8DC Q2 2024 Update

(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.)

It’s hard to believe we’re halfway through 2024! We hope you like second halves, because the second half of this year and into the second half of this Crypto Cycle are shaping up to be very memorable indeed.

TL;DR

This update got quite lengthy. Given the recent volatility and so much going on in crypto markets, we wanted to spend some extra time sharing our thoughts. If you make it to the end, great! If not — here’s a quick summary:

There’s a lot of fear in the market right now. We’ve seen the Fear/Greed Index go from 77 (Extreme Greed) to 28 (Fear) in a couple of weeks. Nobody likes these big drops, but we’ve gotten used to them over the years; and if you can’t take the drawdowns, you won’t be there for the runups. Here’s a quick summary of our current market thoughts:

• Normal Volatility — As we’ve said before “In previous bull markets BTC has seen an average of four 10–20% drawdowns, three 20–30% drawdowns, and two 30%+ drawdowns. We’re currently in a -25% price drawdown, the biggest of this cycle, but well within the “normal” of a volatile crypto bull market.
• We Don’t Overtrade — We have a long term thesis and our strategy reflects that. We’ve been able to better our positions with this volatility, but we don’t overtrade (try and trade every swing). Overtrading this range leads to getting chopped up, guessing wrong, and potentially missing out on future gains.
• Long Term Bullish — With big moves like this we look even more closely at our data and models (multiple signal indicators) to see if anything has fundamentally changed. We’ll dive into all of this more, but with global liquidity on the rise, more favorable political and regulatory tailwinds, and ETFs unlocking more institutional capital, we believe the bullish case for crypto over the coming 12–18 months remains as strong as ever.

Ethereum Market Thoughts

We normally start these updates talking about Bitcoin. There’s plenty to unpack there, and a lot of our Q2 was influenced by Bitcoin Price Action, but there is so much going on with ETH at the moment we wanted to start here.

Relative Strength

On a quarterly basis, this is the first time that ETH has outperformed BTC since 2022. And this lines up with where we are in the cycle. Typically BTC leads the way, and then post-halving is when ETH and other Frontier Assets start to heat up.

This relative strength is exciting because it’s indicative of what’s to come. Here’s a quick look at how ETH and BTC have performed post Bitcoin halvings in the previous two cycles:

Now, obviously, past performance is no guarantee of future results… But even discounting these numbers dramatically, there is a compelling argument to be made for investing in ETH in the latter half of this cycle. A strong ETH move is great for altcoins as well, with SOL being in the best starting line position. (We have exposure to SOL, which could continue to be this cycle’s darling. We’ll touch on SOL more in our next market update).

BTC has already broken through its previous cycle ATH at 69K, and we’re consolidating around that range. ETH, on the other hand, still has a 40% gain just to get back to the last cycle ATH of $4,800. Zooming out on the overall cycle, ETH bottomed out in June 2022, and has been steadily recovering/accumulating since then, whereas BTC continued to grind lower into November 2022.

All this to say, that ETH has been slowly ranging and accumulating and building strength for roughly two years now, and it is just starting to break out. Since November 2023, we’ve been sharing this re-accumulation wedge and calling for a breakout from $2K to $4K ETH.

This played out almost exactly as we expected, and don’t look now, but ETH is again consolidating in another ascending wedge, preparing for a breakout even higher. We still see ETH breaking previous ATHs by the end of this year.

Ethereum ETFs

It’s crazy that 2024 is going to see the launch of not one, but two (maybe more — Solana?!) crypto ETFs. We just witnessed the market digest a Bitcoin ETF, and if there’s any lesson to be learned, it’s to be long and stay long. “Buy the rumor” or “sell the news” is the wrong conversation to be having. Bitcoin ETF inflows absolutely shattered market expectations — and the best part is institutions are just starting to ramp up.

And yet, here we find ourselves again on the eve of the launch of the Ethereum ETFs (all signs point to mid-July), and negative sentiment can still be found around the woeful amount of inflows that can be expected. Concerns such as: “What’s the ETH narrative?” “It’s too complex to understand!” “Investors are just going to rotate from BTC ETFs!” … are all just short term speed bumps along the way to a massive unlock of capital.

