Understanding Web2 vs. Web3

TLDR: Web2 is the internet where users read and write content from and to a centralized database, Web3 is the internet where users don't just read and write content to a database, the users also own what they create and are free to sell or buy content through Web3 infrastructure. The database in Web3 is the blockchain (although for some use-cases, centralized infrastructure is still required but ownership is still bound by cryptography). Below we will cover what this paradigm shift means for the main stakeholders: users, developers and investors.

1. User Experience:

• Web2: Users in the Web2 era are merely content and service consumers. Users of centralized platforms frequently give up privacy and even data of value in exchange for convenience.
• Web3: Users actively participate in Web3. Web3's decentralized architecture gives users greater control over their digital identities and data. Blockchain technology promotes a more user-centric experience by guaranteeing transaction transparency and trust.

2. Application Development:

• Web2: Web2 developers use proprietary infrastructure and centralized application development. The landscape is dominated by monolithic applications with siloed databases.
• Web3: Web3 development is based on blockchain technology and is decentralized. Trustless interactions are made possible by smart contracts, decentralized applications (DApps), and blockchain protocols, which eliminate the need for middlemen.

3. Investor Perspective:

• Web2: Traditional equity or ownership in centralized businesses is usually the focus of investors. Dividends and corporate profits create value.
• Web3: Web3 investors frequently interact with tokens. It becomes essential to understand tokenomics, or the economic model of a blockchain-based system. In distributed systems, tokens stand for utility, ownership, and governance. Investment decisions are influenced by governance and token appreciation potential.

The Token Economy: Fueling Web3 Ecosystems

1. Token Value Accrual

• Scarcity: A limited supply of tokens may raise demand and raise their value.
• Utility: Tokens have intrinsic value since they frequently provide access to services, voting rights, or governance.
• Staking and Yield Farming: Users can engage in yield farming to gain more tokens or stake tokens to secure the network.

2. Bootstrapping Ecosystems:

• Initial Coin Offerings (ICOs): Token sales are the oldest way to raise money for a project.
• Token Sales and Auctions: In order to distribute tokens to the community, projects hold sales or auctions.
• Airdrops: Distributing tokens and encouraging participation through the use of decentralized financial protocols.

Seizing Opportunities in Web3

1. Users:

• Take Charge of Your Data: Adopt platforms that place a high value on user privacy and data ownership.
• Understand the Benefits of DApps: Learn about decentralized apps that provide distinct and open services.

2. Developers:

• Study Blockchain Development: Gain knowledge of blockchain protocols and smart contract creation.
• Support Open Source: Get involved in decentralized projects and help them expand.

3. Investors:

• Understand Tokenomics and Crypto-economics: Examine a project's tokenomics to determine whether any value could accrue.
• Diversify Your Portfolio: To spread risk and take advantage of a variety of opportunities, invest in a variety of Web3 platforms and projects.

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From its early days as a fringe concept, Bitcoin has grown to become , capturing the attention of investors worldwide. We often refer to Bitcoin as “digital gold” because, like the metal, it is a potential store of value with limited supply, has portfolio diversification benefits, and offers the potential to hedge against inflation.

Just as VanEck has been at the  since the firm’s inception, VanEck has played a pivotal role in shaping the  as a strategic allocation in investment portfolios.

A Timeline of VanEck’s Journey with Bitcoin

2009: The Dawn of Bitcoin

Bitcoin was introduced to the world by an anonymous entity, Satoshi Nakamoto. Just as gold has been a store of value for centuries, Bitcoin was designed to be a decentralized digital currency, free from governmental oversight.

In the same way that the discovery of gold redefined wealth, the birth of Bitcoin crafted by the mysterious Satoshi Nakamoto, marked a new era in Digital currency – decentralized and beyond the reach of the traditional financials system.

2010: Bitcoin’s humble first transaction

Bitcoin’s first foray into the commercial world was the now legendary purchase of two pizzas for 10,000 BTC, a transaction that would be worth millions today.

2013: Bitcoin breaks the $1,000 barrier

Bitcoin's price soared to $1,000, signaling its arrival on the global financial stage, capturing the imagination of investors worldwide.

2017: VanEck’s bold entry into crypto

With a visionary approach akin to our pioneering stance in gold investing, VanEck stepped into the digital assets arena. Recognizing digital assets as a blend of technology and value preservation, VanEck starts to provide educational resources to help investors better understand Bitcoin, cryptocurrencies and other digital assets, and the role they play within a portfolio.

2017: Bitcoin’s meteoric rise and futures trading

In a parallel to gold’s historic bull run, Bitcoin’s price skyrocketed to nearly $20,000. The advent of Bitcoin futures trading marked a new chapter in investment history, blending tradition with innovation.

2017: VanEck becomes first ETF issuer to file for futures-based Bitcoin ETF

On August 11, 2017, VanEck filed an S-1 for a Bitcoin futures ETF, becoming the first ETF issuer to file for an ETF that would invest in Bitcoin futures.

2017: VanEck subsidiary MarketVector Indexes unveils digital assets benchmark indexes

On October 23, 2017, MarketVector launched a series of digital assets indexes designed to track the performance of the otherwise fragmented global digital assets markets, becoming the first regulated index provider to meet investment industry benchmarking standards for digital assets indexes.

2018: VanEck files for spot Bitcoin ETF

On June 6, 2018, in a bold move, VanEck filed for a spot Bitcoin ETF (in partnership with SolidX), aiming to provide investors with a seamless and efficient way to access bitcoin. We believe spot ETFs give investors a more efficient vehicle in which to gain direct Bitcoin exposure via a traditional broker, without paying roll costs associated with futures. The SEC subsequently rejected all spot BTC ETF applications due to concerns of “market manipulation.”

2020: The Bitcoin halving – a testament to scarcity

The Bitcoin halving event, a built-in feature that underscores its finite nature, brings attention to the scarcity that has long underpinned the value of gold.

2020: VanEck launches spot Bitcoin ETN in Europe

Expanding the global footprint, the firm’s European arm launches the VanEck Bitcoin ETN (VBTC) on November 19, 2020. VBTC offers European investors a hassle-free way to gain bitcoin exposure, a testament to our commitment to accessibility and innovation.

2021: Expanding VanEck’s digital assets expertise

In 2021, VanEck brought together its , bringing on board more crypto natives, underscoring our dedication to leading the charge in the evolving world of digital assets.

2021: El Salvador adopts Bitcoin as legal tender

became the first country to allow Bitcoin to be used in any transactions. Bitcoin joins the US dollar, which the country had adopted in 2021, as legal tender, and as part of the initiative, the Salvadoran government launched a digital wallet to promote the use of Bitcoin.

2021: MarketVector establishes sector classification system for digital assets

MarketVector created the  in order to provide an efficient investment tool for capturing the breadth, depth, and progress of crypto sectors.

2021: VanEck’s strategic investment in Cadenza Ventures Crypto Fund

VanEck led a $50M raise for Cadenza Ventures Crypto Fund, showcasing our commitment to nurturing the growth and innovation in crypto platforms and blockchain technologies internationally.

2021: VanEck launches Bitcoin Strategy ETF

The introduction of the  marked another milestone, offering investors an avenue to Bitcoin futures, blending traditional investment structures with cutting-edge assets.

2022: VanEck introduces the first NFT to be launched by an asset manager

On 5/2/2022, VanEck broke new ground by launching and distributing the VanEck Community NFT. A first among asset managers, offering not just a digital asset but a gateway to an exclusive, utility-rich community.

2023: VanEck launches Ethereum Strategy ETF

With the launch of the , VanEck not only expanded its crypto offerings but also pledged10% of EFUT’s proceeds to the Protocol Guild, supporting Ethereum core development for 10 years, marrying innovation with social responsibility

2023: VanEck and the industry await potential approval of a spot Bitcoin ETF

U.S. Securities and Exchange Commission (SEC) provides comments on outstanding spot Bitcoin ETF applications for the first time, raising optimism for an eventual approval.

VanEck’s Long-Term Commitment to Bitcoin

Just as VanEck was a pioneer in gold investing, the firm has taken significant strides in bringing Bitcoin to a broader investor audience. By providing educational content, advocating for regulation, and introducing innovative investment vehicles, VanEck continues to play a pivotal role in the integration of Bitcoin into traditional investment portfolios. As we embrace this era of digital gold, VanEck remains committed to empowering investors with the knowledge and tools needed to navigate this exciting and dynamic asset class.

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In December, Bitcoin outperformed the S&P 500 for the fourth straight month (+9% vs. +4%) to end 2023 +154%, its best year since 2020 when BTC rose 305%. While Bitcoin ETN inflows slowed to $300M for the month, a significant deceleration from November’s $1B+, investors recycled previous BTC gains into more speculative alt-coins, especially Layer 1 smart contract platforms as represented by the MVIS Smart Contract Leaders Index, which rose 44% in December for its best month since mid-2021.

Simultaneously, the US dollar experienced another 2% decline for December following November’s 3% fall, after the Jerome Powell-led FOMC signaled US rate cuts as soon as Q1 and the BRICS group expanded to include Saudi Arabia, the UAE, Iran, Egypt and Ethiopia. The market also took cues from significant crypto policy support outside the US, where Bitcoin adoption is more apparent. For example, the Nigerian Central Bank made a major policy change in December by reversing the ban prohibiting banks from servicing virtual asset service providers. An influential 90-year-old Saudi cleric acknowledged Bitcoin as permissible (not haram) in a new fatwah. Argentina’s libertarian President Javier Milei’s new foreign minister said that contracts settled in Bitcoin would be legal under certain conditions. With 50% of the world population voting in national presidential or legislative elections in 2024, we see the prospect for more significant, pro-crypto policies to emerge.

Continuing the notable shift that began in November, small-cap tokens (+27%) dramatically outperformed large-caps (+12%) as crypto natives drove meme coins and less liquid tokens in the Solana ecosystem, particularly to outsized gains. However, as of January 2nd, funding rates are now quite elevated across many digital assets, driving an emerging “sell the news” narrative around the Bitcoin ETFs, which we are reluctant to embrace.

Source: Bloomberg, as of 12/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Smart Contract Platforms

The speculative scramble that gripped the crypto markets in November 2023 continued to unfold in December 2023. The fervor was unbound by fundamentals as speculators focused on memecoins and inscriptions across most smart contract platforms. The consequence of this activity is that L1 tokens ex BTC rose 44% in December. Despite the extremely positive price action, important fundamental metrics like daily active users and stablecoins did not increase in the aggregate. While usership is roughly flat compared to six months ago, stablecoins on-chain are up only +2% from six months ago and down -6% from a year ago. It is also difficult to attribute this broader rally to any new applications or killer use cases despite incrementally positive developments in DePIN and useability. But crypto prices are highly reflexive, and the rockets of mooning tokens often shine light on projects that were overlooked during negative price periods. It is also important to note that higher prices create positive feedback loops not only because they bring in new users looking to speculate or utilize crypto apps but also because they give teams the financial firepower to build the vision of their projects. In crypto, if enough people believe in something and are willing to financially back their beliefs, far-flung ideas can blossom into functioning, widely-used applications.

Smart Contract Platform + Bitcoin Daily Active Users

Source: Artemis XYZ as of 12/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Memecoins drove price action in early December, particularly on Solana, but they mostly crested in mid-December. However, the butterfly wings of memecoin activity on Solana led to a hurricane of inscriptions that raged on Bitcoin and popped up elsewhere. In tandem with Bitcoin, many other chains also saw a squall of inscriptions that caused a massive increase in fees and congestion. Arbitrum was a notable casualty on Friday, December 15th when its sequencer  down for several hours. Inscriptions are a mini hack within blockchain transactions that allow users to write any data within on top of a transaction that will be committed to the blockchain forever. The result is that images and other data pieces that could be considered collectible have been inscribed and this has spurned users to create and speculate on the inscriptions. The smart contract platform most affected by inscription activity, in terms of fee generation, was Avalanche where inscription activity resulted in a total of $39.9M spent on gas. That figure represents 76% of all the Avalanche fees in December. As a result of inscriptions activity, Avalanche’s AVAX token was one of the top performers in December, +79%.

Daily Amount of Gas Spent on Inscriptions by Blockchain

Source: Dune @ hildobby as of 12/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Of course, no chain matched Bitcoin’s inscriptions activity which is estimated to have resulted in  in transaction fees for Bitcoin in December 2023. As a result of inscriptions activity on Bitcoin, the project $ORDI reached $1.6B in market cap at its peak on December 25th. At the same time, congestion clogging the Bitcoin network has spurred interest in scaling solutions such as Stacks whose STX token had an exceptional December (+81%). Because of spillover from activity on Bitcoin to Stacks, fees on Stacks exploded in December moving from a daily average of $261 to $15,640 per day. With the stand-up of Stack’s Neon testnet which enable 5-second block times, Stacks may continue to be a beneficiary of Bitcoin congestion since it is one of top Bitcoin L2s. Curiously, the massive pick-up in activity on the Bitcoin network has even spurred a team called GFX to fork and  Uniswap V3 onto Bitcoin scaling solution RootStock to trade inscriptions and other memecoins within Bitcoin.

One of the most interesting occurrences in December was the continued momentum of the Blur-related L2 chain Blast. While there is no mainnet, no testnet and Blast consists of a series of smart contracts that re-stake user deposited funds, it has been able to attract $1.14B in TVL. Most alarmingly, the developer, known only as Pacman, has access to move all the funds that users deposit. This puzzling phenomenon is attributed almost entirely to the notoriety of Pacman who is considered one of the most capable programmers in the blockchain space and the supposition that Blast will be dispersing high value token rewards. Others are so bold as to speculate that this type of model where user funds are re-hypothecated to earn yield while locked, will be replicated by other emerging Layer-2 blockchains.

Another big winner on TVL in December was Eigenlayer who increased the maximum of its re-staking contract to 500k ETH. As a result, Eigenlayer’s TVL increased from 114.5k ETH to 452k ETH (~$1B) in 10 days.

In December, many Ethereum L2 projects reported noteworthy news items amid speculation of airdrops and partnership deals. Starkware, who will release its token on January 22, 2024,  that 10% of fees generated on chain will go to developers of Starkware dApps as well as Starkware’s team (80% to dApps, 20% to Starkware). Protocol-shared revenue is nothing new -- Canto has experimented with it since late 2022 -- but the topic is still contentious as some suppose this incentivizes developers to create less efficient contracts. Polygon, who is building towards an L2 chain of chains employing zero-knowledge tech, announced that it will be using Celestia for  (DA). This move by Polygon is intriguing given that Polygon recently spun out of its company a DA project called Avail. Polygon has also announced that Immutable X, who is building a Polygon zk L2 chain using the Polygon CDK, will be launching  which will allow users to port both assets and identities across many different blockchain-based games. Arbitrum, a strong competitor in the L2 space, has also announced that its L3 program called Orbit will be utilizing Celestia for DA. Manta network, a privacy-focused former Polkadot project, also announced it will be using Celestia for Data Availability.

TVL of Sui and Aptos

Source: Artemis XYZ as of 12/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Rounding out the Alt-L1 chains, Solana’s SOL token had another impressive month by increasing (+56%). Amid the flurry of speculation on Solana including memecoins involving dogs with hats and dogs being bonked by bats, there were several important developments from more savory projects. Dominant re-staking and MEV project Jito airdropped tokens worth $160M to just under 10k users while DEX aggregator with 80% market share Jupiter  its $JUP token airdrop for January 2024. Additionally, Trezor announced support for Solana and the SPL token. Also notable in December was that Solana’s mobile phone Saga sold out its initial run of 20k units. The move-language based systems, Sui and Aptos, have also been performing well in attracting TVL as Sui broke $200M in TVL while Aptos has surged to $120M. NEAR’s token also had a solid December (+90%) as NEAR partnered with Eigenlayer to create a finality layer for Ethereum L2s. This will be accomplished by transitioning the NEAR-Ethereum Rainbow bridge into an Eigenlayer actively validated service that will rely upon re-staked Ethereum for security. In concert with this new capability, NEAR is also targeting Ethereum L2s by unveiling its  layer to attract Ethereum L2 transaction data. NEAR’s DA project already boasts an impressive assortment of rollups including Fluent, Movement Labs, Caldera and Dymension. NEAR claims that its DA layer will be 8000x cheaper than Ethereum and combined with its new finality layer, may pose a challenge to Ethereum’s settlement business model going forward.

Notable Winner

OP (+111%)

Optimism DEX Volume vs. TVL

Source: Artemis XYZ as of 12/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The best performing smart contract platform token for the month of December was OP token that governs the Optimism layer-2 blockchain. Optimism’s outperformance does not appear to be caused by the improvement of fundamental metrics as these were relatively weak for Optimism. Though fees generated by Optimism increased (+54%) month-to-month, TVL only increased +20%, and users were actually down -20.4%. This compares to chief competitor Arbitrum showing fees, TVL and usership changes of (+98.2%), (+17.2%) and (-9.7%) respectively. Earlier in the month, however, Optimism finished voting for its public good funding which has typically been a price catalyst in the past as users vie to gain access to some of the funding. Also, Optimism was able to gain adherents to its superchain in December with legacy project LISK announcing it will be building an Optimism chain. Another positive development is the release of Clearpool’s KYC pool on Optimism Mainnet which aims to bring private credit markets on-chain. Kraken also enabled the transfer of Tether USDT to Optimism and the upcoming post-Bedrock upgrade called Canyon. The  release improves gas efficiency on chain under high transaction loads while also addressing many minor bugs that plagued Optimism. Though fundamental metrics of Optimism’s adoption look weak at the moment, Worldcoin who is building on Optimism, has  its World ID 2.0 “proof of personhood” with Shopify, Minecraft, Telegram and Reddit. World ID may spur usership on Optimism as it enables the companies that integrate it to add an identification layer that will separate real active users from bots. Bot activity alongside scams, have plagued social networks and video games and Worldcoin ID may offer a tangible solution to substantially curbing bot activity. This solution may become particularly important once AI bot start to make it difficult to distinguish real users from fakes ones.

Optimism, despite its performance, is still far away from its goals of decentralization. Vitalik Buterin, co- founder of Ethereum, has classified the stages of decentralization for Ethereum L2s and Optimism currently sits at the lowest level. Optimism is a Stage 0 rollup which means there is no validity proof system on Optimism chains nor a decentralized security committee to override potential chain issues. In practice, Optimism is still highly centralized with its founding team governing core functions and running its sequencer. This amounts to users of Optimism’s blockchain trusting Optimism’s team with user funds and hoping that Optimism’s team does not act maliciously. Though Optimism’s team is working diligently to reach Stage 1, it has not indicated when that threshold will be reached. Instead, Optimism focused on building the OP stack and Bedrock to enable others to build OP chains to join Optimism’s superchain. While uncertainty over decentralization is far from ideal, it is also a potential set of catalysts that could bring positive price action to the $OP in the future.

December’s Notable Laggard

Ethereum (+10%)

With the exception of Tron’s TRX, ETH was outperformed by every major smart contract platform’s token in December. The bear case for Ethereum is not new, but it is convincing and December’s price action demonstrates that many crypto investors are allocating away from ETH. Many have asserted that Ethereum’s roadmap has become divorced from the needs of Ethereum’s everyday users as the Ethereum Foundation focuses on esoteric concerns that do not scale Ethereum. Another common criticism is that Ethereum is discarding its primary use-case and business model, execution of user transactions, and moving towards the unproven and uncertain data availability and settlement “businesses.” To ETH bears, Ethereum’s new focus is a poor financial decision that pulls Ethereum away from blockchain’s most compelling value accrual mechanisms – execution of user transactions and MEV (ordering of those transactions). As a result, ETH has been plagued with sagging performance throughout the year. For example, ETH is down 24% against Bitcoin’s performance in 2023 and -80% versus Solana’s. To air more grievances, another concern is the growing threat to Ethereum’s credible neutrality posed by validators, blockbuilders and relays sanctioning certain addresses. In December, relay provider bloXroute noted that it will start rejecting non-OFAC compliant transactions. The accumulation of issues surrounding validators, blockbuilders and relays potentially throttling transactions is extremely concerning if we are to suppose that Ethereum is credibly neutral, and that ETH is truly a permissionless asset.

Ethereum also underperformed in December due to comparatively lukewarm fundamentals. Average daily active users on Ethereum were up +10%, Solana and Avalanche usership was up +102% and +68.1% respectively. While Ethereum average daily fees were up 49% month-to-month, Ethereum’s fee growth ranks 11th of the 22 major blockchains we track and this ranking puts Ethereum behind fee growth of four of its own L2 blockchains. For monthly DEX volume growth, Ethereum was 15th, TVL growth has Ethereum placing 16th, and in stablecoin growth Ethereum ranks 11th.

Despite the demoralizing price action of ETH, we think Ethereum and ETH’s future is bright. ETH’s use cases are expanding with many more L2s being spun up that will require ETH for gas. Additionally, Eigenlayer is set to export ETH’s security to enable a flood of novel crypto services. Likewise, EIP 4844 and a host of other upgrades could prove material to Ethereum’s usage as a DA platform. Ethereum also retains the largest development and research community of any blockchain, and has grown their share of active developers from 38% in August 2022 to 50% at the end of December 2023. Ethereum intellectual leader Vitalik has also recently directed the discussion towards needed improvements to scale Ethereum’s execution environment. Finally, there is serious discussion about an ETH ETF on the horizon and the high-growth tech asset with yield narrative could prove convincing to many non-crypto investors.

Smart Contract Platform Developer Count

Source: Artemis XYZ as of 12/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

DeFi

The MarketVector Decentralized Finance Leaders index (MVDFLE) returned 11% in December, slightly underperforming $ETH due to the large drawdown in $RUNE, which fell 18% following its massive rally in previous months. Of the index components, $UNI showed the most strength in December returning an impressive 30% as investors sought to get more exposure to the largest decentralized exchange. The majority of the index performed more or less in-line with major tokens with $LDO, $AAVE, and $CRV returning 19%, 14%, and 15%, respectively. $MKR underperformed $ETH and $BTC, only rising 1% potentially due to investors favoring pure crypto exposure as the market has turned risk-on and MakerDAO’s decision to acquire real world assets (RWA) has limited its exposure to crypto assets.

Ethereum DeFi Returns

Source: Coingecko as of 12/29/23. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

DeFi activity accelerated in December as the crypto rally continued, with decentralized exchange (DEX) volume rising 25%, thanks to the massive increase in activity on Solana. DEXs on Solana facilitated $29B of volume, representing a 256% increase from November, and established Solana as the second most active blockchain by DEX volume according to DefiLlama. The boost for Solana DeFi came as a result of $SOL’s outperformance and on-chain users seeking to participate in the many upcoming airdrops expected for DeFi protocols on Solana that have not yet released a token. This activity was catalyzed by the $JITO airdrop which saw the second largest liquid staking protocol on Solana distribute 90 million of its governance tokens to early users, worth over $200 million at time of writing.

Solana DEX Volume

Source: DefiLlama as of 12/31/23. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Metaverse Tokens Outperform

Metaverse and gaming tokens had a strong month, with the MarketVector Media and Entertainment Leaders index (MVMELE) rising 26%, significantly outperforming $ETH and $BTC. $AXS and $SAND drove the index’s performance with each appreciating 43% and 40%, respectively. The massive returns these tokens experienced can be attributed to rising investor sentiment that blockchain gaming will have a breakout year in 2024 and that Axie Infinity and The Sandbox have established themselves as leaders in the space. Despite blockchain gaming’s low usership, these projects could see an increase in traffic as the rising crypto market gains the attention of the broader public.

NFT Market Speculation Increasing

NFT volume in December rose a staggering 81%, mainly due to rising BRC-20 trading on Bitcoin and a 328% increase in NFT volume on Solana, according to Cryptoslam!. Solana’s massive increase in NFT volume is representative of how drastically investor sentiment in the Solana ecosystem has shifted. In fact, December was the first month where Solana NFT volume exceeded that of Ethereum. Similar to the increase in DeFi activity on Solana, on-chain investors are hoping that acquiring the leading Solana NFT collections could result in them being included in future airdrops that occur. Additionally, since Solana NFTs are priced in $SOL, investors are hoping to generate increased returns by purchasing the most coveted collections, such as Mad Lads and Tensorians, which could outperform the market significantly if Solana’s momentum continues.

