August 2023

Key Insights for this month in Digital Assets : Emerging Narrative in Web3

From the outside, it might seem like the web3 and digital assets space is lacking rhythm and momentum but if you were to scroll through Twitter threads, hear experts on podcasts, follow regulatory developments and study past cycles, you would see a different story. Digital assets are also like any other asset in the market which is heavily driven by human emotions. Since the time of the first Bitcoin transaction, studying past market cycles has been a valuable exercise as it offers an idea of where we are in the current cycle and, more importantly, what the future holds. In this edition of our monthly newsletter, we will try to identify some key narratives that could play out in the next cycle and where we are today as compared to past cycles.

The last few cycles have followed a set pattern –

  • After the price peaked in November 2013, BTC experienced an 85% drawdown before it found a bottom just over a year later.
  • After the price peaked in December 2017, BTC experienced an ~80% drawdown before bottoming almost exactly one year later.
  • After the price peaked in November 2021, BTC experienced another ~80% drawdown before bottoming almost exactly one year later.

The time between price bottoms and new cycle peaks has also been noticeably consistent. In each of the last two major price cycles, it took almost exactly two years for BTC’s price to fully recover to prior cycle highs and three years all in all for the price to go from its cycle bottom to a new cycle top.

Where Are We Now?

Well, we’ve already suffered through the period of pain with an ~80% price drawdown from prior cycle highs. We’re now ~9 months past the cycle bottom back in November, which would put us ~15 months out from recovery to the previous cycle high (Q4 2024). 

The April 2024 Halving is on schedule to occur ~18 months after BTC’s bottom – just like prior cycles – which also aligns with the potential for a new all-time high by Q4 2024 (and a new cycle peak by Q4 2025).

If we look at some on-chain metrics, we can decipher how long-term holders (LTHs) and short-term holders (STHs) feel about the current market. 

The Net Unrealised Profit/Loss (NUPL) is a metric used to indicate current profitability based on the last time each coin was moved. The NUPL for long-term holders (LTHs) went above the neutral line (black) earlier this year and they have been in a comfortable position since then. We can see that they were largely unaffected by price moves from March end onwards. Short-term holders (STHs) however took a hit when the BTC price dropped from $29k to $26k and are still at an unrealised loss as an aggregate. 

The spent output profit ratio (SOPR) indicates the profit/loss when a coin is spent/moved across wallets. It essentially tells you if people are moving coins at a profit or a loss. We can see that LTHs have been reaping profits consistently and there have been no major sell-offs from them as an aggregate. 

The market value to realised value ratio (MVRV) signifies how overvalued the market is currently. It divides the market cap of BTC by the value of all coins when they were last moved. A low MVRV is deemed a good time to buy because the market is supposed to be undervaluing BTC, but it may be the result of a large-scale slowdown in the crypto market, so one should be careful when looking at this metric. The current LTH MVRV shows no stress on the LTHs, but STHs are a little affected. A rising illiquid supply is good and shows that people are confident holding BTC for longer durations. 

From the bird’s eye view, the current market doesn’t seem too stressful for LTHs and they cannot be pressured to sell. STHs have taken a hit from the recent price drop, but they are parties who frequently trade so it should not take long for them to get to a neutral position. However , it’s crucial to acknowledge that the current economic cycle diverges from its predecessors due to the prevailing interest rate landscape, with capital no longer readily available at low costs. While there are no evident signals pointing to potential sell-offs or market stress, it is prudent to adopt a cautiously optimistic stance at this juncture.

Catalysts and Themes

Let’s shift gears and discuss some themes that we feel could play out in the market and see significant user traction in the next couple of years.

$BTC SPOT ETF Approval – In terms of narratives, a spot ETF approval is one that seems to be an extremely positive signal for BTC and other digital assets. The usual chain of events is: BTC goes up a lot, institutions magically turn bullish, and then the application is rejected, so we are back to square one. But this time it is different. A federal appeals court ruled on 29th August that the SEC must review Grayscale’s application to convert its Bitcoin trust into an ETF and this judgment in favour of Grayscale could be taken as a proxy for future judgments that are yet to come on ETF filings from various other entities like BlackRock, etc. ETFs are hugely popular among retail investors and institutions for their simplicity and low fees. A BTC ETF would truly open Bitcoin to the masses. With the halving aligning with ETF approval deadlines (Q1 2024), a lot of capital is expected to flow into the leading digital asset.

