Market & Research Update: Q2 2024
Bitcoin in Q2 opened at $71,296 and closed -12% down at $62,676, following the highest quarterly candle Bitcoin ever printed in Q1.
April closed -15% down, May 11% up, and June 7% down, indicating some healthy consolidation after seven up-only monthly candles and foreshadowing the directional change in crypto prices in July.
Major Events in Q2
April
- Bitcoin halving: Bitcoin block rewards reduced from 6.25 BTC to 3.125 BTC, halving the Bitcoin emission rate.
- Stacks’ Nakamoto upgrade: Introduces smart contracts to Bitcoin, along with a sBTC, a 1:1 representation of native Bitcoin on the Stacks network. Read more here.
- Eigenlayer mainnet and EigenDA launch: Eigenlayer and EigenDA launched on Ethereum mainnet, following the launch of Ethereum’s Dencun upgrade (EIP-4844).
May
- Hong Kong debuts Asia’s first spot Bitcoin, Ether ETFs: Six spot Bitcoin and Ether ETFs — managed by ChinaAMC, Harvest Global, Bosera, and Hashkey — debuted in Hong Kong.
- Taiko mainnet launch: Vitalik Buterin proposed the inaugural block of the new Ethereum ZK rollup L2.
- Friend.tech $FRIEND TGE: The token airdrop and launch of Version 2 took place on May 2. The price rose as high as $169 immediately after it began trading on Base before collapsing to $2.5, due to a combination of liquidity issues and disappointment in the UX of new features.
June
- Markets in Crypto-Assets Law (MiCA): Provisions concerning asset-referenced tokens (ARTs) and e-money tokens (EMTs) came into effect, marking the first phase of MiCA’s implementation, aiming to regulate stablecoins within the EU.
- Mt. Gox Creditor Payouts: The long-awaited release of funds to Mt. Gox creditors started, with approximately 140,000 BTC set for distribution.
- German government selling Bitcoin reserves: German government started selling its reserve of nearly 50,000 Bitcoin that it confiscated from piracy website Movie2k.
- io.net $IO TGE: io.net, one of the major decentralized AI computing and cloud platform, launched its token on Binance Launchpool.
- Blast $BLAST TGE: Blast, a yield-bearing Ethereum L2, launched its token, distributing 17% of the total supply to early users.
- zkSync $ZK TGE: The native token of the Ethereum ZK-rollup was listed on major exchanges including Binance, Bybit, Kucoin, and Gate.io.
- LayerZero $ZRO TGE: LayerZero, a cross-chain communications protocol, launched its native token with an airdrop of 23.8% of the total supply allocated to community and builders. The launch faced mixed reactions due to the introduction of a “proof of donation” mechanism which requires users to donate $0.10 in USDC, USDT, or ETH per claimed ZRO.
Venture in Q2
After a strong Q1, the crypto VC market continued to rebound in Q2, with a slight dip in deal count but an increase in capital invested.
While still far from the heights of 2021–2022 (e.g., $11.9 billion in Q1 2022), capital invested rose from $2.5 billion in Q1 to $3.2 billion in Q2 2024, a 28% increase QoQ. Deal count decreased from 603 in Q1 to 577 in Q2, a 4% decrease QoQ.
Median deal size increased slightly from $3 million to $3.2 million, while pre-money valuations surged from $19 million to $37 million, indicating high competition among investors.
78% of the $3.2 billion deployed by VCs in Q2 went to early-stage companies, while only 20% went to later-stage companies, as larger generalist venture capital firms have reduced their activity in the crypto sector.
Sector & On-Chain Analysis
L1s
Last quarter, we made special mention of Solana, as its price made nearly a full U-shaped recovery from lows in October 2023. However, since reaching an all-time-high market cap in Q2 2024, its price has dipped along with the rest of the cryptocurrency market. Q2 opened at $202.32 and closed at $146.52, a quarterly drop of 27.68%.
Meanwhile, in terms of VC capital raised by category, L1s notably came in fourth at $371 million in Q2, led by Monad ($225 million) and Berachain ($100 million) deals.