Despite the impressive growth in Bitcoin and Solana NFTs, Ethereum NFT volume only rose 1% in December. Blur maintained its position as the leading NFT exchange on Ethereum by volume, facilitating 74% of NFT volume on the chain. Blur’s governance token, $BLUR, underperformed the market significantly, falling 3% while the amount of $BLUR tokens staked rose to 373 million, representing 12.4% of the total supply. Deposits to Blur’s upcoming layer 2 network, Blast, continued to rise and the Blast contract achieved a TVL exceeding $1 billion this month. In a hypothetical scenario where the network is operational, it would rank as the second-largest Ethereum layer 2 platform by value locked. However, it is likely that a significant portion of this capital will be withdrawn following the $BLAST airdrop and the launch of the network as airdrop farmers collect their rewards and seek other opportunities.

December NFT Volume by Blockchain

Source: CryptoSlam! As of 12/31/23. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

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• VBTC, the 2nd most liquid Bitcoin ETN on Xetra, boasts impressive volume: 20-day average of 1.8mio EUR and 3M average of 1.3mio EUR.
• VBTC's 20-day average spread has narrowed down to 18bps, aligning with industry leaders, despite recent market volatility. Plus, it features significantly lower management fees compared to competitors.
• Excellent liquidity and volume for VBTC at only 1% TER
• VBTC showed incredible performance during 2023, ending the year with a return of +153.35%

• VETH is the most liquid Ethereum ETN on Xetra, with a 20-day average volume of 909k EUR and a 3M average of 635k EUR.
• VETH stands out with the tightest spread on Xetra at 22bps, with ongoing efforts to further reduce spreads.
• Exceptional liquidity with VETH coming out on top among the available options with one of the lowest fees at 1% TER.
• VETH has been incredibly resilient during market downturns, ending the year of 2023 with a return +91.19%

VBTC and VETH - Key Features:

• First fully collateralized Bitcoin and Ethereum ETNs in custody of an EU licensed bank. 
• Among the products with the lowest fees in the market.
• 100% backed by Bitcoin or Ethereum, stored securely in cold storage.
• Tradeable like ETFs on regulated stock exchanges.
• No lending risks

Risk Factors

Cryptocurrencies are a highly volatile asset class. The full extent of their underlying risks is not yet well known. Please read the risk factors of each respective ETN to understand the risks of investing in cryptocurrencies.

• Regulatory risk: Digital assets were only introduced within the past decade and regulatory clarity remains elusive in many jurisdictions.
• Risk of a total loss: Due to hacking risk and counterparty risk, no guarantee can be made regarding the custody of the digital assets.
• Risk of extreme volatility: The trading prices of many digital assets have experienced extreme volatility in recent periods and may well continue to do so.

Important Information

For informational and advertising purposes only.

This information originates from VanEck (Europe) GmbH, Kreuznacher Straße 30, 60486 Frankfurt am Main. It is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. Views and opinions expressed are current as of the date of this information and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. VanEck makes no representation or warranty, express or implied regarding the advisability of investing in securities or digital assets generally or in the product mentioned in this information (the “Product”) or the ability of the underlying Index to track the performance of the relevant digital assets market.

The underlying Index is the exclusive property of MarketVector Indexes GmbH, which has contracted with CryptoCompare Data Limited to maintain and calculate the Index. CryptoCompare Data Limited uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the MarketVector Indexes GmbH, CryptoCompare Data Limited has no obligation to point out errors in the Index to third parties.

Investing is subject to risk, including the possible loss of principal up to the entire invested amount and the extreme volatility that ETNs experience. You must read the prospectus and KID before investing, in order to fully understand the potential risks and rewards associated with the decision to invest in the Product. The approved Prospectus is available at www.vaneck.com . Please note that the approval of the prospectus should not be understood as an endorsement of the Products offered or admitted to trading on a regulated market.

Performance quoted represents past performance, which is no guarantee of future results and which may be lower or higher than current performance.

Current performance may be lower or higher than average annual returns shown. Performance shows 12 month performance to the most recent Quarter end for each of the last 5yrs where available. E.g. '1st year' shows the most recent of these 12-month periods and '2nd year' shows the previous 12 month period and so on. Performance data is displayed in Base Currency terms, with net income reinvested, net of fees. Brokerage or transaction fees will apply. Investment return and the principal value of an investment will fluctuate. Notes may be worth more or less than their original cost when redeemed.

Index returns are not ETN returns and do not reflect any management fees or brokerage expenses. An index’s performance is not illustrative of the ETN’s performance. Investors cannot invest directly in the Index. Indices are not securities in which investments can be made.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

© VanEck (Europe) GmbH

This predicament led to the birth of Bitcoin and Blockchain. But before diving into that, let's ponder the 'Why'. There are 2 Why questions: Why decentralization and Why non-state controlled monetary instruments?

Why Decentralization Matters

Creating a digital currency with a centralized keeper is fairly simple, and achievable through a classical database. But why opt for decentralization? One primary reason involves removing middlemen, notably for efficiency and trust issues. Trust, a subjective factor, influences this decision. Can a decentralized system outperform a perfectly centralized one in terms of efficiency—cost, speed, and scalability?

From a technical standpoint, centralized systems excel. However, Bitcoin disrupted this norm by introducing a trustless, permissionless system using blockchain as a database and proof-of-work to curb double-spending. It emerged as the world's inaugural decentralized, trustless, and permissionless monetary system.

What attributes define a trustless system? Consider a centralized monetary system, akin to your bank account. The trust exists within a threshold between you and your bank. In an ideal setup, middlemen, if always held accountable at a higher cost than potential gains, wouldn't necessitate removal. The financial crisis of 2008 highlighted this flaw, with few, if any, bad actors facing penalties exceeding their gains. These bad actors knowingly exploited the system to their advantage.

Bitcoin aims to eliminate incentives for malpractice. Miners uphold the system's integrity because the cost outweighs potential gains, enabling the storage of considerable value securely within Bitcoin. Blockchain's role as an accounting system justifies its application for storing significant value, especially close to the trust threshold—relevant for cross-border transactions.

Understanding Blockchain's Influence on Traditional Business Models

Web3 projects align with Bitcoin's principles, striving for trustlessness, permissionlessness, and decentralization to eliminate middlemen. Any Web3 project not centered around this notion might not warrant blockchain integration. The real synergy arises when token-based models combine with blockchain architecture.

Two Use Cases Showcase Blockchain's Impact:

1. Supply Chain Management:

• Example: TradeMark East Africa collaborates with IOTA, employing the Tangle (IOTA's decentralized ledger) to streamline trade processes across East Africa, aiming to reduce costs, delays, and improve transparency.
• Impact: Blockchain potentially disrupts traditional paper-based trade models by offering security, efficiency, and cost-effectiveness.

1. Decentralized Physical Infrastructure:

• Example: Filecoin's decentralized storage, exemplified by the Internet Archive, secures digital content more effectively than centralized servers, enhancing security and resilience.
• Impact: Filecoin's model challenges traditional data storage by offering enhanced security, efficiency, and reduced costs.

By leveraging blockchain, these applications demonstrate tangible benefits over traditional models, showcasing their potential across diverse sectors.

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Now, let's dive into the pivotal events that have guided the path of the crypto space throughout this dynamic year.

Recap of Crypto in 2023

NFTs Enter Bitcoin's Realm

NFTs, those unique and non-interchangeable digital assets residing securely on blockchains, found their way into Bitcoin's realm. While Bitcoin has been a veteran in the crypto sphere, its recent embrace of NFTs has proven lucrative, grossing around $401 million trading volume in November, albeit trailing Ethereum's staggering $433 million (Cryptoslam, data of 10/29/2023 to 03/12/2023). Despite lagging behind Ethereum, Bitcoin's NFT sales still outstrip those on the Solana network by nearly fourfold, amounting to approximately $97 million. The expansion of inscriptions to other networks underlines the burgeoning value of block space, emphasizing its critical role. There is an ongoing debate on how the Bitcoin Blockchain should be used, opponents of Ordinals (Bitcoin-based NFTs) declare them as spam attacks while proponents see it as part of the freedom that decentralization brings.

MiCAR and Europe's Regulatory Push

The finalization of MiCAR in 2023 fortified Europe's position as the global vanguard in comprehensive crypto regulation. The Markets in Crypto-Assets (MiCA) regulation aims to standardize the crypto-assets framework across the European Union. MiCA promises legal clarity for issuers, service providers, and users, bolstering consumer protection and market integrity. Additionally, it fosters a level playing field, nurturing innovation and competition among market participants.

Tokenized Real-World Assets (RWAs) Shine

The ascent of digitally native tokenized assets witnessed remarkable growth in 2023. The market capitalization of tokenized RWAs surged from zero to over 400M$ (Dune, data as of 10/12/2023), reflecting a monthly growth rate of approximately 6%. Their value stems from real-world assets, demand for the blockchain version of the asset, and utility within the blockchain ecosystem (for example within DeFi), a trend indicating potential future growth.

Non-Blockchain Cryptocurrencies Step Forward

Emerging as potential alternatives to blockchain-based counterparts, non-blockchain cryptocurrencies address scalability and transaction speed constraints. The market share and user adoption of these assets have increased, with examples like Hedera Hashgraph, Nano, IOTA, Kaspa, SUI, SEI, and other smaller players gaining traction. The rise of Directed Acyclic Graph (DAG) based ledgers highlights an evolution in technology, hinting at a potential successor to traditional blockchain frameworks. This information should not be understood as financial advice for particular digital assets.

Staking Surge in Ethereum and Other Proof-of-Stake (PoS) Cryptocurrencies

Staking, a practice embraced not only by Ethereum but also by various PoS-based cryptocurrencies, has witnessed a surge in participation. This trend stems from technological advancements, increased institutional involvement, and a quest for additional yields in a bearish market. Ethereum's staking ratio has surged from 12% to nearly 25% (Stakingrewards.com, data as of 10/12/2023), accentuating its deflationary nature and intensifying pressure on its limited circulating supply.

Airdrops and Token Unlocks: Christmas Year-round

Largest Airdrops of 2023 (by $ value)

Airdrops in the cryptocurrency context are events where tokens or coins are distributed for free to the wallets of active members of the blockchain community, often as a promotion or reward for loyalty. They are used by new or existing projects to increase awareness, distribute tokens widely, and incentivize participation in the network. Airdrops can also serve as a way to reward early adopters or users who perform specific tasks within the ecosystem. Some of the largest airdrops that happened this year include:

Source: Coinmarketcap, data as of 10/12/2023. Historic performance is not an indicator of future results. This information should not be understood as financial advice for particular digital assets.

Largest Token Unlocks (by $ value)

Token unlocks refer to the scheduled release of previously locked or reserved tokens into the circulating supply of a cryptocurrency. These events are typically outlined in a project’s tokenomics and can occur at various intervals, often after an initial coin offering (ICO) or similar fundraising event. Token unlocks can impact the market by increasing the available supply, which may affect the token’s price depending on the demand. Thanks to Blockchain's transparency, anyone can access this information.

Source: token.unlocks.app, data as of 10/12/2023. Historic performance is not an indicator of future results. This information should not be understood as financial advice for any particular digital asset.

Examining the Performance Metrics: Biggest Winners and Losers of the Year

As we evaluate the transformative journey of cryptocurrencies throughout 2023, it's essential to delve into various performance metrics that illuminate their growth and decline.

Price Performance

The Year-to-Date (YTD) price performance, depicted in the column chart, showcases the percentage increase or decrease in value of each token.

Source: MarketVector, data as of 06/12/2023, Historic performance is not an indicator of future results.

Total Value Locked (TVL) and Market Capitalization

The Year-to-Date (YTD) TVL performance, depicted in the column chart, showcases the percentage increase or decrease in total value locked (TVL) or total value secured (in the case of Chainlink) for each token.

Source: Defillama, data as of 06/12/2023, Historic performance is not an indicator of future results.

The Year-to-Date (YTD) TVL performance, depicted in the column chart, showcases the percentage point increase or decrease in the percentage of market share of each token.

Source: Coinmarketcap, data as of 10/12/2023. Historic performance is not an indicator of future results.

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Please note that VanEck may have a position(s) in the digital asset(s) described below.

Step into the realm of speculation with us as we embark on a whimsical journey into the future of crypto in 2024. In the ever-evolving landscape of digital assets, where imagination is not just a luxury but a necessary locomotive for investors, predicting a path feels akin to navigating through a galaxy of possibilities. We understand the skepticism that often surrounds predictions—after all, foreseeing the twists and turns of the crypto cosmos can feel as elusive as catching stardust in your hands. Yet, here we are, ready to peer into the crystal ball with a twinkle in our eyes, saluting the challenge. Because in the world of cryptocurrencies, where coins and tokens are born from the void, imagination has always been the catalyst for innovation. So, fasten your seatbelts, stow away your doubts, and join us in this speculative expedition as we attempt these first tracks in 2024's crypto terrain…with a few potential money-making ideas along the way, we ho-ho-hope! Here are our 15 crypto predictions for 2024, :

1. The long-awaited U.S. recession will finally arrive, but so will the first spot Bitcoin ETFs!

The U.S. economy will finally succumb to recession in the first half of the year. Economic momentum has been slowing for months, and inflation has cooled along, creating an economy more vulnerable to shocks. U.S. leading indicators are now in recessionary territory after 19 months of consecutive declines, close to a record. Shares of retailers are struggling, commodities are weak, employment is softening, corporate bankruptcy filings are back to early COVID levels, and the yield curve is inverted but steepening in recent weeks- all are very late-cycle dynamics. "Soft landing" mentions in the media have spiked, as they often do before an official recession is called. Bitcoin has only experienced one official US recession, from January to April 2020, during which it fell 60% peak-to-trough before rallying sharply once the Fed provided sufficient liquidity. Gold also tends to decline in the early periods of a recession - it fell 12% in two weeks in March 2020. Still, its recent breakout confirms strong demand for hard money that is not cancellable by U.S. authorities, a characteristic shared with Bitcoin. As debt levels are more concerning at the sovereign than corporate or household levels, we expect more than $2.4B will flow into newly approved US spot Bitcoin ETFs in Q1 2024 to keep the Bitcoin price elevated. Notwithstanding the possibility of significant volatility, the Bitcoin price is unlikely to fall below $30k in Q1 2024.

We approximate the inflows into Bitcoin ETFs by examining the relative ratios of the SPDR Gold Shares (GLD) ETF and adjusting it to 2023 dollars. The GLD ETF launched on November 18, 2004, and it saw inflows of around $1B in the first few days of launch, and by the end of Q1 2005, around $2.26B was in GLD. At that date, the total physical gold supply stood at around 152k metric tons, with each ton worth around $15.6M, which implies a total market value of $2.36T. The initial dollar inflows into GLD in those first few days post-launch were around 0.04% of the total gold market. Around one quarter later, on March 31, 2005, GLD reached inflows of $2.26B, and after accounting for supply growth and gold price changes, GLD had become 0.1% of the global gold supply. If we apply these figures to the Bitcoin spot market, we arrive at inflows of $310M in the first few days of BTC spot ETF and ~$750M within a quarter.

However, that was the era of higher interest rates and a far lower money supply. In 2023, we are no longer in the “Dead Ball” era of finance but are careening through the HGH/Steroid era. As measured by the New York Federal Reserve Bank, the supply of M2 in November 2004 was 6.4T dollars compared to $20.7T in October 2023. As such, we believe it is logical to apply that ratio, 3.23x, to possible inflows, bringing us to around $1B in the first few days of a spot Bitcoin ETF and $2.4B within a quarter. Extending our logic further, a more mature state of the BTC ETF may approximate around 1.7%, the approximate amount of gold’s total supply held in gold ETFs, of the total spot market for BTC. This initial sum stands at around $12.5B. As we assume that Bitcoin is taking significant market share from Gold among the hard money crowd and expect 2024 to be a peak year of voter understanding of debt-driven money printing, we apply our 3.23x multiple based on M2 outstanding, to arrive at a medium-term estimate of $40.4B inflows over the first two years of trading.

Lastly, we note that Coinbase charges retail traders all-in transaction fees of ~2.5%. We believe spot Bitcoin ETFs will likely trade at ~10bps spreads, with zero commission at many brokerages. When was the last time a 10x cost reduction didn't catalyze MUCH higher penetration for new tech?

2024 Update: Spot Bitcoin ETFs did launch in the US.

2. The 4th Bitcoin halving will occur with minimal drama.

The four-year Bitcoin halving will proceed without a major fork or missed blocks in April 2024. As the new coin issuance gets cut in half, unprofitable miners will disconnect, ceding shares to those with low-cost power. Still, the public markets will see little distress thanks to much-improved balance sheets among listed miners, who currently control a record % global hash rate (~25%). After a brief (several days to several weeks) period of consolidation post-halving, as the market digests the additional selling pressure from unprofitable miners, Bitcoin will rise above $48k, the neckline of the head-and-shoulder pattern completed in April 2022. Bitcoin miners, in aggregate, will underperform the Bitcoin price before the halving, although the low-cost miners CLSK and RIOT will outperform the field. After the halving, we expect at least one publicly traded miner to be 10x by the end of the year.

Days Since Bitcoin Cycle Peak

Source: Bloomberg, VanEck research as of 11/30/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

3. Bitcoin will make an all-time high in Q4.

In the second half of 2024, Bitcoin will climb a Presidential-sized wall of worry. The percentage of the global population voting in legislative and presidential elections will hit an all-time high above 45% in 2024. This high level of important elections augurs high volatility and the prospect of significant changes. More specifically, we see mounting evidence that voters and courts are rejecting the anti-growth agenda of the Green lobby. Thus, after a combative election that saw Donald Trump win 290 electoral votes and regain the Presidency, raising optimism that the SEC's hostile regulatory approach will be dismantled, we think the Bitcoin price will reach an all-time high on November 9th, exactly 3 years to the day from its last all-time high. (Recall that Bitcoin’s breakout in November 2020 also came exactly three years to the day from its November 2017 top). If Bitcoin reaches $100k by December, we make a long-shot call that Satoshi Nakamoto will be named Time Magazine's "Man of the Year."

Source: Bloomberg, VanEck research as of 11/30/23. Past performance is not indicative of future results. The information, valuation scenarios and price targets presented on Bitcoin in this blog are not intended as financial advice or any call to action, a recommendation to buy or sell Bitcoin, or as a projection of how Bitcoin will perform in the future. Actual future performance of Bitcoin is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance of Bitcoin. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

4. Ethereum won’t flip Bitcoin in 2024

Ethereum will fail to flip Bitcoin in 2024, but it will outperform every mega-cap tech stock. Bitcoin’s more apparent regulatory status and energy intensity will attract interest from quasi-state entities in Latin America, the Middle East, and Asia. Argentina will join El Salvador, the UAE, Oman, and Bhutan as the fifth country to sponsor Bitcoin mining at the state level, as Argentina’s state-owned energy giant YPF may indicate interest in mining digital assets with stranded methane and gas. Like past cycles, Bitcoin will lead the market to rally, and the value will flow into smaller tokens just after the halving. ETH won’t begin outperforming Bitcoin until post-halving and may outperform for the year, but there will be no “flippening.” Despite a strong performance in 2024, ETH will lose market share to other smart contract platforms with less uncertainty surrounding their scalability roadmap, such as Solana.

Bitcoin Mining Investments ($'m) By Country, GDP

Source: Bloomberg Intelligence as of 8/31/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

ETH: BTC Ratio

Source: Coingecko as of 11/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

5. ETH L2s will capture the majority of EVM-compatible TVL and volume post-EIP-4844

Ethereum will implement EIP-4844 (proto-danksharding), which will reduce transaction fees and improve scalability for layer 2 chains such as Polygon, Arbitrum, Optimism, and others. Within 1 year of the upgrade, Ethereum L2s will consolidate down to 2-3 dominant players as measured by value and usage. One will achieve higher monthly DEX volume/TVL than Ethereum for the first time. Collectively, these chains may accumulate 2x the DEX volume of Ethereum (currently 0.8x) by Q4 of 2024 and 10x the number of transactions.

One of them will achieve higher monthly DEX volume/TVL (total valued locked) than Ethereum for the first time. This is because cheaper transaction fees enable tighter bid/ask spreads due to the high cost of DEX transactions on Ethereum. With stricter bid/ask spreads, there exists a greater number of arbitrage opportunities, which leads to more trading. Additionally, faster block times, only 0.25 seconds on chains like Arbitrum, enable more transaction throughput and more prospects for CEX/DEX and DEX/DEX arbitrage. As a result, DEXes and L2s should attract more volume due to the trading opportunities they enable. Collectively, these chains may accumulate 2x the DEX volume of Ethereum (currently 0.8x) by Q4 of 2024 and 10x the number of transactions.

Within 1 year of the upgrade, Ethereum L2s will consolidate down to 2-3 dominant players as measured by value and usage. This is due to the fact that liquidity fragmentation will accelerate the dominance of the dominant L2s. This has already occurred in DEXes, where the exchanges Uniswap, Pancake Swap, and Curve accounted for 78% of DEX volumes in 2023. The same market consolidation on will occur across L2s, with Arbitrum and Optimism looking to be the main contenders.

Ethereum Share of DEX Volume

Source: Artemis.xyz as of 12/3/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

6. NFT activity will rebound to an all-time high.

Monthly NFT volumes will approach a new all-time high as speculators return to crypto and gravitate toward top NFT collections on Ethereum, improved crypto games, and new Bitcoin-based offerings. Despite ETH's nearly 50-1 ratio vs. Bitcoin in primary NFT sales since inception, Bitcoin's Ordinals protocol and emerging layer 2 chains on Bitcoin will drive a continued rebirth in Bitcoin network fees. The ratio of ETH-to-BTC primary NFT issuance will end in 2024 closer to 3-1. Stacks (STX), a smart contract platform secured by Bitcoin, will become a top-30 coin by market cap (currently #54).

Bitcoin & ETH NFT Volume

Source: Cryptoslam! as of 11/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

7. Binance will lose the #1 position for spot trading.

Binance will lose its throne as the #1 centralized exchange by volumes after the company's $4B settlement with US regulators. OKX, Bybit, Coinbase, and Bitget will emerge as well-funded competitors with the potential to grab the #1 spot. Crypto exchanges' pricing inclusion in regulated indices, such as those administered by VanEck subsidiary MarketVectors, will become a critical variable in determining whether certain centralized exchanges are eligible to provide liquidity for ETF-authorized participants and sponsors. With Binance now facing a 3-year DOJ colonoscopy, Coinbase's international futures market will gain share and surpass $1B/day volume, up from ~$200M/day in November 2023.

8. Stablecoin market cap will reach a new all-time high as USDC reverses share losses.

The total value of stablecoins on the chain will reach an all-time high above $200B (currently $128B) as Markets in Crypto Assets (MiCA) regulated stablecoins launch in Europe, yield-bearing stablecoins proliferate, and trading volumes continue to rebound. More controversially, USDC will flip USDT, as more institutional adoption will reveal a preference for USDC already evident on newer L2 chains. Tether’s market share losses may finally materialize after the U.S. U.S. Department of Justice (DOJ) takes enforcement against Justin Sun & Tron for Know Your Customer (KYC) infractions, terror financing, and/or market manipulation.

Monthly Change in Crypto USD Liquidity

Source: Coingecko as of 11/27/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

9. DEX market share of spot trading will reach new all-time highs.

DEX: CEX Spot Trade Volume

Source: The Block, The Graph, Coingecko as of 11/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Decentralized Exchange (DEX) market share of spot crypto trading will rise to an all-time high as high-throughput chains like Solana improve the on-chain trading experience for users. Meanwhile, much-improved wallets - incorporating "account abstraction," a critical feature in enabling automated payments -- will push more users on-chain and into self-custody solutions. As BTC and ETH dominance likely declines after the Bitcoin halving, the long tail of assets may grow faster, skewing trading activity towards decentralized exchanges that list coins earlier in their lifecycle.

10. Remittances and smart contract platforms will power a new Bitcoin yield opportunity

Remittances will emerge as a killer blockchain use case as easier off-ramping and spending of stablecoins make recipient payouts cheap and useful in emerging markets. Given the use of the Bitcoin and layer 2 Lightning (LN) network in some remittance corridors, "Bitcoin Staking" will become a narrative in 2024. With transaction costs rising on the Bitcoin blockchain, BTC maximalists will start spreading the news that you can stake on the BTC network and earn a yield. Staking to Lightning Nodes happens today but is risky and has low return as your BTC is used for payment settlements on the Lightning network. With the proliferation protocols that abstract the technical nuances of managing a Lightning node, such as Amboss, along with federated self-custody solutions like Fedi, users will be able to participate in the remittance market from cold wallets and earn some yield. In addition, Bitcoin holders will be given a new business opportunity in 2024 as a provider of security to Proof of Stake blockchains. Utilizing projects like Cosmos-based Babylon, which will enable BTC holders to earn yield by offering non-custodial staking of PoS chains, Bitcoin holders will be able to earn yield on their Bitcoin and potentially participate in an array of other productive use cases for their BTC.

