Vikara May 2024 Update: Bipartisan Support – Banana Zone Incoming!

Digital assets becoming a 2024 US election issue will be viewed in hindsight as the final hurdle that ushered in large scale global adoption. Trump turned positive, Biden pivoted, and a politically charged SEC has been left hanging out to dry.

We finally have bipartisan agreements to define a regulatory framework, the Bitcoin ETFs prove Wall Street has an insatiable demand for the asset class, and the global monetary and fiscal liquidity cycle is turning at the same time as the halving. What is coming next is a generational opportunity. 

When regulation is defined, the inflows of capital into digital assets will be enormous. Entrepreneurs will partner with the US and begin solving its digital infrastructure inefficiencies. A fly wheel will start and it will usher in the acceptance of the digital asset opportunity.

This is really clear for those of us watching closely, despite the headlines doing little justice to the pace of innovation. As political objectives change, the message from the media and industry will too, and we will be fielding questions on real world use cases instead of meme momentum or SEC cases. 

Despite Bitcoin being at all-time highs, the opportunity to invest is now, just as it was in the last cycle, and the cycle before that. With all the tailwinds mentioned above and below, it is difficult to make a case that the digital asset prices are lower at year end.

US M2 growth has turned positive (Chart 1), fiscal spending remains loose, interest rates have stopped rising, Fed bailouts have restarted, and US growth is slowing. All of this bodes well for more progress on inflation, despite it looking increasingly like a necessary evil along the way to a deglobalized world. 

Chart 1 – Global M2 money supply (logarithmic) (2008-2024)

Source: @TomasOnMarkets

Macro

Parsing out signal versus noise is the hardest part about the seemingly unlimited set of macro data points per month. Understanding the net amount of liquidity is what we are trying to determine at any given point. The one thing we are certain of, is that more liquidity is now required. 

China’s contracting M1 money supply is very concerning to us. How bad must its economy be for physical currency and coins, demand deposits, traveller’s checks, and other checkable deposits to be shrinking (Chart 2)? 

Chart 2 – China M1 Money Supply (2000-2024)

Source: Ollari Consulting

China focused financial analysts are now pricing in the negative bias of the state of the economy, with 12-month forward earnings for the CSI 300 Index declining all year (Chart 3).

Chart 3 – Chinese 12-month forward consensus earnings (CSI300, weekly) (2011-2024)

Source: Longview Economics, Macrobond, thedailyshot.com

China’s real estate crisis also continues to worsen. Chinese home prices dropped by 0.9% in April, the second-biggest decline on record. Home prices have declined in 30 of the last 33 months. China’s housing market recession has worsened after nearly three years (Chart 4).

Chart 4 – Chinese home prices (2011-2024)

Source: True Insights, investing.com, @jsblokland

Markets have been expecting monetary easing from China for some time, and while it has stepped up efforts recently, its actions continue to fall short. Local government asset purchases, small cuts to borrowing rates and minimum deposit changes are not enough (Chart 5). 

Chart 5 – Chinese property prices versus monetary policy rate (2005-2024)

Source: Topdown Charts, LSEG, NBS

The lack of support from the top is creating fear, with the pace at which Chinese people are withdrawing their money from the banking system becoming concerning. Record withdrawals are a sign that the pressure we have been talking about all year is becoming serious onshore (Chart 6). 

Chart 6 – Chinese new monthly Yuan deposits (Trillions of Yuan) (2000-2024)

Source: Bloomberg

While we will never know where this cash is being deployed, we suspect that Chinese private sector gold demand has a lot to do with it, with 543 tonnes imported into China in 1Q24 with only 35% of that making its way to the PBoC (Chart 7).

Chart 7 – Est. Quarterly PBOC gold purchases (mt) (2006-2024)

Source: World Gold Council, Gainsville Coins, IMF, BIS

China needs a joint and substantial monetary and fiscal easing. However,  the repricing of Japanese interest rates means that any interest rate declines in China will add weight to an already heightened risk of a currency devaluation (Chart 8).

Chart 8 – Japanese 10-year government bond yields (2006-2024)

Source: TradingView

Maintaining its currency remains incredibly important for China, particularly given the Yuan’s share of cross-border trade. After decades of convincing the world that its currency can be relied upon, a sudden devaluation would be disastrous (Chart 9). 

