Where Do We Go from Here?

Intro: a Cup of Block Coffee in Crypto Winter

It is May 2022, and the infamous Terra Luna implosion has just shocked everyone, kicking off what I consider to be the "darkest" crypto winter. This was further exacerbated by Fed’s aggressive tightening, CeFi (centralized finance) crypto companies such as Celsius, Three Arrows Capital, Genesis, etc. lining up to declare bankruptcy, and of course, just to make things worse - can’t forget about the main character in 2022, FTX.

Both retail and institutional speculators became fearful and withdrew from the market. Individuals who incurred losses from crypto gambling was crying for regulatory intervention to shut down this industry; Investors who had remained on the sidelines throughout the entire cycle finally declared victory and exclaimed, "I told you so."; Mainstream media began writing their "crypto is dead" articles for the 200th time, aiming to entertain the normies for their clicks.

I launched the Block Coffee Podcast at this exact moment when the market sentiment couldn’t get more bearish. This marked the cycle bottom of $ETH in hindsight (the $BTC bottom happened later during the FTX saga).

Why the hell did I do it? This seems like the worst time to do anything crypto related. Well, a big audience size and monetization were never my goals for the podcast, instead I mainly had these 3 motivations in mind:

• Curiosity🧐: Having been investing & learning about crypto since 2017, I had built conviction in crypto as an asset class by the start of 2020 market cycle. However, I was not completely convinced about actively participating in an early-stage web3 startup. I wanted to have real conversations with entrepreneurs in this space to understand their motivations behind building during the challenging bear market, and their vision for the industry. Starting a podcast provides an excellent avenue to accomplish this goal without requiring any additional financial or career commitments from me.

• Contribute🙋‍♂️: Although I didn't feel ready to found or join a web3 startup myself at that time, I genuinely wanted to contribute to the space. I realized that the least I could do was create a platform for lesser-known web3 founders to have a voice and share their work with the world, even though it may seem like nobody cares. Additionally, my aim was to educate those interested in learning about early-stage web3 startups. Hopefully, some people will come to understand that this industry is not solely comprised of scammers and fraudsters, as portrayed by the mainstream media at that time.

• Build 💪: Bear market is the best time to build, I took this project as an opportunity to build my creativity muscle, personal brand, knowledge and network.

Also, I was comfortably positioned for the bear market at that time so the price action didn't really bother me mentally. Honestly, I just went for it without overthinking.

11 episodes later, I am proud of the content we have produced with my amazing guests on the show. All of this was created within the limited time I could spare outside my 9-5 job at a FAANG company. I have had the privilege of meeting many incredible individuals who have supported me throughout this journey (thank you, you know who you are). Most importantly, I have learned a lot (including the fact that I suck at marketing) and have left my mark during what may be the most challenging crypto winter in hindsight.

Inspired by the founders I spoke with on the show, I decided to take a hiatus from hosting the Block Coffee podcast to spend more time honing my “building” skills on the side through participating in hackathons, pitch competitions, revamping an app for a NPO, and working on a couple of other ongoing ventures. Engaging in these projects has proven to be both enjoyable and rewarding.

While I was taking my podcasting break, the market has been cooking…

Crypto Market in 2023: Ice Melting

The crypto market has been a dark horse this year: the total market cap of crypto has doubled since beginning of the year, with the proxy of the asset class, Bitcoin up 150% YTD, now sitting at 41K (outperformed Nasdaq’s 42% gain YTD).

What’s been driving the market? Let’s look at both macro and micro (crypto industry specific) factors

Macro - an improving US liquidity environment

Both the cryptocurrency and stock markets, in general, have exhibited a strong correlation with the liquidity in the financial system, which could be measured by Fed net liquidity (Federal Balance Sheet - Treasury General Account - Reverse Repo).

As shown in the chart below, the year-over-year (YoY) percentage change in this metric reached its lowest point in Q4'22 (interestingly, this is also when the S&P reached its lowest point). It then returned to a positive YoY growth trend in March 2023, thanks to the intervention of the Federal Reserve through its Bank Term Funding Program (BTFP) to prevent a crisis in the U.S. banking system. After a period of normalization, this trend has picked up pace again in October, driven by ongoing withdrawals from the Fed's reverse-repo facility (RRP) and the U.S. Treasury General Account. These factors have had a positive impact on the performance of risk assets.

