Blockwall - February 2024 - What happened in Web3?

Dear Founders, Investors, and Friends,

Based on the price action we experienced in February, we have officially entered a new market cycle.

It’s just not entirely clear at which stage in the cycle we stand.

With Bitcoin already touching its all-time high, 43 days before the halving, and crypto’s total market capitalization sitting at $2.4 trillion - levels last seen in December 2021 - we seem a bit ahead of our schedule. So what’s driving the market in an atypical manner?

Institution-led Rallye

The factors driving the price movement were dead simple.

Over the course of just seven weeks the ten Bitcoin spot ETFs have blown through $50 billion in AUM, of which around $8.5 billion are coming from the actual flows, while the rest can be attributed to Bitcoins price appreciation and, above all, the conversion of GBTC (Grayscale Bitcoin Trust ETF).

The cumulative flows into the ETFs added around $6 billion throughout February which is a way bigger number than anybody was expecting.

Interestingly, gold seems to suffer from these new Bitcoin ETFs. Since their inception $GLD, the largest gold ETF, has seen outflows every week.

The sustainability of the substantial daily inflows into these new ETFs remains uncertain. Yet, there appears to be no foreseeable decline in demand; in fact, the opposite might be true. Just last week, major institutions such as Bank of America, Merrill Lynch, and Wells Fargo made these ETFs accessible to their clients. Additionally, there are rumors that Morgan Stanley and UBS will follow suit in March.

Furthermore, we hold the view that the real potential for widespread distribution has yet to be fully realized, as numerous financial advisors are just beginning to have significant discussions about portfolio composition with their clients.

However, the tide is clearly turning. Just a week ago, Fidelity Canada updated its advised portfolio structure, moving from the conventional 60/40 asset allocation to a revised 59/39/2 composition.

Ethereum’s Time to Shine?

Although the Bitcoin ETFs are at the forefront of investor interest, the prospect of an Ether spot ETF is already capturing the attention of many.

Evidence of Ether's growing appeal can be found both in its 70% price increase since early February and in Franklin Templeton's application for an Ether spot ETF.

After the recent delay regarding the decision about BlackRocks Ether ETF application, everyone is carefully watching May 23, the final deadline for the SEC to decide on the proposals from VanEck and Ark / 21Shares, as the next date that matters.

Besides that, the next catalyst for Ethereum and its ecosystem is right around the corner.

Scheduled for March 13, the Dencun Upgrade and the implementation of EIP-4844 will reduce the gas fees on Ethereum Layer-2s by (potentially) one order of magnitude.

It will be interesting to watch how big the impact of this update ends up being and how ETH and Layer-2 tokens prices will react to it - especially relative to BTC.

A Look into Private Markets

Historically, private markets always lag behind public markets, with this cycle not being an exception. But now, the venture market is picking up steam, leaving its lows behind.

At Blockwall, we have experienced this shift in sentiment firsthand by seeing a steep increase in deal flow throughout February. We counted over 200 deals in February (419 deals YTD), with teams from the U.S. still leading the pack, followed by UK and Singapore.

In addition to rising valuations in Seed rounds, another compelling sign that private markets are heating up is an increase in token deals. From our point of view, this trend is somewhat concerning.

We see many cases where a token as part of a startup's business model makes sense, for examples as part of protocol networks, however launching a token has to be thought through and planned in detail and it takes time. Also, due to the open source nature, community dynamics have to be taken into consideration. Therefore, when some investors encourage startups to develop and introduce their own tokens prematurely (or wrongly), it should be taken with a pinch of salt, as the company’s priorities often pivot towards creating a token or maintaining the token’s price, at the expense of forsaking long-term achievements for immediate profits. This situation parallels traditional startups undertaking an IPO shortly after securing their Seed funding. Such a focus diverts attention from creating a meaningful product and achieving product-market fit, which are crucial for sustained success while at the same time increasing costs unnecessarily.

Nevertheless, given that crypto markets occasionally operate at seemingly irrational price levels, it's probable that these token deals will continue to flourish, particularly during bull market phases.

Outlook

In the coming months, especially if Bitcoin should significantly break through its previous all-time high, we expect deal flow and general investor interest in crypto to continue trending upwards.

