Hello readers,

Over the last year, we’ve been speculating that the crypto industry is nearing The Turning Point of its technological revolution.

Our thinking was informed by the framework laid out in Carlota Perez’s book, Technological Revolutions and Financial Capital.

The core idea is that revolutionary technologies typically go through 4 distinct phases as they are implemented & deployed: 1) The Irruption Phase, 2) The Frenzy Phase, 3) The Synergy Phase, and 4) The Maturity Phase.

In between Frenzy and Synergy comes The Turning Point.

Turning Points typically occur during the hangover from “The Frenzy” period (2021 for crypto). This comes after financial leverage is wiped out, consumers are hurt, frauds are exposed, and lessons are learned (2022/2023).

These periods of “sobriety” tend to be highlighted by regulation and policymaking, marking the end of the Installation Period — and the beginning of the Deployment Period for new technologies.

Given the events of last week, we think it’s now safe to officially declare that we have entered The Turning Point phase for crypto. Notice the red dot above is touching both frenzy and Turning Point. We think both could occur at the same time in this cycle + post cycle.

As such, we’re sharing a stream-of-consciousness report this week as the crypto industry enters a new paradigm.

Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment, legal, tax, business, or any other advice.

Let’s go.

What happened?

Politics happened.

Stating the obvious here, but it appears that the Democrats miscalculated the popularity of crypto in the United States. And when you pair this with Biden’s poll performance + Trump’s recent alignment with the industry, well, you get to see political game theory playing out right before your eyes.

Now both parties seem to be courting the industry in the US.

But as we wrote about over a year ago, it was always going to be this way. Why? It’s estimated that over 50 million people own crypto in the US — a user base that is uniquely bi-partisan. And because crypto is inherently financial, the industry is turning Americans into single-issue voters.

It’s why the strategy from the Democratic Party never made any sense to us. They really fumbled the ball on this one.

It all started when President Biden installed a puppet at the SEC in an effort to stonewall the industry via “regulation by enforcement?”

Next, we saw the Chairman of the FDIC run “Operation Choke Point 2.0.”

And then it was Senator Warren’s “anti-crypto Army?”

All seeking control. All losing strategies.

Meanwhile, the rest of us have been watching as our industry blows in the winds of politics and the incentives of unelected bureaucrats.

It’s frustrating, to say the least.

But at the same time, democracy is winning.

To those working within and supporting the industry. You all showed that you have a voice. You have agency. You should be proud of yourself.

Together, we all made this happen.

*Special shout out to the numerous original gangsters that have been grinding away since the beginning. People like Ryan Selkis and many others.

Policymakers are listening.

As such, it appears (for now) that Democrats (broadly speaking) are no longer Anti-Crypto:

12 Democrats (including Senate Majority Leader Chuck Schumer) voted to repeal SAB121 last week (an SEC rule designed to prevent banks from providing custody of crypto assets).
71 Democrats (including Nancy Pelosi) voted in favor of passing sweeping legislation in the House via the FIT21 bill last week. Tune into The Signal this week as we have a special legal/policy guest to break it all down.
The Democrat-led SEC (which is supposed to be independent) approved the ETH ETF.
Martin Gruenberg (architect of Operation Choke Point 2.0) was forced to step down as Chairman of the FDIC last week.

While the fight is not over yet, it looks like we’ve “crossed the chasm” as it pertains to crypto becoming a mainstay industry in the United States.

Last week cemented it.

ETH ETF

Long-time subscribers know that we’ve been expecting an ETH ETF ever since the Bitcoin products were approved. But we certainly did not expect it to happen last week.

And from what we can gather, neither did the SEC (yikes).

How it went down:

As far as we can gather (James Seyffart interview with Ryan Sean Adams), The Division of Trading Markets at the SEC was prepared for a denial of the ETH ETF 19b-4 forms up until about a week prior to approval. But seemingly out of nowhere, the agency began engaging with issuers who were equally as surprised to be engaged. Everybody was caught off guard. Makes no sense.

This makes us think the decision to approve the ETF did not come from the SEC. That it may have come from somewhere else (possibly The White House).

Now. We have not yet heard from Gary Gensler on the topic. But we know that the decision was not made via a vote amongst the 5 SEC Commissioners — as it did with the BTC ETF. Again, this points to the decision potentially coming from somewhere outside the SEC.

If that’s the case, who’s running the SEC? I know about 50 million Americans that would like to know.

Is it possible that Chaiman Gensler has to step down? We’ll see. I would imagine it might be difficult for others working at the SEC to trust his judgment at this point.

A few additional notes pertaining to the ETF:

We’re still awaiting approval of the S1 forms of each issuer before trading can commence. This could take another 4-6 weeks +.
The approval of the 19b-4 forms cements ETH as a digital commodity (which could have major implications for other crypto assets as well as the Coinbase and Uniswap lawsuits).
The 19b-4 approval does not include staking. Therefore, it’s possible that the SEC still views Staked ETH as a security.