11. A breakout blockchain game will finally arrive.

Web3 Gaming Investment

Source: DappRadar as of 10/12/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Blockchain gaming will see at least one title surpass 1 million+ daily active users, demonstrating the long-awaited potential. Among candidates to achieve this milestone, IMX is most likely to become a top 25 coin by market cap (currently #42) with the release of Illuvium, Guild of Guardians, and other high-budget games in 2024 and a well-designed token that aligns interests better than most. According to a recent report from DappRadar, the WAX blockchain currently leads the gaming sector with 406k daily unique active wallets, of which ~100k are playing Alien Worlds, a metaverse with multiple simple games that reward players with the Trillium token. However, many of these players are likely bots farming the tokens due to the simplicity of the games. On the other hand, Immutable has multiple AAA games building on their platform that implement token models that cannot be simply farmed and are truly fun games to play. These titles, which have been building for years and received $100m+ in funding, are being released in 2024. They could attract players at the scale of traditional AAA games like Starfield, which was released earlier this year and reached 10 million players within its first two weeks.

Additionally, Immutable has been working to resolve many of the technical pain points that have inhibited the success of Web3 gaming so far, such as wallet management. Immutable’s “Passport” allows users to log in to games and manage their blockchain-based game items through a familiar single sign-on process while abstracting away blockchain interaction. The increased simplicity that Immutable provides gamers combined with large distribution partners such as the Epic Games Store and GameStop could finally allow a blockchain-based game to become a mainstream hit.

12. Solana will continue to outperform ETH as DeFi TVL returns.

Solana Total Value Locked

Source: DefiLlama as of 11/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Solana will become a top 3 blockchain by market cap, Total Value Locked (TVL), and active users. Fueled by this rise, Solana will join the spot ETF wars thanks to a flurry of asset managers submitting filings. Related to Solana's continued market share gains, we see a legitimate possibility that Solana-based price oracle Pyth flips Chainlink in Total Value Secured (“TVS”). For reference, Chainlink today stands at ~$15bn TVS vs. Pyth’s <$2bn, with that dominance driven primarily by blue-chip DeFi protocols on Ethereum mainnet. As TVL continues to grow across high-throughput chains (like Solana) and Chainlink struggles to find institutional adoption of its LINK token, we expect Pyth to gain meaningful market share on the back of several genuine innovations, including its "pull" architecture and confidence interval system.

13. DePin networks see meaningful adoption.

Hivemapper Unique Km Mapped

Source: Hivemapper, as of 12/1/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Multiple decentralized physical infrastructure (DePin) networks will see meaningful adoption that captures the public's attention.

Hivemapper, the decentralized mapping protocol aiming to bootstrap a community-owned competitor to Google Streetview, will map its 10 millionth unique KM, surpassing 15% of global roads capacity. Hivemapper uses its native token, $HONEY, to incentivize thousands of drivers worldwide to mount dashboards to their cars and contribute to its growing database. This global network of permissionless contributors may give Hivemapper a meaningful speed and cost-of-capital advantage relative to the incumbent Google. Google Maps is projected to make more than $11bn in revenue in 2023, representing a meaningful opportunity for Hivemapper if the experiment is successful.

Helium, the decentralized network of wireless hotspots, will reach 100k paying subscribers for its nationwide US 5G plan, up from 5k currently. Hotspots can be set up by anyone, and hotspot operators are paid through crypto rails in Helium’s native tokens. This powerful system of incentives gives Helium some key advantages relative to incumbent wireless infrastructure:

• It is capital-light (from Helium’s perspective).
• It turns hotspot providers into advocates & supporters (given their ongoing stake in the network).
• It gives Helium the ability to respond to real-time data & improve the network by adjusting its incentives (i.e., boosting rewards in areas with poor coverage).

Wireless infrastructure is a $200B, relatively mature market. We see significant scope for disintermediating legacy providers (Towers) as end-users tend towards low-cost solutions with a differentiated brand (“user-owned”). Helium claims they can deliver data at less than 50% of the cost of legacy networks. As crypto adoption becomes more mainstream, and if that claim is true, they will likely join a significant share.

14. New accounting treatment will rejuvenate the case for corporate crypto holdings.

Base Weekly Fees

Source: DefiLlama as of 11/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Coinbase will become the first publicly traded company to break out and report Layer 2 blockchain revenues in its quarterly filings as its Base Protocol crosses $100M+ in annualized revenues and becomes a meaningful contributor to the business. The additional disclosure may be catalyzed by corporate adoption of new FASB guidelines that allow corporates to book mark-to-market gains on crypto, which will favorably impact corporate preference for holding Bitcoin and other crypto as treasury assets. Due to these accounting changes, which take effect in 2025 but can be adopted by corporates earlier, a major, non-crypto financial entity (bank, exchange) may announce the creation of a quasi-public blockchain like an L2, with the possible bridging capability to public blockchains by authorized participants.

15. DeFi Reconciles with Know Your Customer (KYC)

KYC-enabled and walled garden apps like those using Ethereum Attestation Service or Uniswap Hooks will gain significant traction, approaching or even flipping non-KYC applications in user base and fees. Uniswap will lead other protocols in enabling this functionality, which will drive institutional liquidity and volume to the protocol. The additional volume from KYC-gated hooks will significantly bolster protocol fees by allowing new entrants to participate in DeFi without the fear of interacting with OFAC-sanctioned entities. The addition of hooks will help Uniswap reinforce its moat and competitiveness, which should drive token appreciation, especially once the DAO finally votes in favor of turning on the Uniswap Protocol fee switch to allow value to accrue to the token. If so, we expect such fees to be no higher than 10bps.

Decentralized Exchange Market Share

Source: DefiLlama as of 11/28/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Links to third party websites are provided as a convenience and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. By clicking on the link to a non-VanEck webpage, you acknowledge that you are entering a third-party website subject to its own terms and conditions. VanEck disclaims responsibility for content, legality of access or suitability of the third-party websites.

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Gold rallies on geopolitical uncertainty

In October gold demonstratedits historically-proven role as a safe haven investment, a hedge against market uncertainty, volatility and geopolitical risk, and as an asset offering protection when there is a heightened level of peril and fear. Gold traded at a monthly low of $1,820 per ounce on 5 October, before rallying above $1,900 a week later and, finally, above $2,000 on 27 October. The price of gold eventually settled at $1,983.88 by the end of October, posting a 7.32% gain for the month.

Gold stocks kept pace with gold in the first part of the rally; however, just as gold was approaching $2,000, surprisingly, they lost steam and gave back half of their earlier gains. NYSE Arca Gold Miners Index (GDMNTR)¹ and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)² were up 4.2% and 3.8% during the month, respectively. Gold stocks’ significant underperformance further widens the valuation gap between gold stocks and gold.

Why do we even own gold stocks?

Historically, gold stocks have a strong correlation to the price of gold. Despite experiencing a significant de-rating after the last gold bull market, gold mining stocks have outperformed gold during the current gold bull market (the beginning of which we place around the end of 2015).

Gold Stocks vs. Gold: Annualized Total Return Since Start of Current Gold Bull Market (Dec 2015)

Source: Bloomberg. Data as of October 2023.

Gold stocks are supposed to outperform the metal when gold’s price is rising. Their leverage to gold justifies outperformance. For any given move in the price of gold, operating cash flow generated by these companies increases (or decreases) by a much greater percentage.

Take Alamos, for example. The company estimates that a 5% increase in the price of gold, would translate into an increase of almost 30% in their free cash flow in 2024.

Alamos Consolidated Free Cash Flow Outlook

Source: Alamos Gold. Data as of May 2023.

This is why, despite the risks associated with mining operations, investors choose to add gold stocks to their portfolios—the potential for amplified returns during a sustained gold rally.

So, we are surprised and disappointed to see gold stocks underperform this year. To be clear, gold stocks also underperformed gold last year. However, in 2022, gold was down slightly on the year and rampant cost inflation not only ate away at profit margins but also caught the sector by surprise, causing most companies to miss cost guidance issued earlier in the year. The market penalized gold stocks severely, both for shrinking margins and for failing to meet expectations. GDMNTR, for example, was down 8.9% in 2022.

As 2023 goes on, things look a bit different. Gold is up almost 9% and, so far, companies’ 2023 results don’t point to guidance revisions (if any) nearly as punitive as last year. So, what could be causing this performance gap?

Potential causes for the growing gap between gold stocks and gold

Here are a few factors we think could be at play:

1. Central Bank demand – One of the main drivers of gold prices this year has been strong central bank net purchases—potentially set to even beat record levels reported for 2022.

   Central Bank Net Purchases of Gold

   

   Source: World Gold Council. Data as of September 2023.

   In contrast, investment demand, usually the main driver behind a gold price rally, has actually declined significantly this year, as measured by ETF holdings of gold bullion. Without another center of demand for gold stocks to offset the lack of investment demand, poor market sentiment and apathy towards gold has impacted the gold stocks to a much greater extent. In other words, central banks buy gold they don’t buy gold stocks, if they did, perhaps the stocks would also be finding more support in this environment.

2. Industry operating cost inflation – While industry cost inflation has subsided, operating costs guided for 2023 are still higher than in 2022. Analysts’ estimates for the sector’s average all-in sustaining costs in 2023 vary from about 5-8% higher relative to 2022. While the gold price has helped sustain margins relative to last year, the market seems to be dissatisfied with the lack of significant margin expansion. These concerns were likely exacerbated in October, following negative 2023 guidance revisions by Newmont, the largest gold mining company in the world.
3. General equity market exposure – The broader equity markets were down during the month. The S&P 500 and the NASDAQ were down 2.10% and 2.8%, respectively, in October, with particularly weak performance in the latter part of the month when the gold equities also fell. At times, in the early stages of a broader market sell-off, gold stocks also sell off.
4. Country-specific risks – Two country specific news items at the end of October may have also impacted perception of sector risk and further deepened negative sentiment towards gold mining stocks. The Panamanian government announced that a recently enacted law is being challenged, effectively putting at risk a revised and approved contract for the Cobre Panama copper mine operated by First Quantum Minerals, Separately, Bloomberg reported, on 27 October, that Burkina Faso had revised its mining code, increasing the top end of its sliding scale royalty scheme from 5% for gold prices above $1,300/oz, to 7% for gold prices above $2,000/oz.

Concerns may be overblown

While all of these concerns are valid – especially as they relate to operating costs – at present, we see gold companies as greatly undervalued. Historically, the sector has never traded at lower valuation multiples. The companies’ continued focus on cost control, portfolio optimization and disciplined capital allocation to drive growth and maximize returns, responsibly and sustainably, along with our outlook for higher gold prices, support our expectations for a re-rating of the sector. Gold stocks are outperforming in the first few days of November; perhaps the re-rating has already begun.

Gold Stocks: Premium/Discount to Gold Price

Source: Scotiabank. Data as of September 2023.

The phrase "Would you like to pay with crypto?" may be gaining momentum in tomorrow’s digital landscape. In the early days of cryptocurrency, crypto-only events were a statement of ideological purity, signaling the end of fiat dominance. However, as the crypto ecosystem matures, users now have the flexibility to choose their preferred payment method. In this article, we delve into the development of crypto payments, assess the user experience, and ponder whether it surpasses traditional fiat transactions.

Crypto Payments are Making Headlines

Pay for your Lambo (a.k.a. Lamborghini), and your Ferrari and ride in style to go to the movies with your Bitcoin. Thankfully, this is all very possible these days. Luxury car manufacturers like Ferrari have recently joined the crypto revolution, enabling customers to purchase their dream vehicles with digital assets. Ferrari's decision was driven by market demand and a recognition of their clients' investments in cryptocurrencies. While Tesla briefly suspended Bitcoin payments in 2022 due to environmental concerns, recent data shows that nearly 60% of Bitcoin mining energy is sourced from renewables, allaying some of these apprehensions. With most leading cryptocurrencies shifting to Proof-of-Stake, energy consumption is further reduced, potentially opening the door for wider adoption by companies like Tesla.

Are the environmental concerns justified? Not really… at least, not anymore. Nearly 60% of all energy used for Bitcoin mining comes from renewable sources (CCAF, data as of July 2023). Besides Bitcoin, the majority of other leading cryptocurrencies are based on Proof-of-Stake hence significantly lower energy requirements. We expect that companies, including Tesla, will soon start accepting crypto on a larger scale.

BitPay, a leading crypto payment processor, sheds light on the growing trend of crypto transactions. Over the past six months, BitPay has facilitated more than 360,000 transactions, highlighting the increasing acceptance of digital assets across various industries.

Crypto Payments by Percentage and by Number of Transactions

Source: BitPay, Data as of October 2023. This should not be understood as investment advice for any particular digital asset.

Crypto Payments per Industry

Source: BitPay, Data as of October 2023.

How can crypto be spent?

Direct receipt of crypto entails the responsibility of managing private keys, a task many companies are ill-equipped to handle in-house. To bridge this gap, payment service providers convert crypto to fiat before transferring it to vendors. Although this ensures a smooth transaction process, it comes with minor costs, including conversion and service fees. Regulatory concerns in the US may explain why companies like Ferrari prefer this indirect approach. Users simply pay with their debit card (usually Visa or Mastercard) linked to their crypto wallet and the vendor never touches the cryptocurrency directly. This also opens up the possibility to pay with anything else, such as tokenized assets like real estate or even tokenized securities. In other words, you don’t need to own fiat to make payments.

Over the years, the user experience of crypto wallets and storage options has seen remarkable enhancements. A wider array of wallets, ranging from cloud-based to cold storage solutions, cater to varying user preferences. User-friendly applications like Trust, Metamask, and Coinbase have democratized access to crypto, transitioning from complex tools to seamless integrations with popular DApps.

Despite advancements, crypto payments represent a relatively small fraction of overall transactions. A substantial number of crypto enthusiasts opt to "hodl" their assets or engage in DeFi liquidity provision rather than using them for everyday purchases. According to Worldpay FIS, crypto's global P2B transaction volume in 2022 was over $11.6 billion, accounting for just 0.19% of global e-commerce volume. Only 18% of respondents in a survey indicated using crypto for goods and services, while 77% viewed it primarily as an investment.

As we navigate the evolving landscape of crypto payments, it's clear that there is significant room for growth. With improved user experiences, wider acceptance by industries, and a shift towards eco-friendly mining methods, crypto payments are poised to play a more substantial role in shaping the future of finance and commerce. The question, "Would you like to pay with crypto?" may soon become a commonplace inquiry, reflecting the growing prominence of digital assets in our everyday lives. It could also be that the choice of payment method will be entirely abstracted away and instead is replaced by a single card that offers “Pay-with-Anything” functionality where an algorithm chooses the most optimal route to pay for the product or service in real-time.

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At the same time, the UK was reported to already probably be in a recession after soaring interest rates and rising unemployment turned households more cautious about spending, according to analysis by Bloomberg Economics.

I highlight this because bad news for the economy is often good for parts of financial markets. Indeed, the first week of November was notable for rallies in bond markets and crypto assets, triggered by speculation that central banks were finally defeating stubbornly high inflation, paving the way for them to cut interest rates.

Nervous that markets were getting ahead of themselves, Bank of England governor Andrew Bailey weighed in with cautionary words, saying it was “much too early to be thinking about rate cuts.” Even so, perceptions are changing and traders are thinking ahead to when rates will be cut from their current high levels.

Why does this matter? Because for bond markets and cryptocurrencies, a turning point for interest rates would be likely to spark a long lasting rally in prices.

Changing sentiment can already be seen. For instance, the VanEck iBoxx EUR Corporates UCITS ETF that tracks the largest and most liquid euro-denominated corporate bonds, rose by around 1.8% between 19th October and 7th November (the day before I wrote this column).

Over the same few days, the VanEck Crypto and Blockchain Innovators UCITS ETF climbed almost 15%¹.

That tells a tale of two risk profiles. The bond ETF is considered to be relatively low risk, only giving exposure to corporate bonds with an investment-grade rating. As interest rates fall, bonds’ yields fall as well, and as the yields go down the prices go up. However, other associated risks, like credit risk, must be considered before investing.

The higher a bond's credit rating, the more sensitive it generally is to changes in interest rates. This interest rate sensitivity is measured by duration which is the weighted average time it takes for the price of a bond to be recovered with the cash flows that the bond generates. Companies with a higher credit rating generally have lower yields. This means it takes longer to earn back the price of the bond and hence a higher credit rating means a higher duration. A bond with a higher credit rating is therefore more sensitive to interest rate changes than a bond with a lower credit rating.

On the other hand, if the interest rates are too high, high-yield issuers might find it harder to finance their business activities thus making it harder to make timely coupon payments on their bonds. If the rates fall, they would be able to borrow at lower cost, thereby lowering their interest burden. For that reason, the VanEck Global Fallen Angel UCITS ETF – focusing on previously investment grade bonds that have recently been downgraded to high yield status – currently sitting at 8% yield, might also prove sensitive to rate movements.

Of course, crypto currencies are well known for their volatility and their prices lit up at the first whisper of a turning point for interest rates. We have seen in the past that decreasing rates create more room for investing in crypto currencies. But there’s something else happening here, as speculation mounts that the US regulator, the Securities & Exchange Commission, might soon approve bitcoin ETFs. When combined with the EU’s new MiCA crypto regulation that’s due to come into effect in 2024, there’s considerable excitement that cryptocurrencies are finally moving into the mainstream.

Of course, there can be no certainty that interest rates in the EU, UK or US will definitely fall in 2024. It’s true that core inflation is coming down but plenty of people remember the harsh lessons of the 1970s and 1980s when it suddenly rose again. If you do believe that high inflation is beaten, though, you could consider an investment in bonds, perhaps backed by a little exposure to cryptocurrencies.

The most widely followed emerging markets (EM) local currency benchmark will undergo its biggest reconstitution since China's inclusion in 2020, when India joins the index next year. After several years of discussions about possible inclusion, J.P. Morgan announced that certain local currency bonds issued by the Indian government will begin to be added to the GBI-EM suite of indices at the end of June 2024. In the GBI-EM Global Core Index, India's weight will increase by 1% each month until it reaches a 10% weight, where it will be capped.

India's bonds would increase the index yield by 5 basis points, based on 29 September, 2023 prices and assuming full inclusion. The duration would increase by approximately 0.04. Regional exposure will become more tilted towards Asia, with Latin American country exposure being reduced slightly more than EMEA exposure.

Impact of India Inclusion

Source: J.P. Morgan. As of 29 September, 2023.

India has the second largest bond market among emerging markets, second only to China, and is rated investment grade by all major rating agencies. The reason for its lack of inclusion until now has primarily been the operational hurdles and investment restrictions that made access to the market by foreigners prohibitive. In particular, account opening procedures, trading operations and timely currency repatriation have been cited as concerns. J.P. Morgan’s index only includes countries that are accessible to foreign investors without restrictions. India does impose a withholding tax, however tax hurdles alone, if reasonable, do not make a country ineligible.

India introduced "Foreign Accessible Route" ("FAR") bonds in 2020, which are only available to foreign investors and can be invested in without investment limits, and since then has made substantive reforms to address operational hurdles to foreign investment. Only FAR bonds that meet liquidity criteria and have an amount outstanding of at least the equivalent of $1.0 billion are eligible for inclusion. Currently, there are 23 bonds with an aggregate market value of $330 billion that are eligible.

India enters the index against a positive fundamental backdrop. In 2Q 2023, the economy grew at a 7.8% growth rate, driven by increased domestic demand. After improving earlier this year, inflation has recently increased due to higher food prices. However, inflation is expected to drift back to within the Reserve Bank of India’s target range and the central bank is expected to maintain rates for now. India has a strong demographic profile, and as the world’s most populous democracy benefits from political stability and a growth-friendly policy agenda. In particular, the economy has undergone rapid digitalization in recent years, propelled by government investment including a digital identification system, national payments network, and a buildout of infrastructure that provides the population with access to low cost data. These investments are driving economic growth, as well as higher tax revenues, benefiting the country's fiscal position. A more digitalized economy can also encourage more efficient spending, both in the private and public sectors. In equities, India has seen significant foreign inflows this year thanks to the impact of these tailwinds on corporate profits, and according to Goldman Sachs, the country is the biggest overweight in Asia portfolios among EM money managers.

Index inclusion is expected to result in $20-$40 billion of inflows in the near term, and $180 billion over the next decade, according to S&P. Currently, foreign investment in India's bond market is very low at less than 2% due to the historical obstacles that existed. Foreign ownership will increase from this low base, providing the government with a new source of financing and potentially support for further development of the domestic market. These inflows may also result in lower borrowing costs. Given the relatively high level of government debt, the country's budget deficit and high investment needs, this would be welcome. Lastly, foreign inflows may provide support for the local currency.

Global growth outlook is mediocre, with only the U.S. and China characterized by exceptionalism. When excluding U.S. growth, developed market growth is forecasted to be just 1% for 2023. The U.S. growth outlook was revised upwards by 0.3% to 2.1% from the Spring meetings, when most expected the U.S. to enter a recession this year. In contrast, the remainder of developed economies saw their growth forecasts revised downwards. Similarly, in emerging markets (ex-China) growth is forecasted at just 3% in 2023. China is still expected to achieve a 5% growth rate, which makes it the second fastest growing economy in the world after India.

Global inflation is falling, with U.S. inflation far from its target. U.S. inflation is not expected to return to the Fed’s target rate of 2% until 2025. Forecasts for core inflation were revised upwards. Labor markets remain tight, not just in the United States but across Europe and many emerging markets. The lack of a more convincing global disinflation process makes it very difficult for credible central banks to ease policy and those that believe policy rates are sufficiently restrictive are likely to hold them there for longer than markets are pricing. Even in a country, like Brazil, where inflation has converged to its target, cutting interest rates too quickly would lead to currency depreciation and imported inflation. The “higher for longer” narrative was pervasive throughout all meetings. For as long as the Federal Reserve maintains that stance, the rest of the world will remain under its spell.

Rapidly rising long-term U.S. real yields are sucking up global capital and raising global borrowing costs. There was tremendous focus and criticism of U.S. fiscal policy and the resulting borrowing needs. The 2023 U.S. budget deficit of $1.7tn is inconsistent with the current economic expansion in the U.S. and is mostly the result of structural factors stemming from large tax cut packages, increased entitlement spending and growing interest expenditures. Additionally, the Fed’s quantitative tightening (QT) of $900bn means $2.7tn of annual borrowing needs. These large borrowing requirements are putting upward pressure on U.S. long-term real yields. When the U.S. finally enters a recession, these borrowing needs will only increase. The Fed will cut interest rates to help the economy and this will relieve some pressure on government interest expenditure, but the Fed will still not stop QT as it seeks to bring its balance sheet back to a size that no longer stimulates the economy.

Net U.S. Treasury Duration Supply

Source: International Monetary Fund; October 2023. Not intended as a prediction of future results. For illustrative purposes only.

Global savings are needed to finance increased U.S. borrowing, but price sensitive private sector savings are not being properly compensated to increase their holdings. Countries with large current account surpluses, like China, Russia, and Saudi Arabia are no longer interested in financing U.S. borrowing. By sanctioning Russian holdings of U.S. reserve assets, the U.S. sent the message that U.S. Treasuries were no longer a safe investment for central banks that were not in the “U.S. friend zone”. China realized the mistake it made in hoarding U.S. dollar reserves to protect against a financial crisis and instead is switching to holding strategic resources such as commodities as reserves instead for national security interests. Without price insensitive central bank buyers, more of the burden falls on private sector lenders, both domestic and foreign, who are highly price sensitive buyers.

History of U.S. Treasury curve shape for 10y - 2y (2s10s) and 30y - 2y (2s30s)

Source: VanEck Research, Bloomberg LP; October 2023. Past performance is no guarantee of future results.

U.S. government duration risk is still not adequately priced to compensate for the risk of ownership. The yield of both 10-year and 30-year U.S. treasuries are still below the yield on 2-year U.S. treasuries, meaning investors get paid less to take more risk! Historically, there was an average of 50 basis points (bps) of compensation paid for taking this additional duration risk. This repricing of duration risk, which is necessary to restore value, has been a violent and painful adjustment recently: most investors are already long duration, and expected yields to be lower due to a U.S. recession that never materialized. In addition, Treasury market liquidity is not functioning well as dealers cannot warehouse risk from large Treasury auctions, and the banking sector already owns too much interest rate risk. Additionally, there are discussions of a capital charge for U.S. banks for interest rate risk that would consequently lead to higher yields.

