Crypto Winter: Bitcoin Stands Tall, While Ethereum and Other Assets Slump

Crypto Winter: Bitcoin Stands Tall, While Ethereum and Other Assets SlumpCrypto investors are experiencing a slight existential crisis as the young asset class faces waning demand in the midst of a bull run. Over the past month, search interest for crypto has been tepid, network activity has been sluggish, and futures funding rates have even dipped into negative territory

Crypto Winter: Bitcoin Stands Tall, While Ethereum and Other Assets Slump

Crypto investors are experiencing a slight existential crisis as the young asset class faces waning demand in the midst of a bull run. Over the past month, search interest for crypto has been tepid, network activity has been sluggish, and futures funding rates have even dipped into negative territory. Ethereum ETFs, launched just over a month ago, have seen net outflows. Even Bitcoin ETFs, which helped drive the price of Bitcoin to record highs in March, have witnessed net outflows.

ETFs have been a huge success, [Donald] Trump is on TV talking about the US government buying Bitcoin, Bitcoin is hitting $60,000 by all accounts, these headlines show we are doing quite well, yet industry sentiment is extremely low, said Michael Rinko, an analyst at DelphiDigital. He added, Things have been trending down dramatically over the past four months or so. We aren't seeing the sort of broad upward move we expect in past cycles.

Typically during bull market cycles, Bitcoin's rise leads to Ethereum's climb, followed by the broader crypto market. However, as of Thursday morning, Bitcoin was down 12% since April 1. Ethereum and Solana have fallen by 29% and 27%, respectively. Binance Coin is down 10%, while Ripple's XRP has declined by 8%. Over the same period, the S&P 500 index has gained 6%, and gold has risen by 12%.

Crypto has underperformed broadly since the spot ETHETF began trading on July 23, Citi's David Glass said in a note to clients on August 23. While other risk assets have also been weak in that time, crypto has underperformed (on a volatility-adjusted basis) throughout, even as the non-farm payrolls rebounded. Beyond stablecoins, which have continued to grow in market cap during the early August market correction, most crypto demand indicators are weakening, he said.

A resumption of Bitcoin ETF buying is a key driver for increased demand for Bitcoin. Fed Chair Jerome Powell confirmed that interest rates will be lowered, which should help reduce borrowing costs and increase demand for riskier assets. Additionally, according to Julio Moreno of CryptoQuant, Bitcoin price gains are typically correlated with whale holdings growing at a monthly rate of 3%. However, the current growth rate is around 1%, below the 6% seen in February.

On the bright side, the number of Bitcoin addresses that have been holding Bitcoin permanently (i.e., addresses that have never spent or sold their Bitcoin) continues to accumulate, and at an even faster rate than during the first quarter when Bitcoin hit an all-time high.

Bitcoin's Standalone Success

Bitcoin ETFs have been hailed as the most successful ETF launches in history, and while many advisors are still on the sidelines, BlackRock's iSharesBitcoinTrust (IBIT) currently boasts $23 billion in assets under management. However, despite stronger institutional demand in the market Bitcoin is still up 44% this year there is little evidence that investors are pouring funds into new projects or smaller networks. This has led to disappointment among many crypto natives, Rinko said. "Bitcoin's success is somewhat siloed, he said. Not a lot of crypto natives hold Bitcoin, so when Bitcoin goes up a lot, they don't necessarily benefit from it.

By contrast, he said, when Ethereum ETF demand picks up, the wealth effect is expected to be more pronounced. A lot of people hold ETH, he said. They use it on-chain, they stake it, they lend it, so an ETH price rise naturally creates leverage in the system that a Bitcoin price rise doesn't.

Valley of Disillusionment

As the long tail assets behind Bitcoin struggle, the industrys sense of disillusionment has reached one of its highest levels ever, perhaps second only to the aftermath of the FTX debacle, Rinko said. For most industry insiders, crypto has never been simply about speculative trading, and the historical bull run has been a golden era of capital inflows, funding for new projects, and market discovery for the next big application or use case.

We used to be building the future of finance, we were going to tokenize everything and put it on chain those were the narratives of the last cycle, and we haven't seen big breakout applications in this cycle, Rinko said. Decentralized finance (DeFi) is dead, non-fungible tokens (NFTs) are even more dead even meme coins feel incredibly nihilistic, everyone agrees this isn't some revolutionary breakthrough technology. So we're kind of lacking that compelling narrative of a future tech story to excite people and that's why a lot of people are feeling pretty disillusioned with the space.

Whether you want to admit it or not, Rinko said, price speculation still remains the primary use of crypto. The only bright spot in the current market is stablecoins. The aggregate market cap of stablecoins recently hit a 2022 high after months of stillness, suggesting that funds are starting to flow back into crypto and could accelerate further as the Fed begins to cut rates.

Higher interest rates mean higher capital hurdles for stablecoins, Rinko said. If investors can get 5% returns on risk-free dollars, there isn't a lot of incentive to move money on-chain. But we are now on the cusp of the first rate-cutting cycle in four years, which will make crypto returns more competitive.

This article is originally from Finance.sina.com