Why is crypto down while S&P hits record highs?

Dear Investors,

Various factors are pushing the price of crypto down.

Interestingly enough, the S&P 500 and NASDAQ keep hitting record highs. Why?

Read online with all charts and better format.

Crypto vs. S&P 500 and NASDAQ

This is something we investors often watch —> Crypto vs. S&P 500 or Nasdaq.

And lately, the fight was not looking good.

S&P 500 is up 16.75% this year (YTD 2024), Nasdaq 23.18% and crypto?

Overall, crypto is up 31.7%*, with Bitcoin +35.62% and Ether +39.02% up even more, beating the market.

This is just to remind us that while it seems gloomy - the S&P 500 and Nasdaq are rising, and crypto is falling - we are still better than traditional stocks.

So why are we falling behind lately?

There are 3 main reasons:

1. Selling pressure from governments and Mt Gox
2. Regulatory uncertainty, especially in DeFi
3. Token Inflation and overall dilution

Governments and Mt. Gox

Over the past two weeks, Germany has sent 7,828 BTC in transfers to crypto exchanges, valued at $496.4 million at the time of sending.

The US Government is also selling. On June 26, they sent a single 3,940 BTC ($241.22m) deposit to Coinbase Prime.

However, the big news comes from the perished bitcoin exchange Mt. Gox, which announced that it will start distributing assets stolen in a 2014 hack in July.

These “assets” involve a massive 140,000 BTC and Bitcoin Cash, which are valued at approximately $9 billion.

This creates significant selling pressure on the prices and scares investors into thinking about how low the BTC and other crypto assets can fall.

Regulatory uncertainty

Markets were waiting for ETH ETFs, which were not approved this week.

The SEC returned the S-1 fillings for revision; the deadline is next Monday (8th of July).

Furthermore, the SEC has filed lawsuits against ConsenSys and MetaMask, labeling staked ETH from Lido and Rocket Pool as securities.

This is not so surprising because:

• The SEC needs to clarify ETH as a commodity to approve ETH ETFs.
• Since they are getting closer, so is the clarity around asset type.
• But we cannot have a yield (staking) on a commodity.

This is an ongoing struggle for more clarity from the US regulators. However, I see this as positive progress since having this clarity allows for the approval of ETH ETFs.

The staking is just another phase of the process and a roadblock to clear.

Token inflation deserves a separate headline, as there are concepts and examples worth sharing. Let’s explore it.

Token inflation

Tokens usually follow pre-defined rules for when and how they should be distributed. This is broadly called Tokenomics and is often part of a project’s documentation.

It is a mixture of different token allocations - such as to the core team, early investors, marketing and treasury budgets, etc., and vesting schedules for these categories.

In simple terms, it tells us when and how many tokens of a specific project will get released into the market (circulation).

Example

Imagine you have project A with a total of 100,000 tokens.

When a project decides to launch its token for trading (an event often similar to a traditional IPO), it usually releases only a portion of the tokens, let’s say 10,000 tokens (10%) in our case.

After 6 months, this project releases another 10,000 tokens into circulation, according to their pre-defined and published tokenomics.

Suddenly, we have twice as many tokens of the same project on the market.

This is how token inflation is affecting a single project.

Above, you can see a chart of token releases for Avalanche, showing their 10-year token plan and when to expect how many tokens to flow into the market.

A free tool I use to see the token release of major tokens —> https://token.unlocks.app/

How does this affect the price?

In 3 ways:

1. Newly released tokens are often sold, creating a selling pressure.
2. Some investors can perceive it negatively, selling even more.
3. Other investors might use it to buy at a lower price.

If the demand is not high enough, this will result in lower prices.

Side note: That is one of the reasons why it is always important to compare a project's market cap, not just its price since there might be a big difference.

Take a look at Akash, for example. The price is lower than its all-time high (-61.37%), but the capitalization is already higher, meaning the project is “more expensive” than before, even with the lower token price.

What is even more important is how it affects the broad market.

• There is some money on the market: $2.24t today.
• If this money on the market isn’t changing (inflows),
• But there are more and more tokens released (inflation),
• The price of individual tokens will go down while the total market will remain at the same level.

This can result in investors rotating from big tokens (BTC and ETH) into smaller tokens whose prices got diluted due to token releases.

Just how big of a deal this is?

Token Unlocks track only a few of the biggest tokens, and we can see daily $44.39m unlocks, plus an extra $92.56m in the next 7 days.

Not to mention the amount of brand new tokens (especially meme coins) created daily for speculation. This also results in some outflows from the big-cap projects.

This is one reason why individual prices can drop, even when the total amount of money in the market remains the same.

My Thoughts

The selling pressure from governments and exchanges is real, and unless we have a new spike in demand and money inflows, prices will keep falling over the next 6-8 weeks.

On the other hand, we may receive ETH ETF approval this month, which would gradually increase the inflows from traditional investors into crypto.

Furthermore, the overall macro cycle looks positive, with global liquidity (money) yet to arrive in risky assets.

Above is an interesting indicator from Real Vision (Raoul Pal), signaling that Q1 2025 should already see a 10% increase. This may confirm the liquidity cycle peaking around the end of Q2 2025—still 12 months from today.

My strategy is simple: DCA over the summer, focusing on the big projects hitting interesting entry prices, such as ETH, AVAX, or SOL.

That will be around 60-70% of my buying, and the remaining 30% will be split among smaller caps focused on bigger projects.

Regards,

Matt Curda

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