There was a lot of discussion about the U.S. neutral real interest rate now being higher than post global financial crisis (GFC) levels, with a return to either 2% (former NY Fed President, William Dudley’s estimate) or 2.5% (Former U.S. Secretary of the Treasury, Larry Summer’s estimate). Using a 2.5% real yield, adding in a 2.5% annual inflation rate and a 50 bps term premium, the fair value for real long-term U.S. interest rate comes to 5.5%. For the structural reasons just listed, it seems reasonable to think that a 5.5% nominal interest rate is closer to a market clearing level.

As real yields rise to attract new price sensitive buyers, it reduces the pool of savings available to other borrowers and increases the risk of financial accidents. The U.S. and the IMF want to incentivize the private sector to finance an ambitious global transition to green energy. The call to action has largely been ignored as the borrowing requirements of up to 50% of domestic GDP in financing costs over the life of investment is unrealistic when the concern is just financing the world’s current borrowing needs. To put current borrowing needs in context, China and the U.S.’s deficits combine to 2.5% of world GDP! China is one of the few countries that can afford to finance its green transition with its own savings.

Cyclically-Adjusted Primary General Government Balances of China and U.S., % world GDP

Source: VanEck Research; International Monetary Fund; Bloomberg LP; October 2023.

U.S. Cyclically-Adjusted Primary General Government Balance and Selected Current Account Surpluses (bn USD)

Source: VanEck Research; International Monetary Fund; Bloomberg LP; October 2023.

The U.S. deficit dwarfs the world’s largest current account surpluses; global investment needs to fall and savings needs to grow to finance it. The structural need to attract more and more global savings is the main reason to expect interest rates to remain higher for longer, and the main reason the risk of a financial accident rises as there will be fewer savings available to lend to less creditworthy borrowers. The IMF ran global bank stress tests that incorporate a stagflationary scenario of higher for longer interest rates, a scenario U.S. stress tests overlooked, and the results were particularly troubling for the developed market banking sector plus China. Common Equity Tier 1 (CET1) ratios, which measures liquid bank holdings such as cash and stock, fall below 7% for 27% of developed market banks and 50% of Chinese banks. Emerging market banks, in contrast, fared well with just 10% falling below 7%.

Pessimism on the outlook for China’s growth was pervasive but China has policy options. Only 4% of investors were willing to add risk to Chinese assets! It is hard to imagine a more pessimistic survey. The collapse in the property market and the subsequent risk of local government financing vehicle (LGFV) defaults that could cascade into banking sector insolvencies was a major concern. There is reason to be worried. Over 50% of LGFVs are unable to service debt when interest costs rise above 3%. But there is also domestic awareness of the issue and the Chinese government has the tools and fiscal space needed to avoid a debt crisis. The main issue is that so far there has not been a policy bazooka to resolutely solve the problem. The government is keen to avoid moral hazard issues but also given the centralization of decision making under President Xi, there may be some policy paralysis at lower levels of government. The other main investor concern is what China’s growth model will be going forward as investors would like to see a rebalancing of the economy away from investment and toward consumption. One key event to watch for is setting a date for the Third Plenum where the economic policy strategy would normally be set. It typically takes place in November, but so far no date has been announced. If the government were to move more resolutely on tackling debt issues and addressing the country’s future growth model, there could be a more sustained recovery in asset prices that are currently trading at very depressed valuations.

Against this concerning backdrop, the resilience of emerging markets economies shone though. There was an abundance of praise for emerging markets policy making across all geographies. Most emerging markets central banks hiked interest rates early to levels high enough to begin the disinflation process before inflation expectations could deteriorate. For the most part, they have been consolidated fiscal policy after the extraordinary spending during the COVID-19 era. Since emerging markets economies have not been able to rely consistently on portfolio flows post 2013’s taper tantrum, domestic institutions have filled the space to channel domestic savings to fund government borrowings. By doing so, it has greatly reduced the volatility and sensitivity of government bond yields to U.S. bond yields.

Local Currency Government Bond Ownership for the Eight Largest Emerging Market Economies, by Institutions

Source: International Monetary Fund; October 2023.

The “higher for longer” message has been digested by most emerging markets central banks who have adjusted expectations around the terminal policy rate and future rate cutting cycles to include it. Colombia will cut less, Brazil will not increase the pace of rate cuts, and countries like the Philippines and Thailand are considering additional rate hikes. Indonesia just unexpectedly hiked interest rates to protect the exchange rate from higher U.S. interest rates. VanEck’s Emerging Markets Debt team finds it useful to consider which emerging markets central bank policy paths are closely aligned to the U.S. policy path as a step 2 overlay in screening local currency markets. The chart below illustrates our valuation model for 2-year real yields on the x-axis plotted against real 2-year interest rates on the y-axis. The upper right corner of the graph shows the countries with the most attractive short-term interest rates. Each country has a color code indicating the policy stance of the central bank: the darker red the more aligned to U.S. policy and the lighter blue the more aligned to domestic policy needs.

2Y Real Local Yields vs. Valuation (Rich(-) / Cheap(+))

Source: VanEck Research; Moody’s; World Bank; International Monetary Fund; Bloomberg LP; October 2023. Past performance is no guarantee of future results.

Emerging markets countries that stand out are Mexico, Colombia, South Africa, Hungary, the Philippines, and Thailand. The Emerging Markets Debt team has allocations to these local markets, except for Mexico, where the team has concerns over the valuation of the exchange rate and fiscal policy around the election.

The government of Turkey deserves a special mention for the impressive showing given by both Economy Minister Simsek and Central Bank Governor Erkan. Minister Simsek is well known by foreign investors and he made a compelling case that Turkey has credibly changed policy course by reducing the fiscal deficit, reducing the quantity of subsidized credit and tightening standards, allowing an exchange-rate depreciation to restore competitiveness, begin rebuilding reserves and hike interest rates to levels restrictive enough to bring inflation lower. Governor Erkan, however, was not known to investors and she made a very good first impression. It was clear she had a mandate to hike interest rates to levels where monetary policy would be restrictive. The meeting with them was the most packed one of the conferences and some major investment banks are recommending an overweight in Turkish Lira for the first time in recent memory.

In addition to Turkey, there were many memorable country specific meetings:

Hungary’s inflation is finally heading for single digits, which can become the most important growth driver in 2024, boosting both consumption and investments. Higher growth should be associated with better fiscal outcomes, reducing the country’s borrowing needs. A major uncertainty is the disbursement of the EU funds – both the timing and the size. But in the meantime, the country is benefitting from sizable foreign direct investment (FDI) inflows, especially in EV battery manufacturing.

The Czech Republic’s overall policy framework is probably the strongest in emerging markets, but it is often traded “in sympathy” with the rest of the region. The latest fiscal consolidation proposal was a gutsy move and will help offset somewhat lower real interest rates than regional peers Hungary and Romania.

Poland’s general election results were well received by the market, but the government formation, the policy agenda, the fiscal outcomes (both parties promised a lot before the elections), and geopolitical considerations would be just as important going forward.

Brazil is one of emerging market’s poster kids for successful policy tightening, which did not kill growth (past reforms might be to “blame”) and opened room for gradual rate cuts. The focus now increasingly shifts to Brazil’s ability to maintain fiscal discipline – a credible fiscal plan will keep inflation expectations and real interest rates under control and avoid “twin de-anchoring” (high inflation and uncertain fiscal results).

Chile’s disinflation progress shows that the monetary policy transmission mechanism and the flexible exchange rate are working as intended. The central bank is now transitioning towards the policy rate’s “normality” and continues to accumulate reserves, which can weigh on the Chilean peso, especially if there is more political noise associated with the new constitutional referendum.

Colombia is moving in the right direction… slowly. Inflation has finally peaked, but the tight labor market, rising wages, and the El Nino phenomenon pose additional upside risks, keeping the central bank on the defensive.

The market’s key concern in the Philippines is the government’s ability to reduce its fiscal gap. Plans look good, but the adjustment is expected to spread over many years. The central bank might need to tighten more to cool domestic demand, but the government is determined to maintain its pro-growth fiscal stance.

Indonesia remains a bright spot in EM Asia. Domestic activity, fiscal discipline, and the inflation outlook argue against additional policy tightening, while elevated trade surplus (buoyed by strong exports) provides fundamental support for the currency.

South Africa’s inflation was more persistent than expected, with fiscal policy posing additional inflation risks. Multiple domestic and especially global risks make it difficult to simply look through them, keeping the central bank on the cautious side. South Africa’s private energy generation is a potential positive for the country’s assets, but it might take longer to play out.

Morocco remains a structural and economic success story in Northern Africa. The improving equilibrium current account balance is a major new positive that can help reducing Morocco’s external financing needs from now on.

Angola continues to benefit from past reforms, and it continues to target greater diversification and the reduction of its debt burden. However, the economy remains too dependent on the price of oil – against the backdrop of stalling oil production and the end of the debt suspension agreement.

Kenya’s growth story is still strong, and the IMF program remains a good policy anchor, but the market is frustrated about a lack of clarity about the maturing 2024 Eurobond, fearing that they will end up tapping into international reserves to make the payment.

It’s well known that a rising cost of living has historically been a powerful driver of change. Political upheavals from the French Revolution to the Arab Spring have been rooted in times of high inflation. And in today’s Europe, almost a third (32%) of voters cast their ballots for anti-establishment parties last year, according to research from the Guardian¹.

On a more personal level, people are delaying life choices such as buying a home or raising a family. In a recent survey in the United Kingdom, for example, nearly 60% of respondents cited the high cost of living as the key reason to delay or not have children at all.

Change is certainly afoot, as people cut spending. They are changing their habits partly through smart home solutions, as we reported in our December 2022 blog.

Spending More Time at Home

Instead of eating out or ordering in, for instance, people are preparing more restaurant-style meals at home to save money. Smart home options like meal kit delivery service HelloFresh (a current portfolio company), recipe apps or streamed cooking content make it easier.

Moreover, meal kits can actually beat grocery shopping in terms of pricing and waste – you only get what you need for a recipe. And they take the hassle out of meal planning and grocery shopping, helping to explain why HelloFresh’s order value continues to grow.

People are also going out less often, preferring to watch films at home, play games or listen to music. VanEck Smart Home UCITS ETF (CAVE) tracks this trend with investments in gaming stocks like Electronic Arts, Sony and Nintendo. With an implied cost per hour of $0.49, video games are less expensive than movie theaters ($5 per hour), theme parks ($12.50 per hour), sports events ($16.67 per hour) or concerts ($33.33 per hour)².

CAVE also invests in other forms of entertainment. Meticulous in its investment selection, the CAVE team prefers music publishers like Universal Music Group to streaming services, because the publishers capture more upside than the streaming platforms.

With video, yet another dynamic is at work. Whereas gaming and music both provide hours of (repeated) entertainment, people typically watch video content only once. This raises the risk of churn as subscribers binge their favorite shows and then unsubscribe. To tackle this problem, streaming services are tailoring pricing to different customer segments (e.g. adding an ad-based tier) or use bundles (for instance with distributors) to lock-in consumers (see also this blog).

CAVE does invest in streaming video, but here we prefer the pure-play company Netflix. As its recent earnings report showed³, the company grew subscribers in every region as its efforts to limit password sharing took shape. Moreover, it has neither a declining legacy TV business nor challenging debt levels to manage. In addition, it launched a lower-cost, ad-supported plan, attracting more cost-conscious consumers and opening a new potential revenue stream.

A Smart Home ETF may be subject to the risk that economic, political or other conditions that have a negative effect on the relevant sectors or industries will negatively impact the Fund's performance to a greater extent than if its assets were invested in a wider variety of sectors or industries.

New Habits That Last

Some of the emerging habits and cost cuts described in this blog are likely to stick. By doing more at home, and making full use of the technology inside it, we can become more resilient to deal with the cost of living.

Oil companies extend their gains

The third quarter of 2023 largely extended trends seen in the second quarter. The Oil & Gas sector continued its dominance within the resource equity landscape while most other sectors faced challenges.

U.S. exploration & production (E&P) companies approached their November 2019 monthly crude oIl production record in July, achieving an output of 12.99 million barrels per day. Remarkably, this growth was realized with fewer rigs than in 2019, underscoring the increased efficiencies of these companies. Furthermore, their reinvestment rates, which denote capital expenditures in relation to operational cash flow, remained below 2020 levels, reflecting a cautious stance on capital spending to prioritize shareholder value.ⁱ

Despite the conservative spending by E&Ps, oil servicers held their ground. Stable oil prices and industry-wide cost inflation have enabled these servicers to maintain pricing, especially in offshore services like deepwater drilling. Cash-rich integrated oil companies intensified their exploration efforts in these areas. However, a point of concern emerges from dwindling conventional oil discoveries, which hit a five-year low during the first half of the year.ⁱⁱ

Valuation Total Conventional Discoveries (January - June)

Source: Rystad Energy. Data as of August 2023.

Continued pressure on all things green

Battery metal companies, chiefly lithium producers, faced headwinds this quarter. The combination of rising competition and the lingering effects of elevated lithium prices from 2021/2022 led to concerns about potential market oversupply in 2024 and beyond. These apprehensions were manifested in significant price reductions, with lithium hydroxide experiencing a drop of over 50% during the quarter.

Battery manufacturers confronted challenges due to increased input costs and capital expenditures and research & development (R&D) efforts, aimed at staying ahead of competitors. Additionally, solar and wind equipment producers continue to grapple with the impacts of prolonged high-interest rates, resulting in subdued earnings growth forecasts. Growing backlogs for grid connections in renewable projects have further dampened investor optimism.

The agricultural sector presented a varied performance landscape this quarter. Fertilizer producers faced a divide in demand, with dwindling interest in potash contrasted by an uptick in nitrogen-based fertilizers, largely attributed to ongoing natural gas shortages. Grain processors remain optimistic, balancing concerns about potential margin reductions from declining corn and soy prices with a bullish outlook for the latter half of the year.

Looking ahead: fundamentals should outweigh uncertainties

From a broader perspective, our positive long-term stance on resource equities remains unchanged. The evolving global energy landscape hints at potential supply gaps across several commodities. As countries grapple with the complexities of transitioning to renewables, geopolitical tensions pose threats to the supply chain for vital clean energy materials.

Resource companies, bolstered by structural advantages and years of efficiency-focused operations, are uniquely positioned. Their valuable assets, strong financial health, commitment to shareholder value and attractive valuations make them compelling investment opportunities, in our view.

Valuation Metrics Comparison (10-Year Average vs. Current)

Source: FactSet, VanEck. Data as of 30 September, 2023. "Global Equities" represented by the MSCI All-Country World Index (ACWI). "Resource Equities" represented by the S&P Global Natural Resources Index. Data definitions included at the end of this commentary.

However, resource equities might still face near-term macroeconomic uncertainties that have influenced returns intermittently over recent years. Fluctuations in inflation, interest rates and the U.S. dollar's strength, combined with varying investor risk appetites, are critical factors. These challenges may persist given the current limited visibility on long-term economic growth.

The past several years have been characterized by rising rates and emerging risks in global bond markets, after nearly a decade and a half of declining yields and low volatility in many developed markets. Below we explore why investors should consider allocating to emerging market (EM) bonds in the current market environment. View here for a PDF version of this blog.

1. EM Bonds May Help Insulate a Bond Portfolio from DM Risks

Developed markets rates have risen sharply since pandemic-era lows, and bond investors in these markets are on track for a third straight year of losses. Central banks have been aggressively hiking rates, after falling behind the curve on inflation. More recently, long term yields have begun to rise to levels not seen in 15 years, as the market begins to price in a “higher for longer” environment amid persistent inflation, still hot economic data and rising fiscal problems. An eventual Fed rate cut would likely occur when recessionary risks are high, which would likely be adverse for developed markets corporate bonds, which are still very tight. In other words, a turn in rates is not the turn in risk. In contrast, emerging market central banks generally got ahead of inflation in the early days following the pandemic. Inflation has been declining, and real rates in many markets remain attractive, which has provided support to local currencies along with rising commodity prices. The lack of irresponsible fiscal policy in EM stands in stark contrast to what is playing out in developed markets.

Given these diverging backdrops, it is not surprising that emerging markets bonds have been more resilient compared to both US and global investment grade aggregate bonds given the turmoil in those markets over the past few years. Given the long-term nature of the risks that continue to emanate from developed markets, we believe there is a strong case to allocate to EM bonds to make a bond portfolio more resilient.

EM Bonds Have Weathered the Storm Better

Source: Morningstar, as of 30/9/2023. US Agg is represented by the ICE BofA US Broad Market Index; Global Agg is represented by the ICE BofA Global Broad Market Index; EM Bonds is represented by 50% J.P. Morgan EMBI Global Diversified/50% J.P. Morgan GBI-EM Global Diversified.

2. Emerging Markets Have Lower Debt

Notwithstanding China’s more recent policy direction, emerging markets, in general, have moved much more quickly to increase interest rates compared to the U.S. and other developed market (DM) rates in order to stay ahead of inflation. For investors, this fundamental backdrop means less issuance and rolling over of debt, a favorable supply/demand dynamic that should help support EM bonds. In addition, if needed, EM central banks can hike interest rates without bankrupting the government (unlike the challenges we saw in the United Kingdom or even the US during its budget showdowns).

Debt Levels of EM Countries Are Relatively Attractive

General Government Gross Debt, % GDP

Source: VanEck Research; Bloomberg LP. Data as of October 2023.
Past performance is not indicative of future results. Please see important disclosures and definitions at the end of the blog.

3. EM Has Independent Central Banks

The primary focus of EM central banks is to focus on controlling inflation, and they do this by maintaining high real interest rates. For investors, the result has been not only higher nominal yields but higher real yields. The benefits to EM local currency investors are a more substantial level of income that is not eroded by the loss of purchasing power (through a potentially weaker currency). Additionally, if the central bank's actions are successful in controlling inflation, it can lead to a stronger and more stable economy.

EM Central Banks’ Focus on Inflation Means Higher Income for Investors

Real Policy Rates in EM and DM (%), 12m from now if current expectations for rates and inflation materialize

Source: VanEck Research; Bloomberg LP. Data as of 16 October, 2023.

Ex-Post Real Policy Rates in EM and DM, (%)

Source: VanEck Research; Bloomberg LP. Data as of October 2023.
Past performance is not indicative of future results. Please see important disclosures and definitions at the end of the blog.

The VanEck Emerging Markets Bond UCITS Fund is actively managed with the flexibility to invest in sovereign and corporate debt in hard and local-currency. The Fund’s broad universe and bottom-up, high active share approach drives the opportunity to potentially outperform the benchmark over a market cycle.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Bitcoin surged by the most since January, +28% in October, as digital assets outpaced the Nasdaq (-2%) for the second month in a row. Large-caps (+21%) again beat small-caps (+4%), even as the ETH-to-BTC ratio fell below the levels set during the 3AC liquidation in June 2022. Demand for on-chain leverage remained somewhat muted, with DeFi TVL growth merely keeping pace with the incremental rise in ETH prices, hardly an impressive feat. Rather, the activity came from the regulated space: flows into Bitcoin ETNs and ETFs globally reached $412M in the month compared to $630M total YTD, while the Chicago Mercantile Exchange (CME’s) share of Bitcoin futures activity reached record levels (23%). We attribute this surge to astute investors positioning themselves ahead of the impending wave of roughly a dozen or so spot Bitcoin ETFs gearing to launch on U.S. securities exchanges by mid-January 2024.

Source: Bloomberg, as of 10/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Amidst the sharp sell-off in U.S. government debt, Bitcoin’s performance is gaining newfound attention from potential clients who shunned digital assets a year ago. Significantly, the TLT (iShares 20+ Year Treasuries, mkt cap $40B) ETF has fallen further, peak-to-now, than Bitcoin. Even the AGG (iShares Core U.S. Bond, mkt cap $90B) ETF now has a negative return over 5 years! Foreign central banks have been selling U.S. Treasuries and buying gold. Clients are increasingly asking if Bitcoin will be next.

US taxpayers are navigating a complex web of potentially indirectly funding via deficit spending, both sides of the Israeli war through direct aid to Israel, tax incentives for prestigious universities fostering radical leftist ideologies, and recent sanctions relief to Iran coupled with aid to Gaza. Amidst this hypocrisy, a compelling narrative touting “Bitcoin as a safe haven” is taking shape, championed by figures such as BlackRock’s Larry Fink, PIMCO advisor Mohamed El-Erian, and legendary hedge fund investor Stanley Druckenmiller. As the implications of G7 over-indebtedness become increasingly apparent to the average citizen and to America’s growing number of adversaries, we anticipate Bitcoin will thrive. Our observations in October revealed that crypto again demonstrated its strongest price performance during Asian trading hours.

As a personal aside, it is a sad irony that part of Bitcoin’s initial allure to this Jewish portfolio manager was the idea that it might be easier to memorize a 12-word seed phrase rather than try to insert diamonds in my derriere in the case of an extermination attempt or another Jewish diaspora. And while it is true that after viewing Hamas’ barbaric butchery on October 7th, I wonder if my passphrase would probably be extricated by some novel form of torture, my hope remains: that by introducing a harder standard of energy-backed money to the world, Bitcoin might absorb some of the entropy that alienates so many amidst so many polarizing issues. Indeed, even as I debated one particularly irksome pro-Hamas opponent on X, I found myself hours later liking one of her tweets, which read: “Separating money and state. Forget all else, this is the mission of Bitcoin.” Whatever facts we disagree on, and there appears to be a greater number of them now, we both trust the next Bitcoin block in ten minutes. I find that agreement profoundly valuable right now.

Regrettably, many G7 administrations’ approach to tech innovation diverges significantly from certain fundamental principles core to free speech. President Biden's executive order on AI, reportedly influenced by his viewing of the Tom Cruise film 'Mission Impossible – Dead Reckoning Part I,' which features a sentient and rogue AI causing submarine havoc, seeks to regulate the act of solving mathematical problems in public, necessitating government registration beyond a certain threshold. In a parallel effort, Senator Elizabeth Warren is striving to introduce provisions into the essential National Defense Authorization Act that would subject crypto miners, validators, and wallet providers to the Bank Secrecy Act and KYC requirements, a proposition that many entities deem an impractical endeavor. Recent regulations in the EU, Canada, and the UK have placed considerable strain on the open internet, compelling platforms like Meta and others to curtail free news content and implement subscription models. Some of these regulations impose considerable fines for 'misinformation,” an infraction determined by diktat. Opposing such trends, many crypto investors look forward to a potential victory by pro-Bitcoin candidate Javier Milei in Argentina’s Presidential run-off on November 19th as a potential catalyst to remind the world that self-sovereign currencies can play a role at the sovereign level, too.

Layer 1 Smart Contract Platforms

Smart contract platform tokens rallied 11.1% in October, and the total market cap (ex Bitcoin) grew from $268B to $298B. The top performers were Solana (+79%) and Stacks (+30%), while the laggards for the month were Sui (-6%) and ATOM (+9%).

October SCP DAU Gains

Source: Artemis XYZ as of 10/31/2023 . Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Market Capitalization of SCPs

Source: Artemis XYZ as of 10/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The Ethereum ecosystem, including its L2 smart contract platforms, was again front and center in the October news cycle. On October 11, Ethereum saw its validator queue empty, indicating that there was no waiting line for new entities to stake ETH and become a validator for Ethereum. Although more than 14k validators joined the network in October, demand was insufficient to create a queue, and this is the first time since the Merge in September 2022 that this has occurred. Consequently, the Ethereum annualized staking rate reached its lowest level since the Merge on October 15th at 3.5% before rallying to end the month at 4.12% as prices rebounded.

Meanwhile, the focus on L2 technology is heating up as zero-knowledge (ZK) L2 Zk Scroll launched on October 17th and has amassed $10.5M in TVL at the time of writing. Scroll joins existing zero knowledge L2 players Polygon zkEVM, Starkware, and ZkSync Era. To many in the crypto space, zk Layer-2s are a massive improvement over existing optimistic L2s like Arbitrum, Optimism, and Base. Layer-2s that use zk technology post proofs of the transactions that occur on their L2 directly to Ethereum. By contrast, optimistic L2s post a batch of transactions to an L2 without proof of authenticity. As a result, another party can challenge the authenticity of optimistic L2 batches and force the L2 to reverse them if they are incorrect. The advantage of zk L2s is that they enable faster bridging back to Ethereum which can be accomplished in as little as 15 minutes. By contrast, optimistic L2s force a withdrawer to wait 7 days, the challenge period where someone can prove fraud, before they can move their assets off an L2. The tradeoff is that zk Layer-2s cost slightly more to users to transact upon due to the cost of posting large proofs to Ethereum. Long term, zk L2s believe transactions costs will be cheaper as the per-transaction cost will scale down with an increase in the volume of transactions.