Overall, we think the market is still vastly underestimating the demand for crypto offerings. The best proxy for interest is probably ETH CME Futures, which recently hit an all time high:

Galaxy Digital is estimating $5B of net inflows during the first five months after ETFs launch. And Matt Hougan, CIO of Bitwise, is estimating $15B of net inflows in the first 18 months.

Regardless of the amount of inflows, compared to Bitcoin, Ether will be more price sensitive to ETF inflows due to the amount of total supply of ETH that is locked in staking, bridges, and smart contracts, and the lower amount held on centralized exchanges. This, coupled with the fact that ETH’s market cap is 3x smaller than Bitcoin’s, suggest even smaller inflows can have a bigger impact on price.

Ethereum Narratives — What is ETH?

For those new to the space, you might not appreciate how many different narratives Bitcoin has tried on over the years before seemingly finding a fit in “Digital Gold” — which for now seems to be sticking. For Ethereum, this debate on narrative appears to be ongoing. Is it the World’s Computer? Immutable money? Web3? Decentralized Finance? Digital Oil?

Many institutions are already stepping into the ring and offering up their narrative and valuation. We’re increasingly seeing research that is valuing ETH similar to a technology stock:

Here’s a simplified attempt from Bitwise to contrast the capabilities and use cases of Bitcoin vs Ethereum. While you can debate the specifics, it’s clear that Ethereum has become the leading crypto platform for building and innovation. Especially of note here are Stablecoins which have skyrocketed due to global demand for digital access to a relatively stable asset.

Another interesting narrative that is emerging is Ethereum as an “open source app store”. Developers and builders are tired of Big Tech charging their monopolistic take rates, and users are becoming increasingly aware of just how much these tech giants control their lives. It will be interesting to see if this narrative catches hold.

And now that we have an Ethereum ETF, price predictions are starting to roll in. VanEck recently released a report with a bullish target of ETH at $150K by 2030.

And Standard Chartered, never one to shy away from a price prediction, is forecasting an $8K ETH price in 2024, and $14K in 2025.

Predictions are typically worth what you pay for them; however, these are the types of headlines that create the exuberance of bull markets.

Bitcoin Market Thoughts

Like we mentioned above, no one enjoys these dips, but we’ve gotten used to them, and these are the times to remove emotion and stick to our plan. We’ll dive deeper into the three bullet points from our TL;DR.

Normal Volatility

When you’re in the midst of these pullbacks, it’s easy to lose the forest for the trees. Zooming out since 2012, BTC is up over 22 million percent! That’s a compound annual return of over 140%, which includes four drawdowns greater than 85%. The best performing asset in human history is not hyperbole.

When we compare this current cycle to the previous two, it’s important to remember that we’ve fast tracked the typical timing by breaking previous ATHs much sooner than before. We pulled a lot of future demand forward, so a healthy pullback here makes sense.

Zooming out to quarterly candles, we saw our highest ever quarterly candle close in Q1 of this year. In Q2 price retested the previous line of resistance around 58.8K which was the level from which the previous bear market started. Having now flipped this resistance level into support (which price is currently retesting again), this is a very bullish zoomed out chart heading into the next phase of the market.

Bitcoin is again following a very typical path of forming a re-accumulation range after the BTC Halving. These re-accumulation periods have generally lasted around 150 days — we’re about 80 days in. Here’s a look at what has historically followed these re-accumulation ranges. Don’t capitulate just yet.

Reasons for Short Term Selloff

“Show me a 20% drawdown and I’ll show you 20 narratives”

Overall, we take a long term, unemotional approach to managing the fund and try not to let short term narratives and sentiment take over. However, we thought it might be helpful to make some comments on some of the selling narratives that are particularly prevalent right now.

Unprofitable miners selling and closing up shop

Because Bitcoin gets harder to mine over time, and because the block reward gets cut in half every four years, Bitcoin Miners continuously need to be upping their game. Like clockwork after BTC Halvings there is a selloff from Miners who have to capitulate due to unprofitable operations.

