The crypto industry has reached a turning point: What will be the highest price of BTC and ETH in this cycle?

Over the past year, we have been speculating that the crypto industry is approaching a turning point in its technological revolution.

Our thinking was influenced by the framework proposed in Carlota Perez’s book Technological Revolutions and Financial Capital.

The core idea is that revolutionary technologies typically go through four different stages during implementation and deployment: 1) the outbreak stage, 2) the frenzy stage, 3) the synergy stage, and 4) the maturity stage.

Between fanaticism and synergy is the tipping point.

The turning point usually occurs during the aftermath of the “mania” period (2021 for crypto). This is after financial leverage is removed, consumers are harmed, fraud is exposed and lessons are learned (2022/2023).

These “awake” periods, which tend to focus on regulation and policy development, mark the end of the setup period—and the beginning of the new technology deployment period.

Given the events of the last week, we think it is now safe to officially declare that we have entered the turning point phase for cryptocurrencies. Note that the red dots above touch on the mania and turning point. We think both are likely to occur simultaneously in this cycle + the cycle after.

As such, our DeFi report this week skews stream-of-consciousness as the crypto industry enters a new paradigm.

what happened?

The political fallout began.

I’m stating the obvious here, but the Democratic Party appears to have miscalculated the popularity of cryptocurrency in the U.S. When you combine this with Biden’s polling performance + Trump’s recent alignment with the industry, you can see political game theory at work.

Now, both parties appear to be courting the U.S. cryptocurrency industry.

But as we wrote more than a year ago, this has always been the case. Why? It’s estimated that more than 50 million people in the U.S. own cryptocurrency — a uniquely bipartisan user base. And because cryptocurrency is financial in nature, the industry is turning Americans into single-issue voters.

That's why the Democrats' strategy makes no sense to us. They really screwed up on this one.

It all started when President Biden installed a puppet at the SEC to try to hobble the industry’s growth through “enforcement regulation?”

Next, we saw the Chairman of the Federal Deposit Insurance Corporation (FDIC) run “Operation Choke Point 2.0.”

And then there’s Senator Warren’s “anti-crypto army?”

All seek control. All fail.

Meanwhile, the rest of us have been watching our industry teeter on the edge of its seat, swayed by political winds and the incentives of unelected bureaucrats.

It's frustrating, to say the least.

But at the same time, democracy is winning.

To those of you who work in the industry and support the industry. You have all shown that you have a voice. You have agency. You should be proud of yourself.

We achieved this together.

Policymakers are listening.

So, for now, it appears that the Democratic Party (broadly speaking) is no longer against cryptocurrencies:

• Twelve Democrats, including Senate Majority Leader Chuck Schumer, voted last week to repeal SAB121, an SEC rule designed to prevent banks from providing custody of crypto assets.

• 71 Democrats, including Nancy Pelosi, voted last week to support the sweeping legislation that passed the House of Representatives, the FIT21 Act.

• The Democrat-led SEC (which is supposed to be independent) approved an ETH ETF.

• Last week, Martin Gruenberg (the architect of Operation Choke Point 2.0) was forced to resign as FDIC Chairman.

While the battle is not over, it appears we have “crossed the chasm” as cryptocurrency is becoming a major industry in the United States.

Last week solidified that.

ETH ETF

We’ve been anticipating an ETH ETF since the Bitcoin product was approved. But we certainly didn’t expect it to go through last week.

From the information we have, the SEC didn’t expect it either.

How it happened:

From what we know (James Seyffart interviews Ryan Sean Adams), the SEC’s Division of Trading and Markets was prepared to reject the ETH ETF Form 19b-4 about a week before approval. But somehow, it seems, the agency started reaching out to issuers, who were equally surprised. Everyone was caught off guard. It makes no sense.

This makes us think that the decision to approve an ETF did not come from the SEC. It probably came from somewhere else (probably the White House).

Now. We have yet to hear Gary Gensler speak on this topic. But we know that the decision was not made through a vote of 5 SEC Commissioners – the BTC ETF was voted on by them. This again suggests that the decision may have come from somewhere outside of the SEC.

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

Is it possible that Chairman Gensler will step down? We will have to wait and see. I can imagine that the rest of the SEC staff may have a hard time trusting his judgment right now.

Some additional notes on ETFs:

• We are still waiting for each issuer's S1 form to be approved before we can start trading. This may take another 4-6 weeks.

