$100 million for NFTs from Fox. $230 million for a new DeFi funding DAO. $380 million for Ledger. If this is a bear market, it’s going to be well funded.
Today on “The Breakdown,” NLW looks at the contrast between growing bear market sentiment versus a sustained set of high-profile eight and nine figure financing rounds across multiple dimensions of the crypto market. Specifically, he looks at funding deals in NFTs, DeFi and institutional bitcoin, arguing that even if we do head into a bear market, that capital is likely to mean a return to bull more quickly.
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What’s going on guys, it is Wednesday, June 23, and today we are talking about some contrast signals on the idea of it being a new bear market. Yesterday, folks were starting to get dreary. Obviously, the crypto markets haven’t been great for a while now, but there were some big psychological milestones that were crossed yesterday, and crossed in the wrong direction. The two biggest, of course, were bitcoin dipping down under $30,000, effectively retracing the entirety of 2021, and Ethereum going below $200, and meaningfully below for a while. I spent a fair bit of time on this show talking about why the market has been turning but I think it’s worth reviewing here briefly as we set up the rest of today’s show.
First, I believe that there is macro structural weakness. We are now in the post-vaccine pre-tapering phase of COVID-era macroeconomic policy. That means that normal economic activity is resuming, indeed, some of the economic activity is even abnormal as people catch up on things like, trying to build houses and move, that’s putting inflationary pressure on the system, which we see even in the traditional measures like PCE, or personal consumption expenditures, were CPI, consumer price index, holding aside any critique of those measures as tending to underestimate true inflation. The Fed, for their part, has been saying that those pressures are transitory for months. Inflation being transitory, of course, means that it is insufficient to get the Fed to consider a change in policy or withdrawing of support in the form of either bond buying or near zero interest rates.
However, the market and the popular financial media haven’t really bought this transitory argument. And of course, inflation can become a self-fulfilling prophecy pretty easily. If one thinks prices are likely to go up in the future, and has the means to buy now, they tend to buy now, putting pressure on the price to go up. At the latest FOMC meeting last week, the Fed started to admit that they weren’t totally positive that all inflation was, in fact, transitory. And they said they might need to at least start thinking about thinking about tapering policies. That showed up specifically in expectations of a move away from zero interest rates in 2023, about a year earlier than they had previously estimated. The market is completely addicted to cheap money and so, hated this.
Why? Well there could, in a world where interest rates rise, be a move away from the farthest end of the risk curve. That’s where bitcoin and crypto live for most traditional allocators. More than that, though, the simple lack of clarity around what happens next and how it plays out, is a tough moment to get new allocators to dive in. As has been clear, institutional Bitcoin buying has seemed to stall out: Tesla’s rhetorical shift away from the space, even though they still have their Bitcoin on their balance sheet, hasn’t helped. It especially hasn’t helped because it has fueled the fire of one of the biggest sources of FUD this cycle, the environmental impact of Bitcoin mining. Now, to me, this structural macro context and the momentum sapping impact it’s had, is a bigger reason for market weakness than FUD itself. However, the FUD is definitely contributing to that sapping. As just mentioned, environmental impact, especially in the contrast with a rising ESG paradigm, is a key challenge. But so too are one, the return of the “crypto is for crime” narrative, thanks to high profile ransomware attacks like the Colonial Pipeline hack; and two, everything happening around China.
On the China front, as you could tell from my recent episode, the de-Chinafication of Bitcoin, this time really does feel different. Mining is actually being pushed out of China in a meaningful way. The crackdown has been not only on coal-powered mining, but also on cleaner hydroelectric as well. According to The Block research, hashrate has fallen about 50%, from about 168,000 petahashes per second in the middle of May, to around 86,000 as of June 23. Now, to be clear, as I’ve said before, and I’ll say again, the network has more than enough security, even with this drop. Also, this hash power is currently being shifted elsewhere. In fact, we’re watching the decentralization of hash power in real time. It is a testament to the network that such a huge exogenous force can disrupt things in such a profound way. And yet it keeps on humming merrily along: no breakers, no bailouts, no nothing. That said, these things do still have a short term effect and impact on people’s confidence, as we’ve clearly seen show up in prices.