With surging prices we are, once again, entering the so-called “Price-Innovation Cycle”: The relative performance of crypto to other assets results in more people, companies, and developers becoming more engaged with the technology - potentially becoming part of the industry by realizing some of its benefits.

Based on many conversations I had attending different corporate events in the last weeks, the latter already seems to be happening. In particular big corporations are awakening to the benefits of blockchain technology, e.g. in the context of privacy, community engagement, and data provenance - which is of paramount importance with the rise of AI-generated content.

These insights got me to reflect again on the value proposition of crypto and Web3, and there was perhaps no better time than to delve into Chris Dixon's latest publication “Read Write Own”, where he himself makes the case for the importance of our industry.

If you want to get an overview over the book’s most important insights, feel free to have a look at Dominic’s book review on LinkedIn.

Now, without further ado, let's move on to our portfolio update.

Blockwall Portfolio Update

This month, we are pleased to announce our participation in the pre-seed round of Vaporware.

Vaporware is building a direct-to-consumer cloud computer using a purely functional unikernel framework. The company is making it easy to launch apps that target the mentioned cloud computer and is designing a decentralized “app store” protocol to monetize those apps.

Another important announcement was made by our portfolio company Zealy. A few weeks ago the team published a case study on how the car manufacturer Fiat leveraged Zealy's technology to significantly grow and increase the engagement of their community.

You can take an in-depth look into the results here.

Key Events from February

1. Starknet conducts their long-awaited $STRK airdrop
   Since the 20th of February, around 1,3 million wallets can claim the zero-knowledge rollup's native token. The token launch sparked a lot of criticism around the eligibility criteria as well as the initial unlock schedule, which was changed in response to the community's reaction. (Source: Blockworks)

2. Coinbase releases Q4 earnings
   Once again, Coinbase exceeded Wall Street's expectations with its latest quarterly figures. The exchange's revenues climbed to $954 million, marking a 41% increase quarter-over-quarter and leading to its first profitable quarter in 2023, with net earnings reaching $273 million. (Source: Coinbase)

3. Uniswap Foundation presents fee switch proposal
   The non-profit organization behind crypto's biggest decentralized exchange proposed the introduction of a new protocol fee, that should be distributed amongst stakers and delegators of its native token. Following the announcement, $UNI's price surged by 75%, while governance tokens from other "DeFi 1.0" protocols also saw significant double-digit increases. (Source: Blockworks)
4. Farcaster experiences strong user growth
   Experiencing an 800% surge, Farcaster, the decentralized social media protocol, now boasts ≈ 47,000 monthly active users, marking a new high in its activity levels. The growth can be attributed to the launch of a new feature called "Frames", which allows users to embed experiences like NFT mints directly into the platform's social feed. (Source: TechCrunch)

What we’ve been reading

1. Blockwall on Zero-Knowledge Proofs: Empowering the Future of Data Privacy and Scalable Infrastructure
2. In this blog post, our investment manager Syed Armani dives deep into the capabilities and applications of Zero-Knowledge technology and explains why it is a game changer for the privacy, security, and scalability of Web3.
3. Vitalik: The promise and challenges of crypto + AI applications
4. Ethereum founder Vitalik Buterin highlights what he believes to be the most exciting use cases at the intersection of crypto and AI and gives an outlook on how the two technologies could benefit from each other in the future.
5. Galaxy Research: Understanding the Intersection of Crypto and AI
6. Galaxy Research's comprehensive analysis delves into the intersection of crypto and AI, offering valuable insights across various verticals, detailing their present adoption, the biggest challenges, and forecasting future trends.
7. Compound: Expected Value in Crypto & Building Infinite Blockspace
8. Micheal Dempsey from the investing firm Compound discusses the notion of "Expected Value" in crypto, how it corrupts the investing landscape by setting the wrong incentives, and how we need to change those incentive systems to bolster innovation in our industry.
9. European Central Bank: ETF approval for Bitcoin - the naked emperor's new clothes
10. The ECB published another blog post discussing Bitcoin - this time focusing on the approval of the spot ETFs. There, several false statements about Bitcoin's benefits and value were made, some of which Dominic personally debunked via a LinkedIn post.

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