“That’s Our Two Satoshis” - A Disappointing 2Q For Digital Assets

Jeff Dorman, CFA
Jul 1, 2024

Thats Our 2 Satoshis Logo

Screenshot 2024-07-01 at 9.25.42 AM
Source: TradingView, CNBC, Bloomberg, Messari
A Rough Quarter Despite Positive News
Here are some pretty surprising stats:
  • Bitcoin finished the 2nd quarter of 2024 down -12.11%.  
  • The Bloomberg Galaxy Crypto Index (BGCI), which is largely weighted towards BTC and ETH, finished the quarter down -16.65%. 
  • The S&P Cryptocurrency BDM Ex-MegaCap Index (SPCBXM) excludes BTC and ETH and, therefore contains mostly “altcoins,” finishing the quarter -29.97%.  
  • Meanwhile, the S&P 500 finished the quarter +3.92%.  
In short, crypto got hammered while stocks reached all-time highs, even though the Bitcoin halving occurred in April and the largest U.S. regulatory 180 in history happened in May (which we called at the time the most important week in digital assets history).  
The industry is surrounded by tailwinds (new ETF flows, the shift in Washington, multiple legal victories, new successful products in gaming, RWA, AI, DePin, and SocialFi), and yet a few short-term market headwinds related to increased supply pressures (government coins, Grayscale, VC unlocks, new issuance) are going to shake many investors out of the market ultimately. 
While there is no guarantee that prices will rebound, it’s about as safe a bet as the digital assets market has ever faced.  Positive news plus negative price action is usually a time to buy. 
The “So the SEC Said You’re a Security” Investing Playbook
The U.S. SEC sued Consensys Friday, alleging MetaMask's swaps and staking products violated federal securities laws. The suit also targeted Ethereum staking services Lido and Rocket Pool, referring to their popular stETH and rETH tokens as unregistered securities. Unlike two years ago, when this would lead to an immediate delisting of the tokens in question and a turtle-in-shell market response, today, the market just shrugs this off. For good reason.  
The "SEC said you're a security" investing playbook is as follows:
  1. Securities aren't illegal.  It’s ok to invest in securities.
  2. If a token IS a security, it only affects the issuer of the token, and the exchanges who list these tokens (requires different rules/disclosures).
  3. Issuers and exchanges are now fighting back, and often winning.  The exchanges no longer delist these tokens, and issuers no longer live in fear.
Therefore, from a market perspective, it is safe to ignore these allegations until actual laws are in place.
Enough With the Lockups and Airdrops
Recently, airdrops and lockups of tokens have been actively debated in digital assets. There is a lot to unpack here, and none is good. 
For starters, ICOs actually worked really well. Early-stage projects were able to sell tokens to its’ community, find a market-clearing price via a sale, and create sticky users and evangelists in the process. While most likely illegal under securities laws, let's not forget that this was still a good process.  Early-stage investors became the product’s first users, and the growth of a token and a project happened simultaneously.
Fast forward to today. ICOs are illegal, so the market had to adjust, and the adjustment is WAY WAY WAY worse. All token sales are now done via private 144a transactions to AIs and QIBs only (i.e. VCs), eliminating the community's ability to benefit early, and driving prices up in the private markets before retail can participate. These VCs have so much power and control over exchanges and market makers that they mark these tokens way higher before listing them on exchanges, and the price inevitably falls like a stone once listed because retail is (rightfully) balking at these tokens at multi-billion dollar valuations. 
However, the founders still wanted to get tokens into retail users' hands, so they started airdropping (gifting) tokens to users of their products. The problem is that people value things based on what they paid for them, and when you don't pay, you don't value them. As a result, airdropped tokens are getting dumped immediately.  
The biggest problem in digital assets capital markets is that there is no "market clearing price" based on what someone would actually pay for it. You need buyers to dictate the price for a seller.  Letting market makers, exchanges, and VCs dictate the price in a completely arbitrary process is a recipe for tokens being dumped the second they hit the public markets. 
We’ve discussed some potential fixes recently. Unfortunately no one is incentivized to change the system.  
The Bitwise Marketing Campaign
Let me start by saying that I love Bitwise, and I am by no means a marketing expert.  But I do not understand the new Bitwise marketing campaign.  Bitwise dropped a series of ads last week (see here, here and here), and all of them carry a similar theme:  Traditional finance is old and out of touch, while crypto is new and better. 
Forgive my ignorance, but who is this resonating with?  Bitwise is attacking “big finance” to sell the merits of a new technology, even though Bitwise’s largest product offerings are ETFs, which jams this new T+0 technology into the old antiquated T+1 box of big finance.  Doesn’t that seem both hypocritical and uninviting?   
Clearly, I’m in the minority.  The crypto Twitter reaction was naturally to love these ads.  But crypto people already love crypto – you won’t win any new investors by telling people what they already think.  And non-crypto investors who have been making money hand-over-fist for decades in the stock market aren’t going to watch this and say, “yeah, even though big finance works perfectly fine and makes me tons of money, I’m going to switch to crypto because it’s cool”.  It’s generally not a good idea to tell people how they are doing something wrong. 
Bitwise and others marketing Bitcoin and soon-to-be Ethereum ETFs need to market Bitcoin and Ethereum.  That’s what you’re buying.  Bitcoin is digital gold; Ethereum is the Apple app store.  That’s the selling point.  There’s no question that blockchain has some technological advantages over traditional finance, and many companies and projects are trying to take advantage of this new technology by cutting out the middleman and traditional finance altogether. But Bitwise is not one of them.  They are actively utilizing Big Finance by selling old, antiquated ETFs. 
Consider me confused, and I’d love to understand what I’m missing here.


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

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