Speaking of prices, things have rebounded a bit. Bitcoin is back above $33,000 today and eth is fighting to reclaim $2000. But that doesn’t mean that all of yesterday’s concerns and questions about whether we’re entering a bear market were suddenly alleviated. Last week on Friday, I was joined on the show by The Block’s Larry Cermak. We discussed something I’m only half jokingly calling “shorter cycle theory.” The gist of it is, the crypto market cycle is unlikely to follow the same four year pattern that it had been, featuring deep multiyear bear markets.
Today I want to talk about one of the reasons for that and use some evidence for the last couple weeks. That is large financing rounds, large funding rounds actually contained within them a couple different bits of information. They tell us which projects are comparatively better able to weather downturns, a big Treasury is a great way to survive long enough to see a turn back to the upside. They also tell us in terms of the composition of investors, who is interested in what, who is participating in what type of funding round gives us insights into which type of investors have joined the fray, which is particularly interesting when those investors aren’t crypto native. If a slew of institutional investors was suddenly cropping up in DeFi, for example, that’s different than the information we get from a bunch of entertainment companies investing in NFTs. It also gives us insight, as you can see, into what segments of the crypto market those actors are interested in.
Finally, funding rounds can give us a sense of momentum. How many rounds are happening, at what size, and at what valuation. Now, one caveat is that to some extent, funding rounds are a lagging indicator. Rounds come together over the process of months, even in the case of extraordinary excitement weeks. So it’s highly possible that the rounds that get announced now we’re beginning to be formulated in better times at higher price levels, but that doesn’t mean that they’re not still relevant data points. The other caveat is that venture rounds are different than protocol investing. How should we consider, for example, MicroStrategy’s recent $489 million bitcoin purchase. That’s certainly relevant as a piece of data as it relates to the medium term prospects of bitcoin. MicroStrategy, more than anything, is doing work helping setting price floors and creating a predictable buyer for others unloading into the market. This should inform how we think about bitcoin’s relative bottom, but then again, that analysis is a bit different than things like venture rounds.
With all of that context, let’s look at some of these financings that have been announced over the last few weeks and see if we can parse out what they mean. Let’s start with NFTs. NFTs were obviously one of the hottest areas in crypto earlier this year. They were also one of the earliest areas to see price declines. It was a classic situation where, for a while there, anything with the letters NFT attached to them was expensive. Since the peak, average transaction value was down 50%, average price of an NFT sale is down 50% and weekly trade volume is down about 75%. The question is, has funding for new projects also left the space?
Not at all. You literally can’t go a day without seeing more funding for some new NFT platform. To take just today for example, NFT marketplace Rarible raised $14.2 million led by Venrock, one of the oldest venture firms in the world. In May, Jay-Z joined the $19 million round of the Shopify for NFTs Bitski, and even bigger from a numeric standpoint is that last week, we learned that Fox Entertainment is putting $100 million, nine figures baby, behind its NFT project. They’re trying to make quote, “the first ever animated series curated entirely on the blockchain,” and they’re doing it with Rick and Morty creator Dan Harmon, the show “Krapopolis” will quote “feature blockchain related content from character development right up through the premiere night in 2022.” They’re also launching Blockchain Creative Labs.
So, what’s the takeaway here? First, you have both entertainment and traditional venture capital investing serious figures in the space. That means either A., they’re super late to the hype train, or B., they’re convinced that there is something real here that is going to matter longer than the crazy price of NFTs when things popped earlier this year. I continue to think that we’ll look back at NFTs as the first true splinter from crypto. In other words, a crypto powered phenomenon that in the long run, most people don’t even associate with crypto, however we talk about it then.