Daily Active Users zk Layer-2s

Source: Artemis XYZ as of 10/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Another interesting development for zk Layer-2s was the news that popular blockchains Canto and Astar will launch new networks through Polygon’s network of zk chains. Polygon also saw the stand-up of its new token to replace the MATIC token called POL. The token is part of Polygon’s shift to a zk-centric network, and the POL token, unlike the garishly named MATIC, will have inflation, which will be 2% per year. According to the Polygon team, half of the inflation will be used to invest in projects building on Polygon, while the other half will be allocated towards securing the network through validator payments. At its core. Polygon’s new zk approach is a fascinating new direction that could prove sagacious depending upon adoption of its new approach. Like Ethereum, Polygon is moving away from simply being a transaction execution environment and becoming a settlement layer. Additionally, though Starkware does not have a live token, the Israeli team announced in October that they would delay token unlocks for the future token from 11/29/2023 until 4/15/2024. Clearly, Starkware will be releasing its token in the near future.

Not to be left behind, L2 Arbitrum came out with several announcements, including the anticipated launch of their Orbit project. This would allow Arbitrum to scale to more users by enabling developers to create L3 chains that settle their activity to Arbitrum. This would make Arbitrum into a settlement and execution layer similar to Ethereum. Arbitrum also announced its L3s would use Celestia as a data availability layer. Finally, Arbitrum concluded voting on its Short-Term Incentive Program (STIP) that allocates $50M worth of ARB tokens to various projects on Arbitrum’s chain. Big winners included Camelot, GMX, Dopex, Jones, and Galxe.

Other Interesting News Items:

Uniswap charging 0.15% on its frontend for trades.

dYdX launching an app chain in the Cosmos.

Shrapnel, a game on Arbitrum, raising $20M.

BNB launches a data storage competitor to Filecoin called Greenfield.

Polkadot V2 which increases the number of parachains (Polkadot L2s), improved tokenomics, and a lower cost of security for projects building on Polkadot.

Circle partnering with Family Mart in Taiwan to allow Family Mart customers to trade in their frequent shopper points for USDC on the BitoPro crypto exchange.

Frax stablecoin issuer expanding to offer access to T-Bills on chain through its v3 upgrade.

Solana (+79%)

Solana 30-Day MA of DEX Volumes vs TVL

Source: Artemis XYZ as of 10/31/2023.Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Solana’s SOL (79.3+%) token washed away almost a year of bearish vibes with a much-welcome rally in October. In the aftermath of FTX immolation in November 2022, SOL’s price nosedived from the mid-$30 range in early November 2022 to trade as low as $8 on December 29, 2022. After FTX collapsed, the chief backer of Solana was consigned to the glue factory, and with Solana facing a flood of token unlocks, it was assumed that Solana would be joining FTX in the afterlife. Solana was seemingly left with an ecosystem in shambles as many projects lost funding while others saw their on-chain activity dwindle below economic sustainability. As a result of the death of these ventures, individuals, and entities who used Solana pulled their stablecoins that were on Solana, and the total market cap of stablecoins fell from $1.85B on Jan 1, 2023, to a low of $1.44B on October 17, 2023.

Despite the flurry of bad news and languishing SOL price, Solana continued to innovate, as did projects in the Solana ecosystem. Interesting projects we like, including consumer-relevant applications such as Hivemapper, Render, and Helium, continue to attract users. Additionally, the Solana Foundation launched a programming interface for developers to create mobile phone applications for Solana called the Solana Mobile Stack, and Solana even launched its own phone. Coming into October, many investors were lukewarm on Solana due to the overhang of the FTX estate liquidating large chunks of tokens, investor token unlocks, and the popularity of Ethereum L2s that had TVLs surpass that of Solana’s.

In mid-October, however, it was noticed that the FTX estate had staked 5.5M (out of the 58.9M they hold or will receive) Solana tokens worth $122M that many feared would be sold to pay be creditors. The positive news for Solana continued from there with the core Solana project called Squads, a multi-sig, inking a $5.7M VC raise, ensuring it ample runway to continue to provide its pivotal services on Solana. Activity for Solana also significantly picked up as usership increased, surging Solana fees by more than 18%. This uptick in activity helped drive Solana DeFi TVL to advance by 6%. At the same time, the narrative for yield generation from on-chain activity, including MEV using Solana liquid staking tokens (LSTs), also accelerated. Popular liquid staking and MEV facilitator Jito was the chief beneficiary of SOL LSTs, attracting a 70% increase in SOL. Another positive development for Solana in October included the introduction of an encrypted token standard that allows anyone to obscure balances of these tokens from other users. Given that Solana’s ecosystem is still recovering, it was also encouraging to see Solana Labs introduce a new incubator program for nascent Solana projects.

For more on the potential of Solana, please see , including a financial model that anticipates up to $8B in revenues to SOL token-holders by 2030.

Total SOL Deposited at Jito

Source: Dune as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Stacks (+34%)

Stacks, a smart contract platform that rests upon the Bitcoin network and utilizes BTC, was the other largest winner in October, gaining (+34%). Part of this is undoubtedly because it is a leveraged play to the price of BTC, which had a blockbuster month (+24%), outperforming Ethereum. Curiously, activity on Stacks did not change much from September, measured by DEX volumes, daily transactions, or daily active addresses. However, while daily fees did increase by 60%, the average daily fee for October was only $200. TVL did grow meaningfully on Stacks as it rose from $13.8M at the beginning of the month to $25M as of October 27. Positive news included Digital asset custody firm Copper stating that it would integrate support for Stacks for Copper customers.

Part of STX’s price fortune stems from the misfortunes of Stack’s competitors. In mid-October, a security researcher for the Lightning Network announced he had uncovered an attack vector for the Lightning Network that could cause the network to be halted. As a result, the researcher named Antoine Riard declared he would stop his work on the Lightning Network. However, others contend that the Lighting Network is safe, and as of October 27, BTC locked on the Lightning Network was at 5,920, which was up from 4,420 at the start of October.

Sui (-6%)

Sui DAUs vs TVL

Source: Artemis XYZ as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Sui (-6%), despite initial early potential, has continued to languish as it fails to attract developers and users to its ecosystem. Compared to the month of September, the daily active users on Sui have fallen by (-55%). Though DEX volumes have increased by 240% and TVL has jumped by 87%, the increase in activity is overshadowed by high rewards inflation and investor token unlocks. The increase in floating tokens was 7.3% just for the month of October, as more than 67M tokens were added to the supply. This brings the total number of tokens to 906M. However, the token dilution becomes worse as time progresses due to an aggressive unlock schedule for early investors and team members. By this time next year, there will be 2.7B Sui tokens in circulation. Of that, around 1.05B will be in the hands of early investors of Sui. Facing a 3x supply overhang over the next year is a substantial burden that anyone token holder must reconcile no matter how vibrant Sui’s ecosystem becomes. In October, the token dilution issue came to a head as South Korean regulators accused the Sui Foundation of manipulating the supply of tokens. Though Sui denies the rumors of doing anything illegal, the South Korean Financial Supervisory Service announced that it would be launching an investigation into the distribution of the Sui token.

Amid the negative news, Sui awarded over $1M in grants to programs building in its ecosystem. Additionally, they announced a new $51.3M ecosystem fund to support DeFi projects building on Sui. This development is particularly important given the lack of adoption by developers. Sui’s is programmed using Move, which is the same language as Aptos and very similar, because Move is based on Rust, to the language that Solana employs. The result is that Sui is directly competing with those other two ecosystems for developers. Solana, as an incumbent with a strong community identity, continues to maintain its developer share, but Sui could potentially catch up if its ecosystem stirs development interest.

Sui Developer Market Share - SCP Monolithic Chains

Source: Artemis XYZ as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

ATOM (+9%)

Despite a mid-month rally alongside the rest of the SCP market, ATOM ended the month up only (+9%) amid continued concerns with its business model and how it will capture revenue from its ecosystem’s success. The key issue going forward is going to be the willingness of projects to come into the ATOM Economic Zone (AEZ) to lease security from ATOM’s Cosmos Hub blockchain. Though some important projects will be using ATOM for security, including Neutron, Stride, and Noble (eventually), many of the most vibrant projects in the Cosmos contend they will not use the Cosmos Hub. Though lack of Hub business success is not something new in October, it is a serious condition that is limiting Cosmos and could prove terminal to ATOM if things do not improve. Though the Cosmos ecosystem attracts the third most developers in crypto behind Polkadot and Ethereum, those figures are irrelevant to the Cosmos ATOM token until the Cosmos Hub is able to get other projects aligned with its needs. Another longstanding issue weighing on the ATOM’s price is concern over inflation. The ATOM token inflation rate is very high at 16.5% per year, and this is one of the highest among SCPs. Until these issues are resolved, ATOM will have great difficulty matching the performance of the Cosmos ecosystem or competitor blockchains.

Despite the negative news for ATOM, there are some positive trends. Surprisingly, Cosmos had one of the best gains of users in October compared to September, with (+90%) in daily active users. Additionally, the Blockworks team and others are working on proposals to change ATOM’s tokenomics. These plans include focusing the Cosmos Hub’s business approach to other blockchains and reducing inflation of the Cosmos Hub. At the same time, two important projects launched in the Cosmos in October, and they could attract more interest in the Cosmos Hub. Celestia, the first of the new Data Availability blockchains, and dYdX, the dominant derivative DEX, both launched their mainets in October. Finally, earlier in the month, the Cosmos chain Noble launched native USDC in the Cosmos which will allow anyone to mint native USDC through the Noble chain and transport across the 64 active Cosmos chains.

DeFi Volume Rising with the ‘Uptober’ Rally

DEX Volume by Chain

Source: DeFi Llama as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

The MarketVector Decentralized Finance Leaders index (MVDFLE) recorded a 5.8% increase during the month, underperforming the rally in Bitcoin and Ethereum. Among the index components, UNI, MKR, and CRV underperformed significantly, returning -9%, -12%, and -9%, respectively. In contrast, AAVE, RUNE, and LDO rallied 19%, 47%, and 5%.

The underperformance of DeFi as a whole is not surprising, considering the rally in digital assets was led by Bitcoin, and DeFi tokens typically trade better when ETH leads the market. Notably, the top-performing tokens in the index have established substantial dominance in their respective areas of the crypto market, with Aave being the largest lending market, Lido a clear winner in ETH liquid staking, and Thorchain (RUNE) as the dominant decentralized exchange for native BTC and ETH swaps. Decentralized exchange (DEX) volume and the total value locked (TVL) in DeFi experienced significant reversals this month, with DeFi trading volume jumping 26% to $55.7 billion and the TVL across DeFi rising 8% to $41.7 billion. Arbitrum, Thorchain, and Solana experienced the largest surges in DEX volume, rising 53%, 146%, and 115%, respectively. The relative outperformance in DEX volumes across these chains suggests that they are becoming the preferred chains for trading digital assets outside of Ethereum.

Thorchain (RUNE) performed exceptionally well this month due to its dominant position as the most decentralized protocol for swapping native BTC and ETH. The decentralized exchange saw its volume more than double from September to $2.46 billion as investors flocked to acquire Bitcoin, anticipating the tailwinds from a potential U.S. spot Bitcoin ETF and the upcoming Bitcoin halving. While Thorchain’s decentralization comes with a few regulatory concerns, such as the FTX exploiter using the protocol to exchange stolen funds, investors seemed ultimately unconcerned as they rushed to buy RUNE this month.

AAVE Monthly Revenue

Source: Token Terminal as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Aave Surges on Increased Demand for Leverage and Rising Revenue

Aave outperformance this month was driven by a short squeeze on centralized exchanges that led to the liquidation of over $2 million in short positions within a span of three days, alongside positive fundamental growth. Moreover, investors may be strategically positioning themselves in AAVE due to several fundamental factors favoring the protocol. With the recent upsurge in crypto market volatility, Aave is poised to bolster its daily revenue through the liquidation of overleveraged users and the heightened demand for stablecoins, often signaling the onset of a cryptocurrency bull market.

As the predominant lending protocol in DeFi, the borrow rate for USDC on Aave serves as a valuable indicator of the market's appetite for leverage. Users typically deposit their favorite digital assets as collateral and borrow USDC to increase their exposure. During the bear market, the borrow rate for USDC on Aave remained at approximately 4%. However, it has surged to 12% on the V3 market and 19% on V2, signifying that on-chain investors are leveraging their exposure to volatile digital assets in anticipation of a bull market. Aave's daily revenue has surged in tandem with higher borrow rates. According to Token Terminal, Aave's monthly revenue has more than doubled since the start of the year, rising to $1.8 million this month.

Uniswap Labs Implements Frontend Fee

Uniswap Labs Interface Fee

Source: The Block as of 10/30/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

In the middle of the month, Uniswap Labs made the decision to impose a 0.15% swap fee on transactions conducted via their Uniswap front end and within the Uniswap Wallet. This fee applies to swaps involving ETH, USDC, WETH, USDT, DAI, WBTC, agEUR, GUSD, LUSD, EUROC, and XSGD as both the input and output tokens, excluding swaps between stablecoins. Since its introduction, the frontend has collected $631k in fees, indicating a potential annual revenue of over $15 million for Uniswap Labs. This move has generated discontent within the community, as some perceive it as a signal that Uniswap Labs prioritizes enhancing the value of their equity over promoting value accrual to the Uniswap token. The reason why Uniswap Labs could want to do this despite owning a large amount of UNI is that driving value to the token could be accompanied with regulatory scrutiny if it leads to the UNI token being deemed an unregistered security. The community's dissatisfaction is rooted in a prolonged debate spanning several years regarding the activation of the "fee switch" to generate revenue from liquidity provider earnings on the Uniswap protocol. Back in June, the Uniswap DAO nearly voted to activate the fee switch, but the vote ultimately failed due to regulatory apprehensions from venture capital teams holding significant UNI tokens and Uniswap Labs equity. The contentious nature of this debate contributed to the underperformance of the UNI token during crypto’s rally in October.

$FRAX Market Capitalization

Source: Coingecko as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

sFRAX: Bringing Real World Asset Yield to the Frax Protocol

Frax Finance is following in the footsteps of MakerDAO by introducing a staking product for their FRAX stablecoin, known as sFRAX. Utilizing the non-profit entity established by the DAO, FinResPBC, the Frax DAO can now custody Real World Assets (RWAs) off-chain and offer users a yield on sFRAX just below the Interest Rate on Reserve Balances (IORB). Currently, sFRAX has seen a decent amount of adoption, with the amount of FRAX deposited surpassing 44 million. While the strong early growth is a good sign for sFRAX, it is still only a fraction of the amount that Maker has seen deposited into sDAI, which boosted DAI’s market capitalization by 20% and stands today at around $1.5 billion in deposits.

While sFRAX shares similarities with sDAI, there are key distinctions. Notably, MakerDAO's governance dictates the yield earned by sDAI holders via the Enhanced DAI Savings Rate (DSR), which decreases the effective yield for depositors as the DSR utilization increases. Currently, Maker's DSR has a utilization rate of around 30%, meaning nearly one-third of all DAI is deposited in the DSR and receiving yield payouts from MakerDAO. However, once the utilization rate reaches 35%, the yield for depositors will decline to 4.32% and remain at that level even if utilization decreases back to below 35%. In contrast, the yield for sFRAX depositors is solely based on the IORB rate, adjusted slightly lower (0.05%-0.1%) to account for fees related to capital movement between RWAs and on-chain assets. Notably, this ensures that the yield for sFRAX depositors remains unaffected by the actions of other investors but only by fluctuations in short-term interest rates. Consequently, it's likely that sFRAX will become a more capital-efficient means of capturing yield over the long term compared to sDAI. If Maker's rates decrease and the benefits of switching from sDAI to sFRAX become more apparent, we may witness a transition of investors towards holding sFRAX.

Blur Captures Market Share as NFT Volume Stagnates

Monthly NFT Volume Stagnates While Crypto Rallies

Source: Cryptoslam as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

NFT volume saw a small but insignificant increase this month, rising only $7 million to $306 million. Despite the poor volume of the overall NFT market, Blur made strides in market share, with volume this month growing to $132 million, excluding wash sales and its share of the Ethereum NFT exchange marketplace rising to over 60% from 55%. The rise in volume on Blur was influenced by the upcoming end of season 2 farming rewards on November 20th, which will see over 300 million Blur airdropped to users of the protocol. The airdrop gained significant value this month as the price of BLUR rallied 31% on the announcement of a governance proposal to enable a fee on the exchange’s volume. After some discussion by the community, it appears that the DAO will likely vote on whether or not to enable a 0.5% fee on volume. Additionally, the fee would likely be accompanied by a locking mechanism, which would help to sink many of the tokens that will be distributed in the season 2 airdrop and dissuade farmers from dumping them on the market. Those who have voiced their opinions against the proposal have indicated that it could lead to Blur losing its dominant market share, while community members in support have highlighted that there is no utility or value accrual to BLUR and progress on this front needs to be made to support the token valuation. After BLUR’s strong rally this month, it would appear that the market agrees with the latter. For context, if this fee had been applied to both Blur’s exchange and lending volume over the last month, it would have generated just under $2 million in cash flow for the DAO, which could then be used for token buybacks and distributed to owners who lock their tokens.

SoFi: Friend.Tech Maintains Market Dominance as Whale Dumps Keys and Top Competitor Suffers Exploit

Volume Share Among SoFi Platforms

Source: DUNE: @Cryptokoryo as of 10/29/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Friend.Tech continued to capture the majority of Social Finance (SoFi) volume this month while competitors suffered from exploits and lack of usership. At the start of the month, StarsArena was exploited for ~$3 million AVAX due to a re-entrancy bug. However, the team was able to recoup the funds from the exploiter (minus a 10% whitehat bounty) and relaunch the platform by mid-month. Upon relaunch, StarsArena was able to gain back some market share from Friend.Tech, but it has consistently receded since and never exceeded its all-time high market share of volume that it achieved on its initial launch.

In previous recaps, we have mentioned how the illiquidity of Friend.Tech keys will lead to substantial price movements as users exit the protocol. This was made evident this month when one of the top accounts on the platform, Vombatus.eth, dumped 176 of their own keys for 851 ETH, or about $1.5 million. This sent the price of Vombatus.eth keys from around 8.3 ETH each to 1.7 ETH, an 80% drawdown. We believe that there is a high possibility that the same heightened volatility that initially attracted users to Friend.Tech could also catalyze their exit as users look to capitalize on the massive appreciation many of the Friend.Tech keys have experienced. As it stands today, Friend.Tech has been able to onboard 832k unique buyers who have traded over $23 million of keys on the protocol. Friend.Tech’s continued dominance in the SoFi market suggests that its ability to capture a large number of users early and promises of a future airdrop have provided a strong enough moat to retain users at least until the airdrop has commenced.

Gaming and Metaverse Tokens Outperform Despite Low Adoption

The MarketVector Media and Entertainment Leaders index (MVMELE) finished the month up 14.8%, slightly underperforming Bitcoin but outperforming ETH by a considerable margin as investors speculated on the low market capitalization tokens, which can provide higher upside in a bull market rally. Of the index components, GALA, AXS, and MANA received the most attention, returning 32%, 17%, and 16%, respectively. APE and SAND underperformed the rest of the index, returning only 5.6% and 9% throughout the month. While GALA and MANA had no clear catalysts this month to explain their performance, the AXS rally was likely supported by Game Jam 2023, an event where independent game developers were invited to create and submit games to be included in the Axie Infinity universe. Axie Infinity currently attracts about 300k monthly active players, which is still only a fraction of the ~3 million monthly active users it boasted in the bull market before being hacked. While the outperformance of metaverse and gaming tokens was impressive, keep in mind that GALA, AXS, and MANA are still down from their peaks of 98%, 96%, and 93%, respectively.

Web3 Gaming Investment

Source: DappRadar as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

The outperformance of metaverse and gaming tokens indicates that investors still believe in the potential of a blockchain-based metaverse in the future, which is supported by a report from DappRadar indicating that $600m in investment flowed into Web3 gaming in Q3. However, the Web3 gaming space has continued to see lackluster adoption throughout the bear market as multiple AAA games were promised in 2023 but have not yet been released, such as Illuvium and Shrapnel. Additionally, the top metaverse platforms continue to see low monthly usership, with The Sandbox and Decentraland only attracting 12.5k and 3.2k unique users in October. With this in mind, it would appear that the outperformance was likely due to traders speculating ahead of a potential bull market run rather than any real fundamental change in value. Gaming and metaverse tokens have historically been highly speculative, and since the move was not supported by any large fundamental improvements in the tokenomics of these projects, we think it is likely they will underperform during consolidation periods with brief spikes in outperformance until greater adoption is seen and clear winners emerge.

Circle Partners with FamilyMart and BitoGroup to launch “Points-to-Crypto” in Taiwan

USDC Market Capitalization

Source: Coingecko as of 10/31/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Near the end of the month, Circle (the company that issues USDC) announced a partnership with the second-largest convenience store chain in Taiwan, FamilyMart, and the leading cryptocurrency exchange in Taiwan BitoGroup, to provide FamilyMart customers with the ability to exchange loyalty points for USDC. According to the announcement, Taiwan has one of the highest densities of convenience stores, making loyalty points at these shops extremely significant for the daily consumer. By providing the ability to redeem loyalty points for USDC, consumers will be able to avoid the depreciation of loyalty points and use their rewards to purchase a much wider range of goods as they are no longer limited to accessing the value of their points purely through items sold by FamilyMart. Additionally, the partnership should help bolster the circulating supply of USDC, which has been hammered during the bear market and is down 55% from the all-time high. Circle previously announced a partnership with Grab App, a super-app in Southeast Asia with over 130 million users. The latest partnership with FamilyMart highlights Circle’s continued effort to get their stablecoin integrated with more retail-facing applications, as well as the growing adoption of Web3 technology in Asia.

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• In this note, we model a scenario in which Solana is the first blockchain to host an application that onboards 100M+ users.
• We assume SOL monetizes at only 20% of ETH's take rate and achieves less than half of ETH's market shares due to a fundamental difference in community philosophy.
• We see a credible path to $8B in revenues for SOL token holders by 2030.

The purpose of smart contract platforms (SCPs) is to host applications that offer their users the ability to engage in efficient, uncensorable economic activity while minimizing rent extraction on those economic activities by third parties. While many blockchains exist today, the user base of all blockchains is tiny compared to those who engage in commerce off-chain. Roughly 5.5M unique addresses are active each day on SCPs, and around 44M each month. However, it is likely these figures dramatically overstate usership because many users control multiple addresses. Even if we take them at face value, these figures compare poorly to the 2B users who interact with Facebook each day and the 431M who use PayPal every month. The reason why blockchain adoption hasn't been faster already is because blockchains are clunky to use, and there is little to do on the chain besides exchange value and speculation. For crypto to achieve widespread adoption and grow its $1.3T market cap, it needs to have a so-what for people and businesses who are not decentralization maxis or libertarian zealots. It needs a killer application. And the chain that hosts that killer application stands to benefit immensely from the activity generated by that app. In this note, we model a scenario in which Solana is the first blockchain to host a single application that onboards 100M+ users.

Monthly Active Users of SCPs

Source: Token Terminal, Dune, as of 10/25/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Solana's potential begins with its founding team's success in blending radical experimentation with applied science to monumentally improve blockchain scaling. While other chains have chosen scaling paths that cleverly circumnavigate the limitations of distributed ledgers, Solana has instead chosen to push to the limits of technological feasibility problems and work backward from there. The Ethereum ecosystem and many others have chosen a modular vision where different blockchains specialize in the core functions of a layer 1 chain. On the other hand, Solana has plowed ahead, trying to wring greater transaction throughput by optimizing every component of its own blockchain to be hyper-efficient. Consequently, Solana is vastly more capable than any of its legacy competitors regarding blockchain processing capabilities. Parallel to this, but much more importantly, Solana has translated its pioneering spirit into an ecosystem philosophy of risk-taking and techno-optimism. Solana has spawned a variety of fascinating experiments that include blockchain-optimized mobile phones, NFTs that contain applications, and consumer-focused products like decentralized mapping and automobile data collection. More so than any other ecosystem, people building projects in Solana are creating things that may provide a tangible impact on everyday life.

