Original source: Binance Research

Key Points

· What is the current state of the cryptocurrency market? Why does it seem to lack momentum? We aim to delve deeper by examining both short-term and long-term drivers.

· Most people are well aware of the market events that caused the recent sell-off, but we believe that structural factors are also underlying forces affecting market dynamics.

· We have taken a deeper look at these structural factors, launched the Binance CPT framework, and analyzed the current state of the market.

· Overall, we remain optimistic about the market outlook. Several upcoming catalysts will have a positive impact on the market in the second half of this year.

Recent Market Performance

The past few months have undoubtedly been challenging ones for the cryptocurrency market. Despite a rapid rise at the beginning of the year, it seems to have been moving sideways for some time now. The decline in June was particularly severe, with the total cryptocurrency market value falling by about 11.4% month-on-month. In recent days, the situation has eased as the market rebounded, but it is still down about 14.0% from the peak in March.

Factors behind the market weakness

The overall decline in cryptocurrency prices coincides with several market events in recent weeks. We are witnessing a "perfect storm" with several entities reportedly selling Bitcoin around the same time, which has exacerbated selling pressure and triggered negative sentiment.

· Mt. Gox: Began paying back creditors on July 5, distributing approximately 140,000 BTC (about $9 billion). To date, more than a third of the bitcoins have been distributed to creditors.

· German government: 50,000 BTC (about $3.2 billion) were transferred to centralized exchanges and market makers between June 19 and July 13.

· U.S. Government: 3,940 BTC ($248 million) transferred to Coinbase Prime on June 26. On a national level, the U.S. government remains the largest cryptocurrency holder, holding approximately $12.8 billion in cryptocurrencies.

While a massive sell-off of Bitcoin has a negative impact on the market, there are mitigating factors:

Fears of a massive sell-off by Mt. Gox creditors may be overblown: Creditors reportedly have the choice of receiving Bitcoin or fiat. Those who choose to receive Bitcoin will likely hold onto at least some of it rather than sell it on the market.

German Government Has Sold All of Its Bitcoin: The German government has sold all of its Bitcoin holdings over the past month. Like ripping off a band-aid, the pain is temporary and will not last.

The upcoming US election could tip the scales: Cryptocurrency has become a major issue in the election, reflecting its growing importance in the economic landscape. While the election outcome may not directly affect the government's Bitcoin holdings, a supportive attitude toward cryptocurrencies could lead to clearer regulations and promote the widespread use of digital assets in the United States.

Overall, the bad effects of these events may have passed, and the lasting negative impact seems limited. We also observed a rebound in market performance over the past week.

Structural drivers cannot be ignored

Most people are well aware of the market events that led to the sell-off in the past month, but we believe that structural factors are also underlying forces affecting market dynamics. This section discusses the latter.

Introduction to Binance CPT Framework

Market events often have a direct impact on asset prices and occupy most media headlines. However, there are usually multiple forces at work. Some forces may not be immediately apparent but may have similar or even more lasting effects on the market. These structural factors take a long time to take effect but are at the core of the health of the cryptocurrency market.

We categorize these structural factors into three separate but non-comprehensive areas and raise some questions to consider. Capital, people, and technology form the basis of the "CPT" framework.

Analyzing the state of the cryptocurrency market with the CPT framework

1. Capital

The rate at which new capital flows into the cryptocurrency ecosystem has slowed down. A stagnant market without new capital flows becomes a zero-sum game: if one market participant gains, another market participant must lose. In other words, we are in what is commonly known as a "player versus player" (PvP) market.

Some of the indicators we have observed include: stagnant stablecoin supply, slowing project fundraising since the market peak in March, and outflows from spot Bitcoin ETFs.

Overall, the above charts show a slowdown in the inflow of new capital into the cryptocurrency ecosystem. The velocity of capital flows has changed significantly when comparing the first and second quarters of this year. In all three charts, the first quarter shows rapid growth, while the second quarter shows a gradual slowdown. Similarly, it is probably no coincidence that the cryptocurrency market saw significant growth in the first quarter of 2024, while the second quarter saw a general decline.

Key Points:

· New capital is essential to achieving widespread sustainable growth in the cryptocurrency market. Without new capital inflows, market participants must compete with each other to obtain gains, resulting in a zero-sum game where some gain and some lose.

· Attracting new capital requires attracting investors from all sectors of the market: primary markets (such as venture capital funds and angel investors), secondary markets (such as institutional players and retail traders), and traditional finance (such as ETFs).

· While the macro environment plays an important role in driving capital flows, having a strong narrative that is easy to understand, solid fundamentals (e.g., valuation, user appeal, product-market fit), and tangible use cases will help attract and maintain investor interest, ultimately promoting a healthier and stronger cryptocurrency ecosystem.

2. People

In the cryptocurrency space and other asset classes, generating sustainable returns and income is an important motivation for many market participants. Historical performance and the belief that this good state will continue are key reasons why many investors remain invested in traditional asset classes such as stocks and bonds through ups and downs.

However, market participants in the cryptocurrency market have faced many challenges in recent months. In addition to the market events mentioned in the previous section, we believe there is also selling pressure from the prevalence of high-valuation tokens and the large number of token unlocks. In the current market environment, it is increasingly difficult to earn returns. We look at this situation from the perspective of several market participants:

· Retail investors: As the overall market and altcoins have been hit hard, most new projects launched have been on a downward trend since the beginning of the year.

· Institutional investors (primary market): Most venture capital funds may still have paper gains, but trading activity has decreased. The valuations of tokens that are about to vest are low, which reduces profitability.