The crypto industry - several positive fundamental developments and catalysts have reignited investor interest.

The most significant development is the growing legitimization of the crypto asset class and institutional adoption. This has been catalyzed by major financial institutions like BlackRock and Fidelity, who have filed for spot Bitcoin ETFs (exchange-traded funds) to enable direct investment in Bitcoin (many of these institutions have also filed for Ether ETFs).

This represents a significant commitment from these institutions, indicating their recognition of the potential in the crypto asset class. If approved (come on, Gary), the spot Bitcoin ETF will greatly influence the demand and adoption of this digital asset. In the next section, I will delve further into the potential impact of this event.

Finally some positive regulatory rulings: Despite its post-FTX hostile attitude towards crypto that got all the crypto investors worried, SEC has recently taken some Ls in their cases against Ripple Labs and Grayscale (a positive for the likelihood of spot BTC ETF approval); We’ve also witnessed US crypto bills being passed by the congressional committee, and the first direct accounting and disclosure standard on crypto assets being issued by FASB, providing greater regulatory clarity and standardization for the industry.

These pleasantly surprising wins have given investors and builders hope that future innovations in the blockchain industry can flourish in America.

Innovators keep building: Better infrastructure and products that are linked to real-world use cases are being built and gaining traction during this bear market. We now have more tokenized real-world assets (RWA), liquid staking/restaking protocols, Ethereum layer 2 scaling solutions, decentralized physical infrastructure networks (DePIN), advancements in zero-knowledge technology, etc., compared to the beginning of the last cycle.

Speaking of tractions, If you are one of those analysts that loves conducting analysis on fundamental on-chain metrics such as active users/wallet addresses, developers activities, total value lock (TVL), etc. in a short-term timeframe, just to conclude how crappy the user adoption of a blockchain or decentralized application is, I’mma let you finish but (in Kanye’s voice) - all the seasoned crypto investors would agree that fundamentals ain’t nothing but a meme…

Jk😊 - crypto, at its current stage, is very reflexive, the surge in product usage / fundamentals tends to happen after the price uplift, not the other way around. I believe as the institutional adoption grows and market matures, the valuation will trend more towards fundamental.

On-chain capital Inflow: It is worth noting that the supply of stablecoins, which serves as an indicator for on-chain liquidity, experienced a declining trend throughout most of 2023. However, there is a silver lining as this metric may have bottomed in October, thanks to the improving liquidity in the macro environment and capital flowing back into the crypto market due to renewed investor interest (for the reasons I mentioned above).

Reflecting on my journey investing in the 2023 crypto market:

Lesson Learned: Ngl this run up has been quite impressive. I recall that in December 2022, all the crypto investors I spoke to (including myself) were generally pessimistic about the market in 2023. This example along with the frenzy during the 2021 bull run, serves as a reminder that people tend to overreact in both favorable and unfavorable circumstances. It is important to be cautious when sentiment becomes extreme and a consensus is reached among market participants - this is the time to objectively evaluate whether there are any hidden opportunities.

What I did well: I was able to quickly change my stance to long in March when the US regional banking crisis happened. I didn’t intentionally go long crypto at the market bottom in 2022, but I’ve done a pretty decent job accumulating blue chip assets that I have convictions on throughout the bear market via staking, covered call option strategy and liquidity mining without deploying much net new capital, hopefully this strategy will continue to pay off when the full bull market arrives.

Where are we in this market cycle: I don't want to jump the gun and claim that the new bull market has officially started, but I think it's safe to say that the ice has been melting, and the once seemingly eternal crypto winter is behind us now.

Chill bro, forward-looking shit is coming your way.

Where do we go from here?

Frankly speaking, I’m not a huge fan of the crypto market predictions because:

1. There are simply too many of them (Soon, our Twitter/X feed will be inundated with numerous posts about the 2024 outlook).

2. Very few of them turned out to be right, most of them are not actionable and tend to get forgotten.

Nevertheless, I know people enjoy reading this type of content, so your boy will play along today. But I’ll keep it short and focus on what matters most for the big picture.

