Vikara June 2024 Update – The Unseen Revolution that is Happening Now

Chart 1 is fascinating. It shows the considerable time, energy and brain power needed to launch the Bitcoin network. Satoshi’s invention leveraged decades of iteration and prior knowledge into what is one of the most successful digital networks ever invented.

The digital asset ecosystem continues to build upon its foundation, leveraging research, open-source code and shared data. Millions of people globally are focused on improving digital infrastructure. Chart 1 is a sanity check for those that believe digital assets are going away.

Chart 1 – Evolution leading to BTC’s launch

Source: @BitcoinMagazine

While many Web3 businesses do a poor job articulating it to investors, many teams are quietly executing business plans to advance use cases. As it was with Bitcoin, it goes unseen by the majority, particularly given these innovations are not happening inside listed equities.

Wall Street is willing to push Nvidia to astronomical levels on the back of the need for an unlimited global data centre build out without taking the time to think about the technology that is going to provide provenance for the data being processed.

Do we really believe that global corporates are going pay for the privilege to transfer their intellectual property into large language models that are specifically designed to replace the businesses using them? At what point does data provenance become critical these businesses?

Perhaps a better question is how many will opt in to pay big tech for a provenance solution when it is big tech that is commoditizing and selling others data? The opportunity for Web3 in data provenance alone is massive, given it can mitigate this risk for a fraction of the cost of big tech.

Any business with data (client lists, algorithms, process manuals, research, images, working plans, asset reconciliations, etc), should be discussing this risk today. Bitcoin’s value is in the ~1.5 megabytes of data it processes every ten minutes to provide provenance for 21 million coins.

Web3 can provide provenance on all types of metadata attached to real world intellectual property.

Macro

Equity managers remain unambiguously positive, with Bank of America’s global fund manager survey showing cash levels down to 4% (the lowest levels since June 2021) (Chart 2).

Chart 2 – Fund manager cash levels (1999-2024)

Source: BoFa Global Research

This sentiment hasn’t flowed through to any other asset class, with a bearish month for digital assets, commodities, and real estate. While equity markets keep pushing higher, only 30% of stocks inside the S&P500 are outperforming the index (Chart 3).

Chart 3 – Percentage of stocks that outperformed the S&P500 index (1990-2024)

Source: Richard Bernsten Advisors LLC, BofAML US Strategy, @Kobeissiletter

The dispersion in equities is more obvious when looking at the NASDAQ, with NVDA alone contributing to 40% of the total returns for the index year to date. This is anything but a broad-based rally (Chart 4).

Chart 4 – Nvidia versus the rest of the NASDAQ market share gain (2024)

Source: Kelvin Mu from Translink Capital

Despite the low breadth in the equity market, global fund managers are the most bullish since November 2021, which combines expectations around growth, cash levels and equity allocations (Chart 5).

Chart 5 – BoFA global fund manager survey rank of growth, cash, equity allocations (2001-2024)

Source: BoFA global research

Fund managers and CEOs are increasingly on the same page, with positive sentiment returning to the business leaders that are seeing demand in real time (Chart 6).

Chart 6 – CEO confidence levels (1985-2024)

Source: Conference Board, Goldman Sachs Investment Research, @mikezaccardi

Confidence seems to come from business leaders and investors gearing up for another Trump presidency, which is expected to be positive for rates and markets. Punters believe Biden’s chance of re-election are low and falling (Chart 7). 

Chart 7 – Presidential forecast over time (2024)

Source: @Polymarket

There is a notable disagreement between the optimism CEO’s and asset managers have versus Main Street. Some say it is because Biden’s “strong economy and jobs market” is skewed because it is based on over new 2 million government jobs since he took office (Chart 8).

Chart 8 – US government employees (2020-2024)

Source: Fred.com

As government roles keep rising, downward revisions of 2023 Main Street jobs data continues, confirming that the data was overestimated by more than 770,000 jobs. This implies that about one in four jobs that were reported to be added in 2023 never existed. No wonder voters aren’t feeling it.

