October 30, 2024

Vikara October 2024 Update – Is Silly Season Finally Here?

Happy Birthday Vikara! We ticked over two years this month. We want to thank all of our LPs, service providers and readers for the support. As Bitcoin teeters at its all-time high, we remain certain that our decision to build Vikara during the bear market was the right one.

We are excited to announce that our Australia feeder fund is ready for subscriptions. It allows Australian self-managed super funds to invest while lowering the minimum initial investment amount to A$25k. We look forward to you all rushing in at once.

It is hard to be negative right now. The uncertainty caused by the US election will soon be behind us, China’s response to its economic problems will need to rise exponentially to stave off deflation, and the Federal Reserve’s easing cycle will accelerate as China’s problems reverberate globally.

China is a large concern, with the collapse of its money supply alarming. We do not believe the PBOC can control credit events, and think that the reaction to China’s stimulus, with hindsight, will look as foolish as when Bernanke said the 2007 subprime crisis was contained.

China’s deflation will turn into a tailwind for central banks globally and at the same time cause relief for the millions of people that are sick of prices going up. While we are yet to find out who is holding the proverbial bag, we believe digital assets will be a primary beneficiary of the unwind of centralized trust.

Markets spent October questioning the Federal Reserve rate cuts, pushing the 10-year up 50bps after a couple of stronger than expected data points. We believe that the slowing in US labour markets and China’s issues are more likely result in the Fed accelerating its loosening policy than reversing it.

Adding to the concern around a second wave of inflation was the rising probability of a Trump presidency. We don’t buy Trump being inflationary. He was deflationary in his first term, as his tariffs were immediately offset by currency devaluations. His second term will be no different.

Since starting Vikara, we have battled against an adversarial SEC that has constantly created chaos for entrepreneurs trying to advance the utility of the internet. This may be about to change, with both political parties seemingly distancing themselves from Gensler.

If the macro landscape isn’t compelling enough, perhaps the seasonality into yearend is. The yearend risk-on rally is best expressed in digital assets. The moment we’ve been waiting for may be here.

Chart 1 – Bitcoin price seasonality (2012-2024)

Source: LSEG, Topdowncharts

Macro

An entire years’ worth of rate cut expectations was wiped out in October. This is the second time this year where such a large reversal in rate expectations has occurred. A data dependent Fed translates into a market that jumps at every data point that moves towards or away from inflation.

It has not been a normal start to the rate cutting cycle, after a small set of data has resulted in a rapid tightening in nominal rates.

Chart 2 – 10-year UST yield around the first Fed rate cut (change in basis points)

Source: @fwred

Data dependence at the Fed is amplified by Trump’s election odds strengthening, with rate markets highlighting that investors believe America first policies will create a second wave of inflation. A pause in the direction of inflation pass-through doesn’t help sentiment (Chart 3).

Chart 3 – Inflation pass-through / persistence (1950-2024)

Source: @crossbordercap

Adding to speculation of a second round of inflation was China’s decision to begin a stimulus program at the same time as the Fed’s easing cycle. The rush on Chinese equities is signalling that that the collapse of the largest real estate market in the world can be fixed with the stroke of a pen (Chart 4). We doubt it.

Chart 4 – China Home Prices YoY (2009-2024)

Source: Bloomberg Finance L.P, @SoberLook

China’s first round of stimulus will require the PBOC to expand its balance sheet exponentially to clean up the trillions of dollars of destroyed capital at the provincial level. This is starting to show up in the data as the PBOC’s balance sheet has risen by 9.4% in four months (Chart 5).

Chart 5 – Central Bank Balance Sheets ($trillions) (2000-2025)

Source: Refinitiv, Federal Reserve, PBoC, as of Sep 2024, @JeffWeniger

Nationalizing its bankrupt state-owned enterprises and failed real estate developments will do little to change sentiment in China or stimulate demand. It will only highlight how weak its economy is and put US debt to GDP metrics back in line with its largest economic competitor (Chart 6).