Solana's Approach: Usability

The probability of a blockchain network hosting the next “killer apps” hinges upon that chain's ability to make using that application fast, convenient, and accessible. The more capable the blockchain, the better the environment for a user. The key question is measuring blockchain ability and understanding how that translates into useability. A popular metric, transactions per second (TPS), is an inadequate measurement that is easily manipulated. Realistically, blockchain teams can improve this metric by many tricks, including changing the amount of data each transaction contains, forgoing the ordering of transactions, and limiting what parts of a ledger a transaction can change. In fact, the best metric to truly measure blockchain capacity is not transactions per second (TPS) but is instead data throughput.

Data throughput involves a blockchain ingesting, processing, and ordering data and then agreeing on that data's impact on the blockchain's ledger. Data throughput is determined by measuring the amount of data that can be received and applied by a blockchain over a given time period. The more data a blockchain can translate into ledger updates over a time increment, the better. As it stands, Solana's data throughput exceeds that of any other blockchain in existence. In fact, Solana's data capacity exceeds that of most planned blockchains, and Solana's next significant software upgrade called the Firedancer upgrade, promises to exceed Solana's current capacity by a factor of 10. While we do not pretend to know how much data the next killer application's blockchain needs to ingest and process, we imagine that 100M+ users doing anything on-chain will push blockchain scalability to its limits.

Data Throughput Comparisons MB/S

Source: Frictionless Capital, SCP Home Pages as of 10/25/2023.

Solana translates this data throughput capability into solving problems that users care about. Solana enables quicker feedback to the user than most other chains because it offers continuous processing of transactions. For example, Ethereum works by pooling incoming transactions from users in essentially a waiting room called the mempool. Ethereum validators (block builders in the new paradigm) then pick transactions from the pool based on the price offered by each transaction and order them. Every 12 seconds, transactions are then executed, and the block containing the transactions is beamed to the rest of the Ethereum network. Consequently, Ethereum processes transactions at discrete intervals. This is a substantially slower way of processing transactions than Solana's which leads to longer wait times for the user. On Ethereum, users must wait for this entire process to unfold before they know their transaction is complete. Often, this is measured in minutes. Solana, by contrast, begins working on processing the transaction instantly, and the turnaround is approximately 2 seconds.

Apps on Solana

To make the user experience even better, Solana has also created a novel feature called Local Fee Markets. If a blockchain is a data pipeline from users to the blockchain's ledger, Solana's Local Fee Markets are essentially internal sub-pipelines that allow information to flow from different users to multiple parts of the ledger simultaneously. This solves a core problem of Ethereum and other blockchains, as overuse of one application on Ethereum's pipeline slows down all other applications. For example, if many users are trying to mint an NFT on Ethereum, the resulting congestion prevents other users from borrowing on AAVE. In the context of a killer application, users need to be able to consistently interact with the blockchain. By contrast, Solana can segment those different pipelines using Local Fee Markets to charge different prices based on demand. This allows for many applications to have access to Solana even when one application is experiencing heavy usage. This is particularly important because the functionality of a killer application could depend upon simultaneous interaction with many different applications. Additionally, being able to adjust local fee markets to price different types of transactions may be the key to Solana adjusting its price based on the use case. This may allow Solana to price transactions differently based on each's economic value. Local Fee Markets may give the killer application developers greater precision in assessing its costs.

Solana vs. Ethereum: Contrasting Philosophies

Solana was built by Qualcomm engineers who applied their expertise in enhancing mobile network capacity to build a highly performant blockchain. The foundational principle of the Solana team is to build a network that assumes consumer-grade computing power grows with Moore's Law and networking bandwidth expands alongside it. As a result, Solana is engineered to take advantage of hardware advancements more directly than competitors.

We see this as the mindset of optimism that believes in a future of abundance and progress. The core belief of the Solana team is that blockchains should make blockspace, or the amount of data that fits onto a chain in a time frame, very inexpensive. In their view, this unlocks the ability of software engineers and entrepreneurs to cheaply test new use cases for blockchain. This sharply contrasts with the view that Ethereum has evolved its business from that of selling cheap blockspace every day to that peddling expensive blockspace that secures consumer-facing blockchains. In the Ethereum paradigm, success hinges upon ETH being the principal (and only) collateral to secure all blockchains. The initial pitch for Solana was for it to become a “Decentralized Nasdaq.” Though that narrative still has potential, the launch of fascinating non-financial consumer applications such as Hivemapper, Render, and Helium has expanded the perception of Solana's capabilities.

The Solana team, to their credit, has been open-minded in use cases for Solana's ground-breaking technology. They've attempted to bring blockchain to the mobile phone through their  or Solana Mobile Stack, which allows developers to create blockchain applications for cell phones. Solana's experimentation has even led them to create their own  that is optimized to use blockchain. Though Solana Mobile was criticized as a distraction from Solana's core mission, It demonstrates Solana's desire to solve basic core user problems. It is this dedication to the consumer that has helped Solana ink partnerships with Shopify, Visa, and Google to explore new use cases for Solana and boost its ecosystem.

Solana Developer Market Share – SCP Monolithic Chains

Solana Developer Share. Source: Artemis XYZ as of 10/25/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Solana's Cost vs. Revenue Challenge

Solana's focus on cheap blockspace, experimentation, and vanguard technology has not been without drawbacks. While providing cheap blockspace encourages ecosystem growth by giving projects and users a nearly costless (to them) sandbox, it is important to remember that supplying that blockspace still has costs. Though Solana has generated $1.26M in revenue fees over the previous 30 days, Solana's cost of securing its blockchain by paying validators using SOL inflation was $52.78M over the same time period. While Solana is not a business that is in danger of collapsing due to this lack of “profitability” in the near term, long-term the cost of security must be met by organic SOL demand to use the Solana blockchain. This is because Solana validators sell some portion of their token inflation to cover their overhead costs, which include hardware, labor, and connectivity costs (we omit voting costs in this calculation).

Solana Revenue Fees vs. Expenses

Source: Token Terminal as of 10/25/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

We estimate that the total non-blockchain costs for running all of Solana’s 1,977 validator nodes is ~$11.8M per year even before labor is included. As a result, we ballpark this figure as the minimum estimate of Solana’s yearly SOL token sell pressure. On the revenue side, half of the revenue fees, $7.56M, are burned and this represents buy pressure of the SOL token (the other half of tokens are remitted to validators and stakers and are offset by potential selling). Applying this simplified summary of buy pressure and sell pressure, we calculate a net imbalance of -$4.24M which represents buy pressure that has to offset collective validator sell pressure. In practice, these token sales by Solana validators has been offset with capital from speculators. Thus, until fee revenue of Solana improves, Solana is an ecosystem whose ability to function in its current state depends upon the consistent introduction of new speculative capital.

Long-term pricing of Solana's blockspace and how much it costs to utilize Solana is another thorny issue. The chief problem of a monolithic chain like Solana is that it is difficult to extract value from users and remit that back to token holders. This paradigm exists because Solana prices its transactions based on the required compute, total demand for compute, and congestion of the area where that compute is applied. While resource pricing is economically logical from the standpoint of pricing the Solana network's ability to allocate its network resources, it is illogical from the standpoint of pricing various user actions effectively.

For example, sending a trade order to the Chicago Mercantile Exchange (CME) is essentially free. However, the CME and other similar exchanges charge that trader a fee when that trade executes and may even change the amount charged based upon whether that trade executes after it “actively takes” another order or another order “takes it.” Likewise, with something like Twitter, while it costs nothing to make a post if a user chooses to promote that post or target other users with that post, it will cost a lot. In a vacuum, this pricing, while suboptimal from a value extraction standpoint, is irrelevant. However, in the context of there being tens of thousands of blockchains, each tailored to a specific use case, each of these blockchains may be able to capture value more effectively for token holders. This may threaten the economic sustainability of Solana if weakening SOL prices cause Solana's security budget to fall below its needs. Likewise, from a resource's perspective, a blockchain will want to make sure to allocate its finite resources to economically beneficial activities. If resources are priced inadequately, a blockchain could become saturated with economically detrimental activities regardless of if those activities are segmented by Solana's Local Fee Markets. This has already  and resulted in more disruption of more legitimate use cases. Likewise, while Solana is performing hundreds of transactions per second, many of these are low- spamming the network. Through Local Fees Markets may mitigate the issue, it is yet to be seen if this improvement will be sufficiently adaptable if Solana's usage meaningfully accelerates.

We give Solana and its team immense credit for their vision and desire to experiment, but its architecture has led to undesirable outcomes that have affected Solana's technical stability. While Solana has had 100% uptime since March 2023 after a series of important network upgrades, previous to that, it has experienced unpredictable downtimes that completely halted network function. Between January 2022 and February 2023, Solana had occasions in 7 out of those 13 months with outages. The most recent of these outages, on February 25, 2023, lasted nearly 19 hours. The core issue of this outage and others in the past stems from the fact that Solana is running an experimental system. There is no formal verification of the Solana consensus mechanism, nor is there the ability to predict future failures in Solana's design because of the colossal data volumes that the system processes. Though Solana has implemented numerous improvements to mitigate past issues, Solana's design may make it impossible to understand future complications until they happen. As a result, the Solana team still considers the chain to be in “Beta” because future network failures could result from unforeseen causes. And because of the complexity of Solana and the amount of data it processes, resolving these issues might take substantial periods of time to fix.

Clearly, this dynamic is unacceptable to serious financial and non-financial businesses that may want to deploy to Solana. The unpredictability of uptime is partly responsible for Solana's low TVL (total valued locked) in decentralized finance relative to its peers. While the Solana team has implemented what they believe are important fixes, network fragility will remain an issue for the foreseeable future, and the roll-out of the new design Firedancer may even increase the potential for irreconcilable problems.

SCL Weekly Active Developer Market Share

Source: Artemis XYZ as of 10/25/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Finally, we take some issue with Solana's ability to attract developers to its ecosystem. Because of the complexities of Solana's virtual machine (SVM) and Solana's complex design, creating applications on Solana is a challenging task. In fact, building is difficult for developers, that the founder of Solana Anatoly has likened it to “.” This is partly due to the need for Solana developers to be familiar with Rust, a language with  active developers, compared to Ethereum which can draw from the  JavaScript developers. Though Solana has made great strides in creating the tooling to make development simpler, its high bar for programming proficiency has resulted in Solana accounting for roughly 6-7% of weekly active crypto developers over the last 18 months. While this consistent share is remarkable given that Solana lost one of its biggest backers in FTX/Alameda in November 2022, it needs to increase its total developer count as well as its market share of developers to increase the probability of hosting the tomorrow's blockbuster application. Though it may be likely that the average Solana developer is better than the average Polkadot (DOT) developer, building a widely adopted consumer application may be analogous to the Infinite Monkey Theorem (IFM). In the IFM, the greater the number of monkeys one employs randomly hitting keys on a typewriter, the shorter the time (measured in eons) frame it takes for them to randomly write out the complete works of William Shakespeare. In the context of building an application that brings the next 100M users to the blockchain, the more developers working on the problem, the higher the likelihood of one of them randomly banging out the next Instagram.

Solana Valuation Scenarios Overview by 2030

Source: VanEck Research as of Oct 25th 2023. Past performance is no guarantee of future results. The information, valuation scenarios and price targets presented on Solana in this blog are not intended as financial advice or any call to action, a recommendation to buy or sell Solana, or as a projection of how Solana will perform in the future. Actual future performance of Solana is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance of Solana. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

We apply VanEck's standardized valuation framework to Solana to achieve a token valuation of $335 in our 2030 Base. The estimate is based upon projecting a terminal valuation multiple on Solana's SOL tokens derived from a predicted real rate of return. This real rate of return is calculated from estimated cash flow remittance to SOL token holders. This multiple is then applied to the terminal year's FCF (free cash flow) to the token and divided by the expected number of tokens in the terminal year.

Source: VanEck Research as of Oct 25th 2023. Past performance is no guarantee of future results. The information, valuation scenarios and price targets presented on Solana in this blog are not intended as financial advice or any call to action, a recommendation to buy or sell Solana, or as a projection of how Solana will perform in the future. Actual future performance of Solana is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance of Solana. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

More specifically, on revenues and cashflows, our framework begins by examining the different revenue items for Solana. First is a take rate on end market activity. We begin this exercise by identifying end markets that will utilize public blockchains, such as Ethereum and Solana. The three main categories for this are Finance, Banking and Payments (FBP), Metaverse and Gaming (MG), and Infrastructure (I). Depending upon the scenario, we then assume a certain portion of businesses and their revenues will be derived from blockchain activities or employ blockchain in some capacity to find customers, create new products, reduce costs, or simplify back-end business functions. Since public blockchains are analogous to Web 2.0 platforms like Amazon, the Apple App Store, and Uber, we then suppose that public blockchains will have an effective take rate of the GMV of their end markets' revenues. In our Base Case, we find a take rate that is 1/5th of the Ethereum equivalent take rate on blockchain activity. Thus, the total revenue to Solana from end-market transactions is $2.88B. Additionally, we also factor in MEV as a revenue item that is effectively waterfalled from trader entities to validators to token holders. We calculate MEV by estimating the total number of assets locked in Solana DeFi and multiply it by an annual take rate. Our Base Case finds revenue from MEV in 2030 to be $5.99B. Once we have the raw revenue figures, we deduct an assumed tax rate as well as an approximation of the validators' cost to the ecosystem.

Base Case 2030 Transaction Revenue Estimate Assumptions

Source: VanEck Research as of Oct 2023. Past performance is no guarantee of future results. The information, valuation scenarios and price targets presented on Solana in this blog are not intended as financial advice or any call to action, a recommendation to buy or sell Solana, or as a projection of how Solana will perform in the future. Actual future performance of Solana is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance of Solana. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

Despite its potential, we believe Solana's likelihood of hosting the majority of the world's crypto transactions by 2030 is lower than Ethereum's. While Solana's network and execution engine enables higher throughput and unlock greater potential, it lacks adoption momentum by the majority of crypto users and developers. Solana currently retains a substantially lower share of crypto TVL $408M out of $46B, and a similarly small percentage of daily active users, with 184K out of 5.5M. We also believe that new developers entering the space during widespread public blockchains may not be wedded to existing ecosystems nor be decentralization maximalists. As a result, future inbound new developers may become enamored with the next generation of blockchains that offer novel developer frameworks, features, and capabilities, as has been the case in prior crypto cycles As a result, in our base case, we see Solana adoption nearing 30% - a substantial jump from today's figures, but far lower than Ethereum's base case of 70%. This comparison is apt due to the blackhole-like effect of the Ethereum ecosystem growth by swallowing and absorbing ideas while increasing its share of blockchain developers. For context, our $11.8k price target for Ethereum was based on the ETH network achieving a 70% market share of value transmitted across open-source blockchains. Were Solana to avoid Ethereum's event horizon and achieve Ethereum-like dominance, our bull case reveals $51.8B in revenues and a $3,211 price target in 2030.

Source: Space.com as of Oct 2023.

In terms of value capture of end-market revenues that employ blockchain, we believe Solana has less potential for value capture than Ethereum. In our base case, we believe that Solana's value capture of GMV will be 20% of that of Ethereum's. We make this assertion based upon the simplicity of Solana's value capture stack and the philosophical assertions of the founder Anatoly Yakovenko that favor abundance over scarcity. The result of abundance over scarcity means that blockspace will remain inexpensive, and the result will be extremely cheap transactions. Putting this into mathematical terms, this ballparks Solana's “take rate” on GMV at 0.60% of FBP, 2.00% of MSG, and 1.00% of I.

Average Fee Per Transaction Last 30 Days

Source: Artemis XYZ as of October 25th, 2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The key question is, “given its low transaction pricing, how will Solana make money over the long term?” Currently, transaction prices are so minuscule that it will take an immense amount of activity to bring up Solana's revenue figures. In our base model, we assume roughly 600B in yearly transactions by 2030, and we deduce that transaction figure from an expectation of 534M monthly active users given Solana's market share of end markets and an assumption of the number of transactions each user will perform. While MEV will be the most important value capture mechanism of Solana, accounting for 67.5% of all revenues in our base case, we believe there is a possibility that Solana can pull other levers to make its token more valuable even if usage does not appreciate to our base case estimates.

As we noted earlier, blockchains must price activity in such a way as to be cheap enough to encourage widespread usage while still ensuring that its validators get paid enough to validate the network. Blockchains like Solana bootstrap this security budget, the money paid to validators, by building in inflation that dilutes existing token holders to compensate validators. Paying a security budget solely out of Inflation is not sustainable indefinitely if there is no economic activity or if economic activity on the chain is priced too cheaply.

Long run, even if Solana is not able to attract 600B transactions per annum, they have ample levers to pull that could increase the token's value. The first of which is simply to raise transaction prices. While Solana will almost certainly see less transaction throughput if they raise prices, if there are economically valuable activities, it stands to reason that Solana should be able to effectively capture some of that value. Furthermore, Solana could also decrease the effective supply of its token by increasing the amount it charges programs (applications), crypto wallets, NFTs, and tokens to store data on the chain. On Solana, all entities that deploy code to Solana or operate a wallet must pay fees in SOL based on the size of their storage. Anyone using Solana also has the option to forgo this fee by keeping enough SOL in their account to pay for 2 years of rent. With storage fees at 0.00000348 SOL per byte and wallet data size of 372 bytes, each active wallet holder must maintain 0.0026 SOL. Similarly, applications and token smart contracts have to maintain these storage fees as well. A program like Serum which has around 340KB will need to keep a balance of 2.4 SOL to avoid paying rent. If Solana chooses to do so, it could dramatically increase these balances and effectively reduce the supply of floating SOL.

Of course, these rent and transaction cost changes would violate the current principles of the Solana founding team, which controls the protocol. At the same time, there is no governance on Solana to mediate these decisions but recently some validators have brought up  to introduce token-voting governance on Solana. By the year 2030, we believe that Solana will already be practicing governance using token-voting and we believe this will enhance the economics of the SOL token if the Solana blockchain has a vibrant ecosystem of activity.

Solana's Potential: Risks and Rewards

Solana is an endlessly fascinating project that is committed to improving the user experience by pushing the edge of what is possible on a blockchain. As a result, it offers the cradle with the right features that have the best opportunity of growing the next killer application. Additionally, the Solana team are titans of the space whose non-consensus thinking has birthed in the most capable blockchain in existence. As they continue to innovate, their philosophy of experimentation and optimism has infused a small yet creative ecosystem of consumer-focused applications. Most importantly, Solana's community has a strong identity that allowed it to remain resilient despite immense setbacks that would have destroyed many other blockchain ecosystems.

That said, Solana is surfing in currents that are far different from the consensus view of established names in the space, like Ethereum. Rather than specializing in modular blockchain components as Ethereum and its supplicants are building, they are cutting a course to develop an integrated blockchain that combines these components into an integrated data throughput machine. This is a monumental task, and the Solana team is starting from a position of relative weakness – they have fewer developers, TVL, VC funds and foundation capital to build their vision than EVM-compatible chains. Likewise, they still face tremendous questions over the long-term stability of their blockchain's technical approach. Still, even using terminal market share and take-rate assumptions well below that which we use for Ethereum, our model produces more upside in our base case for the SOL token. Thus, we believe a meaningful weight for SOL in investor portfolios is justified.

Disclosure: The VanEck team owns SOL tokens and stakes in other Solana-based applications such as Hive mapper, Helium, and Render.

Source: VanEck Research as of Oct 2023. Past performance is no guarantee of future results. The information, valuation scenarios and price targets presented on Solana in this blog are not intended as financial advice or any call to action, a recommendation to buy or sell Solana, or as a projection of how Solana will perform in the future. Actual future performance of Solana is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance of Solana. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

* Number of scenes rendered monthly.

** Average daily Data Credits burned ($).

Source: chrome-stats.com, Dune, Flipside Crypto, Hivemapper, VanEck as of October 25th, 2023.

Thank you to all who contributed perspective to this article including Eugene Chen from Ellipsis Labs, Edgar Xi from Jito Labs, Matt Sorg from Solana, and 0xkrane.

Links to third party websites are provided as a convenience and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. By clicking on the link to a non-VanEck webpage, you acknowledge that you are entering a third-party website subject to its own terms and conditions. VanEck disclaims responsibility for content, legality of access or suitability of the third-party websites.

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1. New Four-Year Bull-Bear Cycle: A Historical Guide

Explanation: The four-year cycle in cryptocurrency refers to a pattern where the market experiences significant movements roughly every four years. This is closely tied to Bitcoin's halving events, which occur approximately every four years.

This year marks the initiation of a new four-year cycle. Historically, this has been an optimistic sign for the crypto market. Based on past trends, we can anticipate a bull market in the next two to three years.

Four-year Cycles and the Bitcoin Price

Source: VanEck Research, Data as of 30/09/2023. Historic performance is no guarantee for future results.

2. Impending Bitcoin Halving Event

Explanation: Bitcoin halving is a process that occurs approximately every four years, during which the rewards for mining new blocks are halved. This mechanism is programmed into Bitcoin's code to control its inflation.

Traditionally, bull markets have started well before the actual halving event. This anticipation is driven by the belief that the reduced rewards for mining will create scarcity, potentially driving up the price.

Bitcoin Halving Events projected on the Bitcoin Price Performance

Source: VanEck Research, Data as of 30/09/2023. Historic performance is no guarantee for future results.

3. Short Term vs. Long Term Holders Ratio

Explanation: This metric refers to the proportion of cryptocurrency holders who have recently acquired their assets (short term holders) compared to those who have held their assets for an extended period (long term holders).

Currently, the market has seen a significant exodus of short term holders, leaving ample room for potential growth. Historically, the bottom of a bear market is associated with a maximum level of long term holders. As the market shifts into a bull phase, the ratio tilts in favor of short term holders. This phenomenon comes in phases, starting with long-term holder accumulation which transitions in long-term holder distribution. While long term-holders are distributing coins, short-term holders are accumulating faster than long term-holders are distributing giving rise to significant price appreciation (albeit for a shorter amount of time as the bull market may soon come to an end). Short-term holder accumulation is followed short term holder distribution faster than long-term holders can accumulate leading to significant price depreciation.

Short Term versus Long Term Holders Supply Ratio

Source: VanEck Research, data as of 30/09/2023. Historic performance is not an indicator of future results.

4. Recovery of Transactions Usage

After a crash, it's crucial to monitor the usage of a blockchain network, measured by the number of transactions conducted on the chain. Recent data indicates that the chain's activity has largely rebounded, approaching pre-crash levels. This suggests renewed interest and activity in the cryptocurrency space.

5. Changing Dynamics: Price Appreciation and Trading Volume

Bull markets are characterized by rapid price appreciation and a surge in trading volume. Interestingly, we are noticing a shift in this trend. While price appreciation is a key factor, the trading volume, which reflects the level of market participation, has seen notable changes. This evolving dynamic may signal the transition from a bear to a bull market.

6. Bonus Reason: Useful DApps

Explanation: DApps are decentralized applications based on smart contracts that use blockchain as their main infrastructure. DApps often have their own utility token but also leverage the native network token (such as ETH) to facilitate transactions or any other on-chain activity driven by the DApp.

In the past year, increasingly many DApps have found product market fit and a long term sustainable business model that actually makes sense to decentralize. The utility token creates incentives and revenue streams for token holders and users while the DApp provides a service or product that is unique and cannot be done with traditional Web2 technology.

Type of Applications and Industries and Industry Size Targeted by DApps

Source: VanEck Research, Data as of 30/09/2023. This should not be understood as financial advice for any particular asset type or industry.

For each of the beforementioned reasons, historical performance or events are not an indicator for future results. Investing in crypto comes with significant risks such as the risk of extreme volatility and risk of total loss.

Conclusion

While cryptocurrency markets are known for their volatility, there are several compelling indicators suggesting that the bear market may be on its last legs. From historical cycles to fundamental metrics like short term vs. long term holder ratios, the signs are encouraging. As always, it's important to approach investment decisions with caution and conduct thorough research.

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The crucial role of nuclear energy

As of 2022, nuclear power was responsible for 9% of global electricity generation and nearly 25% of global, low-carbon electricity generation.¹ Per the International Energy Agency (IEA), in the last 50 years, nuclear energy has averted over 60 gigatonnes of CO2 emissions—approximately equal to two years’ worth of total energy-related emissions worldwide.² Nuclear energy’s consistent power output offers an efficient alternative to traditional fossil fuels and a solution to escalating energy demands, especially in rural regions where access to electricity remains sparse.

Moreover, nuclear plants, unlike intermittent renewables such as wind and solar, maintain nearly full capacity operations. This ensures power delivery even during extreme weather conditions — an increasing concern given that 2023 has been the hottest year on record since the 1890s.

Global Electricity Generation by Fuel (2022)

Source: Energy Institute. Data as of December 2022.