Chart 9 – Cross-border FX deals by currency (2010-2024)

Source: @StubbornFacts

Higher ex-Chinese interest rates limit the ability for Beijing to stimulate. Strategically, it is no surprise that the US may want to maintain higher rates for longer as an effective form of pressure on China. As a result, markets are finally questioning rate cuts in 2024 (Chart 10).

Chart 10 – Market pricing for the Fed funds rate change in 2024 (2023-2024)

Source: Thedailyshot.com

But how can the US afford to maintain higher rates without causing issues to its economy? It cannot. The Fed merely took risk onto its balance sheet when the banking sector collapsed in 2023. The level of support still being provided is significant (Chart 11).

Chart 11 – Credit facilities provided by the Federal reserve (2003-2024)

Source: Board of Governors of the Federal Reserve System (US)

While the support provided to bank balance sheets has worked to date, there are more signs that the US economy is starting to slow, with the Citi US economic surprise index now considerably below zero (Chart 12).

Chart 12 – Citi US Economic Surprise Index (2021-2024)

Source: Citi, TheDailyShot.com

Other leading indicators are also pointing to potential concerns, with the US Conference Board Leading Economic Index down 13.1% from its peak (Chart 13). 

Chart 13 – Conference Board Leading Economic Index (1959-2024)

Source: FRED, VettaFi, advisorperspectives.com

At the same time as the economy is weakening, US interest expenses on public debt has risen to $1 trillion (Chart 14). With debt levels rising and interest rates remaining higher for longer, more Federal Reserve support is likely needed for the economy to remain unscathed. 

Chart 14 – US Government Interest Expense (billions) (1947-2024)

Source: US Bureau of Economic Analysis, Game of trades

Additional support doesn’t seem to concern the Fed, with its commencement of Treasury buybacks just another way to support a reckless pace of spending without “easing” (Figure 1). They are telling us they are tightening while buying back Treasuries. 

Figure 1 – Tentative schedule of Treasury buyback operations

Source: @krugermacro

So far, Treasury markets have managed to find buyers of the unprecedented levels of debt being pushed into the market. While many US trade partners continue to reduce ownership, the demand in non-official Treasury holdings continues to grow (Chart 15).

Chart 15 – Foreign official holding of long term US Treasury holdings (2012-2024)

Source: US treasury, Bloomberg, TheDailyShot.com

Global investment flows into US equity markets are not concerned about the current backdrop of the US economy (Chart 16). So despite the increasingly uncertain outlook, there isn’t an obvious alternative to invest in.

Chart 16 – Foreign investment in US securities (2003-2023)

Source: US Department of Treasury, Federal Reserve Board, Bloomberg

While it is easy to focus on a broadening US economic slowing, it is also prudent to point out that M2 money supply has finally stopped shrinking, supporting our view that liquidity is returning. This has historically been very favorable for digital assets returns. We believe it will be this time too.

Chart 17 – US M2 Money Supply YoY% (1960-2023)

Source: Koyfin, @CarlBMenger

Digital Assets

It’s been a wild month for digital assets. From former President Trump kicking off the “R vs D and who is more pro-crypto” race to the spot ETH ETF approval to pensions aping into Bitcoin ETFs, it’s all lining up nicely for an imminent crypto run.

Starting with news we found of interest.