· Project teams: Since part of the team's compensation is usually paid in the project's native token, lower valuations will lead to lower overall compensation for the team. Teams that do not conduct a token generation event (TGE) may remain private for longer while waiting for the market to improve. Overall, low token valuations weaken financial strength and may discourage talent from building cryptocurrencies.

· Market Makers (MM): Market makers play an important role in providing liquidity for newly listed tokens. In a sideways or bear market, newly launched tokens may not rise significantly due to low trading volumes, and market makers face more challenges in profitability.

· Regulators: Clear regulations lay the foundation for large-scale applications. Circle’s announcement that it has become the world’s first stablecoin issuer to comply with the EU’s Crypto-Asset Market Regulation (MiCA) regulatory framework is undoubtedly a positive development. As a popular regulated stablecoin, USDC will play an important role in promoting trust and adoption of crypto assets.

Over time, market participants will exit the market or reduce trading activities due to stagnant or declining total portfolio values. We have observed this phenomenon happening over the past few months, with trading volumes declining since the peak in March.

As mentioned earlier, we believe that the difficult market environment stems from structural challenges. In Binance’s previous report Analysis of the prevalence of low circulating supply and high valuation tokens, we highlighted the problems associated with the prevalence of low circulating supply and high valuation tokens. The general consensus is that this market structure will not bring sustainable upside to the overall market after the token generation event (TGE). This is particularly evident when we compare these new tokens with those launched in the past few years: the market capitalization (MC) to fully diluted market capitalization (FDV) ratio of tokens launched in 2024 is the lowest in recent years, indicating that a large number of tokens will be unlocked in the future.

Notably, it is estimated that approximately $155 billion worth of tokens will be unlocked from 2024 to 2030. The influx of tokens into the market will create selling pressure if there is no corresponding increase in buy-side demand and capital flows.

Key Points:

· The prevalence of tokens with high valuations and low initial circulating supply poses a structural challenge to long-term sustainable returns.

· Following Binance’s last report, we have observed an increase in awareness and discussion of this phenomenon, prompting more investors to research token economics on their own to avoid any risk that could lead to losses.

· To further foster a healthy and sustainable market environment, Binance is also committed to supporting high-quality projects with small and medium market caps.

3. Technology

The past year has seen significant technological advances in the blockchain and cryptocurrency space, some of which will have positive long-term impacts (such as scaling solutions) while others address immediate needs (such as improved user experience). These initiatives are critical to making it easier to attract more users to the cryptocurrency space.

User-centric developments such as features that make on-chain transactions smoother (e.g., Solana blockchain links and intent-based architecture), tools that simplify processes (e.g., account abstraction and trading bots), and DApps that can attract a wide user base (some decentralized social DApps have achieved some success) are some examples of simplifying the user experience and lowering the barrier to entry for non-crypto natives.

Admittedly, we still have a long way to go to attract the next billion users. Currently, capital is still flowing significantly into infrastructure projects, which are critical to the ecosystem and form the most fundamental cornerstone. However, many infrastructure projects tend to be developer-facing platforms (e.g., blockchains), while DApps are consumer-facing frontends for user interaction and attention. The proliferation of Layer 1 and Layer 2 has led to fragmented liquidity and may not help in attracting attention.

Key Points:

· Technological progress and innovation play an important role in attracting a wider and more diverse audience to the cryptocurrency ecosystem. By providing real use cases and real value, we can attract individuals who are not just looking for financial gains.

· While infrastructure projects are important, they receive more attention and funding than normal. Investing some resources in developing practical, diverse and innovative DApps may help expand the reach of the cryptocurrency ecosystem and attract more users.

Upcoming Catalysts

Despite structural challenges, we remain optimistic about the outlook for the second half of this year. Several upcoming catalysts may drive the industry forward.

· Spot Ethereum ETF approved: Multiple media outlets quoted sources as saying that this may happen around July 23. New capital inflows will increase demand for ETH, and as a rising tide lifts all boats, this will drive a general recovery in the market. Note that the effect may not be immediate (see what we saw after the BTC ETF was approved in January).

· Macro Environment: With inflation showing signs of tapering off (the latest CPI data fell for the third consecutive month and was lower than expected), traders are currently pricing in lower interest rates in September. Lower interest rates reduce the cost of money, which typically stimulates multiple different markets and could be a potential bullish factor for both the stock market and the cryptocurrency market.

· US Presidential Election and Bitcoin Conference: Polymarket currently predicts a 70% chance of Donald Trump winning the upcoming November presidential election. The Trump campaign accepted cryptocurrency donations in May and has become increasingly vocal about the future of digital assets. Trump also announced crypto-friendly Senator J.D. Vance as his vice presidential pick. The senator has disclosed holdings of between $100,000 and $250,000 in BTC and has spoken positively about blockchain technology. Trump’s comments will be in the spotlight when he speaks at a Bitcoin conference in Nashville on July 27.

· Impact of Bitcoin Halving: Bitcoin prices typically move higher in the 6-12 months following a halving. While past performance is no guarantee of future results, this timing roughly coincides with the Federal Reserve (Fed) September meeting and the U.S. presidential election.

Conclusion

Market cycles always have ups and downs. Pullbacks are a common phenomenon and can even help restore healthy levels when markets are overly volatile.

At this time, it may be helpful to take a broader view, look to the future, and re-examine your strategy. Are you a long-term investor in cryptocurrencies in your portfolio? Perhaps you believe that cryptocurrencies have the potential to fill gaps in traditional systems, introduce new ways of operating, or become an important asset in your portfolio. If so, you can take advantage of market pullbacks to add to your portfolio. If you prefer to be risk-averse, then you can evaluate your investment horizon and liquidity needs. Sometimes holding can be a good strategy.

This article is from a contribution and does not represent the views of BlockBeats.

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