Chart 6 – US vs China net debt to GDP (2001-2024)

Source: tradingview.com

China’s net leverage has been underreported for years, using its provincial and state-owned enterprise balance sheets as an effective way to hide total leverage. That is all about to change. The pace with which M1 continues to collapse says all we need to know about the credit crisis (Chart 7).

Chart 7 – China M1 vs M2 (2001-2024)

Source: @zerohedge

The only way for China to avoid a deflationary spiral is to print an ungodly amount of new debt. We still question if this new debt creates inflation, as it may merely stop deflation. The collapse of China’s financial institution credit growth shows this isn’t a crisis that is easily fixed (Chart 8).

Chart 8 – China Financial Institutions Loans YoY (2017-2024)

Source: The Daily Shot, @SoberLook

China’s PPI has fallen for 24 consecutive months, which will be hard to unwind with stimulus as its customers are moving offshore, leaving a large and underutilized manufacturing base (Chart 9).

Chart 9 – China PPI YoY (2006-2024)

Source: Ollari Consulting

This deflationary pressure is now showing up in Chinese CPI data (Chart 10), driven by weak consumer demand and abysmal sentiment. Western investors are forever questioning if the Fed is making a mistake, with 2008 as a recent memory. Chinese investors cannot speak out in the same way.

The lack of concern onshore seems to allay fears from non-China based investors who naively believe everything is under control. The blind faith in China’s centrally controlled economy is about to evaporate rapidly.

Chart 10 – China Core CPI YoY (2017-2024)

Source: TheDailyShot.com, @SoberLook

Deflation in China will reverberate abroad, as it did during the GFC, the Asian financial crisis and every other credit event that started in a major economy. While investors and the Fed remain data dependent, in a year from now worries of persistent inflation will be a distant memory .

While it has taken longer than many expected to show up in US data, it is happening. The personal consumption expenditures price index (PCE), which measures changes in consumer spending on goods, is back at pre-pandemic levels (Chart 11).

Chart 11 – Dallas Fed Trimmed Mean PCE Inflation MoM (2017-2024)

Source: TheDailyShot.com

While the market may continue to overreact to short term CPI prints, particularly as consensus rushes to revise estimates lower, we don’t see why inflation is about to roar back (Chart 12).

Chart 12 – US CPI MoM (2017-2024)

Source: TheDailyShot.com

The number of US employees quitting their jobs is down significantly, and this data set has been good leading indicator of where wage growth will trend over the coming months (Chart 13).

Chart 13 – Wage growth (set forward 9-months) versus US quits level (2004-2024)

Source: Steno Research, Bloomberg and Macrobond, @AndreasSteno

It is not a surprise to us that most of the labour market data is being revised lower. Markets get a sugar hit on the day of release, but don’t react when a negative revision occurs a month later. This has been a consistent pattern over the last two years (Chart 14).

Chart 14 – September JOLT versus expectations (2024)

Source: @zerohedge

Jobless claims are also rising, jumping to the highest level since July 2021. The spike was not limited to states affected by Hurricane Helene either, with continuous claims also rising (Chart 15).

Chart 15 – US jobless claims (2023-2024)

Source: Dailychartbook.com Koyfin

Lastly, leading indicators continue to signal weaker rental inflation is really about to start impacting CPI data (Chart 16).

Chart 16 – US: Rental Inflation (2001-2023)

Source: Oxford Economics / Haver Analytics

As inflation falls, the Fed will gain more certainty around looser monetary policy. Crude oil prices are signalling this already, being highly correlated to 10-year bond yields, suggesting the spike in 10-year Treasury yields is transient (Chart 17).

Chart 17 – WTI Crude Oil Futures Price vs. US 10-Year Treasury Yield (2023-2024)

Source: @MacroMicroMe

The ratio of copper versus gold also suggest yields will head lower. Chart 18 is a proxy for the troubles in the Chinese economy as well as what is happening in the US, with the reverberation of China’s issues allowing the Fed to lower further.

Chart 18 – Copper versus gold ratio versus the US 10-year treasury yield (2009-2024)

Source: TheDailyShot.com, @LanceRoberts

Until the data changes materially, there is no better place to be investing than in long duration assets, particularly given the seasonal decline in volatility into yearend (Chart 19).

