8DC Market Update — Q1 2024

Published in

8 Digit Capital

10 min readApr 22, 2024

[Originally Posted on 11 April 2024]

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

Hopefully you’re enjoying the terrestrial transition from Winter to Spring as we now enjoy the crypto transition from Spring to Summer!

Q1 2024 Performance

Bitcoin, thanks largely to record breaking ETF inflows (more on that later), has continued to lead the way breaking the previous ATH of $69K from November 2021.

We said this in our last post, but to say it again, congrats on being a part of the best performing asset class humanity has ever known! We’ve seen exponential growth from new technologies before, but I don’t think we’ve ever seen such a democratization of access to such revolutionary technologies granting anyone with internet access the ability to meaningfully participate. Sometimes being in the crypto space, we take for granted the returns, so we wanted to take a minute and compare returns across different asset classes since we started 8DC back in May 2022.

These returns compare over the life of the fund, but just zooming in a little, and looking at the last two quarters, the S&P was up 11% and 10% respectively, some of the best performing quarters in the history of the stock market.

As you can see, there’s a clear outperformance in crypto. Crypto’s ability to outperform other asset classes, in spite of 80% drawdowns, is astounding. It’s also worth noting that an active approach to crypto which aims to avoid some of the downside volatility pays off massively in this stage of the adoption cycle.

On top of this, when you factor in that the US Dollar has lost 25% of its purchasing power since 2020, you realize that just buying the stock market barely keeps your head above water, and really only crypto and tech are gaining against the monetary debasement that is occurring.

All that said, we’ve just seen two very strong quarters in markets across the board. Nothing goes up in a straight line, so we wouldn’t be at all surprised to see some further consolidation and re-accumulation during Q2. This could result in more modest or flat performance on the quarter before we continue with phase two of the bull market later this year.

Bitcoin

Bitcoin ETFs

The market just can’t stop talking about Bitcoin ETF volumes, and neither can we. I think it’s safe to say now with the first quarter behind us, that the Bitcoin ETFs have been a massive success. In fact, BlackRock’s $IBIT has already become the fastest growing ETF in the history of ETFs.

Even the most bullish estimates didn’t anticipate just how much unmet demand there was to get exposure to Bitcoin through a convenient, and familiar vehicle. This demand came pouring into the system and rocketed Bitcoin past its previous all-time high of $69K. In the history of Bitcoin (albeit a short one), we’ve never surpassed the previous ATH ahead of a Bitcoin Halving. We just did a few weeks ago.

Bitcoin Halving

If the ETFs were the red letter calendar date for Q1, then the Bitcoin Halving takes that spot for Q2… let the countdown begin!

In just a handful of days, we’ll be experiencing just the fourth Bitcoin Halving. As a quick refresher, the Bitcoin Halving is an event that halves the reward for mining new blocks (currently 6.25 bitcoins per block) on the Bitcoin blockchain, occurring approximately every four years. This reduction in block reward effectively decreases the rate at which new bitcoins are generated. This event is significant as it increases the scarcity of Bitcoin. One measure of scarcity is the Stock-to-Flow Ratio. Currently, gold is the most scarce asset by this measure. But after the upcoming halving, Bitcoin will surpass gold in terms of the world’s scarcest resource.

Whether narrative or reality, this halving event has historically kicked off the second phase of explosive growth in the bull market as you can see from the below chart (this chart is a bit outdated as it predicted the current pre-halving price to be almost half of what it currently is).

And if the Halving is just a narrative, then this narrative has never been more widely discussed. We’ve talked before about how the ETFs result in an upgrade in marketing. We’re seeing this play out as these large financial institutions have picked up the baton and started educating their clients and the media about the upcoming halving and its significance. Mentions about the Bitcoin Halving in the media are now at an all time high.

Monetary Debasement

One of the core reasons why there is so much pent-up demand for Bitcoin, is that the narrative of monetary debasement has taken hold. Rewind the clock ten years and it was only libertarians and gold bugs who were rambling about the dangers of printing too much money. In the recent past, it would take over six years to add $1T to the US National Debt… now we’re adding another $1T every few months, and people are starting to notice. See the below chart for a visual:

Morgan Stanley’s Wealth and Investment Management division, which oversees $6.6 trillion in assets, is now educating their clients as to why Bitcoin is a safe haven from fiat currency debasement.

All of this suggests that we’re still early in the adoption phase of Bitcoin as a technology. But where exactly are we in this current crypto cycle and how much opportunity lies ahead of us over the next 1–2 years?

Crypto Cycle — You Are Here

Now that we’ve breached previous ATHs, the narrative has turned from “are you sure the bottom is in?” to “are we certain that wasn’t the top?”. We don’t have a crystal ball, and as always we maintain a healthy dose of skepticism, but data suggests that we’re not done yet.

One of our core themes throughout this journey has been that we will see an uptick in global liquidity which will lead to further risk asset appreciation. We remain on track, and with trillions of treasuries coming due at over 5% interest rates, we anticipate increased money printing and further liquidity to come.

