Original title: The Current State of Crypto: Bearish or Bullish?

Original author: Ignas | DeFi Research, DeFi analyst

Original translation: Deep Tide TechFlow

To be honest, I have been bullish since mid-2023, but my confidence has recently begun to waver. This is actually a good sign, indicating that the market is recovering. I have also received more and more private messages from veterans in the cryptocurrency circle who are concerned about the market, especially ETH's recent poor performance. This is another comic reversal signal. Looking back to March, the consensus of the market was to follow the typical 4-year cycle. This seems too simple, and it turns out to be true! But how bad is the situation? I want to jump out of the Twitter bubble and see the data myself. So here is a snapshot of some data points to help us understand where we are currently and prepare for the next changes.

U.S. ISM Manufacturing Index

This may seem like a strange place to start, but let me explain. A year ago, I shared Delphi Digital’s catalysts for the upcoming bull run in a post. It makes sense to review previous predictions to learn important lessons.

In their analysis, Delphi details the “heavyweight” and “lightweight” narratives that will dominate the cycle.

The heavyweight narratives include the Fed’s liquidity cycle, wars, and new government policies. Delphi accurately predicted that Grayscale’s court victory would drive the emergence of a BTC ETF, but they (and others) did not expect that an ETH ETF would follow.

They also successfully predicted the surge in SOL, the emergence of AI Token, and the dominance of memecoin. Huge respect for that.

But there is one thing they seem to do better than others. Check out the chart below.

They wrote: "The US ISM, one of the best predictors of asset price trends, currently looks to be approaching the bottom of its two-year downtrend. Stock markets have already begun to react to this..."

“It is amazing how precisely the ISM tracks the trajectory of previous cycles, including the timing of peaks and troughs. Every 3.5 years, it repeats like clockwork.”

They correctly point out that the ISM can predict the price of BTC. However, the big problem is that the US ISM manufacturing index reversed its bullish trend in 2024 and began to decline.

The US manufacturing sector has contracted for the fifth consecutive month, with the index falling to 47.2 points. The ISM Manufacturing PMI index missed last month’s expectations of 47.5 points. Source: The Kobeissi Letter.

The US ISM index affects cryptocurrencies by influencing economic sentiment, risk appetite, and the strength of the US dollar. A weak index can lead to reduced risk investments and selling, while a strong index boosts market confidence.

In addition, it also affects inflation and monetary policy expectations, usually rising interest rates or a stronger dollar have a negative impact on cryptocurrencies.

If the US ISM is one of the best indicators predicting asset prices, we need to keep a close eye on the trend to catch the opportunity of a bullish reversal.

Crypto ETFs

Our new ETFs are facing a tough time.

In 8 of the past 9 days, the BTC ETF has seen outflows totaling $1 billion. This is the longest period of negative outflows since the ETF was launched.

Source: Jim Bianco on X

It got even worse.

On Friday, spot BTC closed at $52,900, exposing ETF holders to a record $2.2 billion in unrealized losses, equivalent to a 16% loss, according to Jim Bianco. At the time of writing, the situation has improved slightly.

He also noted that the buyers of the ETF are not institutions or baby boomers, but small "tourist" retail investors with an average transaction size of $12,000.

According to crypto quantitative analysis, most of the inflows to spot BTC ETFs come from on-chain holders transferring funds back to traditional financial accounts, so the "new" funds entering the crypto market are very limited.

The institutions involved are mainly hedge funds that focus on basis trading (profiting through funding rates) rather than directional investing. Wealth advisors are not very interested in this.

As a result, baby boomers have not yet participated.

However, the situation is getting worse. Just look at the fund flows of ETH ETFs.

Did you notice those zeros?

ETH ETFs are not even attracting retail interest. Even Blackrock's ETHA has only seen inflows on two of the past 13 days. And the cumulative fund flows of all ETF issuers are negative.

The sell-off by ETH big players since July is another blow to the market.

The only good news is that Grayscale ETHE has not sold ETH on a large scale. Grayscale still holds $5 billion in ETH, but with daily inflows below $10 million, the demand for the ETF is not enough to absorb these outflows.

Although the data seems unfavorable, I share my optimistic view on ETH below. Since that post, the discussion about the ETH roadmap and the value enhancement of L2 to L1 has become increasingly heated. I am optimistic that the community can finally start focusing on the value accumulation of L1.

What are venture capital firms doing?