I believe the total crypto market cap will likely receive another boost in the next 12 months if the following scenarios unfold:

Macro trends to watch:

As the inflation has peaked in 2023 and disinflation continues, I think we are near, if not at the end of fed hiking cycle - The Fed's latest median projection for the Fed Funds Rate by the end of 2024 was 4.6% (down from current target rate 5.25-5.50), did someone say pivot?

I'm not going to pretend that I'm a macro expert here, so let's hear what a reputable source like Goldman Sachs is saying. They are expecting further disinflation next year and projecting an even lower 3.5-3.75% rate by the end of year 2024.

Spot Bitcoin ETF approval:

We will determine if this will indeed occur as early as approximately 15 days later (by January 10, 2024). I am of the opinion that, unlike the CME Group's Bitcoin Futures launch in 2017, which experienced a classic "buy the rumors, sell the news" scenario (BTC dropped 84% to a cycle low after the CME launch), this development is fundamentally positive for crypto as an asset class. This is because a spot ETF will actually offer a more convenient and compliant method for a broader range of investors to access bitcoin, potentially leading to an acceleration in mainstream adoption. Neither the CME BTC Futures launch nor the existing futures ETF were able to achieve this.

Imagine the approval of the spot ETF. With this development, the wealth management industry will have a convenient and capital & tax-efficient way to tap into the potential of bitcoin, utilizing their most familiar investment vehicle, ETFs.

Also, ask yourself what’s going to prevent the retail investors from allocating a small portion (2-5%) of their capital to diversify their IRA portfolio with the digital gold that has a disinflationary supply schedule and a growing network effect (I don’t make the rules, they will probably pick up this narrative from the new bitcoin ETF TV commercials, brought to you by the largest financial institutions in the world).

With that said, I don’t think the approval of the ETF itself is enough to warrant an Up Only in BTC price, the ETF needs to be a successful product, i.e. a good amount of inflow in year 1 and onward to confirm that increase in real demand from net new investors is happening, rather than just current crypto holders’ illusion. Many institutions have modeled the potential addressable market for the new ETF - taking Galaxy’s analysis as an example, they estimated $14.4 billion inflows in the first year of an ETF approval.

Bitcoin Halving:

This one is not a prediction, it will happen in April 2024 because it’s a pre-programmed event that lowers bitcoin inflation by reducing the amount of new bitcoins created. As a result, bitcoin issuance rewards will go from 6.25 BTC to 3.125 BTC per block minded in 2024.

If we do end up seeing a spike in bitcoin demand driven by the spot ETF and related narratives, together with the pre-programmed supply decrease next year - you do the math on what’s going to happen to the asset price.

Look, first of all, this is not a financial advice - I have no desire to shill you bitcoin, ether or any shitcoin and will never do it. I will just share one quote from George Soros as food for thought.

Although I generally agree with the optimistic market sentiment at the moment and do not believe we have reached the “inflection point” yet, it is extremely difficult to forecast short-term price fluctuations and address the million-dollar question of “how much has already been priced in”.

The market can pull back or pump from here or even immediately after the key “bullish” events mentioned above (Fed pivot, ETF, halving). I always prefer to focus on the bigger picture by closely monitoring the most crucial market trends & catalysts for the medium to long term plays and stay nimble, rather than getting too distracted by the short-term noise.

Also, I think new capital inflow into crypto will initially focus on bitcoin given the narrative highlighted in this blog. However, as the bull market intensifies, there will likely be a shift towards ETH and other altcoins, as this is a common pattern driven by human psychology. I’ll spare you from too much alpha by skipping my bullish thesis on a few projects unrelated to BTC this time, but I will save them for the future blog series.

As far as where Block Coffee goes from here: My goal is to write more going forward, my blog posts will still be under the “Block Coffee” brand, and they'll be packed with my personal analysis and learning notes on crypto and DeFi. And those of you who are missing my podcast - don’t worry, I got a couple of new podcast series in the making, hopefully I can announce them soon.

Thank you for reading this long-ass article. Stay tuned for more, and let's climb up together in 2024.