  • Mastercard launched their new “Crypto Credential” service making peer-to-peer crypto transfers more intuitive for average users, allowing users to send and receive digital assets using a Mastercard Crypto Credential Alias rather than blockchain addresses (Figure 2).
  • Chainlink ($LINK) and the DTCC announced successful completion of a pilot project, named Smart NAV pilot, with JPMorgan, Templeton, BNY Mellon, and other major US banks in order to accelerate tokenization of funds. 
  • PayPal’s stablecoin (PYUSD) launched on Solana.
  • Crypto lending company Maple Finance ($MPL) launched a new platform called Syrup, a DeFi lending product targeting 15% yields sourced from fully collateralized loans to the largest institutions in crypto.
  • DBS, Singapore’s largest bank, is reported by on-chain analytics firm Nansen to hold more $650 million in ETH.
  • Reebok launched “Reebok Impact” with a partnership with Futureverse, developer of The Root Network ($ROOT).
  • Casper Labs ($CSPR) announced a partnership with IBM Consulting to launch Prove AI, an AI governance solution that enhances transparency and auditability for AI training data and directly integrates with IBM’s watsonx. 
  • Hong Kong banned Worldcoin’s ($WLD) data collection due to privacy concerns.
  • Tether, issuer of USDT, the world’s largest stablecoin, announced plans to launch its Pear Phone that will run on Android Open-Source Project (AOSP) software, ditching Google apps in favor of peer-to-peer (P2P) alternatives.
  • Decentralized Physical Infrastructure (DePIN) project MapMetrics announced that they would move from Solana to Peaq, a layer 1 built specifically for DePIN projects and one which we are keeping a close eye on ahead of their token launch.
  • Circle, the world’s second-largest stablecoin issuer ($USDC) announced plans to move its legal base to the US from its current home of Ireland, a sign that there is growing comfort to base operations in the USA, after several years of companies leaving for more friendly jurisdictions.
  • Hugo Boss launched HUGO BOSS XP, a Web3 loyalty program that seamlessly blends traditional loyalty features, such as levels and points, with innovative blockchain-supported elements including collection and redemption of tokens (NFTs) through their purchases and other interactions across channels and brands.
  • Semler Scientific, a medical device maker that trades on the NASDAQ under the SMLR ticker, announced that they have adopted Bitcoin as its “primary treasury reserve asset,” purchasing 581 BTC for $40 million.
  • A new restructuring plan for failed crypto exchange FTX was announced and is expected to give 98% of creditors more than 118% of allowed claims.
  • Robinhood Markets announced Monday that the SEC issued its crypto unit with a Wells Notice on May 4, signalling that charges or an enforcement action is imminent

Figure 2 – Mastercard Crypto Credential Launched

TextSource: x.com

Vikara’s fund performance has been strong both month and year to date with factors lining up nicely for a potential crypto market surge in the back-half of 2024 through 2025.

And as we’ve been preaching for a while now, history looks to be repeating itself as evidenced in Charts 18 and 19. 

Chart 18 – BTC & Presidential Election Cycles

Source: x.com

Chart 19 – BTC prepping to enter Banana Zone?

Source: LSEG Datastream; Global Macro Investor (GMI)

Why do we believe there is a strong chance of extraordinary gains ahead? Beyond the macro factors mentioned above, we have:

  • BTC and ETH ETF approvals – check
  • Bitcoin halving number four – check
  • Bipartisan support in USA for sensible regulation – check
  • Accelerating institutional adoption – check
  • Growing real world use cases – check
  • Accommodative monetary policy – coming
  • Pro-crypto Trump next US president – likely


For context on potential upside, the Total3 Index (all listed tokens not including Bitcoin and Ethereum) was up over 20x from May 2020 to November 2021 (Chart 20). 

Chart 20 – Total3 Index (May 2020 – November 2021) up over 20x

Source: Tradingview

And we appear to be in the equivalent of May 2020. Time is running out. Especially since many seem to be front running themes well in advance these days.

Onto politics and regulations, a favourite topic for us given its overall importance to the future institutional adoption of crypto. 

It was the month that the Trump campaign ramped up their effort of courting crypto bros. What started with a stereotypical bro (possible a plant 😊) asking Trump his views on crypto, turned into a viral exchange (has 1.1m views on X) that put influencer Malcolm DeGods in the spotlight, even credited him for getting Rs and Ds on the same crypto team.

Figure 3 – Malcolm DeGods asking Trump his views on crypto at Mar Lago

Source: x.com

Trump doubled and tripled down, first sending a note on Truth Social that he’s “positive” and “open-minded” to “all things in this burgeoning industry” (Figure 4). Bullish. 

Figure 4 – Trump on Truth Social supporting crypto

Source: Truthsocial

Then while speaking at the Libertarian National Convention, he stated “I will support the right to self-custody” (Figure 5). Music to the ears of those that understand why decentralization is important. 