Chart 19 – VIX Seasonality (average daily level of the VIX) (1990-2024)

Source: Chart of the Week – Volatility Season

With lower volatility, there is no reason to believe the yearend rally in risk assets will not occur, with Bitcoin and in turn alt coins the largest beneficiary of this (as seen in Chart 1).

In a matter of days, election uncertainty will be behind us and the world can begin positioning for the next four years. The probability for a crypto friendly administration is high. The SEC chair is likely to turn over regardless. And the macro backdrop for risk assets is improving.

We believe our decision to launch a liquid crypto fund two weeks before FTX collapsed! while staying the course will be rewarded as investors and liquidity returns to digital assets.

Digital Assets

So much for Uptober! October was a difficult month for many alt coins versus Bitcoin. After an excellent September when Vikara significantly outperformed Bitcoin and Ethereum, alt coins once again underperformed Bitcoin, although this is typical at this point in the cycle (see more on this below).

The TOTALS index, which represents the total crypto market capitalization excluding the top 10 largest tokens, was down 4% on the month versus Bitcoin that gained 13% through October 30.

Chart 20 – Crypto Total Market Cap Excluding Top 10 (TOTALS) (LTM)

Source: Tradingview.com

While the alts market underperformed in October, there was plenty of news indicating the industry continues to move forward. Things we found interesting during the month include the following:

Chainlink (LINK), an Ethereum-based oracle network, launched new technology to help financial institutions maintain data privacy while transacting across blockchain networks focused on tokenized RWA settlement. Australia and New Zealand Banking Group (ANZ) will be the first to pilot the tech under Singapore’s Project Guardian.
The Argentine city of Buenos Aires released a blockchain-based ID allowing residents now access to decentralized digital IDs on their mobile devices, powered by the scaling protocol ZKsync Era (ZK).
The Open Network (TON) selected Axelar (AXL) to connect their TON ecosystem with 68 other blockchain networks.
Microsoft shareholders are set to vote on December 10 on whether the company should publicly assess adding Bitcoin to its balance sheet via a proposal filed with the SEC titled “Assessment of Investing in Bitcoin”.
Payment processing giant Stripe announced the acquisition of stablecoin platform Bridge for $1.1bn, one of the largest in crypto history. Stripe also launched a stablecoin payment service and saw users from 70 countries use it on the first day of its launch.
Visa announced their tokenization platform on Ethereum and will partner with BBVA, the second largest bank in Spain, to launch a stablecoin in 2025.
Singapore’s DBS Banked launched blockchain-based banking services for institutions called “DBS Token Services” for real-time blockchain payment settlements, using smart contracts for enhanced security and transparency.
Decentralized peer-to-peer vacation rental platform Dtravel (TRVL) announced the launch of the first AI-powered travel agent for developers on the Fetch.ai (FET) marketplace.
PayPal completed its first business to business payment using PayPal USD (PYUSD), its proprietary USD-pegged stablecoin, to Ernst & Young through SAP’s digital currency hub.
Layer 0 Avalanche (AVAX) announced the launch of a Visa cryptocurrency card that allows AVAX wallet holders the ability to spend cryptocurrency via the debit card.
WisdomTree announced a partnership with Visa to allow WisdomTree Government Money Market Digital Fund (WTGXX) holders the ability to spend directly from its tokenized onchain money fund.
Major cryptocurrency exchange and service provider Crypto.com announced it is suing the SEC, contending that “the SEC has unilaterally expanded its jurisdiction beyond statutory limits and separately that the SEC has established an unlawful rule that trades in nearly all crypto assets are securities transactions”.
CattleProof, a company that uses a decentralized digital ledger to record information related to individual cows announced that it has become the United States Department of Agriculture’s first blockchain-based Process Verified Program.
Samsung announced the integration of blockchain technology for enhanced security in AI home devices.
Pos Indonesia, the state-owned postal service of Indonesia, has introduced its first-ever postage stamps with non-fungible token (NFT) counterparts, combining tradition with technology.