Add to this the continued decline in full time roles, which fell by 625,000 in May (Chart 9), the biggest drop in full-time employment since December 2023, which also came with a rise in unemployment to 4%.

Chart 9 – Employed, usually work full time (1970-2024)

Source: FRED.com

Part time employment is the only strong area of the labor market, and while Chart 10’s axis is misleading, seeing foreign born workers gaining six million jobs while native born workers lose one to two million since Biden too office isn’t helping Biden’s loose immigration policy (Chart 10). 

Chart 10 – US foreign versus native born workers (2015-2024)

Source: US Bureau of Labor statistics, Financial Times

Sadly, even the part-time employment market strength seems to be coming to an end, with temporary help service jobs back below pre-Covid levels (typically seen as a leading indicator) (Chart 11).

Chart 11 – All employees, temporary help services (1990-2024)

Source: US Bureau of Labor Statistics, National Bureau of Economic Research, Game of Trades

Another way to measure how Main Streeters are feeling about the economy is The University of Michigan’s Current Conditions Index minus the University of Michigan’s Expectations Index, which has just hit a new low. It is notable that all past bottoms have coincided with recessions (Chart 12).

Chart 12 – The University of Michigan’s Current Conditions minus Expectations Index (1978-2024)

Source: Ollari Consulting, Bloomberg

It is no surprise that sentiment is this bad given the data across the economy. Starting with small firms seeing their inventories as too high (Chart 13).

Chart 13 – NFIB small business inventory satisfaction (2005-2024)

Source: Thedailyshot.com

Adding to it that commercial construction starts are back to GFC lows (Chart 14).

Chart 14 – Commercial contruction starts (million of square feet) (2008-2024)

Source: Wells Fargo

The Covid-19 excess savings safety net has evaporated (Chart 15).

Chart 15 – Household excess savings as a share of GDP (2019-2024)

Source: de Soyres, F., Moore, D., and Julio Ortiz, FEDS notes, @GameofTrades

US PMI data continues to decline, and it is very likely that many manufacturers go into wait and see mode ahead of elections, further creating a demand vacuum into year-end (Chart 16).

Chart 16 – Chicago Business Barometer (1970-2024)

Source: @Vetta_Fi

An economic surprise index that suggests everyone can see things weakening except for the 10-year rate market (Chart 17).

Chart 17 – Citi economic surprise index (2022-2024)

Source: Bloomberg, @Convertbond

And lastly the collapse in short cycle, physically settled lumber and scrap metal prices (Chart 18). This is a recipe for a soft economy in the back half of the year.

Chart 18 – Lumber and steel scrap prices (2023-2024)

Source: tradingview.com

Aggregating what we see in the data, a growth scare in the US is likely. Remarkably, the upcoming recession will happen despite US and global debt going parabolic (Chart 19).

Chart 19 – World debt ($ trillions) (1952-2024)

Source: Bank of America Investment Strategy, Bloomberg

It will happen despite the Federal Reserve bailing out US banks to the tune of $517 billion of unrealized losses (Chart 20).

Chart 20 – All FDIC insured institutions unrealized losses on investment securities (2008-2024)

Source: FDIC

It will also happen despite US interest payments outpacing defense spending (Chart 21).

Chart 21 – US defence spending versus interest payments (1950-2024)

Source: FRED.com, THeDailyShot.com

But here is the kicker. This will be the first global recession since the 1990’s where central banks are in a position where they can ease financial conditions considerably as things weaken, a completely novel scenario for many traders that are sub-50 years old. 

This is likely why Main Streeters (and institutional investors as noted above) have a higher allocation in equities than ever before, not only is it the only asset class outpacing the inflation they have suffered, but it is also likely the largest beneficiary of loosening monetary policy (Chart 22).

Chart 22 – Stocks as a percentage of personal assets (households and personal trusts) (1950-2024)

Source: NDR.com @WinfieldSmart

With all the bearish news, how can anyone be positive or allocated in this market? It is simple. The Fed is going to cut sooner than consensus believes, and when it does, China will be able to stimulate as shrinking interest rate differentials with the US provides cover for its currency as it loosens.