Figure 5 – Trump Speaking at Libertarian National Party Convention

Source: x.com

He topped it off by announcing that he would accept crypto donations in eight separate cryptocurrencies (although no donations on May 31 given website crashed following his guilty conviction!)

Figure 6 – Trump campaign accepting eight cryptocurrencies

Source: winred.com

In typical Trump fashion, he got tons of milage out of what is a small special interest group. People even claiming crypto bros will flip the election. Love him or despise him, the man is a marketing guru. 

None of this is surprising. While its clear that the crypto voter block is still small, it’s growing and more importantly, it’s comprised of younger voters across all socioeconomic groups and cultural classes. 

In fact, a survey by Harris Polling revealed that 20% of registered voters in swing states view crypto as a major election issue. Quite surprising!

Figure 7 – Blockchain Association, DCG & Harris Poll Survey: Crypto Attitudes in Swing States

Source: DCG & The Harris Poll

On the regulation front, the House passed the Financial Innovation and Technology for the 21st Century Act (FIT21), creating a pathway for cryptocurrencies to be exempt from many securities regulations if they achieve sufficient decentralization. This is a stark contrast to the SEC’s current approach and potentially provides a regulatory framework for the classification of what is and is not a security, versus regulation by enforcement, the SEC’s current approach.  

The US House of Representatives also passed H.R. 5403, the Central Bank Digital Currency (CBDC)  Anti-Surveillance State Act, sponsored by Majority Whip Tom Emmer (R-MN). The legislation blocks the creation and issuance of a CBDC without explicit congressional authorization, aiming to safeguard Americans’ financial privacy.

They weren’t done with Congressmen French Hill (R-AR), Josh Gottheimer (D-NJ), Tom Emmer (R-MN), Wiley Nickel III (D-NC) and Mike Flood (R-NE) sending a letter to SEC Chairman Gary Gensler asking that the SEC approve the ETH ETF on May 22. ETH ETFs were approved 24 hours later. While timing is suspect, we’ll take it. And importantly, both sides of the aisle came together which is a great sign for the future of crypto and regulation in the USA.

Their formal letter also included approval of “other digital asset ETPs” (Figure 8).

Figure 8 – House of Reps letter to SEC Chairman Gary Gensler

Source: House.gov

This got the Solana bros giddy. Joe McCann posted a survey where 77% of those surveyed said Solana was the next ETF to be approved (Figure 9).

Figure 9 – Is there a Solana ETF coming?

Source: x.com

There was also regulation passed at the state level. Governor Ron DeSantis signed Senate Bill (SB) 7054 and SB 214 to protect the personal finances of Floridians from (in their words) “government overreach and woke corporate monitoring” (Figure 10). SB 7054 prohibits the use of a federally adopted central CBDCs by excluding it from the definition of money within Florida’s Uniform Commercial Code.

Figure 10 – State of Florida’s Take on CBDCs

Source: x.com

Oklahoma also passed a bill earlier this week that protects state residents’ right to self-custody digital assets. The bill will go into effect on November 1, 2024. OKHB3594 was signed into law by Governor Kevin Stitt. It was sponsored by four Republicans — State Senators Bill Coleman and Dana Prieto and State Representatives Brian Hill and Cody Maynard. Under the bill, Oklahoma bans restricting or outlawing the use “or the self-custody of digital assets using a self-hosted wallet or a hardware wallet”.

Sensible, formal regulation (versus regulation by enforcement) is the secret sauce to onboard institutions en masse. We compare this to alternatives like private equity funds, hedge funds or real asset funds, where pension funds and endowments gradually increased their exposure over the years as returns exceeded equity and debt markets. We expect the same approach where they dip their toes in with ETFs, but eventually move to funds like Vikara and an increasing pace and size.

Take the state of Wisconsin Investment Board for example. They recently disclosed a $100 million in BlackRock’s Bitcoin ETF (IBIT) as well as a position in Grayscale’s Bitcoin ETF.

In other huge and somewhat surprising news, the spot ETH ETF was approved on May 23, including applications from BlackRock, Fidelity, Grayscale, Bitwise, VanEck, Ark, Invesco Galaxy and Franklin Templeton. While there are endless amounts of hype posts pushing the fact it’s likely ETH gets bid as money flows into the ETFs, we want to provide what we hope is a thoughtful analysis and why it’s great for bringing capital into “crypto”, it’s really just keeping money in the traditional financial ecosystem.

