The Bull Market Isn't Coming, It's Already Here!

Good Morning All!

I’m bringing you a special edition of the WOLF Financial newsletter today in collaboration with my friends over at Secure Digital Markets, an institutional liquidity provider based in Toronto. 

We’re going to break down some of the most important alpha from SDM’s Year-in-Review report, to show you why prioritizing research over speculation is the new playbook for adoption in 2024; especially if you want to make money in the crypto markets.

With the help of some of crypto’s most well-known companies including Bitwise, Bloomberg, Polymesh, and nearly a dozen other firms, SDM’s report spans nearly 100 pages of in-depth interviews, market research, and technical analysis. The full breakdown of everything you need to know is in an easy Q&A format below. Make sure to get your full copy before continuing. 

We hope you enjoy it!

Who is Secure Digital Markets? 

Secure Digital Markets is an institutional liquidity provider based in Toronto. The team offers spot trading, lending, and derivatives services to institutional investors and crypto-related clients. The team works with a diverse group of miners, BTMs, exchanges, and payment platforms, giving SDM a unique pulse on the market, where trading flows are coming from, and what this industry's service providers are really thinking behind the scenes. 

Where will adoption come from in 2024? 

One of the highlights of the report was SDM’s interview with Bitwise, one of the eleven ETF issuers. The conversation focused on where crypto adoption will come from as we enter the institutional era of digital assets. There were several powerful trends worth analyzing: 

1. More financial advisors have been waiting for the ETF than we thought

88% of financial advisors surveyed by Bitwise said they were already interested in crypto and have been waiting for the Bitcoin ETF.

2. 80% of wealth in America has been unable to invest in crypto, until now

The investable wealth in America can be placed into three categories. 

1. Retail Investors (The average individual managing his/her own investments) 

2. Registered Investment Advisors  (RIAs) 

3. Institutional Investors (Pension Funds, Family Offices, Endowments, etc)

Since all of the spot market liquidity trades on unregulated and offshore exchanges, 80% of the investable wealth in America that comes from these RIA’s and institutional investors has been on the sidelines, unable to invest into this asset class. Until now. The approval of these ETFs opens up the digital assets market to that 80% of investors. Such a seismic shift in the access to crypto will make RIA’s and institutional investors some of the largest contributors to crypto’s market appreciation over the next 5 years. 

When will we see ETFs for other digital assets? 

From interviews with Bitwise and Bloomberg’s Eric Balchunas (Lead ETF correspondent), there are two core metrics that will likely become precedents for any future ETF applications.

1. The Future’s Markets is an Essential First Step

Since the majority of spot markets are unregulated, there needs to be an active and regulated futures market so the SEC can analyze price discovery and assess the threat of market manipulation. 

ETH is the only asset with a regulated futures markets outside of Bitcoin so they are the only real candidate based on this criteria. The fact that it is a significantly smaller market could cause some delays. Blackrock’s spot ETH ETF application has already been delayed until August. However, now that the spot BTC ETF has already provided a roadmap for the industry, there is no reason why the ETH ETF won’t get approved. It just might take longer then people would like. 

2. Regulators Love Decentralization

Another data point from the Bitwise and Bloomberg interviews is how decentralized these protocols are. Regulators were meticulously evaluating these protocols governance systems and their level of decentralization to ensure the token supply is not controlled by a small group of actors and the dynamics for a free market can exist. 

With binary criteria like this (there either is a futures market or there is not) it is very easy to see which digital assets are next in line for their own spot ETFs (hello Ethereum). 

Now that we have ETFs, what will happen to the other public crypto-related companies?  

Now that the spot Bitcoin ETF is here, there's an interesting development that isn't getting a lot of attention. How will the public crypto companies like Coinbase, Microstrategy, Galaxy Digital, and all of the public mining companies be impacted? 

Before the ETF, these public companies offered an indirect way for investors to get Bitcoin exposure and were highly correlated (0.75) to BTC. It is too early to tell if this proxy relationship will continue, or if the ETF will fundamentally alter this correlation, but the emergence of the ETF changes the public market landscape and it is worth monitoring these assets. 

By looking at On-chain fundamentals, we can see a lot of people are focusing on Bitcoin and ignoring other undervalued assets. 

Solana ended Q4 as one of the best-performing assets, and the fundamentals are there for that to continue. Solana’s DAU rate increased by 4.7x and their incredibly cheap fees mean their users are very resistant to a change in fees. Something that has been a problem for ETH and other more expensive protocols as their usage rate has been known to drop during periods of high transaction fees.

User/Transaction Fee Correlation: 

1. Ethereum: -0.475

2. BNB Chain: -0.277

3. Polygon: -0.232

4. Bitcoin: -0.208

5. Solana: -0.203

6. Tron: -0.044

The L2 EVM chains are also worth monitoring. Polygon’s DAU rate increased by over 25%  in 2023. With the expected bull market coming up and ETH’s ongoing scalability issues, L2 solutions could be a key benefactor. 

This is just scratching the surface of the report. If you want to read the whole thing, make sure you get your copy here.

Enjoy!