Dog Days of Summer

This piece complements our macro report, The Dark Night Rises, which dropped earlier this month. We hope you enjoy both.

2024 has been a tale of two summers. From January through March, the market ripped. It featured the relentless FinkDawg bid, a Solana revival, and memecoin mania. But then came the Ides of March. And from March until today, markets chopped. Majors bled, memes nuked, and ETF flows dwindled. We went from a classic crypto summer to the dog days of summer.

This period of consolidation — or annihilation, depending on your positioning — has led some to call for a market top and claim the cycle is over. We couldn’t disagree more. We think the cycle has only just begun, probably in its 2nd or 3rd inning now, and see this latest correction was nothing more than a heat check. Back in the day, Bitcoin used to eat -25% drawdowns for breakfast. So, if the volatility is getting to you, just remember: this is the price we pay for Valhalla.

In retrospect, the summer indigestion is not particularly surprising. BTC did go up +150% in 2023 — and then another +65% in the first 12 weeks of 2024 — so consolidation was always in the cards. Summer lulls have been a feature of crypto markets for a while and of general human existence for even longer.

Since the days of Achilles and the ancient Greeks, the dog days of summer and the oppressive heat they bring often mean these months are filled with inactivity and a general sense of sluggishness. This is precisely what we see across crypto markets today.

The good news is the dog days of summer are behind us, and a classic crypto summer is set to bloom. The past few months have not been easy. Many coins perished, leverage was purged, and sentiment took a beating. But we made it. And now, we have a clean slate heading into the ETH ETFs, rate cuts, and the election. While markets are always forward-looking, we believe these catalysts are not yet priced in. From our perspective, right now is one of the best setups in recent memory.

Allow us to explain.

We Didn’t Start the Fire

In the first half of 2024, crypto markets were dominated by three big themes:

1. ETF flows
2. Dispersion
3. Memecoins

But we would be remiss if we did not state the obvious. We are only here today because of one man. The father of this bull run:  Mr. Larry D. Fink.

Okay, this might be a slight exaggeration, but it’s a useful heuristic. After all, Larry and frens blessed us with spot Bitcoin ETFs, which amassed nearly $40 billion in six (!) months.

The demand for these products has blown even the most bullish analyst projections out of the water.

IBIT has passed QQQ into YTD net flows. And could pass Vanguard’s Total Stock Market ETF very soon too. Compare the net sizes of these ETF’s vs. net inflows. Demand for Bitcoin via ETF has been relentless. Unprecedented really. pic.twitter.com/CyD3p7c9CX

— Spencer Hakimian (@SpencerHakimian) July 22, 2024

Since the ETFs launched, Bitcoin and the broader crypto market have largely traded in line with ETF flows. On good flows, Bitcoin pumped. On bad flows, Bitcoin dumped.

Outside of their considerable impact on market structure, the ETFs became the narrative. They gave us a reason to bid and an easy rationalization of why prices were going up. So, when the flows started to wane, this rationale became less tenable. Starting in March, it started to look like the first wave of ETF demand had been saturated. And ever since, the market has been adrift — in search of the next narrative to resume uponly.

The market wasn’t always this sensitive to ETFs. After Blackrock filed in June 2023 — with its 576-1 approval record — Bitcoin traded sideways for four months before news of the launch timing leaked. Then, we pumped from ~$25K to $40K before stalling out again in the five weeks leading up to their actual launch. By the time the ETFs launched, BTC was still ~40% off ATHs. The upshot is that despite all the anticipation, the market did not front-run the spot Bitcoin ETFs.

This insight becomes more interesting when you consider ETH’s price action leading up to its own ETF. Starting last summer, ETHE’s discount began to narrow as the odds of a BTC ETF rose. Investors were betting that an ETH ETF wasn’t far behind, though consensus expected the ETF to come sometime in 2025. But then Darth Gensler surprised everyone in June by saying he expected the approval sometime this summer.

Almost immediately, ETH pumped more than 30% from $3,000 to nearly $4,000, all but eliminating the ETHE discount, which narrowed from 25% to 1%. This violent repricing signaled just how offside the market was.

The next big update came from Bloomberg ETF analyst Eric Balchunas, who has become something of a TradFi soothsayer to crypto degens. Eric said that following Gensler’s latest comments, his team had moved their over/under on an ETH ETF to July 2nd.

UPDATE: we are moving up our over/under date for the launch of spot Ether ETF to July 2nd, hearing the Staff sent issuers comments on S-1s today, and they’re pretty light, nothing major, asking for them back in a week. Decent chance they work to declare them effective the next… https://t.co/XJZ8JLwEFF

— Eric Balchunas (@EricBalchunas) June 14, 2024

Yet again, this date was sooner than the market expected, and ETH reacted positively to the new information — jumping +5% over the next couple of sessions. Since then, ETH has traded sideways.

Similar to the anxiety that dominated the run-up to the BTC ETF, the market seems to be talking itself down again.

• “TradFi won’t understand the product”
• “There’s no staking”
• “Macro is bad”

To be clear, these are all legitimate arguments. But flows are flows, and we believe the market is overly bearish on the impact the ETFs will have on