Crypto’s Dog Days of Summer
June 2024 Commentary
The “dog days of summer" refers to the summer months in the Northern Hemisphere, characterized by hot temperatures, inactivity, and was previously associated with misfortune, according to the Old Farmer’s Almanac. That pretty much sums up the digital assets price action over June. But one doesn’t have to look too far beyond prices to realize that the ecosystem has been anything but inactive and unfortunate.
Reflecting for a moment on ourselves at Firinne Capital, we are thrilled and honored to announce that we won the Hedgeweek’s Performance of the Year – Directional Fund (1+ Year) award. Here’s our proud CIO, Ruairi Hanafin, stepping up to receive that award just a couple of weeks ago in London. For us, this wasn’t simply a reflection of our fund’s performance. It’s a mirror of our daily grind to improve our investment and business processes, hone our investment insights, broaden our network, and of our supporters who assisted us along the way.
June’s Pullback
Over June, the broad market pulled back 13%, with that trend continuing into July. Much of this pullback seems to be technical, rather than fundamental, as realities have not matched the lofty expectations that had been built into the market. For instance, much of the chatter of spot ETH ETFs being approved and trading by July 2 came and passed as a non-event. It was exciting to see Van Eck file an S-1 to issue a spot Solana ETF. It gave the SOL price a nice jolt back on June 27, but many used it as an opportunity to take profits.
Quite importantly, these events are being overshadowed by ongoing and expected sales of BTC from Mt. Gox repaying its creditors and the German government. Mt. Gox, a bitcoin exchange defunct since 2014, was reported to have transferred 140,000 BTC to wallets presumably for repayment. The German Police had seized about 50,000 BTC as part of a piracy raid earlier this year.
The impact from the sales may remain over the next several weeks but for the long-horizon investor, this ought to present some good buying opportunities.
The Long-Horizon Investor
Looking over one month or the last calendar quarter can be a bit myopic and make it hard to appreciate the vast strides that the digital assets ecosystem has made in the past 6 to 12 months.
Let’s start with investor and political attitudes. The US spot BTC ETFs were approved only in January of this year, and in barely just six months of trading, they’ve accumulated approximately $50 billion in net assets, according to sosovalue.xyz’s BTC ETF page. That’s over one-fifth of the net assets of $233 billion held in gold ETFs. Meanwhile, although the July 2nd expected date for the spot ETH ETF approval has come and passed, expectations remain high that these instruments will be available for trading before the end of July.
Source: Polymarket
Politically, digital assets are now central to the campaign and policy discussions, even though the topic was not a feature during the recent Biden-Trump presidential debate. Overall, not bad for an asset class that, only a year ago, had been unjustly decried for wasting energy and incorrectly pilloried for having no use except for criminal activities.
Bringing real-world assets (RWAs) on-chain is an application we continue to be excited about and had discussed in the past (see here and here). Traditional assets on-chain, representing private credit and treasuries to commodities and as tracked by rwa.xyz, now total $10.9 billion, a 67% increase from just a year ago.
Source: rwa.xyz
Valuations of RWAs in the billions of dollars however pale in comparison to over $1.5 trillion of transactions in repo’s and other securities that are being executed over private blockchains. That’s a strong endorsement of the blockchain technology for financial settlement, albeit in a permissioned manner.
As blockchain usage expands, it is absolutely critical that scalability continues to improve. Here, we continue to see progress. According to DeFiLlama, transactions on the Ethereum mainnet have hovered around the same levels for the last couple of years but fees have significantly been lowered, as quoted in ETH terms.
Source: DeFiLlama, Ethereum Fees and Transactions
Much of this is due to the work that is being done to develop Ethereum’s Layer 2 (L2) scaling infrastructure. While the Ethereum mainnet can process around 13 transactions per second (TPS), equating to about 1 million per day, the L2 networks together provide over an order of magnitude of improvement. As tracked by Orbiter Finance, the L2 networks are executing about 15 million transactions in total.
Source: Orbiter Finance
Scaling isn’t relegated to the typical smart contract chains. Developers are working to bring similar functionalities to Bitcoin, as we had previously discussed, with the Ordinals and Runes protocols. Further work is being done to develop a Bitcoin Virtual Machine (BitVM) to more fully enable smart contracts on the Bitcoin chain.
So, rather than the “dog days of summer”, perhaps a more befitting idiom should be “working like dogs”.