Memecoins
Q1 saw massive capital growth of memecoins owing to Solana’s superb on-chain casino experience. While growth slowed down in Q2, memecoins still led in terms of price growth and relative strength to BTC.
In Q2, memecoin prices grew by 67%, which was 424% more profitable than investing in Bitcoin and 55% more profitable than the mean price change across all narrative categories. The best performing memecoin was $DEGEN, with over 10x growth.
Metaverse & GameFi
Looking at the chart above, GameFi was the worst performer in Q2 secondary markets. Investing in GameFi was 328% less profitable than investing in BTC and 53% less profitable than investing across the mean of all other narratives.
Coinciding with the downturn in GameFi prices was also a downturn in GameFi NFT trading volumes as well as a general downturn in NFT prices.
Coinciding with the downturn in GameFi prices was also a downturn in GameFi NFT trading volumes as well as a general downturn in NFT prices.
RWAs
Despite a downturn, RWAs continued to be the second-best performing narrative in Q2 as in Q1. RWAs delivered returns of -25%, with relative strength -66% less than Bitcoin’s performance.
Looking at the on-chain data, value locked in RWA by protocol and by chain has remained relatively stagnant since Q1.
However, the market cap of yield-bearing stablecoins backed by US treasuries has steadily increased, with nearly 30% growth owing to the introduction of Blackrock’s BUIDL fund last quarter.
For more insights into RWA classifications, market dynamics, and strategic insights, see our recent research report here (abridged version in Appendix).
AI
While decentralized AI emerged as a strong narrative in Q1, Q2 tells a different story. In secondary markets, decentralized AI was the third-worst performing category with price growth down by 56%, with a relative strength 259% lower than investing in Bitcoin. In terms of narrative rank, decentralized AI experienced the largest negative shift, dropping three ranks from Q1 to Q2.
On the venture side, decentralized AI captured only 2% of the $3.2 billion of crypto VC capital invested in Q2, reflecting investor hesitation about the substance behind the hype and high valuations in this category.
L2s & Scaling
L2s show an opposite direction in secondary markets, with narrative profitability rising three ranks from the lowest position in Q1. In particular, Q2 continued with a notable rise in optimistic rollup activity driven by Base, Arbitrum, and the new entrant, Blast.
On the other hand, ZK-rollup activity has trended slightly downwards in Q2, aside from a spike in Linea activity likely driven by the announcement of Linear Surge points program.
DeFi
As a whole, DeFi activity appears to have plateaued since Q1.
Stablecoin supply, while rising rapidly in Q1, also started to plateau with little net growth since May.
Perhaps most exciting in this narrative is the growth of DeFi on the TON blockchain, coinciding with the growth of native USDT issued on TON, announced by Tether in April.
For more insights on TON’s outstanding performance in Q2, see our research reports on TON’s rebirth and the importance of Telegram in crypto (abridged versions in Appendix).
Social
While Farcaster took the spotlight in Q1, with explosive growth following the announcement of Frames, interest in SocialFi has waned and Farcaster daily activity fell dramatically in Q2. With that said, both daily users and activity are orders of magnitude higher than at the start of the year.
Similarly, Friend.tech saw a crash in transaction count and daily users since launching V2 and its token in May.
Conclusion
Q2 has been a dynamic quarter for the cryptocurrency industry, characterized by significant market movements and pivotal events. Despite a 12% dip in Bitcoin’s value, the sector showed resilience, highlighted by substantial institutional engagements like the launch of spot Bitcoin and Ether ETFs and Hong Kong and moves toward regulatory clarity like MiCA in the EU. Noteworthy technological developments such as the launch of Eigenlayer and EigenDA and major token launches including ZK, ZRO, and BLAST indicate steady industry progress despite market consolidation and recalibration. While certain narratives like decentralized AI, DePin, and SocialFi appear to be losing steam, other narratives like L1s (especially TON) and L2s maintained momentum. On the venture side, capital continued to flow robustly into early-stage projects, with a 28% QoQ increase in capital invested, indicating sustained investor confidence. However, total venture capital available shows some stagnation, and later-stage startups are finding it harder to secure continued funding by larger VCs.
