Discover more from The Blockchain Sector With James Bachini
Bear Markets Are For Building
The Blockchain Sector @ 2022-09-29
The Blockchain Sector provides information relating to emerging financial technologies. It should not be considered financial advice. Disclaimer below.
In the midst of a bear market there seems to be a lot less development and new projects being released. The ones that are released do however have a greater chance of success because less “jump on the bandwagon” projects are getting to the launch stage. If a project is viable in a bear market it should be exciting when sentiment shifts and we get back into up only mode during the next bull market.
I expect blue chip DeFi tokens and NFTs to perform well but they will inevitably be outpaced by the latest and greatest new projects. Whenever we have a bull cycle or an #altszn, the projects that do the best are almost always the projects that have been recently released.
The reason for this is that there is more potential upside for a project that is currently gaining traction from nothing. A newly deployed project with 3 devs and an illiquid governance token has far more potential upside than a mature project with five billion dollars in TVL.
VC’s will be promoting their own bags. The crypto influencers will be shilling the projects that are launching and paying for their services. Note that I don't do sponsored promotions. The effect of this is everyone is talking about the latest and greatest new projects that are due for release.
There will be some outright scams, rug pools and ponzis but there will also be hidden gems as well. Every year in the blockchain space a new protocol or a new project will be launched and go on to change the way we interact with financial assets.
One of the key signals is looking at the traction a project has or is gaining. Real users and token utility is rare in the blockchain sector and DeFi protocols that are genuinely useful gain traction. Liquid staking tokens would be a recent example of this which are tokenised assets representing and underlying staked ETH position. Ethereum staking was always going to be popular and not everyone had the 32 ETH or inclination to run their own node so a simple token that gains yield on ETH gained traction.
Attention is shot lived in crypto markets and there is always a new narrative. If you can find the best in class asset for a particular future narrative you will likely outperform the market.
The utility and tokenomics play a very important part too.
How much real viable value does this product create?
Does the protocol just incentivise users through the distribution of a governance token or is there a real use case here?
Does it fundamentally improve upon current systems?
Is it more capital efficient or does it provide a service previously unavailable in DeFi?
It is these projects which I'm looking for over the next few years. The projects that have traction, utility and sound economics will outperform the market relative to the US dollar, Bitcoin and Ethereum.
This doesn't mean however I am going to put 100% of my net worth in to the hyped sh*tcoin. The further up the risk of you go, the more chance there is that you're going to come away with a complete loss.
Alternate Layer 1 Blockchains
What about alternate layer one blockchains like Avalanche, Solana & Polygon?
These have underperformed recently which is a lot to do with the attention going to Ethereum. Also, the market downturn has caused the gas prices on mainnet to drop to a level where everyone can use it again. This negates the value proposition of alternate L1 blockchains which provided additional capacity for EVM clients.
The exception to this would be Solana which uses a different framework and isn’t EVM based. Solana has been through the wars in the last year with a lot of network outages and they've lost credibility. Some of the bad sentiment is from their own doing in the obfuscation of real data and usage. If you look at the figures Solana is doing thousands of transactions a second but these are all internal rent transactions which shouldn't be counted towards actual network usage and also wouldn't cause any real load on the system.
One interesting development in the Solana ecosystem is that there seems to be a move towards a mobile first user experience. It was announced recently that they are developing a hardware unit, a physical mobile phone with an integrated crypto wallet.
This is something where I think other blockchains have been a little bit slow to adopt. The user experience of using Metamask mobile isn't great. There are other alternatives like Trust Wallet which are usable but don’t provide a slick UX or viable alternative to desktop usage for the most part..
If Solana can fix their network issues and they can create a mobile first experience for the DeFI and NFT ecosystems on Solana, then there is potential to regain traction, momentum and narrative in the coming years. However, this is by no means guaranteed and will be a massive challenge to the core developers and VCs who support the space.
Possible Future Narratives
Crypto markets are driven by narratives and some future narratives I am keeping an eye out for:
GameFi - We saw this play out once with Axi Infinity but I think there's a good chance that we see a massive multiplayer online game which has a natural built-in economy and uses blockchain emerge at some point. This will be great for the industry, not just for speculators and investors but for bringing on a new generation of users and onboarding them to self-custody and digital assets.
RealYield/RWA - Another narrative that is beginning to build and I'm keeping an eye on is #RealYield which involves protocols redistributing platform fees or protocol fees to the holders of the governance token. Alternatively we are seeing more protocols built around revenue generated from off-chain assets. RWA is a similar movement following the tokenisation of real world assets.
Staking - Another very interesting narrative that I think might emerge After the Ethereum merge has gone through is the explosion of liquid staking tokens. We've already seen this somewhat with Lido finance and their stETH product. There is a competitor in RocketPool who has had some scaling issues but is also well positioned to benefit from the increase in demand from users who want to stake Ethereum but don't want to run a validating node themselves.
Stablecoins - I expect to see the stablecoin wars to heat up. The value of sucking in capital to release a tokenized US dollar is a very good business model and there is huge proven demand for this product. I expect this to become a trillion dollar business by market cap over the next five years and there will be drama in the battle for stablecoin market share.
While there are now multiple stablecoins pegged to various currencies around the world we haven't yet seen a compelling Forex (foreign exchange) trading product. I think this is likely in the future as there is a crossover in technically minded traders operating on Forex exchanges and traders working in crypto markets. Forex is one of the most widely traded markets in the world and on-chain Forex trading would bring with it significant utility and new users. There is a massive opportunity to tap into this market and create efficient, censorship resistant trading applications built on blockchain technology.
The same could be said for stocks and shares although I feel the regulatory burden and securities laws in America would currently make this unfeasible except for the most risk adversed anonymous developers.
The markets are struggling but the industry is in a better position than ever before. Inovation is blooming as some of the brightest minds on the planet are working on blockchain projects. Holding cryptocurrency is no longer a stigma for individuals, corporations and even nation states.
Keep building in the bear market and enjoy the relative calm.
Nothing has changed since the last newsletter. All eyes on BTC/USD potentially breaking out of this triangle.
I’ll leave you with this lovely quote from Caroline Elliot, CEO and head of trading at Alameda which puts technical analysis in it’s place nicely.
Disclaimer: Not a financial advisor, not financial advice. The content I create is to document my journey and for educational and entertainment purposes only. It is not under any circumstances investment advice. I am not an investment or trading professional and am learning myself while still making plenty of mistakes along the way. Any code published is experimental and not production ready to be used for financial transactions. Do your own research and do not play with funds you do not want to lose.