Convergence on Ethereum – With the rise of L2s on Ethereum, blockchain activity is consolidating to the most secure PoS blockchain. Since The Merge last year, 0.25% of $ETH supply has been burned, making $ETH a deflationary asset. Ethereum is focused on dishing out its rollup-centric modular roadmap in an effort to make the ecosystem faster, cheaper, and more secure. EIP-4844 is an effort to create a new fee market for data availability on Ethereum, making posting transaction data cheaper for L2s. Decentralised Validator Technology, currently being tested on the mainnet, is aimed at improving Ethereum’s decentralization and resilience by allowing multiple node operators to run a validator as a unit. Other proposals like enshrined PBS, PEPC, MEV burn, increasing MAX_EFFECTIVE_BALANCE, etc. are also aimed at improving the efficiency and security of the Ethereum L1. With all these proposed upgrades going live in the next few years, Ethereum could easily attract more developers, better applications, and various enterprises and act as the global settlement and development platform. Moreover, $ETH benefits as a commodity used within the blockchain network and as an asset of value with its retail and institutional adoption.

DeFi Reborn – Since the Shapella upgrade, liquid staking and restaking have taken the DeFi world by storm. Their dominance and growth will continue as DeFi markets become more efficient. Consolidation of decentralised exchanges, lending/borrowing, and futures/perpetual markets is another theme that is quite prevalent – the blue chip companies in these sectors have innovated on their designs and gained market share in this “build” market. This is expected to continue as the rate of innovation decreases and network effects start playing a larger role. The consolidation is also resulting in aggregators across that focus on intent and deliver the best UX. Other sectors like options and RWA markets are seeing slow but steady growth – they don’t play a large role as retail adoption catalysts but are significant to spur certain institutional interest. These developments collectively drive the DeFi ecosystem towards increased accessibility, innovation, and mainstream adoption.

GambleFi – Recent months have seen GambleFi getting significant attention. Essentially, this entails merging DeFi tokenomics with a casino-themed product. If we consider the parabolic growth of GMX and GLP as the benchmark for DeFi’s real-yield returns, then integrating real-yield features into GambleFi initiatives is likely to attract a broader user demographic. This includes not just gamblers, but also those seeking DeFi yields. Betting and prediction market platforms like Rollbit, Thales, Shuffle, Azuro, etc. have experienced substantial traction. Notably, most of these platforms currently operate in a centralized manner, facilitating cryptocurrency deposits. However, it’s foreseeable that in the future, there will be a shift towards conducting all wagering transactions on the blockchain. This move would enhance transparency while introducing a token economy that offers genuine yield prospects. Onchain gambling would enable betting by tying speculative entertainment value to token revenues. However, the exploit worth $41mn raises a red flag when it comes to the security of digital assets, imploring better frameworks for code audits, wallet security, and user awareness.

SocialFi – If you have been using social media platforms in the last decade, you have probably noticed that they are fumbling. From arbitrary censoring of competitor links in tweets, nonstop bots and spam across platforms to shadow banning or sudden changes in API access. When you use a centralized social app, your social graph (the entirety of your experience on the platform) exists at the whims of those who control the platform. Users feel locked into that application even when the app’s interests clearly don’t align with theirs. The rise of Web3 has led to the emergence of a new generation of social media platforms that are built on blockchain technology. Social apps like, Lens Protocol, DeSo etc. have been experimenting in the web3 space by allowing users to take ownership of their online identities and data, allowing them to tokenize their profile from existing web2 communities and introducing token-gated interaction mechanisms to increase and optimize engagement. In a traditional social media model, the platform owners and advertisers are the ones who reap most of the benefits. However, in a decentralized model, users and creators are compensated directly for their work. This compensation is usually in the form of cryptocurrencies. A lot of other benefits of using web3 tech fall in line with the influencer-driven content pipelines on social media platforms today –

  1. Immediate creator payouts – smart contract-based stablecoin/token transfers.
  2. Smaller but more interactive communities/fan groups – using a continuous curve to sell key access (E.g.
  3. Common Social graph – Solutions like Lens Protocol use singular social graphs across multiple platforms/frontends that allow external developers to develop newer user-centric experiences.
  4. Privacy – Privacy has been an important cornerstone of the Web3 vision. Users’ privacy and security have become paramount with data breaches and unfair sharing of user data. A reliable Web3 social startup with robust encryption and privacy measures can ensure that users have complete control over their data and interactions.

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