Addendum: August 2024 Black Swan Event
On Monday, August 5 early Asian morning hours, BTC nosedived to $49,300, bringing the whole market down with it. On the same day, ETH crashed from $2,697 to $2,111 (-22%) and SOL from $138 to $110 (-20%). The crypto crash coincided with a global stock market selloff, with VIX reaching heights not seen since the 2018 financial crisis and COVID crash.
What happened?
Unwinding of JPY carry trade: The JPY carry trade is basically an interest rate arbitrage play where traders borrow JPY at low interest rates, convert it to USD or another currency with high-interest rates, and use these to buy assets with even more yield (e.g., US stocks and crypto assets).
But the Bank of Japan (BOJ) recently announced increasing its key interest rate to “around 0.25%” from the previous range of 0% to 0.1%, raising the cost of borrowing for only the second time in 17 years. The monetary tightening measure has strengthened JPY significantly against USD.
Now, traders have to pay higher interest rates on the borrowed JPY and are facing potentially huge losses in forex as well. The USD and assets they’ve bought might not be enough to pay off their JPY debts.
This is causing a huge unwind of these “JPY carry trade” positions. Traders facing losses and margin calls are selling their US stocks and crypto assets and buying JPY to pay off their loans.
Exacerbation by Jump sell off: Amidst all of this, Jump Crypto, the cryptocurrency arm of the Chicago-based prop trading firm Jump Trading, appears to have been selling off hundreds of millions of ETH. Since July 25, Jump Crypto redeemed 83,091 wstETH into 97,000 stETH and unstaked 86,059 stETH from Lido Finance. So far, they deposited 72,213 ETH to various exchanges.
Other catalysts: Beyond these two major catalysts, there are rising fears about war in the Middle East and global recession fears. The former being exacerbated by threats by Iran to avenge the recent assassination of Hamas’ political leader and the latter being exacerbated by worrisome macroeconomic indicators and news of Warren Buffet selling over half of his Apple stock holdings. In addition, some market commentators cited political uncertainty in the US with polls shifting toward Kamala Harris recently.
Altogether, the perfect storm for a broad risk-off market sell-off came together in early August, hitting crypto markets especially hard. While it appears to have slowed down, there is no certainty we won’t see lower lows with potentially more unwinding of the JPY carry trade and heightening tensions in the Middle East. On the other hand, some traders are speculating that the Federal Reserve will cut interest rates — even by next month in an emergency — to push quantitative easing and stimulate the economy, much like in 2020 when markets dumped out of economic fears related to COVID. In the short term, we expect volatility amidst the uncertainty and recommend watching these events closely as they unfold.
Appendix: Q2 Research Highlights
The prediction market primitive (April 2024)
People have been predicting prediction markets to take off sooner or later and ongoing UX improvements (e.g., Polymarket) are priming this segment for takeoff.
Besides markets hitting ATHs in 2024, it’s also one of the biggest election years in history. 8 of 10 of the world’s most populous nations are going to the polls this year. We also have the 2024 Summer Olympics coming up.
But to scale to billions of users, we need “something new”, and we believe that is AIs as the cog and the linchpin in the machine.
The orchestration of AI content creators, event recommenders, liquidity allocators, and information aggregators can catalyze massive new activity in this space.
Integrating these AIs into the prediction market framework enables prediction markets at microscopic scale. Meaning prediction markets that are pertinent to specific communities and personally relevant.
This prediction market primitive paves the way for prediction market apps with UX more like Tinder or TikTok, and prediction market extensions that embed directly into our daily browsing experiences.
Understanding the new Bitcoin ecosystem (April 2024)
The Bitcoin ecosystem is experiencing rapid expansion, evidenced by the remarkable growth of Bitcoin L2s and sidechains, which increased to over 25 in less than a year.