One of the most confusing issues in this cycle is the low amount of fundraising. While BTC has rebounded, fundraising activity is still lagging, and I have been updating the chart below to reflect this.

VCs may know something and are less optimistic about the industry, or they are chasing highs like retail investors. My exchanges with some VCs show that VCs in the crypto field are like retail investors, but with more funds.

While total fundraising is much lower than in 2021, the median pre-funding valuation almost doubled from $19 million in the first quarter to $37 million in the second quarter, close to historical highs.

According to Galaxy’s 2024 Q2 VC Report, despite limited available funding, competition and FOMO have driven up valuations, especially among early-stage startups.

This phenomenon is understandable. As cryptocurrency prices rebound, VCs are scrambling to invest in a handful of quality protocols. For example, Paradigm chose to support its competitor Symbiotic after failing to participate in Eigenlayer’s investment.

Another interesting phenomenon is that despite lower retail interest, Web3, NFT, DAO, Metaverse, and Gaming projects are leading in fundraising, raising a total of $758 million in the second quarter, accounting for 24% of total VC capital.

Among them, the two largest deals were Farcaster ($150 million) and Zentry ($140 million). Infrastructure, Layer 1, and Trading categories followed closely behind. It is important to note that the combination of cryptocurrency and AI still attracts only a small amount of capital.

I feel that there is currently a low demand for games and the metaverse. At my DeFi creative agency Pink Brains, we hired someone to be responsible for research and community building for GameFi and the metaverse, but we had to pause this project due to low interest in games.

Interestingly, Bitcoin L2 raised $94.6 million this quarter, a year-on-year increase of 174%, which shows that venture capital's interest in the BTCFi ecosystem is increasing.

Investors are still full of expectations for the Bitcoin ecosystem, believing that more composable block spaces will emerge, thereby attracting DeFi and NFT models to return to the Bitcoin ecosystem. ——Excerpt from Galaxy's Q2 2024 Venture Capital Report.

In addition, Galaxy reported that early-stage deals accounted for nearly 80% of investment capital in the first quarter, with pre-seed deals accounting for 13%. This shows that the market is optimistic about the prospects of cryptocurrencies.

Despite the challenges faced by late-stage companies, new innovative ideas are still attracting the attention of VCs.

I personally feel that fundraising activities have decreased because there are very few new private messages inviting me to participate in KOL rounds.

However, I usually do not participate in KOL rounds because I do not think I have a special advantage in the private market. I prefer to choose investments with higher liquidity and hope to maintain the independence of content.

On the current situation of L2 - Base is a bright spot, while others are relatively inferior.

The good news is: activity on L2 is growing rapidly. The number of active wallets and weekly transactions are increasing, and the transaction volume of decentralized exchanges has also been on an upward trend for a year.

Steakhouse on Dune

However, Base is growing much faster than others. Please see the blue line in the chart representing the number of weekly active wallets.

Base continues to attract new users while other L2s lose users. This growing dominance is particularly evident in the number of traders on decentralized exchanges, where Base holds a whopping 87% of the market share!

So, what’s going on?

Base debuted its Smart Wallet during the Onchain Summer event. While the ability to create a wallet through Passkeys was novel, I mainly minted multiple NFTs through the app just to experience it.

However, the real highlight of Base this summer was the speculation around meme coins, which greatly drove trading volume and wallet counts to all-time highs. As you can see, Base and Solana were the main drivers of most new token issuance on decentralized exchanges.

Source: Archimed Capital

It’s surprising that even though the meme coin craze has faded and summer is over, trading volumes have remained high.

This may also have something to do with the airdrop: multiple crypto industry insiders I met during my time at KBW speculated that Base Token is a strong possibility. So, make sure to create your smart wallet and try an app or two. Farcaster might be a good choice :)

About SocialFi

Despite some complaints about Racer and Friend Tech, SocialFi is another area that has seen significant growth in users.

While Farcaster and Lens have a higher profile on X, APAC’s OpenSocial Protocol recently hit 100k DAU, surpassing Farcaster’s 65k and Lens’ 25k combined. However, few on X seem to understand the specific features of OpenSocial. Solana-backed DSCVR has also quietly hit 60k DAU with little notice.

Despite my losses on Friend.tech, I remain bullish on SocialFi. SocialFi is one of the few sectors in crypto that has transcended pure speculation. Vitalik Buterin mentioned in an AMA that he is most optimistic about the decentralized social media space.

