Where did the funds go? Interpreting key events affecting the encryption asset cycle

After experiencing two months of painful decline, the market welcomed a comprehensive cooling of the US CPI data yesterday. BTC successfully rebounded and broke through $59,000. However, the continuous selling of coins by the German government resulted in the sale of approximately 10,627 BTC worth $616 million in just 16 hours yesterday, causing BTC to directly recover all the gains brought by the CPI expectations.

Key Points

• The cycle of encryption assets is influenced by four important factors: macroeconomics, whether there is innovative breakthrough in technical infrastructure construction, whether the regulatory system is friendly, and the Halving cycle of BTC. We are currently in an important period of global interest rate cuts, BTC Halving, gradually clear regulations, and Cryptocurrency entering the public eye.

• Since last year, the strong performance of large AI companies has to some extent overshadowed the crypto market. Investors have shifted a significant amount of funds to AI-related stocks. “Perhaps the market peak is not because cryptocurrency is not good, but because AI is more attractive”.

• Currently, there are still Unfavourable Information factors in the market, including the possibility of an economic recession after the US interest rate cut, BTC selling pressure from the German and American governments as well as Mt. Gox, and the expected dump after the landing of the ETH Spot ETF. How much selling pressure remains?

• Ignoring the Unfavourable Information, we should pay more attention to the long-term development trend. There is still a lot of upward potential in the market: Trump’s presidency in the United States will bring about friendly policies on encryption regulation, stablecoin supply will stabilize the market Liquidity, continuous buying of BTC by institutions, active investment of risk capital, and continuous increase in on-chain user base, etc. We should take a long-term view and follow these positive factors, rather than being overly obsessed with short-term price Fluctuation.

How much selling pressure will the market still bear?

Roughly calculated, as of July 12th, the German government only holds 9094 BTC to be sold, and they will continue to sell coins in the following week. At the current selling rate, they will be able to complete all sales within this week. This may lead to a rapid decline in BTC in the short term in extreme cases, but the market is capable of supporting such a scale of selling pressure.

Mt.gox and the US government’s $1-3 billion BTC have yet to take action, and with the German government’s $2.36 billion sell-off, these will put a total of about $4-7 billion of selling pressure on the encryption market, which is also the reason why the market has been unable to pump. However, this does not mean that the Bull Market has ended. According to Bitwise’s Q2 report, it mentioned some positive factors that support Cryptocurrency’s long-term pump, such as the continuous inflow of BTC ETF, which reached a record high of over $2.4 billion in the previous quarter. The number of active wallets for BTC and ETH also rose by 26% and 34% respectively last month, with over 1 million users holding more than 1 BTC for the first time. The average open interest in regulated BTC futures contracts also reached a new high of $9.8 billion (nearly 400% YoY rise), indicating continued interest from institutional investors, and the Assets Under Management and volume of stablecoins have also been steadily increasing. VCs invested $3.194 billion in the last quarter, a 28% increase compared to the previous quarter. The launch of the ETH Spot ETF will also boost market confidence, as well as the US presidential election in the second half of the year. These data and events prove that the Cryptocurrency Bull Market still has further potential for development. Another important event that the market has forgotten is that if FTX is approved to repay $16 billion to creditors, it will be a strong boost to pump the Cryptocurrency market. Specifically:

Key time Nodes include the customer voting deadline on August 16 and the judge’s final decision on October 7. If approved, this huge amount will be gradually returned between the fourth quarter of 2024 and the first quarter of 2025. This happens to coincide with other Favourable Information factors such as interest rate cuts and the timing of the US election results. And since most FTX customers are encryption enthusiasts, this $16 billion may directly enter the Cryptocurrency market, becoming the biggest driving force behind the price surge.

U.S. economic data cools down, rate cut imminent

If the market’s optimistic expectations for a decrease in inflation are consistent, the announced US non-seasonally adjusted CPI for June recorded a 3.0% year-on-year, lower than the market’s expected 3.1%, falling to the lowest level since June last year; the core CPI recorded a 3.3% year-on-year, lower than the market’s expected 3.4%, falling to the lowest level since April 2021. Both CPI and core CPI are lower than the previous values, and BTC also rebounded to the position of $59k, perhaps traders have early bet on the Favourable Information data lower than expected. Yesterday’s rebound was limited and the German government continues to sell BTC. Earlier today, BTC has recaptured all of yesterday’s gains. Let’s take a look at the detailed CPI data:

The food inflation rate has dropped from a high of 11% in 2020 to around 2% now, steadily decreasing, and is currently at a low level.

2. In terms of energy, gasoline prices fell by 3.8% compared to the previous month. The index dropped by 3.6% in May. The continued decline in gasoline prices made a significant contribution to the inflation data being lower than expected. The energy index, which includes natural gas, electricity, and heating oil prices, dropped by 2% in June.