For context, compare this growth rate to Ethereum’s ecosystem, where it took three years to develop 48 L2 solutions, as listed by L2Beat.
We at Inception are diligently monitoring these developments. However, there are challenges in evaluating the incoming projects as documentation and information tends to be sparse or highly technical.
In this article, we focus on Stacks and its imminent Nakamoto hard fork. Then, we compare and contrast a variety of newer projects entering the scene that have been on our radar including RGB++, Merlin, Build on Bitcoin, BEVM, BSquared, and Nostr Assets.
Through these case studies, we intended to bring clarity to ourselves around the nuances of different Bitcoin scaling solutions and infrastructure. In doing so, we developed a comparison system for each of these projects, which we hope will also bring clarity for you.
Unpacking RWAs (May 2024)
What are RWAs and what are not? Why do we need them? What RWAs are onchain now what’s on the horizon? What might the market look like by 2030? What are the main challenges to global adoption? What areas look ripe for investment?
RWAs are the tokenized representation of anything with value that exists outside of the blockchain, including physical and digital assets.
Tokenization leverages blockchains for improved trade and management, enhancing liquidity, global reach, and transparency while reducing intermediary costs.
As of writing, the most dominant RWA is by far USD stablecoins (~97%), followed by securities (~1.5%, primary US T-bills), and commodities (~1%, primarily gold).
Stablecoins hold a unique position in bridging the adoption gap between crypto enthusiasts and ordinary people with their use case extending beyond diversification to hedging against currency debasement and cross-border payments.
Global interest in tokenized US treasuries skyrocketed in 2023 as investors worldwide were attracted to increasing yield.
There are a number of emerging RWA categories that are intriguing but also highly speculative, including art and collectibles, IP rights, infrastructure financing, impact claims, insurance policies, and agricultural assets.
Market projections have one thing in common: RWAs will become a huge industry this decade — estimates range from $3.5 trillion in the bear-case scenario to $16 trillion in the bull-case.
There are a bunch of challenges to realizing these projections — regulatory obstacles, first, and foremost, but also technical and operational risks, valuation challenges, uncertainties around market readiness, economic and social barriers to entry, and category-specific challenges around each RWA category.
Here, we propose a heuristic guide for identifying investable projects given these risks and challenges that takes into account unlockable liquidity, global demand, yield opportunities, and regulatory clarity
TON’s rebirth (May 2024)
TON has rapidly ascended this year to become the 9th largest crypto project, with a circulating MC > $21 billion, 10x in under a year. We did some research to understand why.
First, TON has an intimate relationship with Telegram, which has an intimate relationship with crypto communities and is approaching 1 billion monthly active users, positioning it uniquely in the crypto space.
On the tech, many think TON is just a blockchain, but the protocol actually encompasses several other subprotocols: TON DNS: Human-readable names for accounts and services, over 76K sold so far; TON Storage: Decentralized file storage; TON Proxy: Decentralized VPN service; a blockchain-based Tor alternative; and TON Payments: Instant, off-chain micropayments with zero fees via payment channels.
The TON blockchain itself is a high-throughput network enabled by dynamic horizontal sharding, with the network scaling as activity scales. It demonstrated a record-breaking 104,715 TPS in a public demonstration on 256 highly-powered nodes.
But while the tech is impressive, it’s not the main driver of TON’s recent momentum. TON’s momentum picked up coinciding with a series of significant events. For example: TON Space (Sept 2023): TON’s new self-custodial wallet was announced jointly by Telegram and the TON Foundation, marking Telegram’s renewed involvement with TON after years of distancing; The Open League (March 2024): A community initiative distributing 30 million $TON (now worth ~$200 million) to accelerate TON ecosystem development; and native USDT on TON (as of April 2024): Tether launched USDT natively on TON, with total authorized USDT already at $330 million as of writing.
To put that into perspective, that’s 80% more USDT authorized on TON than NEAR, and twice that authorized on Cosmos. This integration of native USDT into TON is something especially important to keep watch of. Telegram is one of the best platforms there could be for people to transact value around the world, to anyone, at any time.