The question that continues to be asked is if there is an impending alt season (aka wen moon)? In our view, the answer is yes, framed by the macro, regulatory, and political backdrop, historical correlations and performance at this point in the four-year cycle, and fact that crypto as an asset class has been all but forgotten.

That said, for a move like we have seen in previous cycles, retail needs to come back to a space where they have been burned several times. And there are early signs that it is happening, but we still have a long way to go to earn back their trust and money.

Let’s start with a reminder of how crypto cycles have worked in the past. Bitcoin moves first, followed by Ethereum (maybe it’s Solana this time?), then large caps, then full on Altseason where nearly everything goes higher (Figure 1).

Figure 1 – Path to Altseason

Source: x.com

While there will be a time when this stops working, given the macro backdrop, the size of the crypto market, retail dominance and close similarities to previous cycles, we believe this still holds.

So where are we now? Arguably still in Phase 1 as evidenced by:

Ethereum has lagged, signaling that investors have yet to move into alts en masse
Altcoin Season Index is at 29, well below the 75 number that signals its Altcoin Season (Chart 21)
BTC dominance is at levels not seen since March 2021, signaling BTC continues to outperform alt coins (Chart 22)

Chart 21 – Altcoin Season Index

Source: Blockchaincenter.net

Chart 22 – BTC Dominance

Source: Tradingview.com

First, the fact is it is hard to ignore the crypto cycles that have played out over the 14 years since BTC’s launch and the fact crypto loves liquidity. If we are indeed moving into a period of increased liquidity and historical relationships remain intact, then crypto prices follow liquidity higher (Chart 23).

Chart 23 – Bitcoin price vs GMI Total Liquidity Index (10-week lead)

Source: LSEG Datastream – Real Vision.

If we look at where we are in terms of the four-year cycle bottoms, the move in BTC through mid-October 2024 is nearly identical to the 2016-17 cycle and the 2020-21 cycle. We’d like to think the chart is telling us what comes next.

Chart 24 – BTC Market Cycles ROI from Bottom (past three cycles)

Source: Into The Cryptoverse; Cycle 1: (2015-2017); Cycle 2: (2019-2021); Cycle 3 (2023 – ?)

In terms of crypto price performance and election cycles, crypto has done best right after the US presidential elections as evidenced in Chart 25, where the market surged post the 2012, 2016 and 2020 elections, the same year as the previous three halvings.

Chart 25 – BTC Price Performance Since BTC’s launch

Source: x.com @el_crypto_prof

Given that the crypto market is still largely dominated by smaller, retail investors, it’s essential that they bring capital back to the market, or at least until institutional investors move beyond the top 10 tokens, if we are expecting to see upside similar to previous cycles.

There are initial signs that it is beginning to occur. October 2024 was the first month since May that saw retail interest in BTC increase (Chart 26).

Chart 26 – BTC Retail Investor Demand (Volumes up to $10k USD) (30D Change)

Source: CryptoQuant; x.com @AxelAdlerJr

Another positive sign is the number of active Solana addresses, which have actually come down over the past week after surging to nearly 6m on October 23 from 1m in August, driven largely by Pump.fun meme mania. They now sit at 5.3m, falling 12% in a week, which we view as a good thing as we touch on in the Tokens section below. But the number of new entrants into the Solana ecosystem is a positive sign is they move beyond memes.

Chart 27 – Number of Active Addresses on Solana (Daily, 7DMA)

Source: TheBlock

That said, other retail metrics remain in the doldrums. Take Coinbase app downloads. When BTC was $71k in March 2024, the app was ranked 20th by downloads. BTC is now $71k again and the app is ranked 482nd. Or YouTube crypto channel viewership. It’s at multi-year lows.

While none of the charts above, if taken in isolation, necessarily mean we are going higher, when viewed collectively, it’s hard not to lean towards a significantly higher market 6-12 months from now.

Spot BTC and ETH ETFs were back in the headlines this month as inflows picked up again. ETH ETFs started the month off strong with Blackrock’s iShares Spot Ethereum ETF surpassing $1bn in assets, ranking it in the top 20% of the 3,700+ ETF universe. BTC spot ETFs continued to gather assets, with the BTC ETFs recording $920m in inflows for the week ending October 25, bringing YTD inflows to over $24bn.