3. The core CPI data, which excludes the Fluctuation in energy and food, has dropped to a 4-year low.

4. Slowing down of commodity inflation, new and used car data continue to decline.

5. The service inflation data is controlled at the best level in several years: In June, the month-on-month housing prices pump 0.2%, the rent for the month pump 0.3%, and the equivalent rent index for landlords also pump 0.3%, all showing the smallest increase since August 2021. Entertainment services and educational services also significantly slowed down, showing a lower growth rate.

In September, the first interest rate cut in the United States is already a done deal, and Powell also stated the day before that the Fed does not need the inflation rate to be below 2% before cutting interest rates. According to the CME observation tool, after the latest inflation data is released, the probability of the Fed maintaining the Intrerest Rate unchanged in August is 93.3%, and the probability of a 25 basis point rate cut in September has risen to 86.4%. Traders expect two interest rate cuts for the full year of 2024, with a 25% chance of a third 25 basis point cut within the year.

CME FedWatch Tool

Lowering interest rates can increase market liquidity, which is beneficial for pumping risky assets, but also comes with the risk of US economic recession. It is expected that the interest rate will decrease within the year. For deposit levels, changes in interest rate levels, adjustments in monetary policy, and changes in the overall economic situation are all crucial for market liquidity.

Latest Progress on Ethereum ETF

The ETF listing process is divided into two parts. The first part is that issuers need to submit Form 19b-4 before May. Long has already submitted an application for an Ethereum ETF, and the SEC has approved 8 Spot Ethereum ETF 19b-4 forms through a comprehensive order in May (Blackrock, Fidelity, Grayscale, Bitwise, VanEck, ARK, Invesco and Franklin Templeton). The second part is the S-1 form, which is not subject to any specific deadline. Several issuers have submitted S-1 registration applications for Ethereum Spot ETFs and are waiting for SEC approval. At present, the issuers have revised and resubmitted the S-1 form that was previously returned by the SEC before July 8th. It is estimated that at least one round of declaration is required before the ETF can begin trading. The timing of the listing of Ethereum Spot ETF depends on the efficiency of the SEC’s approval. Once approved by the SEC, the Ethereum Spot ETF will be officially open for trading.

About the listing date:

• The ETF Store President Nate Geraci stated on July 8 that the revised S-1 application submission was closed on the 8th. It is still unclear when the SEC will process it, but he is optimistic that the Ethereum Spot ETF may be launched next week or in two weeks.

• Bloomberg analyst Eric Balchunas commented: No one really knows why the SEC is taking so long to process these filings, considering the lack of comments, the listing should be fast, but it may be some ‘issue’ issuer slowing down the process, or just summer laziness/people on vacation, not sure.

• Bloomberg analyst James Seyffart previously predicted that the Ethereum Spot ETF may be listed later this week or during the week of July 15th. There have been many examples in history where this process took 3 months, but it is also possible for it to be approved in as short as one day.

The approval process of these S-1 forms is an important focus for investors to follow the dynamics of Ethereum ETF. Once these S-1 applications are approved by the SEC, the related Ethereum ETF products are expected to be officially listed in a short period of time, and all signs indicate that the listing will be this month. However, the SEC has always been cautious in approving Cryptocurrency ETFs, so there is still some uncertainty about the final results of these applications.

If the Ethereum Spot ETF is ultimately approved and listed, it will provide investors with a new channel for direct investment in Ethereum, thereby having significant impacts on several aspects of the entire Cryptocurrency market:

1. Enhance institutional participation

ETF is an investment vehicle favored by institutional investors, which is more conducive to Risk Management of large funds. ETF reduces the risk exposure of single assets through diversified investments, and is also more convenient in trading with good Liquidity. The management fees of ETFs are usually lower than those of actively managed funds, which gives institutional investors a cost advantage. The approval of ETF on Ethereum will open a door for institutional investors, attracting more long-term capital inflows to Ethereum and the entire encryption market.

2. Improvement of market Depth

ETF, as a standardized investment vehicles, is recognized by regulators and operates relatively regulated, which is more reassuring for investors. The introduction of ETFs will help increase the volume and counterparties of the CryptocurrencySpot market, thereby enhancing overall Liquidity.

3. Drive the Derivatives market

With the attraction of more long-term institutional investors into the encryption market, these institutional investors typically participate in Derivatives trading such as futures, Options, etc. At the same time, the ETH Ethereum ETF provides investors with a direct channel for investing in Ethereum, which will increase the demand for hedging and Hedging, and directly stimulate exchange and Derivatives providers to accelerate product innovation and launch more long derivative tools, enriching the market with more diverse offerings.