TON DeFi has picked up momentum, with TVL reaching $620 million, positioning it alongside other major high-throughput blockchain projects like Sui, Aptos, and NEAR.
GameFi on TON made a breakthrough this year with the viral success of Notcoin, the simple “tap-to-earn” mining game that attracted over 35 million players within months of its launch.
TON stands out for its mobile-first, community-developed, and messaging-integrated approach. It stands out for being one of the only crypto projects that started with a massive global community.
Looking ahead, there are several investment areas within the TON ecosystem that are promising, which we cover in detail in this report.
PRIME: A framework for evaluating RWA projects (June 2024)
The RWA space isn’t like other crypto sectors. Things get very complicated when linking crypto rails to offchain assets and their established regulatory frameworks.
After reviewing dozens of projects in this space, it’s clear to me that a lot of practical obstacles must be overcome for massive value to flow in (as in even >1% of stablecoin supply). Setting apart the wheat from the chaff isn’t an easy task.
We wanted to try to make it easier for you all. In this research, we present a framework for the PRIME scale. The scale is a simple rating tool that yields a weighted average score for any given RWA project based on the following dimensions: Permissionlessness, Reliability, Integrated utility, Maintenance-minimization, Easy UX.
Telegram: Crypto Island’s bridge to the mainland (June 2024)
Crypto is a relatively insulated new technology, making the path to mass adoption uniquely challenging. To me, it doesn’t seem like the main issue is about UX per se. That’s almost ready. The real bottleneck is easy accessibility between blockchain projects and massive social networks. This is where Telegram’s user base and open APIs provide a game-changing opportunity — and not just for TON.
Telegram has become an essential tool for crypto projects’ communications and community building. And it is widely used not only by crypto natives, but by potentially hundreds of millions of crypto-ready users, based on the number of users already playing TON mini-games.
TON has made the most strides into this space due to its special relationship with Telegram. Since being endorsed as Telegram’s “official web3 infrastructure” in September 2023, TON has attracted considerable attention and investment (e.g., Pantera Capital’s “largest investment ever”).
The launch of TON Space, a self-custodial wallet embedded in Telegram settings and attachment menus, allows nearly a billion users to easily engage with crypto apps on Telegram (“tApps”) without ever leaving the platform. These apps provide an all-in-one, de-fragmented experience, where users don’t have to connect a wallet to a separated browser application.
TON’s recent collaboration with Telegram reminds me of Spotify’s collaboration with Facebook in 2011. As Spotify leveraged Facebook’s social graph to build communities around music sharing, TON harnesses Telegram to foster communities around value transfer. In both cases, the integration with a massive social network — each boasting around 800 million monthly users at the time — catalyzed significant growth and adoption of a new technology.
TON may have stolen the spotlight, but we shouldn’t overlook other blockchain projects making moves into Telegram. To me, NEAR protocol stands out with its new self-custodial HERE Wallet and its Telegram implementation. These integrations too have seen substantial user adoption, underscoring the potential for multiple blockchains to coexist and thrive on Telegram.
tApps have come a long way, with UIs improving from simple proxy-page-like trading bots to full-fledged apps combining memes, gaming, social, and more to offer a much more captivating user experience. Notcoin and Hamster Kombat are a couple of strong examples, but there are a bunch coming out.
We are starting to see early indications of a transformative pattern: new technologies that challenge established ones experiencing rapid growth after integrating with massive social networks. Just as Facebook was the right product at the right time to accelerate the rise of Spotify and music streaming in the 2010s, Telegram is the right product at the right time to accelerate blockchain adoption and normalize onchain value transfer in the 2020s.
Learn more about Inception Capital at our website
Subscribe to our Medium Publication
Follow us on X @_inceptioncap
Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice, or investment recommendations. This post reflects the current opinions of the authors and does not necessarily reflect the opinions of Inception Capital, its affiliates, or individuals associated with Inception Capital. The opinions reflected herein are subject to change without being updated.