• The approval of Form 19b-4 solidifies ETH’s status as a digital commodity (which could have significant implications for other crypto assets as well as the Coinbase and Uniswap lawsuits).

• 19b-4 approval does not include staking. Therefore, the SEC may still consider staked ETH to be a security.

Market Outlook

Predicting ETH ETF flows

Bloomberg's ETF experts (James Seyffart and Eric Balchunas) predict that ETH ETF flows will account for around 10-20% of BTC ETF flows.

What is logic?

• Currently, there is less institutional interest in ETH.

• ETH is more difficult to understand than BTC.

• ETH futures ETF trading volume is smaller than BTC (10-20%).

• ETH spot trading volume is smaller than BTC (about 50%).

• ETH accounts for about 1/3 of BTC's market capitalization.

Let’s assume this view is correct. Since launch, the BTC ETF has had net inflows of around $13 billion. If ETH gets 10-20% of the net inflows, that would imply $1.3-2.6 billion in net inflows.

Our take:

Given that BTC was trading at around $40,000 after the ETF launch and rose to $70,000 two months later (a 75% increase), we expect a similar trend to occur with ETH (pushing the asset past its all-time high of $4,800).

That being said, ETH has several characteristics that set it apart from BTC. Here are a few things to keep in mind as we anticipate ETH’s potential outperformance:

• ETH does not face the same “structural selling pressure” as BTC because ETH validators do not incur operating expenses like Bitcoin miners (forcing them to sell a portion of their mined tokens).

• Currently 38% of ETH supply is “soft locked” on-chain - earning income in staking contracts, DeFi applications, as collateral, etc.:

Data source: Glassnode

• Considering a percentage of on-chain supply, ETH balances on exchanges are at their lowest levels since 2016 (11% of circulating supply - lower than BTC’s 11.8%):

Data source: Glassnode

• ETH is more reflexive than BTC. This reflexivity can be expressed by price action leading on-chain activity, which leads to more ETH being burned, which can further drive the narrative, more price action, more on-chain activity, and more ETH being burned. We think this will eventually lead to Larry Fink going on national TV talking about Ethereum and its potential to be the new rail for finance.

• ETH is a technical play on web3 growth. A “call option” or “high growth index for web3 adoption”. Whereas Bitcoin is “digital gold”. For this reason, we believe ETH ultimately has a larger addressable market than BTC.

• ETH has superior network effects and fundamentals while providing returns to stakers of the asset (not available to BTC holders).

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

• What percentage of BTC ETF holders can be rebalanced into ETH?

• What percentage of investors could seek a 50/50 split between BTC and ETH?

• What percentage of investors could directly choose ETH instead of BTC?

• If momentum strikes, will ETH see a “reflexive flywheel” kick in?

• How many institutions are currently on the sidelines because they missed out on BTC? Will they go all in on ETH?

• What would happen if ETH got 40-50% of BTC ETF flows?

• What will “altcoin rotation” look like among ETF holders during this cycle?

Given our fundamental view on ETH, we believe it is more likely to outperform Bloomberg’s forecast of 10-20% BTC net inflows.

A simple framework for thinking about the potential valuation of ETH (and BTC) in this cycle:

• The cryptocurrency market cap is $10 trillion;

• BTC peaked at 40% (43% in the previous cycle);

• ETH peaked at 45% of BTC’s market value (50% in the previous cycle);

• ETH market cap at cycle peak = $1.8 trillion

• ETH price at cycle peak was $14,984 (3.9x)

• *Assuming no change in supply as of today

For reference, a $4 trillion Bitcoin valuation would be $202,000 per BTC (2.8x ). Finally, a $10 trillion total market cap assumes the same growth rate of the 2017/2018 cycle compared to the previous cycle (388%).

*The Bitcoin price is $150,000 (2.1 times), and the ETH price is $11,200 (2.9 times), all other things being equal.

A broader market perspective

We try not to overhype or overconfident, but it’s hard to imagine a more bullish outlook for crypto right now. Everything seems to be in place, including:

• Innovation cycle.

• Macro/liquidity cycle.

• Election cycle.

• Bitcoin halving cycle.

• BTC and ETH ETFs.

Now we have removed a key barrier because the market no longer has to worry about Gary Gensler scorching the industry.

Therefore, we increasingly believe that the crypto market will continue to climb in the second half of the year and could peak in 2025.