Source: TradingView, CNBC, Bloomberg, Messari
FTX and Bybit: A Symbol of the Road to DeFi
This is one of the most confusing investment environments we’ve seen as digital assets investors. We’ve written for weeks about the disconnect between sentiment and fundamentals, but there’s also a curious lack of correlation. Whenever digital assets move up in tandem with other global markets, you often hear about how digital assets are just “speculation beta”, which is a way of trying to discredit rising crypto prices. But you don’t hear much about that when the correlation completely breaks down,
which happens just as often and is happening again currently. The true sign of an uncorrelated asset class is that the short-term correlations come and go with no real rhyme or reason. At times, throughout the past few years, we’ve highlighted certain areas of the digital assets ecosystem showing strong short-term correlations with the Nasdaq, gold, the Chinese Yuan, the U.S. dollar, interest rates and AI stocks. None of these correlations have held over longer-term horizons, as longer-term correlations between crypto and other risk assets remain close to 0. The charts below show the Bitwise 10 Index vs SPY, GLD, and TLT over the past four years. As you can see, none of these relationships are statistically significant.
Recently, you may have noticed that:
- Gold is near all-time highs
- U.S. equities are near all-time highs
- Credit spreads are at all-time tights
- The VIX (prior to Friday) has continuously been depressed
- Interest rates have fallen 50 basis points from the recent highs
- The DXY has fallen precipitously from recent highs
- Bitcoin is still hovering near all-time highs
And yet, the rest of the digital assets market is getting outright smoked. Since mid-December, most tokens are now -30-80%, with a few exceptions. And this selling has largely been broad-based, with little differentiation between sectors. So it’s not just that correlations have evaporated versus other asset classes, but it’s also that correlations have increased within the asset class.
Which is why this week’s FTX and Bybit news serves as a reminder that
- Decentralized Finance is eating Centralized Finance’s lunch and
- Investors do not seem to care one bit
On February 18th, FTX began repayments to creditors as part of the bankruptcy reorganization plan, which will distribute nearly $17 billion back to customers at roughly ~120% of their account value at the time FTX filed for bankruptcy in November 2022. While that sounds great, compared to the November 2022 record date, BTC is now trading ~6x higher, SOL is up ~11x, and ETH is up ~2x. Creditors who trusted this centralized counterparty with their assets have still lost a ton of value despite the high dollar-based recoveries.
At the same time, Bybit, a top 10 crypto exchange by volume located in Dubai, was
for over $1.5 billion, the largest hack of all time. While Bybit seems to have no issues covering this loss, and the
CEO did an excellent job of crisis management, it still led to billions of dollars of outflows from Bybit and other centralized exchanges.
So, in the same week, we were reminded of the centralized exchange’s flawed history, as well as the current flaws. And this is, unfortunately, nothing new. Robinhood and Coinbase have historically listed and delisted assets on a whim, while frequently having downtime and withdrawal issues, while plenty of non-U.S. exchanges have also been hacked and gone bankrupt over the past years. Trusting your assets with a 3rd party run by humans is simply a dangerous game. Naturally, you’d expect the tokens and stocks of competitors, especially in DeFi, to go higher, while the tokens and stocks of centralized venues would potentially get hurt.
So how did the market react? Binance Coin (BNB), the biggest centralized exchange most similar to ByBit, was down only -4% for the week, outperforming almost every other token in crypto. Meanwhile, Robinhood (HOOD) and Coinbase (COIN) stocks fell -17%, and the most significant Decentralized Exchange tokens fell more than just about everything else in crypto (HYPE -14%, UNI -10%, RAY -32%).
Source: TradingView
Even as decentralized futures exchanges and decentralized spot exchanges steal market share away from the centralized exchanges, the crypto investor base seems unenthused with this growing sector as an investment, failing to differentiate it from the rest of the crypto assets.
Source: TheBlock]
And it’s not just a growth story. These DEX tokens are also value tokens, trading at the lowest multiples of just about anything in both the stock and crypto investment universe.
Source: Arca Internal Valuations
This past week just served as a reminder that the waiting game continues in crypto. COIN makes $6.6 billion in revenue, and the stock trades at 11x sales. HOOD does $3 bn of revenue, and the stock trades at 18x sales. Neither is growing as fast as DeFi. Meanwhile, these DeFi tokens trade at 1-10x sales and, in many cases, are conducting buybacks of their tokens.
Logic suggests that both growth and value investors flock to this space as rotation traders, given the recent spat of bad news at their centralized counterparts. And the fact that this isn’t happening just shows us how early this asset class still is when it comes to fundamental investing.
The road to DeFi is clear as day. The road to liquid digital assets investing is still flashing “detour” signs.