But now let’s move on to DeFi. Many were surprised that DeFi didn’t have its chance to shine before this bearish sentiment came crashing. I sort of think we may need to adjust how we see the cycle and mark the beginning around the time of Paul Tudor Jones’ Great Monetary Inflation thesis and the resilience of Bitcoin post-COVID, rather than late last fall. If that’s the case, DeFi did have its moment, i.e. DeFi summer, but that’s a topic for another episode. It’s still worth asking, now that so many tokens are 50 to 70% off their all time highs, is the flow of fund interest receding? Again, big fat no.
Last week the DeFi exchange dYdX announced a $65 million raise. This one was more DeFi and crypto insiders with paradigm leading, but it still shows how much dry powder those insiders have. And speaking of serious dry powder, check out the $314 million raised by Solana, an eth alternative for DeFi. This one was led by a16z and Polychain, and obviously gives them a ton of runway to work with, regardless of what market cycle comes next. Then, there was BitDAO, a new approach to DeFi financing that is itself decentralized. The project is being spearheaded in part by Bybit who’ve committed to share futures contracts trading volume that could be worth a billion dollars a year or more, based on this year’s run rate. The BitDAO also raised $230 million, though, from other investors led by Peter Thiel, Founders Fund, Pantera Capital and Dragonfly. The last two are obviously crypto insiders but Thiel1 and Founders Fund are on the outskirts. Billionaire traditional financier turned crypto financier Alan Howard also participated.
So, what’s my takeaway from just this small sample of DeFi deals? One, the space is going to remain extremely well capitalized, even if we are heading towards a downturn. Two, it’s not super deep into actual allocations from traditional investors yet. This isn’t necessarily a bad thing as it creates a new narrative wellspring that could help launch a new bull run in the future, i.e. the institutionalization of DeFi. Again, none of this is to look at the ultimate prospects of these sub-industries within crypto, just to note how the capital flowing into them remains at odds with the perception of a new bear market.
What about the institutional bitcoin and institutional crypto trading space? Has that gone sour? Well, here’s a sample of headlines from just the last week. ” Goldman Sachs partners with Mike Novogratz’s Galaxy Digital.” “BBVA is Opening Bitcoin Trading and Custody Services in Switzerland.” “Statestreet Has Launched a Cryptocurrency Division” “Visa and PayPal Were Both LPs in a New $300 Million Fund Just Raised by Blockchain Capital, the First Time PayPal Has Been an LP in the Space,” and “Bitwise the Crypto Asset Manager Just Raised the $70 Million Round Valuing the Firm at a Half Billion Dollars.” That round included hedge fund titans like Stan Druckenmiller and Dan Loeb, and honestly, that’s just the tip of an insane list of traditional finance people who got in.
All in all, while corporate treasuries may not be making big news with allocations, there is clearly still action happening when it comes to institutions getting deeper into bitcoin and the crypto space as a whole. Then on top of all of this, there are some other randoms: our real estate tycoon is apparently planning on spending $100 million on a decentralized networking protocol called Project Liberty; Ledger, the hardware wallet raised an eye popping $380 million, and so on and so forth.
So, the point that I want to make here is that the larger space is still flush with cash, and it’s cash from serious investors that extend from crypto to beyond. That wasn’t the case in 2017, 2018. The capital flowing in at that time was almost entirely ICO retail. And when it stopped, it cratered. I mean, people left a space in shame. That’s simply not happening now. And that doesn’t mean that we aren’t entering a more bearish period. What it means is that there is still going to be a ton happening and there remains a huge number of deep-pocketed actors invested in the future of the space across multiple dimensions. To me, that mitigates a lot of the pain around how deep we go, as well as how long it will last.
And finally, a last note, keep in mind that I didn’t say anything about dog coins. Those, I believe, are likely to be totally wiped out, if not now at some point. But that, as they say, is nature healing. Anyways guys, I hope you’re feeling better today than you did yesterday. I certainly know I am and until tomorrow, when you hopefully feel even better still, be safe and take care of each other. Peace!