market, there are still countless projects and developers creating different products and protocols on the Ethereum network, and there are still tens of thousands of developers and projects creating new module components on this network regardless of returns. All Web3 funds and investors cannot avoid investing in the Ethereum ecosystem, which means that with the current market value of ETH at hundreds of billions of dollars, they will continue to bet hundreds of billions of dollars on Ethereum ecosystem projects, and Ethereum will become bigger and bigger and will not fall!

4. BTC Ordinals Ecosystem Must Be Mentioned

With the rapid recovery of the market, Bitcoin, as the favored child of heaven, many Bitcoin ecological projects have begun to compete with each other with various themes. It is extremely difficult to think about Ordi's value proposition from the perspective of Bitcoin fundamentalism. As the totem of the crypto world, Bitcoin's core function is value storage. Bitcoin has gained wider social acceptance, with increased consensus, value appreciation, institutional entry, ETF expectations, Bitcoin halving and many other factors appearing together. Ecological prosperity is inevitable in the accident; whether it is Bitcoin Layer 2, Ordinals or other protocol applications, they should first respect and protect the core of Bitcoin, that is, value storage.

The rise of Bitcoin meme and NFT assets has a lot to do with the retail investor movement against VC "fair offering" behind it; after all, under the leadership of VC, retail investors can only eat bones, and the soup and meat are eaten by VC. Compared with the ICO era, the valuation threshold for retail investors is too high (Ethereum's ICO in 2014 was only valued at 23 million US dollars). The secondary market for a type of project is basically billions of US dollars in FDV. For retail investors, EV is too low.

It is under this market structure that retail investors have launched the current "Occupy Wallstreet" in the currency circle. However, this trend itself is also unhealthy. There were a large number of "fair sale" projects during the DeFi Summer, but in the end, the "fair sale" was a short-term, quick and messy pump and dump project, various simple and crude forks, from "one-month tour" to "one-day tour", and bad money drove out good money;

Finally, after a cycle of great waves, there are few "fair sales" left, and the remaining long-term developments are still old projects that have been tested and have a good financing structure. Long-term projects require long-term capital risk investment, and short-term "fair sales" are difficult to support the development of long-term ecology. The reason why mainstream crypto institutions have not followed up too much on the Bitcoin technology ecosystem is that there is indeed no substantial technical scalability. It is more of a retail investor sentiment call under the label of "fair offering" (of course, it is not ruled out that some institutions and exchanges manipulate such sentiment).

We do not support technical applications that threaten the robustness of the Bitcoin native network. Emotional speculation cannot last long. The brc20 protocol technology still has many shortcomings. As institutional investors, we do not encourage speculation, but are willing to support more valuable and meaningful builders to bring more protocols with ecological value.

Therefore, the crypto market is a big dye vat. The current brc20 tokens such as Ordi have amplified speculation and price speculation. I believe that many people will make a lot of returns from it, but when we do more profit-seeking transactions without thesis drive, we will gradually get lost and lose money on some projects for the same reason.

So if new friends who are preparing to enter the market see this push, or if some of your family and friends are about to start buying under the FOMO mood, I hope everyone can do a good job of mobilizing this kind of thinking and remind them of the risks, so that they only need to choose between BTC/ETH, which is the simplest and least error-prone path. It is very difficult to abide by principles in investment. Hype and meme bring wealth effects, but how to not only see these in the crypto market, but also go beyond hype and meme to support those protocols with more value propositions and application prospects will also become an important responsibility and responsibility of the industry beneficiaries.

Thanks to Mindao Teacher/Wendy/Fiona for the modification suggestions

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