Our view is that an ETH ETF approval was guaranteed. Why? Because the US Government would much rather have investors funnelled into a traditional finance product run by companies they have close ties with (ie BlackRock). Bloomberg, for example, noted that “BlackRock is becoming one of Wall Street’s key D.C. conduits” in an August 2022 article.

Fact is, once an investor buys ETH in an ETF, the only thing they gain is exposure to ETH. Fiat in, fiat out. No self-custody. No money outside the “system”. Just the same ‘ol tradfi products pretending to be crypto. 

But more importantly, it stops learnings. When investors open a Coinbase account, or heaven forbid start a MetaMask or similar wallet, they are forced to educate themselves on crypto and ultimately the benefits of decentralization. For many, it’s an exciting new path that opens up the doors to a whole new world of investment opportunities. One that is global and democratized. 

This is exactly what the US Government and Wall Street do not want. They have long had a monopoly on money. Crypto is a threat, both as a store of value but also a currency to be used across projects ecosystems and networks. No longer do you need to be a slave to a mortgage from the bank down the street that has average customer service at best, charges ridiculous fees, and is doing you a favor by accepting your hard-earned savings. 

Now we’re not naive and think crypto is going to replace the USD, likely ever (dollar likely kills itself first), but at the same time, it is the first real competitor to the dying dollar, something the US Government has long underestimated but will now do what can to reign in, in this case keep the money in the banking system. Just like always.

Tokens

We’ve taken a bit of a detour this month on the token discussion. 

The first ever memecoin conference was held in Lisbon the last week of May. It quickly sold out with tickets costing $850 each. The skeptical view is that this marks the top, or at least slowdown, for mememania. Token price action for most leading memes also signalling the same with utility tokens significantly outperforming memes the past month, although large cap memes did well the last week of May. And while we aren’t a memecoin fund, we keep a close eye on the ebbs and flows of memes given it pushes and pulls liquidity from the broader crypto ecosystem, at least for now.

With that in mind, are memes ded (dead for the unindoctrinated)? We don’t think so, at least not ones in certain genres or those that have managed to garner huge followings and are listed on centralized exchanges.

On the former, let’s take political (PolitiFi in crypto). Think people are finally understanding that many politicians do not act in the best interest of people. One way to demonstrate disdain is own tokens and join the community of unflattering takes on those politicians. This is exactly what the Tremp ($TREMP) and Boden ($BODEN) projects on Solana have done. 

Figure 11 – TREMP v BODEN

Source: Decrypt

Both have been unbelievably successful with token prices up astronomical amounts since launch, with $TREMP recently outperforming as he appears to be the 2024 election frontrunner (and his stand-up comedy act is on fire). Both are gaining a huge following on social media. Even Anatoly Yakovenko, one of the founders of Solana, tweets regularly about $TREMP.

This has morphed into wider communities with even more unflattering takes on other politicians like anti-crypto figures Elizabeth Warren or Gary Gensler or even family members of recent US presidents, like Doland Tremp Jr ($TREMPJR) or Hunter Biden’s Laptop ($LAPTOP).

And let’s not forget dogs and cats, who were the original meme tokens. Dogecoin ($DOGE) was after all created as a joke by Billy Marcus in 2013 that rose to over $50 billion market cap last cycle.

The combined market cap of dog and cats memes is over $43bn, with most in $DOGE and Shiba Inu ($SHIB).

Figure 12 – Dog and cat memes are huge

Source: x.com

Why have memes morphed into something more than just a $hitcoin? While many are of course looking for the next meme lottery ticket, there are those who become owners of tokens to join communities with similar views or interests. Just jump into a Telegram feed and observe communities posting gifs, talking banter, or just interacting, likely with people from every walk of life in hundreds of countries. Just like message boards back in the early days of the internet. You like gardening, join the Australia Native Plants message board. Although the big difference is some memes can produce face melting gains versus better looking flowers.

And while this concept is likely foreign to many older investors, where you purchase a digital token that represents a “joke’, the newer generation of investors has proven that it can be valuable, both monetarily and socially. We think they are here to stay.

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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