4. Drive the prosperity of related ecosystems

As the second largest Cryptocurrency, the launch of Spot ETF for Ethereum will not only drive the demand for related Derivatives, but also promote the development of the entire Ethereum ecosystem, including the activity of on-chain Decentralized Finance, Non-fungible Token and other applications. Even if the users of the Ethereum ecosystem lose the motivation to continue using these Rollups after receiving some airdrops from some top L2 projects, I believe that the stagnant ecosystem will be revitalized with the increase of Derivatives demand.

The industry is still waiting for the SEC to decide on the ETH ETF application. Once the S-1 form is approved, the ETH ETF will be officially allowed to trade on US securities exchanges, and a large amount of passive investment funds will flow into ETH. Gemini estimates that there may be a net inflow of up to $5 billion in the first six months. The influx of passive funds often leads to a rapid pump in asset prices. Matthew Sigel, Head of Digital Asset Research at VanEck, is also optimistic that over $6 trillion in assets may flow into Cryptocurrency in the next 20 years.

Currently, the ETH/BTC ratio is close to the low point of the past few years, and there is a large pump space for Ethereum compared to Bitcoin, which also reserves a large amount of momentum for the future rise of Ethereum.

If the ETH/BTC ratio can return to the median level of the past 3 years, the price of Ethereum is expected to pump by nearly 20%; if the ETH/BTC ratio can re-attack the previous high point near 0.087 in the past 3 years, the price of Ethereum will pump by around 55%, potentially reaching a new high. In any case, the value of Ethereum relative to Bitcoin is clearly undervalued at present, and the launch of the Ethereum Spot ETF will bring favorable information to the entire cryptocurrency market, attracting more long funds to promote the overall market sentiment.

New Turn in the US Election, Obama Returns?

The 2024 US presidential election is in full swing, and there is a certain division within the Democratic Party on whether Biden should seek re-election. On the one hand, the ace candidate Trump has strong competitiveness. An increasing number of young voters are not following traditional political parties and are more inclined to express their political positions on social media, posing a challenge to the traditional campaigning methods of politicians. Trump, on the other hand, likes to express his views on social media and is active in internet politics. Compared to Biden’s worrying physical condition, Trump is more popular among a long list of people, with consistently high support and a strong momentum.

On the other hand, the Democratic Party has also failed to cultivate a strong candidate to confront Trump. But what is interesting is that there seems to be a backup plan within the Democratic Party. They have been closely following Biden’s physical condition, fearing that he may not last until the end of the election. If something really happens, they already have a contingency plan, which is to have former President Obama take over in an emergency.

Given the US Constitution, Obama must avoid running for office, but can participate in the Biden team, win the election as vice president, and then ensure that Obama can take over as president in the event that Biden is unable to complete his term due to health reasons, through various means. In fact, Obama has long been prepared for this, and Biden has maintained close contact with Obama. He regularly reports on the progress of the campaign or discusses family matters with Obama, and Obama also provides advice to the White House and the Biden campaign team. In addition to behind-the-scenes support, Obama will also appear in campaign activities.

Earlier this year, Biden hosted a rare dialogue event in Manhattan with Obama and another former president, Clinton, all efforts by senior Democrats to consolidate internal cohesion and ensure Biden’s smooth reelection.

The presidential election campaign is in full swing. In contrast, the Republican Party, in its official party platform for the 2024 US presidential election, expressed support for long-term encryption policy measures that are beneficial to digital asset companies and holders.

According to the official document released by the Trump campaign team, the Republican Party’s “Make America Great Again” manifesto vows to end the “illegal and un-American crackdown on the Cryptocurrency industry” in the United States. The manifesto also promises to “defend the right to mine BTC” and allow Cryptocurrency holders to self-custody their Tokens, as well as opposing the creation of central bank digital currency (CBDC). The document reads: “We will defend the right to transact freely, without government surveillance and censorship.”

Trump himself has repeatedly voiced support for discussing BTC as a corporate asset. He has officially confirmed his attendance at the BTC summit from July 25th to 27th and will deliver a speech at the conference. This should be the first time a former U.S. president has spoken at such a large-scale encryption conference. Trump’s encryption-friendly stance has also brought him a lot of traffic and votes. According to opinion polls, about 13% of voters who do not intend to vote for the Republican Party have a more positive view of Trump.

Currently, the encryption prediction market Polymarket data shows that Biden’s probability of winning is 21%, and Trump’s probability of winning is 62%. In the most followed poll in the American political arena - a poll by The New York Times and Siena College, Trump’s approval rating is 49%, while Biden’s is 43%. Trump leads Biden by 6 percentage points in potential voters’ support. Biden’s current situation is not optimistic. Time magazine reported that his approval rating has been consistently low, far behind other former presidents seeking re-election. Surveys indicate that concerns about Biden’s age are the main reason for the reversal of the situation.

Polymarket prediction result

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