The price of moving away from nuclear

The world's nuclear infrastructure is aging, with many reactors nearing their design end-of-life. The premature decommissioning of these reactors might disrupt energy transition plans, potentially leading to an additional 4 billion tonnes of CO2 emissions, per the IEA.³ Substituting nuclear capacity with renewables like wind or solar would demand an unparalleled deployment pace. The decline in nuclear power could also require an extra $1.6 trillion in investments from advanced economies, translating to higher consumer electricity prices.⁴ Importantly, in many scenarios – on a levelized cost basis over several decades – prolonging a reactor's lifespan is estimated to be more economical than constructing new renewable energy infrastructures.⁵

Innovations in nuclear technologies

The nuclear sector is far from static; it's evolving. The spotlight on technology development in the space is currently on Small Modular Reactors (SMRs) which promise heightened efficiency, affordability, and flexibility. Their compact size and enhanced safety attributes make them highly adaptable, even holding the potential to replace older fossil fuel units. The market for SMRs, at present, is projected to grow to around $6.8 billion by 2030 (around a 2.3% compound annual growth rate), with companies like NuScale Power and BWXT Advanced Technologies at the forefront.⁶

Certain SMR designs have the capability to recycle existing nuclear waste as fuel. Additionally, nuclear fusion, the energy source of the sun and stars, is undergoing intensive research. Companies like Helion Energy and Nucor are collaborating to harness this immense power. And on the tech frontier, giants like Microsoft are exploring nuclear energy to power energy-intensive operations like artificial intelligence.

The current dynamics of uranium pricing

Uranium prices have seen considerable fluctuations recently. Factors like long lead times for mining projects, reduced capital expenditure on new sources, existing supply deficits, and geopolitical tensions, notably in Europe, have driven prices upward.⁷ These dynamics are influencing the broader industry. Utility companies are grappling with escalating costs, whereas uranium miners are poised to gain, attracting increased investor interest.

Uranium Exploration Budgets ($M)

Source: S&P Global Market Intelligence. Data as of October 2022.

Uranium Supply Surpluses and Deficits

Source: S&P Global Market Intelligence. Data as of October 2022.

The path forward

A glance at Japan provides a lens into the evolving nuclear narrative. After the Fukushima disaster, Japan curtailed its nuclear operations. However, faced with the global energy crisis and geopolitical tensions, such as the Russia-Ukraine war, Japan is reviving its nuclear reactors, marking a significant policy pivot. Other nations like Germany, Belgium, and India are also re-evaluating their nuclear strategies. As countries grapple with energy security and decarbonization, nuclear energy, with its promise of reliability and zero emissions, is regaining prominence.

Bottom line

The drive towards decarbonization, coupled with geopolitical shifts, has elevated nuclear energy's significance in the energy transition narrative. Despite the promising investment prospects, especially with advancements in nuclear technologies and energy policy reformation, the sector is not without its challenges, such as:

• Uranium Price Volatility: Miners must navigate fluctuating uranium prices which directly impact revenues.
• Developmental Hurdles: Utility companies could face unforeseen costs and delays in reactor projects.
• Policy Shifts: Regulatory changes, particularly after major events or the emergence of alternative technologies, can transform the industry.

Given these challenges and the evident opportunities, particularly with nuclear technological advancements and policy transformations, investors should tread carefully, measuring potential rewards against the inherent risks.

VanEck Uranium and Nuclear Technologies UCITS ETF (ISIN: IE000M7V94E1)

VanEck Uranium and Nuclear Technologies UCITS ETF (ISIN: IE000M7V94E1) offers exposure to a pivotal segment of the clean energy sector, addressing the growing demand associated with combating climate change. This passively managed fund tracks the MarketVector™ Global Uranium and Nuclear Energy Infrastructure Index (MVNUCLTR). It encompasses companies throughout the uranium and nuclear energy spectrum, from uranium miners to providers of services and hardware for the nuclear industry. By doing so, the Index allows investors to not only participate in uranium price movements, but also to allocate to companies directly involved in nuclear technologies themselves.

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The same is true of other cities in the US Northeast, and in other parts of the world like the United Kingdom. Here the competition among renters is so intense that there are 20 requests to review each available property, according to data recently reported by the BBC, the UK national state broadcaster.

While local factors such as a shortage of housing alter the dynamics in each area, broadly speaking rents rise roughly in line with inflation in many developed countries across the world. In fact, in the recent burst of rapidly rising inflation since 2022, rents on a range of types of property have been a key part of the inflationary mix.

This illustrates the appeal of real estate as a whole as an investment at such times. Commercial real estate, too, has a reputation for being a good hedge against inflation. That’s often because leases on assets like warehouses or shops may either be directly linked to a measure of inflation, like consumer price inflation, or have an option to increase the rent when there is a break clause.

From the US to the UK and Germany

Turning back to the residential market, how has it performed against inflation over time? That depends on the country but, broadly speaking, rents have risen when inflation has, although sometimes with a lag.

The United States is the world’s second largest real estate market by value (China is the biggest). Looking back more than 10 years, residential rents have closely tracked US inflation, as the chart below shows. In fact, the average annual rate of rent inflation spiked at about 16% in 2022, according to Zillow, the US real estate marketplace. More recently, though, the rate of rental increases has slowed as the Federal Reserve’s policy interest rate rises have begun to quell inflation.

Other countries where inflation has been running rampant recently have had a similar experience. Take the United Kingdom: here rent increases were averaging at about 6% across the country in the summer of 2023, according to the country’s Office for National Statistics. That was roughly in line with inflation at the time, although the UK consumer price index had briefly peaked at over 10% in late 2022.

In the interests of balance, though, one should also mention Germany where regulation caps the amount that landlords can increase rents. That has clearly limited rent rises to about 2% a year, even though consumer prices were increasing at a rate of close to 12% at their peak in late 2022 (see chart).

Top 100 Real Estate Stocks and a 4% Income Yield

It’s clear that real estate’s ability to track inflation – offering a hedge – varies from one country to another. Indeed, just as there are hot spots like Boston or the United Kingdom where tenants compete fiercely for homes, so too in countries like Germany rents are carefully controlled.

That’s why the VanEck Global Real Estate UCITS ETF is diversified across markets and stocks from across the world. A single trade buys a real estate portfolio consisting of the top 100 real estate stocks. And while more than 65% of the portfolio is invested in the United States, only just over 2% is in the smaller real estate market of Germany. Investing in this ETF is also associated with risks, including the loss of capital.

For investors, the other appealing feature is that like real estate itself the ETF pays out a high income that should have a degree of inflation proofing – in fact, it currently pays a dividend yield of more than 4%¹.

Since the Covid-19 pandemic began to spread around the world at the beginning of 2020, financial markets have delivered a rollercoaster ride, shaken by a significant rise in inflation and interest rate volatility. Most funds have felt the impact: thematic funds in particular. That’s because thematic ETFs are often opportunity-driven, with portfolios mostly consisting of growth stocks (which are hit the hardest in a rising interest rate environment).

Looking forward, uncertainty about the direction of inflation, interest rates, economic growth and fiscal policies is causing a disconnect in financial markets. CAVE, however, is an actively-managed fund using a multi-layered thematic approach – as we explained in previous blogs – making it more mindful of the current uncertainty. This enables CAVE to benefit from the performance differences between factors such as value (versus growth) and size (large versus small caps) or industries (cyclicals vs defensive).

Since it is difficult to accurately time and predict the direction of macro-economic variables, and the fact that their influence on different parts of the equity markets is large, Seb makes sure that CAVE’s portfolio is well balanced and diversified across sectors and factors to reduce volatility. He monthly rebalances the portfolio, maintaining its diversification.

Layering Factors Within Themes

How does he do that? Well, Seb explains, the portfolio currently consists of a mix of cyclical sector exposures , such as consumer discretionary stocks like MercadoLibre, and more defensive sector exposures, such as consumer staples (e.g. Nestle) or healthcare (e.g. Option Care Health). Defensive sectors typically have lower volatility. Within those defensive sectors, however, we can also choose between growth and value stocks.

Healthcare, for instance, is an important subtheme within the smart home ETF. We believe that by bringing more technology-related care into our homes, it will be possible to keep costs in check and address the challenges of an ageing society suffering from chronic illnesses and diseases (see also this blog).

Two companies that fit the healthcare sub-theme are Dexcom and Option Care Health. Dexcom is a provider of glucose monitoring systems, whereas Option Care provides home infusion services. Both companies have defensive revenue streams (i.e., not cyclical). Dexcom, however, would have a stronger correlation with the growth factor compared to Option Care.

Seb also takes value and growth stocks into consideration at the overall portfolio level to make sure there is a mix of stocks with varying levels of sensitivity to changes in interest rates. For instance, cyber security growth stocks such as Crowdstrike and Zscaler have higher duration, meaning that a higher proportion of their cash flows lies in the more distant future. As a result, they are perceived to be more sensitive to interest rates. More value-like stocks such as Cisco Systems or gaming company Electronic Arts, have lower duration and are less sensitive to interest rate movements.

Size is a final factor to take into account. CAVE’s multi-layered thematic approach makes it possible to add companies beyond the usual suspects. Naturally, Seb also selects large companies such as Microsoft and Amazon, which both have important roles to play in the smart home. But he also adds smaller less obvious stocks, such as PowerSchool and Franklin Covey. Powerschool provides business software running core applications for educational institutions. Franklin Covey is a coaching company that provides training and assessment services in the areas of leadership, individual effectiveness and business execution for organizations and individuals.

Despite these advantages, Seb warns that thematic investing still comes with some risks that are less dominant in an index-tracking fund. Thematic funds will always be less diversified in most areas compared to a broad stock index with hundreds or thousands of stocks. Moreover, CAVE’s approach also requires the exclusion of sectors such as oil & gas, which can have a strong impact on the performance of a broader index. Additionally, a thematic view implies a longer-term perspective, which introduces some uncertainty. Finally, although we strive to balance relevant investment factors, the thematic angle means that growth plays a more dominant role relative to the broader equity market.

Reaping Results

Seb’s strategy is delivering the intended results. In the graph below, we compare the volatility of the Bloomberg thematic ETF database¹ to CAVE. It shows that CAVE clearly has a lower volatility than other thematic funds.

Based on Volatility, CAVE’s Risk Profile is Lower Than a Large Portion of Thematic ETFs

Smart Home vs. Bloomberg Thematic ETF database (YtD annualized 90-day volatility)

Source: Bloomberg – ETF database. (selected all ETFs in North America and Europe categorized as thematic, includes both single and multi-theme funds. Only ETFs with complete data for the selected YtD period are included. Excluding CAVE the selection contains 209 ETFs.)

Moreover, when we look at the ETFs with lower volatility than CAVE, it is noticeable that many of them are linked to infrastructure-related investments. Infrastructure is an asset class known for its relatively low volatility. This is due to the stable cash flow of the underlying assets, which are often contractually secured.

Dynamically diversifying the portfolio by investing across sub-themes, industries and factors has helped to reduce volatility in 2023 while safeguarding returns. Moreover, as the graph shows, CAVE has a lower volatility than other thematic ETFs, resulting in a more measured risk profile.

For many years, this might have seemed an interesting anomaly that did not tempt many investors away from equity markets. Yet with interest rates in the US and Europe looking like staying higher for longer, fallen angel bonds are flying high. Our VanEck US Fallen Angel High Yield Bond ETF, for instance, has an income yield of more than 7.5% (note that it accumulates the yield rather than paying it out).

So, what exactly is fallen angel fixed income? In short, fallen angels are bonds that had an investment grade credit rating before being downgraded by credit rating agencies due to the declining creditworthiness of the companies issuing them. They include major companies like Vodafone, Royal Caribbean Cruises and Nordstrom.

The recent launch of our VanEck US Fallen Angel High Yield Bond UCITS ETF complements well our offering of fallen angels, which includes already a global version. This latter seems to be more appropriate for investors who aim at achieving higher diversification, since it includes bonds from several countries and with many currency denominations. The latest launch instead focuses on the US and can be attractive especially for those investors wanting to have separate fixed-income allocations in terms of currency¹.

At VanEck we leverage more than 10 years of experience in fallen angels investing, with the strategy offered in the US counting assets under management in excess of $2bn.

Averaging Higher Returns

It’s a well-known anomaly that fallen angels have historically delivered higher average returns than other high yield bonds. For instance, over the 20 years or so from the end of 2003 to the end of June 2023, the ICE US Fallen Angel High Yield 10% Constrained Index generated a total return of 367.9%. This compares with 225.4% for the ICE BofA High Yield Index².

What’s more, the fallen angels’ outperformance was pretty consistent. In other words, the fallen angel index has outperformed the high yield index in 14 of the last 20 calendar years (see below).

Calendar Year and YTD Returns (31/12/2003 – 30/06/2023)

Source: FactSet. Data as of 30/06/2023.

Why might that be the case? Largely because financial markets tend to think ahead, anticipating outcomes. Indeed, investors often easily see when credit rating agencies are about to downgrade bonds. As many can only hold investment-grade bonds, they sell ahead of the downgrade, meaning that the bonds are often over-sold when the downgrade actually occurs.

Naturally Contrarian

But fallen angel bonds have tended to have a higher credit quality on average than the broad high yield universe, and they are naturally contrarian because companies’ finances tend to deteriorate at times when the sectors they are in come under pressure. The colourful chart below of sector weightings in the ICE US Fallen Angel High Yield 10% Constrained Index illustrates the point: following the 2008 financial crisis the weighting in bank stocks ballooned, a similar thing happened with energy stocks after the 2015 oil price crash, and then again with automotive stocks following the Covid-19 2020 lockdowns when car sales plummeted.

ICE US Fallen Angel High Yield 10% Constrained Index

Historical Sector Allocations (31/12/2003 – 30/06/2023)

While fallen angel bonds have fairly consistently beaten the returns from their high yield peers, what’s changing now is that their yields compare favorably with the historical returns of equities. The bond market as a whole did not have such high yields during the long decade or more of low policy rates from 2010. However, the fast rate hiking cycle of central banks in response to inflation has changed the picture, with yields now at much more interesting levels.

But it seems like those days of low policy interest rates were the anomaly. While rates will undoubtedly fall back at some point, most observers think they are unlikely to touch the extreme lows previously seen. All of which means that fallen angels should continue to fly reasonably high.

Gold finally gives way to dollar strength

Gold fell below $1,900 per ounce in the final week of September. Gold tested the $1,900 level at the end of June, and again in August, but found support and bounced above it. However, this time, it failed to find support, dropping to $1,849 per ounce on 29 September, a $92 loss (-4.7%) for the month. Most of gold’s gains for 2023 have now evaporated. After resilient performance in the first half of the year, gold finally succumbed to the pressure of rising yields and an ever-so-strong U.S. dollar in the third quarter of the year.

U.S. 10-year and 30-year treasury yields are just shy of 5% at present and the U.S. dollar (as measured by the U.S. Dollar Index, or DXY¹) managed to climb a whopping 6.4% from its mid-July lows to the end of September. The historically-strong, inverse correlation between gold and the U.S. dollar was on full display, with gold dropping 5.7% during the same period. What was expected to be a U.S. Federal Reserve (Fed) pause at its September 20 meeting instead turned into a skip and hold; this, after the Fed chairman (and, subsequently, other members) made it clear to markets that they were prepared to hike again if needed and hold policy rates at a restrictive level to continue their fight against inflation. Gold and gold equities sold off along with the rest of the U.S. equity markets and bonds. The NYSE Arca Gold Miners Index (GDMNTR)² and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)³ were down 8.1% and 10.3%, respectively, during the month.

Demand from the East lends support to the West

The gold price in China also dropped, reducing what had been a record $120 per ounce premium over the international spot price to just around $10. Demand out of China has so far been very strong in 2023, with Bloomberg reporting a year-on-year increase of 30% in the domestic sales of gold bars and coins as of last week.^* This pickup in demand from China, as well as from Turkey – together, representing two of the largest gold consumers in the East – has helped filled the gap left by declining western investment demand, as reflected by persistent outflows from gold-bullion-backed ETFs. Strong central bank gold buying has also supported gold prices.

Investors in China and Turkey are using gold to hedge against economic risks and weakening currencies. Turkey has been experiencing hyperinflation due to unconventional monetary policies. Since the presidential elections in May, the government has taken steps to restore confidence; however, there remains a high level of uncertainty. In China, the slowing economy, along with fallout from its real estate bust and government crackdown on the tech sector, has also created financial uncertainty. Central banks are buying gold to diversify away from the U.S. dollar and as a hedge against market volatility. Its performance during times of crisis, its role as a long-term store of value, and its high liquidity make it an asset of choice.

Well-positioned vs. “consensus” with gold?

In contrast, Western investors have yet to find a reason to seek shelter in what has been a very robust year for equity markets and, in particular, tech stocks. A “soft landing” now appears more within reach, and with inflation decreasing, markets seem to think there isn’t a need for gold. However, equity valuations are very rich, and the prospect of sustained, elevated interest rates poses a significant risk to most sectors and the entire economic and financial system. British pension funds, Credit Suisse, Silicon Valley Bank and Signature Bank were all victims of rising rates. Who is next? Is there another crisis looming?

The weakness in gold markets in these past couple of weeks comes precisely at a time when these risks appear to be front and center for investors, which, to us, creates a notable market dislocation. If or when tides turn – i.e., when markets are hit with a drop in corporate earnings, a deep correction in equity markets, a weaker jobs market or significantly higher unemployment, along with sustained, high interest rates under the stress of above-target inflation – we think gold is well positioned to benefit. In our view, gold equities should benefit to an even greater extent as victims of their own market dislocation. Currently trading at historically low valuation multiples, and significantly lagging gold bullion, the gold mining sector’s balance sheets, cash flow generation and capital allocation strategies are as strong as they have ever been.

Stepping out: gold conference recap

Last month, we attended two of the sector’s major conferences, both in Colorado: Precious Metals Summit, in Beaver Creek, focused on explorers, developers and emerging producers; and Gold Forum Americas, in Colorado Springs, which showcases seven-eighths of the world’s publicly traded gold and silver companies when measured by production or reserves. We held meetings with the management teams of more than 50 companies during the two conferences.

The mood at Gold Forum Americas was quiet and reflective—perhaps not surprisingly given the recent lack of investor appetite for gold equities and the resulting poor share price performance of many of the companies. However, the message continues to be generally upbeat, with a focus on portfolio optimization, disciplined growth, cost control and delivering against expectations. The companies understand that to achieve a rerating and attract a broad investor base they need to consistently demonstrate to the markets that this sector is investable throughout the metal price cycles, with a strategy that focuses on value creation by reducing costs, increasing mine lives and finding and developing new deposits all while maximizing returns for stakeholders. Build it, and they will come. Markets are efficient; if there is indeed a dislocation between equity prices and the implied value of the gold mining sector based on its sustainable profitability (as we believe), then it shouldn’t last too long.

At Precious Metals Summit, one CEO commented that this market feels like the bottom of the bear market in 2015 when gold fell to $1,050. However, the gold price is now in a bull market trend, with gold recently near record highs, and internal rates of return on many projects ranging between 20% and 50% or more. Talk about dislocation! As a result of the strong gold market and weak gold equity market, we are seeing development stage companies fall into one of three categories:

1. Those with strong financial backing willing to raise capital to develop their projects at depressed equity valuations;
2. Those who are bootstrapping their developments – starting smaller projects with less capital and using operating cash flow to expand production in years two or three; and
3. Those with little access to capital who are either going dormant or looking for a buyer with better funding.

Our Strategy carries all three types of developers. We look at the quality and scale of projects along with geopolitical risks and management capabilities. Value and performance will ultimately be realized in high-quality, well-run companies. However, it seems that current conditions will certainly require some extra patience!

VanEck's rich history, grounded in macro investing and a unique investment philosophy, has shaped the company over the years. In this Q&A, CEO Jan van Eck shares his perspective on the firm’s journey, its investment strategies, and its foray into the world of cryptocurrencies.

• What do you think differentiates VanEck from other investment managers?
• What can investors learn from market history and how does your understanding of history shape your investment philosophy?
• When did you first notice Bitcoin?
• How should investors think about cryptocurrencies in their broader portfolio allocations?
• How will cryptocurrencies impact finance?

What do you think differentiates VanEck from other investment managers?

JAN VAN ECK: Our investment approach revolves around macro trends that impact financial markets. Unlike many investment firms that focus on specific stocks or sectors, we take a broader view, examining global trends such as wars, political instability, and technological advancements.

In a nutshell, we examine big global trends and evaluate how they will impact financial markets, as well as the potential opportunities and risks they create for investment portfolios. For example, the firm was founded on the premise that, particularly after World War II, international stocks — specifically from Europe, Germany, and Japan, as well as Asia — were growing at a faster rate. So there was significant growth potential in this area that had not fully entered the mainstream of traditional markets and therefore, was not a part of most investor portfolios.

But as macro investors we also have to make sure we’re looking at pervasive risks that might be under the radar. In 1968, the U.S. was performing well economically, but there were concerns about its large government spending policies and the rapid expansion of its money supply. My father, John van Eck, foresaw the risk of inflation in the U.S. and started looking for ways to hedge against that risk—one unusual option at that time, given its fixed price, was investing in gold.

One point to remember is how different the future can look from what you might imagine. No one thought the price of gold could reach anywhere close to today’s levels. This kind of dramatic change is often not on people's radar unless they have a historical perspective that allows them to entertain a wide range of possibilities.

Speaking of historical perspective, we know you are a big history buff. What can investors learn from market history and how does your understanding of history shape your investment philosophy?

VAN ECK: Predicting the future is difficult, but articulating potential outcomes and likelihood is a reasonable exercise. History can suggest an array of government policies and economic outcomes that may not be obvious at a point in time. History can also tell us a lot about the path of current trends.

For example, railroads, a vital technology of their time, were essentially complete around the 1860s in the U.S. However, there was a substantial increase in the market cap and stock prices of these companies before their full implementation. Investors correctly anticipated the potential profits from this new technology, but there’s risk in being too early. Even if your fundamental premise is correct, you can still experience significant losses. Railroad stocks peaked before 1860 and subsequently fell by over 50 percent, despite the continued development of the technology.

I reference this history when discussing cryptocurrencies, as a lesson from the past that holds relevance even today. Like railroads, cryptocurrencies could potentially be highly disruptive. However, being cautious of the volatile investment cycles is essential. Even if your investment thesis is correct, you could still lose money as an investor, making it a cautionary tale worth remembering.

When did you first notice Bitcoin?

VAN ECK: In 2017, I dove deep into the world of Bitcoin. As you can imagine, even in 2017, there were plenty of skeptics. I sought opinions from my colleagues, but they didn't have much insight into this emerging asset at the time. By listening to podcasts and reading white papers, I was able to develop a solid understanding of the technology behind cryptocurrencies. Although I'm not a computer scientist, I am familiar with how computers and databases are structured, which helped.

Following this research, I concluded that Bitcoin indeed had the potential to be included in our offering.

How should investors think about cryptocurrencies in their broader portfolio allocations?

VAN ECK: I believe there a different facets of cryptocurrencies overall and depending on what specifically is being discussed can fit into different parts of an investor’s portfolio. It's crucial to clarify that what I'm about to share cannot be empirically proven, because we can't predict the future. This is more of a mental model that guides my thinking.

Firstly, Bitcoin acts as a competitor or companion to gold. This is due to its scarcity value, which mirrors that of gold—indestructible not because of physical limits (like the finite amount of gold in the ground) but because of the algorithms underlying Bitcoin. So, it represents a store of value and offers protection against inflation.

Secondly, beyond Bitcoin, other cryptocurrencies represent applications akin to any other type of growth or technology investment. Be it healthcare, science, databases, cloud computing, 5G or 6G, these cryptocurrencies play a similar role. Say you own 50 stocks, with a split of 25 for growth and 25 for value. I would include a small allocation to these crypto related applications in that overall growth exposure.

In both cases, I believe you need it as a hedge to your financials and technology equity exposure. So, in a sense, similar to how Argentinians would rather hold U.S. dollar-linked stablecoins than the Argentinian peso that has almost 100% inflation, in your growth portfolio you'd like to have some allocation to a technology that could be a significant disruptor.

How will cryptocurrencies impact finance?

VAN ECK: The financial ecosystem has transitioned from being run by paper in the 1950s to programmed mainframe computers in the 1970s. Now, we’re facing the question of whether a decentralized financial ecosystem can be built.

My main concern is around the fragmentation of the financial system. Major financial institutions are working on blockchain applications, but private blockchains would be no different than having private mainframes. Also, regulatory bodies are moving at different speeds. Europe and Brazil, for instance, are advancing towards adopting tokenization and blockchain technologies to reduce costs for investors, while other countries like the U.S. are at a standstill.