Yano pointed out that OpenSocial has been overlooked because crypto news media and X are mainly dominated by the West, while OpenSocial originated in Asia: Indonesia, Vietnam and India are its main sources of users, and the United States ranks fourth.

OpenSocial is committed to building a decentralized social platform that gives creators and communities full control over their social networks and data. Users can build and manage their own social applications, communities and assets without relying on large platforms such as Facebook or Twitter. This provides users with more control, ownership and opportunities to profit from content interactions, making social media more open and fair.

Similar to Lens and Farcaster, OpenSocial is a platform that hosts multiple applications and interfaces. Of these, Social Monster (SoMon) leads in daily active users, although the current experience still has many holes…

The point to make here is that the cryptocurrency narrative is often dominated by Western audiences, but in reality, real users around the world may use cryptocurrency in a different way than described by the crypto OGs on X.

Quick Charts to Understand Current Market Conditions

I wanted to share a few data points to help you understand the current state of our market.

According to the IPOR Stablecoin Index, on-chain leverage has subsided as borrowing rates have returned to pre-2023 market rally levels. Borrowing rates had surged during the airdrop activity, but many investors chose to close their revolving positions due to the poor performance of the airdrops.

We can also clearly observe a leverage reset on Bitcoin open interest rates.

Note that funding rates were higher in March, turned negative in April, and were negative again in July and August. Negative rates mean that shorts need to pay longs, which is usually a sign that traders expect the market to fall.

Note that funding rates were higher in March, turned negative in April, and were negative again in July and August. Negative rates mean that shorts need to pay longs, which is usually a sign that traders expect the market to fall.

Note that funding rates were higher in March, turned negative in April, and were negative again in July and August. Negative rates mean that shorts need to pay longs, which is usually a sign that traders expect the market to fall.

However, open interest (OI) is now back to positive.

Another bullish indicator is miner selling. Miners seem to have stopped selling and are accumulating Bitcoin again.

Perhaps a more bullish chart is the stablecoin supply: their total supply is continuing to grow.

However, the biggest difference is that USDT's supply is increasing, while USDC's supply is decreasing from $55 billion to $34 billion. Why is this happening?

First, the Silicon Valley crash caused USDC to depeg, which marked a peak in USDC supply. Nic Carter proposed another possible explanation: US policies are driving investors to less regulated offshore stablecoins, so USDC's growth is stagnant while USDT is expanding.

If this is the case, then the US's pro-cryptocurrency regulatory policies may be a favorable factor driving USDC's rise.

Regarding regulation, the US Securities and Exchange Commission (SEC) collected $4.7 billion from crypto companies in 2024. This is a 30-fold increase from 2023.

These funds could have been used for cryptocurrency investments, but they went to government officials rather than the real victims in the crypto field.

Of course, most of this was the $4.47 billion settlement reached with Terra. The good news is that Social Capital’s report states that “the SEC is issuing fewer fines but increasing the size of the fines, focusing on high-impact enforcement actions that set precedents for the industry as a whole.”

This is not a good sign. We need the current government to change its negative attitude towards cryptocurrencies, or be replaced by new policies.

Summary: Will the market go higher or lower?

The current situation does not look optimistic.

The ISM index fell, the demand for ETH ETF was weak, and the risk investors were cautious. These are not ideal market conditions. However, this is the process of the market self-healing. In fact, when everyone is panicking, it often means that we may be closer to the bottom of the market than we think.

While there are a lot of bearish data, there are also many positive signals. L2 solutions are performing well (especially Base), social platforms such as Farcaster and OpenSocial are growing, and market leverage has been cleaned up. Although the market has cooled down, it remains active in some key areas.

The current regulatory environment is quite confusing. The SEC has been exerting pressure on the cryptocurrency field. We need a change in US regulation or a change in leadership to curb this. Pro-crypto regulation could be a catalyst for the market to rise. Until then, pressure remains. However, even if the Democrats come to power, they may need to deliver on their promises by increasing the money supply. In such an environment, Bitcoin is the most advantageous asset.

Ultimately, markets don't move in a straight line. We are in a phase where market sentiment is volatile, but this is not a big deal. Stay focused, pay attention to the data, and don't get affected by market noise.

Bullish trends are often not obvious until they are obvious. In short, I am still bullish on the market outlook.

Of course, I could be wrong.

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