While it is not perfect, there are many parallels to 1995, which was the last time a soft landing occurred in the US. The Fed cut from 600bps to 525bps, pushing the S&P500 to new all-time highs on its way to a 1999 blow off top (Chart 23).

Chart 23 – S&P500 parallell in 1995 versus 2024

Source: Goldman Sachs Investment Research

With a Trump presidency, a soft landing may be possible, as there is no doubt he will pressure the Federal Reserve to lower spending rates while pushing the accelerator on an already blazing fiscal policy. This all seems increasingly possible due to a continued erosion of core CPI (Chart 24).

Chart 24 – US CPI (1990-2024)

Source: Creative planning, @charliebilello, YCharts

The question remains as to what asset class has the most upside within the backdrop of falling inflation, looser monetary policy, irresponsible fiscal policy and high geopolitical tension. We would point your attention to the below chart of Bitcoin’s adoption (Chart 25).

Chart 25 – Bitcoin adoption versus the internet (1990-2005 versus 2014-2029)

Source: crypto.com

Like it or not, the adoption of the digital economy is happening in real time, and it is still early for anyone that takes the time to understand it (Chart 26).

Chart 26 – Technology adoption s-curves (1900-2024)

Source: @LukeMikic21

While Bitcoin is the most well-known digital network, it is one of many with business models forming in Web3 that have equally as good fundamentals supporting their continued adoption.

We continue to ask the same question to potential LPs and readers of our monthly: can you truly afford to stick your head in the sand and remain unallocated to one of the largest changes happening in commerce since the invention of the computer?

Digital Assets

June was a rough month for digital assets, with a number of large caps finishing the month down significantly on the year (ImmutableX (IMX) and Injective (INJ) are both down ~35% in 2024, for example). Many others have given back gains and then some from the recent peak in March (Chart 27). Small caps have fared even worse with many tokens returning back to November-December 2023 levels.

Chart 27 – Large cap altcoins YTD 2024 price performance

Source: Tradingview; tokens in order from top to bottom include: RNDR, NEAR, SOL, GRT, LINK, INJ, IMX

While altcoins have been selling off since March, Bitcoin hung in until very recently, falling back below $60k the week of June 24, although bouncing back to $61k on June 30. Many are blaming the recent sell off on what seems like a coordinated effort amongst governments and administrators that hold large amounts of recovered or confiscated Bitcoin.

This includes the US Government’s announcement that they are moving 3,940 BTC onto Coinbase (the same Coinbase they previously sued for being an unregistered exchange!) and the German Government’s 6,500 BTC transfer on June 19 and subsequent sale of 900 BTC on June 25 (German government still holds 46,359 BTC). Or Mt. Gox claiming they will finally be distributing $9.4bn worth of BTC to approximately 127,000 Mt. Gox creditors.

The reality is daily BTC volume is significantly higher than the total that potentially will come to market and the fact is this is likely to drip out over time, or not at all, as may be the case with the Mt. Gox beneficiaries. Regardless, it has created a fair bit of fear around BTC the past week.

While June was overshadowed by poor token performance, plenty of positive news was released during the month. Things we found of interest:

  • Investment manager VanEck filed the first US exchange traded fund (ETF) tied to the spot price of Solana ($SOL).
  • Standard Chartered is in the process of launching a crypto trading desk to be based out of London.
  • Fidelity announced that they have joined JPMorgan’s tokenized network built on Onyx Digital Assets, JPMorgan’s private blockchain network based on Ethereum.
  • Analysts at research and brokerage firm Bernstein upped their Bitcoin price target by year-end 2025 from $150,000 to $200,000. Giddy-up.
  • Robinhood announced the $200m acquisition of crypto exchange Bitstamp that will bring retail and institutional customers from the EU, UK, US and Asia to Robinhood.
  • Coinbase launched its new “smart wallet” that intends to solve current onboarding issues, complex onboarding, network fees, and recovery phrases, with new users being able to create a wallet with Face ID, Google Chrome profile, fingerprint, or Yubikey without recovery phrases.
  • MicroStrategy acquired an additional 11,931 BTC for $786m at $65,883 per BTC, bringing their total holdings to 226,331 BTC acquired for $8.3bn at an average price of $36,798 per BTC.
  • Moody’s Ratings granted an “A-bf” bond fund rating to Hill Lights International Limited, responsible for the issuance of OpenEden’s tokenized US Treasury bills, or TBILL Tokens.
  • Deutsche Telekom announced they plan to enter Bitcoin mining.
  • Video game giant Konami announced that they will use Avalanche ($AVAX) for their NFT platform, Resella.
  • Aptos Labs ($APT) and NBCUniversal have entered into a long-term development agreement to provide the entertainment company with Web3 fan experiences, customer loyalty programs and gaming.
  • RWA platform Swarm Markets will offer tokenized gold via NFTs that represent ownership of physical gold, with the gold bars undergirding the tokenized assets held in a London-based Brink’s vault.
  • Nomura Holdings and its digital asset arm Laser Digital released results of their “Institutional Investor Survey on Digital Asset Investment Trends” that interviewed 547 investment managers with the survey noting that 54% of Japanese institutional investors plan to invest in crypto over the next three years, citing portfolio diversification and high return potential as key drivers.
  • McKinsey released a report titled “From ripples to waves: The transformational power of tokenizing assets” where they forecast a market size of $2 trillion by 2030.
  • The Vatican Library has partnered with NTT DATA Italia to use blockchain technology to preserve its vast collection of 180,000 manuscripts and 1.5 million printed books in the form of NFTs.
  • Investment manager VanEck filed the first US exchange traded fund (ETF) tied to the spot price of Solana ($SOL) while change their profile picture on X to a Pudgy Penguin NFT
 

While industry adoption has continued its positive momentum, token prices have sold off as noted above. That said, lots of data is pointing to a lack of investor interest in crypto and capitulation…once again. This data ranges from greed and fear and bullish/bearish sentiment to socials engagement and crypto outflows. Below is a collection of different data that points to a collective bearishness while also signaling a potential entry opportunity in altcoins.

First is the greed and fear index. CoinMarketCap (CMC) uses the price and trading data of the top 100 tokens, together with proprietary user behaviour data to track market sentiment. Values sub 50 have historically provided excellent entry points while values above 80 have signalled tops. The index is current at 44 (Chart 28).

Chart 28 – CMC Greed & Fear Index at 44

Source: Coinmarketcap; at June 29, 2024

Next is sentiment. Data from crypto analytics firm Santiment shows that bullish Bitcoin remarks across social media platforms X, Reddit, Telegram (TG), among others, have dropped significantly over the past few weeks, potentially signally a market bottom (Chart 29).

Chart 29 – Bitcoin crowd sentiment on social media (April 1, 2024 – June 28, 2024)

Source: Santiment

Another indicator we use to gauge crypto sentiment given the high number of retail participants versus other markets is socials engagement. Things like X, TG or YouTube. YouTube crypto channels viewership is back to October 2023 levels, when the crypto market last bottomed and near the lowest levels since early 2021 (Chart 30).

Chart 30 – Crypto YouTube viewership (January 2019 – June 2024)

Source: Intothecryptoverse

Again, given the high amount of retail market participants, we can guarantee when things start getting wild again, and new money is flowing back into the crypto market, YouTube viewership will explode.

Next is fund flows. Flows have been largely negative for the spot BTC ETFs for weeks, only changing the past week, potentially signalling a market reversal.

Chart 31 – Daily total BTC Spot ETF Net Inflows

Source: sosovalue.xyz

Unsurprisingly, total crypto asset flows have been negative the past two weeks as capitulation seems to have crept into the market. The week ending June 21 saw the third largest crypto outflows over the past year at $584m. The prior week was the second highest with outflows of $597m. Only flows at the end of March 2024, when the market peaked, saw higher outflows at $943m. This lines up with the prior chart, although as noted above flows seems to have turned positive the last week of June, at least with spot BTC ETFs.