Eventually these unprofitable miners run out of coins to sell. This can be measured through Hash Ribbons — essentially this is showing when the price of BTC falls below the production costs needed to mine BTC. When this hashrate reverts, it will print a very reliable Bitcoin Bull continuation signal. This has been very reliable in previous cycles post-halving, and the last time this signal printed was August 2023, after which BTC rose 190% over the following seven months.

Long term holders taking profits

It’s also very typical for long term BTC holders to realize profits after a sustained runup in price. Coming into 2024 we had the highest amount of BTC ever that hadn’t been moved in over a year — almost everyone was waiting for higher prices. It’s natural for some of these “Bitcoin Whales” to realize some profit along the way — we’ve seen it in every cycle.

However, we’re starting to see these whales start to accumulate even more than what they sold. On Bitfinex, for example, whales have increased their long positions by approximately 2,580 BTC since June 17. This buying offset previous reductions. Bitcoin Whales have been buying the dip…

Mt. Gox Distributing ~$9B Worth of BTC Back to Holders

After years of FUD and speculation, the time for the infamous Mt. Gox distribution has finally come! At a very high level, Mt. Gox was the largest Bitcoin Exchange in the very early days of Bitcoin’s history. Mt. Gox went Bankrupt in 2014 when the price of BTC was around $600. After the bankruptcy, 140,000 of the missing bitcoin were recovered which given current prices means roughly $9 billion worth of bitcoin will be returned to its’ owners.

There’s a lot of speculation around how many of these OG holders will sell their Bitcoin, how these bitcoins will be transferred, and what the impact will be on price. Here’s one take, but the long and short of it is that soon, we’ll have this Mt. Gox distribution behind us:

Germany Selling 50K BTC

The German government held 50,000 BTC up to late June. They published their intent to sell this amount, and they have been selling relentlessly in small increments since June 19. On July 8 they increased the amount and moved 16,038 BTC to brokers and exchanges. Their balance is now down to 23,788 BTC.

We’re entering the final stretch of the German onslaught and at this rate they’ll run out of coin within the next few weeks.

We Don’t Overtrade

Markets are inherently difficult to time — and doing this on ever shorter time frames moves into the realm of gambling. For this reason we manage our fund over cycles, so a down quarter along the way in the most volatile asset class in the world is to be expected.

And to be fair — we knew a quarter like this was possible, and even called for it in our Q1 Update:

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.

Also from our April 2024 Update:

We’re only 3 months post halving. We focus on longer time frames. Which means we don’t sell every local top or buy every local bottom. We expected some downside, so we were able to move a portion of our Foundational positions to cash, and as mentioned above, buy the dip we were looking for. We are opportunistic with the volatility, which we feel played out great. Price continues to test a bit deeper into the lower end of this range, and we’re keeping a very close eye on all of our data and models to determine if this is a local short-term deviation, or a broader long-term market shift. Though long-term bullish, we are cautiously watching our indicators for invalidations.

Overall, we’ve seen multiple opportunities to increase our positions at key levels of support and at discounted prices during this bull run. We were able to execute on bettering our positions, ahead of a future breakout, whenever that might be (Q3/Q4). We do reports on a quarterly calendar, but we don’t let this affect how we are trying to position the fund for the long term. We don’t know when we will break out of this current range, but we are very excited about the additions we were able to make to our core long term positions during the quarter; ultimately, we believe that what happens in this current re-accumulation range is largely irrelevant compared to what’s coming next…

Phase 2 of the Bull Market — Parabolic Uptrend

As mentioned previously, we’re only halfway through this bull market. This current sideways, or re-accumulation phase, is very typical in previous cycles and can last 3 to 5 months (we’re currently two months in). Looking to the past:

• In the 2015–2017 cycle, Bitcoin peaked 518 days after the Halving.
• In the 2019–2021 cycle, Bitcoin peaked 546 days after the Halving.

