VanEck Crypto Monthly Recap for August 2024

 Most crypto assets fell sharply in August as fundamental usage and financial statistics slipped against the broader market backdrop of rising volatility. For the month of August, Bitcoin (BTC) fell 11%, Ethereum (ETH) -24%, and Solana (SOL) -21%, vs. the S&P +2% and the Nasdaq +1%. The market capitalization of all Smart Contract Platforms (SCP) ended August (-12%) lower than it closed in July.

• Breaking Down Ethereum’s Struggles
• Notable Performer - Tron
• Notable Laggard - zkSync

Though the precipitating event for the dismal price performance was a risk-off typhoon spawned by the yen carry trade, general sentiment for crypto remained poor even after the event. The apex of the pandemonium was August 5, when BTC wicked as low as $49k while ETH crashed to $2.1k after opening the month at around $64.6k and $3.2k respectively. Though Bitcoin has regained some of its value since the “flash crash,” sitting around $ 58k at the time of writing, ETH is still wallowing around $2.5k. The impact of the yen carry trade implosion translated into BTC and ETH’s August 30-day volatility climbing (+48%) and (+52%) higher than the previous month, as well as Bitcoin’s 90-day correlation with the Nasdaq rising to an 18-month high of 38%.

Besides macro factors driving prices lower, blockchain usage deteriorated in August. For example, daily active usership was down (-10%) in August, fees generated fell (-12%), and DEX volumes sagged (-4%) compared to July. The German & US Governments also transferred 62k Bitcoin to exchanges, presumably for sale, while Mt. Gox and Gemini bankruptcy distributions totaled another 124k Bitcoin. That’s $11B in non-repeatable sales, roughly equivalent to the net inflows to Bitcoin ETPs in the first two months of trading. Lastly, driving weak price action at month-end, the SEC sent a Wells Notice to OpenSea, one of the largest NFT exchanges, claiming that the company is an unregistered broker. The action is another sign that regulation by enforcement may continue in the US unless Donald Trump wins the election.

Price Returns

	August (%)	YTD (%)
Bitcoin	-11	38
MarketVector Smart Contract Leaders Index	-12	-6
MV Global Digital Assets Equity Index	-14	3
Coinbase	-19	5
S&P 500 Index	2	18
Nasdaq Index	1	18
Ethereum	-24	9
MarketVector Meme Coin Index	-24	NA
MarketVector Decentralized Finance Leaders Index	-28	-31
MarketVector Infrastructure Application Leaders Index	-14	-28

Source: Bloomberg as of 8/31/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Market Cap of Smart Contract Platforms (SCPs) Fell 12% in August

Source: Artemis XYZ as of 8/27/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

One of the most controversial issues in the month of August was the partnership between Bitgo, the custodian of WBTC, and Justin Sun. A very important DeFi “primitive,” WBTC, or “Wrapped Bitcoin,” is a token on Ethereum that is backed by Bitcoin custodied at the crypto exchange Bitgo. Someone who wishes to use mint WBTC can send their Bitcoin to Bitgo, which then issues the WBTC on Ethereum. WBTC is backed 1:1 by Bitcoin, held by Bitgo, which provides attestations of holdings.

At the time of writing, more than 153k BTC worth $9.2B have been “wrapped” into WBTC for use in Ethereum’s DeFi. As part of the new partnership agreement, Bitgo will move custody of WBTC outside of the United States to three different Asian countries. The crypto community reacted negatively to these developments due to the negative perception of Justin Sun and past issues with other projects brought under his aegis, like USDD and TrueUSD. MakerDAO, the entity that runs the permissionless crypto-backed stablecoin DAI, passed a governance proposal banning wBTC as used for collateral to create DAI. To seize the initiative, Coinbase announced its own wrapped version of BTC called wbBTC. At the same time, Bitcoin L2 Babylon unexpectedly declared the launch of their mainnet the week after Bitgo’s new custody announcement. Meanwhile, existing competitors such as tBTC and BTC.b saw modest inflows of 250 BTC and 50 BTC.

Daily Memecoin Volumes on Solana Fall Back to 2023 Levels

Source: Dune @ally as of 8/28/2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Solana (-21%) has had a mixed month as several underlying issues surfaced to generate a minor FUD (fear, uncertainty, doubt) cycle. Speculation is the lifeblood of crypto, and no more is this a reality than on Solana, which accounts for ~22% of all DEX trading, of which 47% has been memecoin trading since June 1, 2024. It is apparent to many in the crypto community that Solana memecoin trading is rife with fraudulent activity. A coin supposedly associated with Donald Trump was “rugged” for $2M, someone hacked McDonald’s Instagram account to announce a memecoin that eventually scammed buyers out of $700k, while other tokens with liquidities of <$100k are seeing daily trading volumes >$10M. The result has been that many traders on Solana have lost money due to memecoins. It is estimated that only 0.76% of wallets on Solana’s top memecoin platform, pump.fun, are profitable.

Many small traders are catching on to the fact that memecoin trading is usually a zero-sum game. This change in sentiment has driven memecoin trading down (-43%) month-to-month while total DEX volume on Solana is down (-48%). As a result, Solana's monthly fees have declined (35%). On the positive front for Solana, the first (and second) spot SOL ETF debuted in Brazil, while the interesting DePIN project Grass announced its token airdrop, and the perpetual futures platform Drift launched a prediction market. The stablecoin of PayPal, PYUSD, reached $664M in supply on Solana, nearly double the $345M of PYUSD on Ethereum. In August, the total supply of all stablecoins on Solana reached $3.9B, 160% greater than a year earlier.

A budding challenge for the widespread adoption of Solana is its blockchain's massive size in computer storage space. Solana is designed to process tens of thousands of transactions per second and has consistently demonstrated this capability. Blockchain transactions are essentially “writes” to each blockchain’s database of information. The more transactions, the more “writes” occur, and this causes more data to be stored on a blockchain. While Bitcoin’s blocks are around 1.6MB in size and occur every 10 minutes, Solana blocks can be as large as 128MB, and these blocks occur around every half second. The result is that the Bitcoin blockchain is around 550 GB in size for 15 years of history, while Solana’s chain is around 150TB (272x bigger) for roughly 4.5 years of history.

This is an issue because it makes it very difficult and expensive for people to store its history and query its contents. Looking at past events or simple things like an account’s historical balances is cost-prohibitive. Solana expects private entities to spin up to provide services for those wishing to comb Solana’s history. Allium, an S-tier data services provider, is one of the few entities that can effectively assess Solana’s history. This presents a challenge to anyone who wants to create assets on Solana.

If an audit is to occur or an issue crops up, someone has to spend large sums of money to untangle Solana’s historical archive. The instability of Solana’s consensus mechanism and its history of outages add to the challenges posed by Solana’s substantial history. Because of these two issues, it is nearly impossible to prove that Solana’s chain has operated without any faults (double spending of currency) and without sifting through the entire chain. Though this is a challenge with any blockchain, Solana’s massive data output creates novel difficulties that are not posed by lower throughput chains. It must also be noted that while history is challenging to verify by new nodes, real-time verification of chain functionality can be verified by anyone with a full node. Newer high-throughput blockchains, such as Aptos and Sui, have different design philosophies that seek to address these challenges. But realistically, Solana’s big data limitations will likely plague other high-capacity blockchains.