Weakening Market Fundamentals and Declining Demand Signal a Potential Downturn for Bitcoin and Digital Assets in Sep 2024

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While we remain optimistic about digital assets' mid- to long-term prospects, the current evidence warrants caution. Despite near–V-shaped rebounds following dips in early May, July and August, the market structure and fundamentals have weakened, with each dip deeper and each recovery more muted. Recent data suggests we’re approaching a critical tipping point in September, marked by declining demand.

Contrary to the common belief that Bitcoin's price is primarily driven by supply changes, such as halving events, our research shows that demand fluctuations have been the key drivers of each bull market. Bitcoin's price declines when demand weakens, reflecting its nature as a highly cyclical asset. While cycle lows often align with mid-halving points, price peaks are driven by surges in demand, as seen in the 2011, 2013, 2017 and 2021 bull markets.

One early indicator that the latest bull market has been maturing is the peak in new Bitcoin address growth at 720,000 between September and November 2023, which has since declined to 240,000. The market value to realized value (MVRV) ratio shows diminishing returns for each bull market, with the most recent peak in March 2024. Additionally, the supply held by short-term holders reached its highest level in April 2024, signaling declining interest from short-term traders. On-chain momentum has steadily decreased since June, reaching levels typically associated with a bear market.

We have long maintained that the stock-to-flow model will ultimately fail, as outlined in our May 10 report. This supply-based model, which assumes Bitcoin can continue to increase tenfold every four years, is unrealistic. Our analysis shows that this model began to break down during the most recent cycle, when Bitcoin failed to reach the $100,000 target. Instead, we use a diminishing returns model focused on demand to better gauge the length and dynamics of Bitcoin cycles.

This cycle has been driven by two major demand factors, both of which are slowing down. Our negative outlook on Ethereum has been clear for months, as declining revenues indicate a broader market shift in demand. This explains Bitcoin's struggle to reach new highs while the broader ex-BTC crypto market remains under pressure.

Exhibit 1: SOL-USDT (LHS) vs. Solana Monthly Fees (RHS, $ million)

One of the biggest surprises this cycle has been Solana, which rolled out significant upgrades in October 2023 to address its past network congestion and outage issues. At the Breakpoint 2023 event, Solana unveiled the Firedancer upgrade, successfully launched on the testnet that same month. Despite Solana’s impressive rally to $200, it still fell short of its 2021 high of $250, forming a lower high.

The launch of several new meme coins on Solana drove protocol revenues from $7 million to $35 million, with the SOL-USDT pair doubling in value between February and March 2024 as retail investors poured into meme coins and Crypto Twitter buzzed about tokens like Dogwifhat, Pepe and Floki. However, this surge in revenue, while notable, remains modest for a protocol with an $80 billion market cap, especially given expenses and token incentives of $415 million. As revenues dropped to $16 million by August, a clear downward trend emerged, reflecting waning demand for meme coins and reduced trading activity.

Ethereum also appears overvalued amid falling revenues, a trend that has been evident since April (as highlighted in our June report). With ETH-USDT down 35%, the ongoing correction is likely to continue, which could dampen any potential Bitcoin rally. Similarly, Solana's steep 44% month-over-month fee decline reflects the fading meme coin hype, with prices also trending downward. This decrease in market activity could prompt further profit-taking and stop-loss selling, potentially driving prices lower as we approach September, historically Bitcoin's weakest month.