If the next Bull Market peak occurs in a similar timeframe, we’re looking at a Bitcoin Cycle Peak sometime in September/October 2025.

More importantly…

Once Bitcoin breaks out from the current price range, we will see a breakout into the parabolic uptrend. Every cycle’s parabolic uptrend provides some of the best returns in crypto.

Crypto has a way of lulling people to indifference before big moves up. Looking to the past gives us an idea of where we could go:

• In the 2015–2017 cycle, Bitcoin increased 2,000%+ in Phase 2 of the Bull Market.
• In the 2019–2021 cycle, Bitcoin increased 600%+ in Phase 2 of the Bull Market.

We expect to see at least another 300%+ move in the crypto markets over this next phase.

Here’s a chart that shows where we are, and based on previous cycles, what happens next…

Long Term Bullish

Shifting away from just price and supply/demand analysis… During these types of pullbacks it’s a good time to revisit your core thesis and see if any fundamentals have changed. Here’s a quick look at some of the bullish demand drivers for crypto over the coming 12–18 months and beyond.

Global Liquidity

Bitcoin and crypto serve as a hedge to monetary debasement. This means that as central banks inject more liquidity into the system, crypto assets will outperform this debasement. We’re starting to see this money printing tick up causing huge problems for billions of people:

Just because we sit comfy in the West, doesn’t mean we’re immune. In the US, since 2008, the monetary debasement due to money printing has been ~12% per year on average.

We can see all of this play out as we track the flows of central banks around the world. Looking at Global M2 since 2014, Bitcoin price is strongly correlated (>95%) with how much liquidity Central Banks inject into the system. All assets follow this same correlation; only Bitcoin and Crypto outperform the monetary debasement.

This current cycle of Global Liquidity doesn’t appear to be over yet. Tracking Global Liquidity is one of the best measures to determine when to be long risk assets. Global Liquidity has historically followed a 5–6 year cycle. In the chart below, you can see the previous BTC peak in 2021 coincided with a peak in Global Liquidity. We’re currently coming off the trough of this long term liquidity index — indicating an increasing wave of liquidity injections through the next peak likely in late 2025.

Perhaps the strongest indicator that this current bull market isn’t over yet is the fact that there is so much data pointing to an increased amount of Global Liquidity still to enter the market.

Favorable Political & Regulatory Tailwinds

We talked extensively about the recent developments from a regulatory front during our May Update, including favorable legislation passing, a shift in attitude about crypto from the White House, and increasing airtime about crypto during this upcoming US Election Cycle.

We’ve seen this narrative continue as Trump now is hinting at the US actually adding Bitcoin to their Treasury if elected president.

We’re also seeing the GOP double down on their support of crypto and include it as a key part of their 2024 platform. We’re seeing the narrative shift from “governments are going to ban Bitcoin” to “governments are supporting Bitcoin”.

Regardless of what actually happens with either party, having this narrative and conversation on a national level is bullish for crypto.

ETFs unlocking more institutional demand

We’ve already seen a hugely positive response from the new Bitcoin ETFs, attracting ~$15B in new net inflows in just the first months since launch. However, most data points to these inflows coming largely still from retail investors. New research from the AllianceBernstein (a $750B asset management firm) is suggesting that institutions are getting the approvals they need and are on the cusp of some major inflows over coming quarters. Here’s some highlights from their report:

Add to this the expected $15B of inflows into the Ethereum ETFs that we covered above, and we see a confluence of factors leading to an increase in demand. All of these drivers reinforce each other and act as a flywheel increasing adoption — more global liquidity results in institutions with more capital to deploy, favorable regulatory environments instill more confidence in investing in the crypto space, increased ETF inflows increase the strength of the pro-crypto movement putting increased pressure on a more favorable regulatory environment, etc.

All in all — we remain confident in our position that governments will continue to be forced into printing more money, that Bitcoin and Crypto are the best mechanisms for outpacing this debasement, and given the world will be more digital tomorrow than today, the demand for a digital monetary system will continue to rise.

~ 8DC Team