Figure 3 – ETH ETF Inflows (LHS) and BTC ETF Inflows (RHS)

Source: Farside Investors

Trading volumes were also massive, with Blackrock’s iShares Spot Bitcoin ETF trading $3.3bn on October 29, the highest in 6 months.

Figure 4 – Blackrock’s Spot BTC ETF ($IBIT) traded over $3.3bn on October 29

Source: x.com @ericbalchunas

We are of two minds here. The positive is it brings money into and attention to the crypto ecosystem, assuming ETFs are buying the underlying and not just derivatives.

On the flipside, we question if a portion of that money would have gone into alts versus just ETH, which investors may use as a proxy for non-BTC exposure. If a Solana ETF is approved, imagine that point is even more relevant.

Further, once an investor buys BTC or ETH in an ETF, the only thing they gain is exposure to that “financial product”. 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.

That being said, we believe that the buyers of ETFs and those that set-up their own wallets or even CEX accounts are likely two very different sets of investors. The former who is here for the diversification or hedge to a larger portfolio versus the latter who is here for the upside, tech or even community and culture when it comes to things like memes.

Further, the fact is, institutional investment in liquid crypto tokens is insignificant today. The entire crypto market cap excluding BTC, ETH and USDT, USDC and DAI stablecoins is $475bn. The Teacher Retirement System of Texas (TRS) pension fund is over $200bn. That’s one single pension fund. Puts the size of the crypto market in context and the size of the potential opportunity if allocators onboard en masse.

Onto politics. Given the US Presidential Elections are only a week away and following the past three elections, crypto has done very well (see Chart 25 above), we want to revisit how each candidate may affect the crypto industry.

When we released our Trump vs Harris piece a month ago (read it HERE), the odds where in Harris’ favor, both in terms of polling and gambling markets. Both have moved in Trump’s favor, with gambling markets predicting an overwhelming Trump victory (Figure 5), while polling is showing Trump winning the Electoral College 312-226 (Figure 6).

Figure 5 – Polymarket (LHS) and PredicIt (RHS) Betting Market Odds

Source: Polymarket & PredicitIt

Figure 6 – Real Clear Polling National Average Polls (October 29, 2024)

Source: Real Clear Polling

While many view risk assets and namely crypto as a “Trump trade”, we continue to be of the view that the pendulum has swung in favor the crypto industry such that the hostile approach by regulators and most politicians is largely over.

Further, while the fact is that Republicans have been far more supportive of the crypto industry than Democrats, the latter has begun to embrace the sector as it has gained influence, especially amongst younger voters, therefore it’s not so much a Trump v Harris debate, but a when does the fiscal irresponsibility end debate, which many, including us, believe is never.

A report released this month by crypto advocacy group The Digital Chamber demonstrates why both parties are embracing crypto bros. The survey of over 1,000 voters showed that one in seven, or 16%, of respondents said crypto was “extremely” or “very” important in deciding who to vote for and were “much” or “somewhat” more likely to vote for a pro-crypto candidate.

Potential bias aside, we understand why both parties are wooing the voting bloc, especially as it represents younger, often less engaged voters.

Figure 7 – Survey: Americans’ Views on Crypto Policies and Their Effects on Voting

Source: The Digital Chamber

Tokens

Instead of focusing on an individual token this month, we want to discuss YTD performance of broadly owned, well-known, non-meme tokens. It hasn’t been pretty since March, with the exception of September.

We believe there are multiple reasons this is the case, ranging from a significant amount of new, large cap, VC-backed tokens coming to market in 1H 2024, tighter monetary conditions for longer limiting new liquidity, and lackluster retail interest outside memes. Further, we believe that meme coins have been sucking down the limited liquidity that has come into the market in 2024.

Take the meme coin launch platform Pump.fun on Solana. The numbers are wild. The total revenue earned by the platform over the last 8 months post launch is $161 million with nearly 2.8 million tokens launched during the same time frame!

Metrics since March 1, 2024 are below.

Chart 28 – Pump.fun Total Fees (March 1, 2024 – Present)