The DeFi Report is powered by Token Terminal — the leading onchain data & analytics platform for institutional investors. If you’re interested, you can sign up for a free account at the link here: FREE ACCOUNT

Market Outlook

Projecting ETH ETF Flows

The ETF experts over at Bloomberg (James Seyffart and Eric Balchunas) are projecting ETH ETF flows to represent about 10-20% of the BTC ETF flows.

The logic?

There is less interest in ETH from institutions right now.
ETH is more difficult to understand than BTC.
ETH futures ETF volume is less than BTC (10-20%).
ETH spot trading volumes are less than BTC (about 50%).
ETH is about 1/3 of BTC’s market cap.

Let’s assume that this view is correct. The BTC ETF has about $13b in net flows since launch. If ETH were to get 10-20% this would mean $1.3-$2.6b of net inflows.

Our take:

Given that BTC was trading at about $40k just after the ETF launch before rising to $70k two months later (75% gain), we expect to see a similar move for ETH (pushing the asset through prior all-time highs of $4,800).

With that said, ETH has several characteristics that differentiate it from BTC. A few items to keep in mind as we project potential ETH outperformance:

ETH does not have the same level of “structural sell pressure” that BTC has since ETH validators do not incur operating expenses as Bitcoin Miners do (forcing them to sell a portion of coins mined).
38% of ETH supply is currently “soft locked” onchain — earning yield while being held within staking contracts, DeFi applications, acting as collateral, etc:

Data: Glassnode

Given the % of supply onchain, ETH balances on exchanges are at their lowest level since 2016 (11% of the circulating supply - less than BTC at 11.8%):

Data: Glassnode

ETH is more reflexive than BTC. This reflexivity could be expressed with price action leading onchain activity, which leads to more ETH burned, which can further drive narratives, more price action, more onchain activity, and more ETH burned. We think this eventually leads to Larry Fink on national TV talking about Ethereum and its potential to become the new rails of finance.
ETH is a tech play on the growth of web3. A “call option” or “high-growth index for web3 adoption.” Whereas Bitcoin is “digital gold.” We believe ETH ultimately has a much larger addressable market than BTC for this reason. We cover this topic in detail in The Ethereum Investment Framework.
ETH has superior network effects & fundamentals while offering stakers of the asset a yield (not available to BTC holders).

Given the structural differences, we think it’s prudent to ask the following questions:

What % of BTC ETF holders could rebalance into ETH?
What % of investors could look for a 50/50 allocation to BTC and ETH?
What % of investors could outright opt for ETH over BTC?
If momentum hits ETH, will we see the “reflexivity flywheel” kick into gear?
How many institutions are on the sideline right now, having missed BTC? Will they go all in on ETH?
What happens if ETH gets 40-50% of the BTC ETF flows?
What could the “altcoin rotation” look like amongst ETF holders in this cycle?

Given our fundamental views on ETH, we think it’s more likely that ETH will outperform Bloomberg’s projections of 10-20% of BTC’s net inflows.

A simple framework to think about potential valuation for ETH (& BTC) this cycle:

$10 trillion market cap for crypto
BTC 40% at peak (43% last cycle)
ETH 45% of BTC market cap at peak (50% last cycle)
= ETH Marketcap at cycle peak = $1.8 trillion
= $14,984 (3.9x) Price/ETH at cycle peak
*assumes no change in supply as of today

For reference, Bitcoin at a $4 trillion market cap would be $202k/BTC (2.8x). Finally, the $10 trillion total market cap assumes a growth rate of 233% this cycle compared to ‘21 (288% growth in ‘21 compared to ‘17/’18).

*Bitcoin at $150k (2.1x) all else equal puts ETH at $11.2k (2.9x).

If you’re looking for much more detailed price predictions and valuation analysis, check out The Ethereum Investment Framework.

Broader Market Views

We try not to get overly hyped or overconfident, but it’s difficult to envision a more bullish setup for crypto right now. Everything seems to be lining up, including:

The innovation cycle.
The macro/liquidity cycle.
The election cycle.
The Bitcoin halving cycle.
BTC & ETH ETFs.

And now we’ve removed a key barrier to entry as the markets no longer need to worry about Gary Gensler going scorched earth on the entire industry.

As such, we increasingly believe that the market will continue to climb a wall of worry into the second half of the year, with a potential blow-off top in 2025.

As always, please do your own research. And stay tuned as we’ll be sharing more analysis in the coming weeks, including an onchain data/cycle awareness update.

Take a Report.

And Stay Curious.

Disclaimer: Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment advisor and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such should not be construed as investment advice. The content contained in the report is derived from both publicly available information as well as proprietary data sources. All information presented and sources are believed to be reliable as of the date first published. Any opinions expressed in the report are based on the information cited herein as of the date of the publication. Although The DeFi Report and the author believe the information presented is substantially accurate in all material respects and does not omit to state material facts necessary to make the statements herein not misleading, all information and materials in the report are provided on an “as is” and “as available” basis, without warranty or condition of any kind either expressed or implied.

Did crypto just enter "The Turning Point?"

Breaking down the biggest week in the history of the industry.

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