It’s important to remember that Previous ATHs often serve as a level of resistance and take some time to break through. In 2020 it took multiple weeks and a 12% pullback before definitively breaking through to new levels.

It’s also important to note that in both 2017 and 2020 (previous bull market years where Bitcoin attained new ATHs), price saw over 13 double digit drawdowns along the way to setting record highs. Even bull markets get bumpy.

We expect to see a bit more of this bumpiness over the next quarter as we’ve seen 6 months of strength in the market, and seem to be accumulating around previous all time highs. After two really strong quarters, we wouldn’t be surprised at all to see a flat quarter in Q2 before phase 2 of the bull market in the second half of this year.

We have seen some profit taking recently, but that’s normal behavior for a market reaching new ATHs. By definition, Bitcoin gets spread by old hodlers selling to new hands. However, in looking at the MVRV Z-Score (a measure of market value to realized value/profits), we’re sitting in mid-cycle territory. Historically, when this ratio has eclipsed 7 it has indicated a top in the crypto cycle, we’re currently sitting just under 3.

In recent weeks as price has passed ATH levels earlier than expected, there has been a lot of chatter around a potential accelerated cycle. Maybe, maybe not. It was feeling quite quick, but the last 3 weeks of sideways price action is a really positive sign for normal growth. By typical historical cycle timing, we would expect a peak sometime during the mid to end of 2025. Regardless of when that happens, we believe we are still around mid-cycle territory and tracking very closely with the previous cycle (in blue).

Other indicators, such as the Logarithmic Growth Curve, also show that we’re about halfway through the channel, and that a peak at around $160K is still very much on the table.

Though our base case is that we still have room to run,we are diligently tracking the market for signs of a shift in structure. We’ve created and curated a robust system of indicators and metrics to assist in timing when the market is overly frothy. We are monitoring this dashboard daily looking for red flags. So far, so good, but as always, we’re keeping a close eye on things.

Ethereum

Bitcoin has continued to lead the way, but Ethereum is right on its heels. Where BTC has passed previous cycle highs, ETH is still 38% off all time highs. ETH still had a great quarter, returning 60% in Q1 (trailing BTC gains by only 8%). Potential parabolic phase is still yet to come as shown by comparing this cycle to the previous.

Some of the momentum around the Ethereum ETF approval in May has stalled, but we continue to believe that an Ethereum ETF is an inevitability over the near term. In addition to favorable price action, Q1 saw several interesting developments within the Ethereum ecosystem.

DenCun Upgrade

A few weeks ago the Ethereum Foundation successfully rolled out the latest updates on their roadmap, called the DenCun Upgrade. The main feature of this release was something called EIP-4844 or Proto-Danksharding (there’s a good word for your crypto bingo games). The TLDR is that this new rollout allows for much cheaper transaction fees on L2s.

Essentially, this new feature introduces a new kind of transaction type to Ethereum which accepts “blobs” of data to be persisted in the beacon node for a short period of time. Prior to the upgrade, L2s had to store data on the main Ethereum chain indefinitely to ensure the safety of their second layer transactions. Storing this data for such a long time was a big contributor to high fees. Now, with the DenCun Upgrade, Layer 2s are able to only store the necessary data onchain for a few weeks in “blobs” thus drastically shrinking their costs. We’re already seeing L2 fees reduced dramatically:

Blackrock Launches Tokenized Fund on Ethereum

Blackrock showed that they’re fully embracing the crypto space by announcing a Tokenized Asset Fund on the Ethereum Blockchain and seeding it with $100M. Blackrock submitted a request to the SEC to launch a tokenized investment fund named the “Blackrock USD Institutional Digital Liquidity Fund” (BUIDL) on the Ethereum blockchain. This move highlights Blackrock’s increasing embrace of digital assets, following its introduction of a spot bitcoin ETF and application to launch an Ishares Ethereum Trust, which it hopes to list on the Nasdaq, pending regulatory approval.

Frontier

Solana continues to play an important role in this cycle. Despite a nearly 10x rise in 2023, SOL price barely lifted its foot off the gas, returning 99% in Q1 of this year. Our exposure to SOL and other Frontier assets are what help us in outperforming our ETH/BTC Benchmark.

Solana’s focus on speed and usability has won it a place especially in new crypto user’s hearts. We’re now seeing that sentiment reflected in the market. In terms of market depth, SOL has increased by 4x and is now trading in the same ballpark as ETH and BTC in terms of liquidity.

And while memecoins have been fun to watch (here’s looking at you $WIF), there has been an explosion of DeFi projects launching on Solana that have injected a lot of growth in the ecosystem. $JITO is one project in particular that had a very successful Airdrop and kicked the show off for the Solana ecosystem.

You can see the growth in the number of new tokens that are opting for the Solana ecosystem:

And all of this has led to the market cap of the Solana ecosystem outpacing the market cap of SOL for the first time ever. We remain bullish on Solana.