JAN 20, 2024
The Impact Post ETF! Talking with Daniel Yan, founder of Kryptanium Capital
by 吴说猫弟, WuBlockchain
Please give a brief self-introduction
Hello everyone, my name is Daniel, and I am thrilled to be here with you today, especially as an inaugural guest, which is a great honor. A brief overview about myself: I am the founder and CIO of Kryptanium Capital, a crypto hedge fund that was launched in mid-October last year. Despite being only three months old, we have generated good results - outperforming Bitcoin every month after launch, and accumulated 50%+ return in such a short period of time.
My journey in the blockchain space began in 2018, making this year, 2024, my seventh year in this dynamic field. Before founding this fund, I was a co-founder at Matrixport since 2019.
I am very excited to share my thoughts and perspectives about the cryptocurrency space here today and look forward to an engaging session.
What do you think will be the market trend after the approval
of the Bitcoin spot ETF? Will there be a 'sell the news' phenomenon, or will it lead to a significant increase in new demand for Bitcoin? Some say the ETF launch is not successful as market crashed after it, do you agree?
The approval of the Bitcoin spot ETF has been a major talking point in the cryptocurrency community. Post-approval, we observed a 'sell the news' phenomenon, evident from the market data. On the first day of the ETF launch, Bitcoin's price peaked around $48,900 and then experienced a sharp decline, dropping nearly 15% from that peak. Aside from the "fact selling", there was also significant selling in GBTC, likely due to investors finally getting out after being locked in GBTC for a long time.
Looking forward, it's essential to be data-dependent and we should closely monitor the ETFs' balances and volume changes. In the first two trading days post-launch, we saw a net inflow of $500 to $800 million into the ETF, which is a positive sign. A steady weekly inflow of around $300 million for the next two weeks would be a good benchmark, suggesting a strong buyers' market despite the selling pressure from GBTC positions. However, if the inflow numbers are lower or turn negative, caution is advised.
Long-term, I am more optimistic. The ETF opens up Bitcoin to investors who previously couldn't or didn't bother to purchase it, like the IRA accounts(retirement plan accounts) holders and the mass stock account owners. Over a six-month span, I anticipate a net inflow of about $10 billion into the Bitcoin asset class, a substantial number that could significantly drive the price up, at least for the first half of 2024.
In terms of judging a successful ETF launch, the key isn't solely about the immediate price movement of Bitcoin but rather the attention garnered, the launch's smooth execution, and the scale of the ETFs as they grow. As most of the Bitcoin price rally over the past couple of months was driven by the anticipation of the ETF launch, it's unfair to attribute subsequent price drops solely to the ETF issuers and claim it a subdued launch. To me, these Bitcoin ETF launches are definitely successful.
Arthur Hayes has suggested that there will be a major pullback in March. Do you agree with this view? What is the relationship between Federal Reserve liquidity and this year's economic trends? Do you think it's a bad thing for Bitcoin to be more centralized after Bitcoin ETFs grows bigger?
On Potential Liquidity Issues:
As much as I respect Arthur's experiences and expertise, I don't fully agree.
Arthur's main point is that the expected termination of the BTFP (Bank Term Funding Program) by the Federal Reserve in March 2024 could possibly create a liquidity problem, especially for smaller and medium-sized banks. But we don't know that to be honest - right now there are 140bn usd sitting in that program, but due to the extremely favorable term of BTFP, it's arguable that even if a small bank does not need it, it still may want to use it to earn some extra yield. Even if we do have some pockets of liquidity issues, they are likely ideosyncratical than systematic. It's unlikely to result in a high-profile crisis like SVB from March 2023, as both the Fed and the financial institutions have learned from past mistakes and are more prepared.
The upcoming US Presidential election makes it even more critical to avoid financial turmoil, from the Democrats' perspective. While the termination of BTFP might raise concerns, it is unlikely to cause a major meltdown for risky assets. Still, it’s prudent to monitor the market closely going into March for any signs of instability.