Chart 32 – Weekly crypto asset flows (US$m)

Source: Bloomberg; CoinShares; as at June 21, 2024

Last is funding costs. Funding costs for most tokens are close to breakeven or negative (Figure 1). Given negative funding rates mean shorts pay funding fees to longs, it is indicating bearish market sentiment. While this can extend for periods of time, given it aligns with what we view to be a potential capitulation in altcoins after three months of downward trending prices, we expect this to reverse in the near term.

Figure 1 – Funding Rates For Perpetual Swaps

Source: CoinGlass; as at June 29, 2024.

Collectively, much of the crypto specific data is pointing to an opportunity to edge into the market ahead of what we continue to view as the coming Banana Zone.

While the market has been performing poorly, many new, high-profile tokens have still come to market, with most underperforming post launch. This has given rise to the narrative that retail punters will finally have a chance to get one up on VCs. While that is unlikely, there are a few cases in the market at the moment where prior high-profile businesses raised rounds at higher valuations than the listed tokens current valuation and more importantly, with no lock-ups. Take blockchain infrastructure provider LayerZero Labs, who raised a $120 million Series B round in April 2023 at a valuation of $3 billion from 33 investors, including Andreessen Horowitz, auction house Christie’s, Sequoia Capital and Samsung Next, Circle Ventures and OpenSea Ventures. It is reported that these investors have a 4-year lock-up from token listing.

The token ($ZRO) listed on June 20 at a market cap of $4.1bn, but quickly fell to $2.4bn on June 28, or 20% below the last private round in April 2023.

Other newly listed tokens have experienced similar drops post listing, again approaching prior private round valuations (Figure 2).

Figure 2 – New 2024 large cap tokens have performed poorly post launch

Source: Coinmarketcap; Crunchbase; *Dealroom estimate

This ties into the overall approach to new token listings. Most of the large, new listings have a very low circulating supply versus fully diluted supply. Meaning tokens will leak out over varying periods of time, diluting current owners. A recent Binance study demonstrated this in Chart 33.

Chart 33 – Recently launched tokens circulating versus fully diluted supply

Source: Binance Research; data as at May 14, 2024

The devil is in the details. The narrative has been that VCs got in cheap and are dumping on retail. While that holds true in some instances, token lock-ups have improved over previous cycles, where lock-ups tend to be over 3-4 years or longer versus shorter periods in the past. Further, investors need to understand the process and structure for tokens that are used for community growth such as incentives or marketing, which can be a significant portion of supply. That said, circulating supply versus fully diluted supply can be misleading if a meaningful portion of supply is used to secure the network, such as to pay validators or miners.

One thing we make sure to analyse prior to any token purchase is the token unlock schedule. As noted above, lock-up schedules have become more aligned with traditional equity investors, where teams and investors are locked up for more than one year.

Chart 34 – Forecast token unlocks (2024-2030)

Source: Token Unlocks; Binance Research; as at May 14, 2024

On the regulatory front, it was a month of litigation, with the biggest news of the month was that fact the Securities Exchange Commission (SEC) closed its investigation into Ethereum 2.0 (Figure 3). Another win for the crypto industry versus the SEC. Also not surprising given the imminent launch of spot ETF ETFs.

Figure 3 – SEC drops investigation into Ethereum and deems ETH not a security

Source: x.com

Next, the SEC announced that it has filed a lawsuit against Consensys, the parent company of MetaMask. According to a complaint on June 28, the company has been operating as an unregistered broker and engaging in the unregistered offer and sale of securities through MetaMask Swaps since 2020.

The complaint claims that Consensys has collected more than $250 million in fees by brokering crypto asset transactions and offering staking services without proper registration, thereby depriving investors of crucial protections. The SEC seeks a permanent injunction, civil penalties and other equitable relief against Consensys for these alleged violations of federal securities laws.

This follows the fact that Consensys sued the SEC in April after receiving a Wells notice from the agency, challenging potential attempts to classify Ether and related staking services as securities.

At the time the company said it “fully expected” the regulator to follow through on its investigation:

“The SEC has been pursuing an anti-crypto agenda led by ad hoc enforcement action. This is just the latest example of its regulatory overreach — a transparent attempt to redefine well-established legal standards and expand the SEC’s jurisdiction via lawsuit.” 

Looks like the SEC did just that.

Last, Coinbase filed lawsuits on June 27 against the SEC and the Federal Deposit Insurance Corporation (FDIC) for alleged noncompliance with FOIA requests regarding Ethereum’s proof-of-stake transition. Coinbases’ lawsuits also accuse the federal agencies of attempting to exclude the crypto industry from the banking sector.

Figure 4 – Coinbase counsel comment on SEC/FDIC lawsuit

Source: x.com

In US state news, both North Carolina and Louisiana introduced bills to block Central Bank Digital Currencies (CBDCs).

Tokens

This month we are highlighting a platform called Pump.fun. Pump.fun is a relatively new Solana-based marketplace that allows users to create and distribute their own tokens, with the platform used almost entirely for memecoins.

For those who have been around markets for a while, this is the type of activity that happens when hype overtakes sanity. Couple that with the launch of celeb endorsed memecoins, ranging from Caitlyn (fka Bruce) Jenner, Iggy Azalea to Hulk Hogan and Andrew Tate, and it’s all coming together for a period of capitulation in alt coins.

The good news is it looks to have come to an end as evidenced by the amount of active and new users on Pump.fun. New daily users peaked in early June at over 30k per day. It’s now under 8k per day. Add to that total daily users are now sub 25k, a huge drop from nearly 70k a couple weeks ago.

Chart 35 – Pump.fun active and new user count

Source: Dune

Further, many memes have been destroyed. Take $JENNER for example. It’s down 95% from its late May peak. Well known memes like Pepe ($PEPE), Bonk ($BONK) and Dog Wif Hat ($WIF) were down between 40 to 50% in the first three weeks of the month, although the largest market cap memes have come back the last week of June.

As we pointed out in our last monthly update, the first ever memecoin conference was held in Lisbon at the end of May, with it selling out at ticket prices at $850. These type of events and demand for such events happens because of hype and nothing more. This is evidenced in the number of new tokens being launched (Charts 36 and 37). We note in Chart 36 the blue bar is Layer 2 Base, which has been used predominately for memes.

Chart 36 – New ERC-20 tokens by blockchain (January 2017 – May 2024) 

Source: Dune

Chart 37 – New Solana tokens (August 1, 2023 – June 30, 2024)

Source: Step Finance

As portfolio managers of tokens we deem to have utility, we welcome this clean out as it drags quality projects down with it and presents buying opportunities for quality tokens.

Many, including us, have said it’s a positive thing that memecoins help onboard new users and in turn bring capital into the ecosystem. We still believe that. But when the scammers, hypesters and D-list celebs takeover, lessons need to be learned. Think the past few weeks have done just that, helping create an opportunity to enter positions on high quality utility coins ahead of silly season.

Vikara

Luke McFarlane
Co-Founder & Portfolio Manager
Vikara Capital

Vikara CO-FOUNDER & PORTFOLIO MANAGER

Mark Riccio, CFA
Co-Founder & Portfolio Manager
Vikara Capital

Contact Us

Vikara is a liquid, open-ended fund investing in digital assets (excluding Bitcoin and Ethereum) with no lockups (add or redeem monthly). Vikara’s proprietary investment and rigorous risk management processes aim to outperform the broader digital asset markets. Founders have over 40 years combined investment experience at Millennium, Balyasny, Platinum, Merrill Lynch and Macquarie.

Vikara, in Sanskrit, describes the process of change. Its definition is constantly evolving, changing with economic cycles, technology, and geopolitics. It is a transformation of thought or logic, a modification in the direction of travel, an alteration in action or participation. It is one thing to want change, but another to drive it. We believe in a world where commerce doesn’t need intermediaries. Where people are paid directly for content, time, and effort. Where privacy, data and free speech is given, not something to opt-in for.

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