On Government Agencies Holding Bitcoin(more centralization):
The fact that Bitcoin is a POW (Proof of Work) coin, not a POS one(Proof of Stake), means the amount of Bitcoin held in custody by entities like Coinbase or governments doesn’t create a problem. Bitcoin should be viewed more as digital gold rather than currency, thus a less frequently circulated Bitcoin is not an issue either. The same case applies to the gold - no one worries about the Gold held by governments, right?
While theoretically, a single agency controlling a significant portion of Bitcoin mining power could pose a risk, if it's getting close to 50%. We are very far from that now, as US and China govs each only controls 1-2%. Even if one day we get close to the 50% problem, it's still unlikely for double spending attacks to happen - as such an action would be disastrous and counterproductive to the interests of the agency who are capable of the attack.
In conclusion, the introduction of the Bitcoin ETF is unlikely to create a negative impact on Bitcoin in the long term. and potential liquidity issues due to the termination of BTFP are manageable but warrant attention.
The market believes that the next focal point will be the approval of Ethereum spot ETF, which would drive up the ETH ecosystem. What are your thoughts on this view?
The recent appreciation of Ethereum against Bitcoin by nearly 20% following the Bitcoin ETF launch was indeed remarkable. While I am bullish on Ethereum and see its potential, a 20% increase in just a week seems unsustainable at that pace.
Regarding the expectations for an Ethereum ETF approval within four months, this appears somewhat premature. Several factors need to be considered:
Ethereum's Nature as a POS Token: Ethereum's proof-of-stake (POS) mechanism, which produces staking yield, could complicate its classification in the eyes of regulatory bodies like the SEC. The question is whether Ethereum should be viewed as a commodity or security. We don't know the answer.
SEC's Perspective: The current SEC Chairman Gensler has previously indicated that while Bitcoin should be seen as a commodity, most other cryptocurrencies are likely considered securities. In addition, the SEC may require more time to observe the effects of the Bitcoin ETF before proceeding with the possibility of an Ethereum ETF.
Regulatory Caution: The SEC, as a regulatory agency, prioritizes protecting retail investors. In an election year, the agency is likely to be even more cautious, avoiding rapid decisions that could backfire. While for the Bitcoin ETFs they were under pressures from the court order regarding Grayscale, they don't have the same pressure on the ETH ETFs.
In the realm of other smaller cryptocurrencies, which tracks and projects are you focusing on, and what insights do you have?
1. Focus on Blockchain Layers and DeFi:
Our fund primarily concentrates on two categories: blockchain layers (both Layer 1 and Layer 2) and decentralized finance (DeFi). We avoid areas like gaming due to our lacks of expertise.
a. Layer 1 Chains:
In the realm of Layer 1 chains, Ethereum is a primary focus, but we also pay attention to its competitors, like Solana, which has shown resilience, especially after the FTX crisis. The success of Solana can be attributed to its speed and a robust community that supports both users and developers. This community engagement has played a crucial role in growing the ecosystem’s popularity. We are also exploring other Layer 1 chains with potentially superior technology to Solana that could emerge as strong contenders in the current cycle.
b. Layer 2 and Modular Blockchain:
Layer 2 solutions and modular blockchains are grouped together here as they both represent experiments in modularity on the Ethereum blockchain. The need for modularity arose from Ethereum’s limitations in speed. L2 Projects like Arbitrum and Optimism have shown significant growth and innovation. With the upcoming EIP-4844 upgrade, we foresee a substantial reduction in Layer 2 costs and better dApps on the L2s.
c. Modular Blockchain Space:
In the modular blockchain space, new challengers like Celestia have had great token launches. While it’s still early, we are keenly observing new entrants in this domain to identify potential opportunities.
2. DeFi as a Sustainable Application Layer:
Coming from a financial background, I have a particular interest in DeFi. Unlike other areas in crypto, DeFi has successfully transitioned from concept to product and sustained its business model and grew its scale even during bear markets. While some may overlook DeFi for being less ‘hyped,’ its resilience and business viability are undeniable. There are both established and smaller protocols in DeFi generating substantial revenue with relatively low valuations. The continuous innovation and rollout of new, more useful versions of these protocols keep this space particularly intriguing.