Things are changing, and we need to recognize that. We can't predict how they will evolve, but we must stay aware and open to these developments.

Diving into the intricate tapestry of VanEck's storied history, from its inception during the Nixon era to its modern-day focus on ETFs, the van Eck family has remained at the forefront of financial innovation. In an extensive profile of CEO Jan van Eck, Real Assets Adviser explores his personal journey, the firm's evolution, and VanEck’s forward-thinking investment philosophy. As the investment world ebbs and flows with the changing tides of global events, Jan's perspective serves as a beacon for those looking to navigate the future.

Here are highlights from the article:

The Nixon Era and Gold

In 1971, President Nixon unhooked the dollar from the gold standard. Jan’s father and the firm’s founder, John van Eck, saw this move coming and had already jumped into the gold market. His gold fund (known today as the VanEck International Investors Gold Fund), the first of its kind, skyrocketed as gold prices soared from $35 to $800 per ounce, making it the industry's top performer.

VanEck's Evolution: From Gold to ETFs

While John was passionate about gold, his son, Jan van Eck, realized the firm's over-reliance on gold was a vulnerability. Jan shifted the firm's focus, pioneering in ETFs. Today, ETFs account for 90% of VanEck's business, and the firm expects this sector to drive its growth for the foreseeable future.

Taking a Global Perspective

Founded in 1955, VanEck was originally focused on leveraging post-WWII investment opportunities in Asia and Europe. Today, Jan keeps an eye on emerging markets, technological innovations like blockchain, and the evolution of private finance in countries like Brazil and India.

Investment Philosophies and Forward Thinking

Jan believes in contrarian investing, seeing potential in assets like office real estate and cryptocurrencies. He's bullish on Bitcoin as a competitor to gold and has been pushing for Bitcoin ETFs since 2017. Jan's investments reflect his beliefs, with allocations in fintech startups and a digital assets fund.

A Changing Financial Landscape

For Jan, finance is intertwined with current events, making every day in the industry intellectually stimulating. He delves into alternative media for insights and research, emphasizing the importance of staying updated. He's particularly intrigued by global demographic changes, such as China's shrinking population.

Jan van Eck: Redefining Success

With a rich legacy behind him and a dynamic world ahead, Jan continues to reshape the definition of success in the investment world.

Read the full profile here: Real Assets Advisor – Honor Thy Father

Follow along as we consider climate across a variety of sectors. This includes forests sequestering carbon emissions, the critical metals and minerals needed for electric vehicle batteries, and boots-on-the-ground experience visiting offshore wind farms and battery manufacturing plants.

Going Beyond the Trees at the van Eck Forests

The history and unique forestry management of the van Eck Forests in Northern California and Oregon is showcased in the documentary “Beyond the Trees”. For decades, the forests have been managed using an innovative model at a cross-section of conservation, climate, and commerce.

In addition to reducing carbon by the equivalent of removing over 400,000 cars from the road, these forests continue to produce revenue and to help fund forest research.

The fight to restore our native forests began long ago when Fred van Eck, an investment manager passionate about forests, met Laurie Wayburn, a pioneer in forestry restoration. Today, the forests operate as living laboratories to test out innovations in forest management, showing how forests can generate economic returns while also providing climate change resilience.

Watch Trailer

EM Countries Have Lower Debt

Emerging markets in general have moved much more quickly to increase interest rates compared to the U.S. and other developed markets in order to stay ahead of inflation. For investors, this fundamental backdrop means less issuance and rolling over of debt, a favorable supply/demand dynamic that should help support EM bonds. Additionally, if needed, EM central banks can hike interest rates without bankrupting the government (like we saw in the UK).

EM Debt Has Higher Yields

The primary focus of EM central banks is to focus on controlling inflation, and they do this by maintaining high real interest rates. For investors, the result has been not only higher nominal yields but higher real yields. The benefits to EM local currency investors are a more substantial level of income that is not eroded by loss of purchasing power (through a potentially weaker currency).

EM Debt Benefits from New Supply Chain Dynamics

Unlike developed markets, which experience higher commodity prices as a price shock, emerging markets export more commodities than they import, which means they benefit from higher prices.

Highlights of the Discussion Include:

02:13 - Eric's background as the son of diplomats and how he ended up designing weapons systems
13:44 - The overall emerging markets debt landscape
16:23 - The benefits of emerging markets debt for the U.S. investor
21:12 - Some of the unique issues in emerging markets debt relative to developed markets
25:37 - Eric's investment process
30:08 - Sovereign vs. corporate emerging markets debt
32:02 - Eric's views on country concentration
44:28 - The overall growth of emerging markets
53:01 - Political risk in emerging markets
58:41 - The one lesson Eric would teach the average investor

Listen to the full podcast here.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Digital assets outperformed other risk assets in September for the first time since May, as Bitcoin rose +3% and Ethereum +1% vs. the S&P -5% and the Nasdaq Composite -6%. Among tokens, large-caps’ outperformance surged to all-time highs vs. small-caps as dwindling on-chain volumes and lackluster blockchain fees prompted market participants to defend BTC and ETH weakness on ETF approval hopes rather than take risk on more speculative coins with less valuation support. The exception was DeFi, which outperformed materially (+13%) in the month thanks to AAVE & MKR essentially capturing yield income from US Treasuries (“real world assets”), a trend to be discussed further below.

Source: Bloomberg, VanEck research as of 9/30/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Source: Bloomberg, MarketVector, VanEck, as of 10/2/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

A curious development in the month involved Bitcoin active addresses making all-time highs in September even as the median transfer value made multi-year lows. One explanation is the emerging dominance of Bitcoin “Inscriptions,” which encode images, files, or text into the Bitcoin blockchain’s data structure, similar to NFTs. Such transactions are low value, but inscribers have been “buyers of last resort” of Bitcoin blockspace, and that trend continued in September. Another explanation is that Binance has been making many unusual wallet movements, possibly ahead of a DOJ action. A third reason for the animated address activity is that while overall crypto trading volumes have dwindled, Asia and Latin America (where transactions are smaller) have outperformed Europe or the US.

Bitcoin Transactions Soar Amidst Dwindling Transaction Values

Source: Bloomberg, as of 9/27/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Another encouraging development of late is the narrative shift around Bitcoin’s energy intensity. First, in August, the University of Cambridge Center for Alternative Finance (CCAF) slashed its estimate of Bitcoin’s total energy usage by 14% to account for the higher efficiency of newer mining machines. Then the Bitcoin Mining Council, in its most recent quarterly release, announced that more than 50% of the network is now powered from renewable energy sources (recall that Elon Musk previously tweeted that Tesla would resume accepting Bitcoin once more than half of the network was powered by sustainable electricity). PWC then wrote a  explicitly calling Bitcoin “ESG,” and Bloomberg published a long article and accompanying video (“”) touting Iceland’s “carbon-free” Bitcoin mining. Finally, on September 25th, Argentina’s largest private oil & gas company, Tecpetrol, accounting for roughly 15% of the country’s oil & gas production, announced it would start mining digital assets with gas power leftovers like vented methane in a bid to increase production and safeguard the environment. Argentina could play an even more crucial role in the global adoption of Bitcoin as soon as October 22nd, when the final round of Argentina’s Presidential Election could catapult the libertarian and pro-Bitcoin Javier Milei into the top job, based on recent polling.

The evolving story around Bitcoin’s energy intensity and its role in powering the transition to renewables is particularly welcome alongside other pivots in the energy transition story, which we believe may have positive ramifications for Bitcoin in the longer term. The UK’s Prime Minister Rishi Sunak walked back net zero targets; Kansas opted to leave a coal-fired power plant open to supply power to a $4B Panasonic EV battery factory; and Microsoft posted a job listing for a nuclear engineer to help implement its small modular reactor (SMR) strategy amidst a dizzying rally in spot uranium prices. We believe the more the world pivots to a “more is more” mindset with regard to energy consumption, the better for Bitcoin.

Of course, the opposite is still possible. The UK’s just-passed privacy laws make internet platforms – including metaverse protocols - liable for user speech. This development has prompted Whatsapp, Signal, and Apple to threaten to withdraw from the UK market if the law is not amended to protect end-to-end encryption. There are also legitimate questions about how decentralized exchanges and protocols could even possibly comply with such monitoring requests, let alone satisfy GPDR requirements to delete customer data, which is immutable on open-source blockchains. If and as crypto-enabled social apps like Friend.tech become more relevant, this debate could heat up further. To put a point on these additional friction “taxes” that crypto & other encrypting intermediaries are facing in some jurisdictions, Chase Bank just started banning transfers to crypto exchanges in the UK, presumably to comply with the new consumer protection regulations just recently enacted. And anti-AI luddites are starting to measure ChatGPT queries regarding water & electricity consumption. So far, the US has avoided such legislation along with other “progressive” proposals that seek to define digital asset node operators and validators as “brokers.” That could change.

Still, we have recently observed Bitcoin’s correlation with Donald Trump’s odds of winning the presidency (as measured by PredictIt) rising. We think such a heightened relationship currently reflects the markets’ optimism that the US can avoid Senator Elizabeth Warren’s setting White House financial policy in a Biden second term via a strong Republican showing at the ballot box next November. The stakes are high and rising.

Layer 1s

Smart contract platforms ended the month flat after a month characterized by fears of FTX asset liquidation, continued regulatory limbo, low DEX volumes, and substantial reductions in total SCP fees. For the month, Notable outperformers among layer 1 coins were TRON (+12%) and ATOM (+2%), while major losers were AVAX (-9%) and SUI (-11%). On-chain activity fell sharply in September as DEX trading fees and crypto volatility continued their downward trend, making life tough for market makers and exchanges. Ethereum fees fell -32% month-to-month, while other chains like Polygon’s ZK chain are down 70% vs. August.

FTX news was a major negative catalyst as on September 13, FTX’s liquidation estate was permitted to sell up to  of its cryptocurrencies. Initially, they were authorized to liquidate $50M weekly, but with the new approval, they are now allowed to sell $100M weekly. FTX owns over $3.4B in digital assets, of which $1.16B is in SOL, $560M is in BTC, and $192M is in ETH. The SOL tokens represent nearly 15% of floating SOL, which represents between 3-6 days of total SOL trading volume. However, 67% of those SOL tokens are locked until 2025, which will limit the immediate price impact of those sales on spot markets.

SCP Daily Fees vs Daily DEX Volume

Source: Artemis XYZ as of 10/1/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Implied 30-day volatility for ETH fell back to 29%, just a few notches above its low of 26% reached on August 13, 2023. Falling volatility has been a trend across all markets, with call-selling ETFs like JEPI (JPMorgan Equity Premium ETF) attracting $12B inflows this year alone and attracting copycats like BALI (Blackrock Advantage Large-cap Income ETF), which just launched last week. Thus, it’s unclear how much of the falling volatility in the space is due to structural vs. cyclical and crypto-specific reasons.

Implied 30 Day Volatility - Stocks, Bonds, Crypto

Source: Artemis XYZ as of 9/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

However, under the surface bubbled more positive news from corporations announcing crypto endeavors, interesting project developments, and new incentivized marketing campaigns. The most important development for crypto from the corporate world came on September 7 when Visa announced it would be using Solana to supplement Visa’s . In the new offering, Visa is running a pilot with important acquirers Nuvei and Worldpay to settle USDC on the Solana blockchain in under 0.5 seconds at the price of $0.00025 each. The pilot would follow the success of Visa’s similar  using Ethereum with Crypto.com. The potential of Visa’s new arrangement could be immensely beneficial to Solana by bringing a new source of transactions, users, and application developers and necessitating entities to buy SOL tokens to use the Solana network.

Total Payments Revenue Opportunity, Less China

Source: Federal Reserve, VanEck Estimates as of 9/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

To unpack Solana's potential, we estimate the number of annual payments across all mediums. Using data from the US Federal Reserve (Fed), we calculate that the total number of payments made across the globe each year is ~1T transactions or 629B less China. Therefore, we estimate the TAM revenue opportunity for payments on Solana will be between $666M and $3.3B, as the average fee on Solana will likely be between $0.005 and $0.001. However, this figure vastly understates the potential benefits to Solana because the impact on Solana’s ecosystem will transcend the payment revenue opportunity alone. With the introduction of payments will come many new users, application developers, and institutional attention. As a result, businesses can deploy value-added services to payments, such as banking, asset management, identity, marketing, and social media. If Solana replicates Ethereum’s distribution of revenues from payments and associated services, payments would only represent around 5% of Solana’s revenues. Extrapolating this, we find that the total revenue opportunity for Solana could be between $13B and $66B vs. our base case for ETH revenues of .

Ethereum Revenue by Business Line

Source: Artemis XYZ as of 9/19/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Another way to consider the impact on Solana is to assess the value unlocked for merchants switching to payments using Solana-hosted stablecoins over credit cards. While the credit card experience is simple and costless for many consumers, it is grossly expensive to those who accept it. Ideally, the merchant would prefer as many customers as possible away from credit cards to avoid substantial merchant charges. Merchants currently pay around 2-3% of their GMV of sales to the ecosystem of credit card businesses. At the same time, the consumer receives around 1% of the GMV back in the form of credit card points and benefits. In a new system where Solana USDC payments are used in lieu of credit card payments, merchants could work with Circle (the USDC stablecoin issuer) to rebate a portion of the savings to consumers through a new points system or even using direct payments in USDC. And because this would all be accomplished on Solana, those funds would be instantly received right after purchasing the product or service. We will expand on this potential in an upcoming payments piece to further underline the potential stablecoins have for merchants, blockchains, and consumers.

In terms of important technical developments for open-source blockchain protocols, the most important in the month of September may have been Circle’s blitz to enable native USDC on five blockchains and Google Cloud’s expansion of blockchain support to include Polygon, Tron, Arbitrum, and Bitcoin Ordinals. After Circle’s new integrations, USDC is now natively available on Base, Polkadot, NEAR, Cosmos, and Optimism. Before this development, USDC was only available as a wrapped bridge asset where a user had to lock USDC on smart contracts on Ethereum and mint a representation of it on another blockchain. This presented many issues as each blockchain has dozens of bridges with different levels of security. This means that each bridge mints a different version of USDC, which is not interchangeable. In some ecosystems, like Polkadot, there were nearly a dozen versions of USDC – each belonging to a different bridge. Most critically, in this wrapped asset arrangement, many hacks could and did happen of the bridges, which allowed hackers to unlock and steal the locked USDC on Ethereum, which rendered wrapped assets on other blockchains worthless. Native USDC is a substantial development for all blockchains that host. It enables users to bridge stable liquidity and traders the ability to enhance market-making activities.

ATOM (+3.13%)

Cosmos Developer Market Share

Source: Artemis XYZ as of 9/27/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

After persistent monthly underperformance over the past few months, ATOM was able to find footing in a down market to provide a positive return for the month of September (+3.13%). The biggest news for the ecosystem was one that is evolving in tandem. First, the launch of USDC occurred with Noble chain integrating into Circle. This will allow Noble to mint USDC and send it across IBC, a very secure form of interchain asset transfer, to the  that make up the Cosmos. Native USDC issuance is the precipitating cause of dYdX chain moving to the Cosmos. Until native USDC was live in the Cosmos, dYdX would not upgrade to v4, which is its standalone blockchain in the Cosmos. The dYdX migration will now occur, which is massively positive for the Cosmos ecosystem. It is the most important decentralized derivatives exchange and will bring its $343M in liquidity to the Cosmos. A third dimension to this positive news for the Cosmos is that Noble is speculated to be joining the Cosmos Hub, which would provide direct value accrual of Noble’s financial activities to the ATOM token.

Another important development in the introduction was the announcement of MetaMask snaps integrating Cosmos blockchains. Previously, Cosmos blockchains would need to use Cosmos-specific wallets and could not use Ethereum wallets like Metamask. As a result, Cosmos usage was illusive to users of MetaMask, who were wedded to its application experience. With snaps, Metamask’s  monthly active users can now use Metamask in the Cosmos. Other positive news for the Cosmos included the creation of a liquid staking module on the Cosmos Hub, the announcement of a Celestia airdrop, and the announcement of a roadmap to introduce IBC to new blockchains through initiatives such as integration in the . Finally, another positive development is an increased usage of ATOM to pay for transactions on blockchains in the Cosmos. For example, in September, 14% of all transactions on Osmosis were paid for using ATOM.

Tron (+12.42%)

stUSDT

Source: DefiLlama as of 9/28/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Tron had another stellar month despite seeing a (+4%) drop in daily active users amid a roughly flat month-to-month reading on fees at (+0.4%). The total value locked on Tron continues to inch up, up around (+8%), as other blockchains like Ethereum (-8%) and BNB (-7%) reported down figures. Tron also continues to see an average USDT of around . This $10B figure compares to Ethereum, which averages $14.5B daily in stablecoin volumes. Tron continues to demonstrate a strong product market fit for payments using stablecoins.

A big driver of the TVL increases is the stUSDT application, which accepts USDT in return for a fixed yield denominated in USDT. After only 11 weeks of operation, stUSDT has grown to $1.8B in USDT locked. While this clearly demonstrates demand for its project, details on how and where the funds are invested are scant. While the protocol claims to invest in real-world assets that produce yield, little is known about its risk exposure other than cryptic releases claiming to  where it is invested, but not precise CUSIPs nor who custodies those assets. According to its site, USDT “staked” USDT yields 4.6% per year, corresponding to the yield on a US Treasury 10-year Note.

AVAX (-7%)

DEX Volume 30 Day MA vs DAUs

Source: Artemis XYZ as of 9/27/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Avalanche continues to demonstrate a collapse in usership and activity on all its blockchains. Avalanche lost the third most DAUs among SCPs as it churned (-34%) of its daily active user base in September compared to August. In terms of fees, Avalanche earned (-45%) less fees, which was the second worst decline among the SCPs we track. Weekly active developers on Avalanche have dropped to 28, compared to 165 for Solana and 125 for Polygon. Avalanche’s active developer count is down (-34%) month to month and down (-70%) from September 2022. Of Avalanche’s 53 chains, the only mildly successful subnet is the JEWEL DFK Subnet, which earns around $1k-$3k daily in fees on 300-500k transactions.

Despite poor on-chain activity, Avalanche recently released upgrades to its software development kit, called the “Hyper SDK,” that enables users to create blockchains capable of 143k TPS. This monumental figure compares well to Solana’s 50k TPS claims and dwarfs Ethereum’s current estimated 200-300 TPS. In September, Avalanche also announced the launch of Firewood, which claims to revolutionize blockchain storage. Storage, or the ability to keep a record of historical transactions of a blockchain, will increasingly become an issue as blockchain persists. The longer blockchain’s exist, the more data it takes to hold all blockchain records. This record is important because if a new node wants to join the network, it needs to sync to the current state of the blockchain by downloading the entire history. As networks grow, this could become a multi-day or multi-month activity. A solution is needed to enable new nodes to join a blockchain network. In September, Avalanche also quietly acknowledged that its developer ecosystem is terminally ill and, to address this, has launched an academy to teach programmers how to become blockchain application creators.

Avalanche’s long-term strategy is to create a multi-blockchain network whose value is secured by the AVAX token. This was premised on creating a framework for others to build blockchains, an SDK, that would bring new ideas, users, and fees to Avalanche’s growing blockchain web. It was also supposed that Ava Labs, the entity that developed the software that runs Avalanche, would be paid consulting fees to build these Avalanche blockchains for outside parties. When Avalanche launched in September 2020, it was staffed with some of the sharpest academic minds in blockchain protocols and marketed itself as a faster version of Ethereum.

Avalanche’s blockchain eventually became a financial success in the fall of 2021 on its in-house developed EVM blockchain, called the C-Chain. At its peak, the C-Chain held more than $10B TVL locked in its smart contracts, boasted $1M in fees per day, and consistently held over 100K DAUs. In September 2023, those figures had dwindled to $500M in TVL, $11k per day in fees, and 34k daily active users.

The reason for this decline is manifold but mostly relates to the implosion of Avalanche’s chief backers, the dastardly Three Arrows Capital, and Avalanche’s lack of product differentiation becoming painfully clear in a bear market. Avalanche has never been able to capitalize on its unique architecture, and many of the projects that were built during Avalanche’s early days were shoddy copies of Ethereum projects (that were often copies of other projects). Avalanche’s initial user base came mostly from the more financially adventurous and curious Ethereum user base. At its peak, $6B, around 60% of Avalanche’s peak TVL of $10B, came directly from Ethereum users. As the bear market gripped crypto amid the implosion of Three Arrows Capital and Luna, it became clear that Avalanche usage was geared to speculation on use cases that never materialized and developers who abandoned their projects once Three Arrows Capital and related VC funding dried up. At the same time, the explosion in usership amongst Ethereum L2s like Arbitrum, Base, and Optimism has taken away many users and much capital from Avalanche.

Though we have great confidence in the technical abilities of Avalanche, we are unsure if Avalanche will be able to use its strong marketing talent to bring in the enterprise customers needed to revitalize Avalanche’s chain of chains, additionally, with a rapidly vaporizing developer base and a crop of VC capital migrating away from all but the top projects in crypto, its hard to be bullish on the long term prospects of Avalanche. Avalanche does not have the sticky coder base nor the backing of Jump Capital to create a 1M TPS chain, and it also lacks the thriving ecosystem of developers and capital that Ethereum retains. That said, anything could happen in a bull market, and we continue to see Avalanche announce fascinating technical solutions to complex blockchain problems. But until it gets applications that bring in new users, AVAX will suffer accordingly.

SUI (-15.4%)

SUI TVL and Daily Active Users

Source: Artemis XYZ as of 9/30/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

SUI was the weakest token amongst SCP tokens in September, and this decline resulted from sagging on-chain activity and persistent, substantial token unlocks. SUI’s blockchain saw the third worst decline in users (-36%) and the highest drop in transactions (-42%) among SCPs.

From the standpoint of unlocks, the current floating supply of SUI is worth roughly $352M, and in the month of September, 70M tokens worth ~$36M were unlocked. Going forward, a further 70M tokens will be unlocked monthly between June and August 2024 when unlocks of over 1B tokens occur. As a result, the token supply will grow 197% over that period of time. While some would contend that the market prices in these supply inflows and that much of the supply will not be sold for years, even if only 10% of this supply is sold, it would amount to multiples of the current daily active volume for the SUI token. Most likely, that selling would cause substantial price declines.

While SUI has enormous transaction throughput potential, which was as high as 60M transactions per day in late July, its financial viability is premised on tremendous blockchain usage. Currently, transactions cost roughly $0.0004. This implies that the current revenue of the chain is approximately $200-$400 per day. While it is not uncommon for start-ups to lack revenues, it is quite uncommon to see them command fully diluted valuations of $4.5B.

SUI’s focus has been on creating a blockchain to enable high throughput to enable consumer use cases that demand lots of transactions per second. To that end, SUI claims to be able to process up to 297k TPS, which should be more than enough blockspace supply to satisfy most use cases. This technical feat is accomplished by a combination of SUI's unique programming language, Move, and a more computationally efficient virtual machine. Unlink Ethereum enables SUI to parallelize the processing of many transactions simultaneously, which massively speeds up throughput.

As a result of SUI’s consumer focus, it has sought to simplify the user experience for both the account holder and the developer. In September, SUI announced zkLogin, eliminating the need for account holders to maintain private keys. The new setup allows SUI users to log into Web3 dApps with their Google, Twitch, and Facebook credentials. This is a massive user improvement over that offered by Ethereum and others, where users have to maintain seed phrases to keep backups of their accounts. Sui has also formed important partnerships with gaming companies, and in September, SUI announced partnerships with NHN, an important mobile game developer out of South Korea. Going forward, SUI will need to see these initiatives blossom into substantial usage of its chain, or it will wither due to selling pressure.

DeFi

The Market Vector Decentralized Finance Leaders index displayed remarkable resilience in September, +13%, surpassing ETH’s 1% gain as investors gravitated towards assets such as MKR and AAVE, which returned 40% and 14% respectively. These protocols have spearheaded the drive to bring Real World Assets (RWA) onto the blockchain, a narrative which, with T-bills at 5%, continues to attract investors across the space. The RWA narrative has ignited enthusiasm among DeFi enthusiasts, who view it as the first big step in bringing traditional financial instruments on-chain since the inception of stablecoins and potentially paving the way for a composable financial world in the future. Notably, the establishment of the Tokenized Asset Coalition, comprising Aave, Centrifuge, Circle, Coinbase, Base, Credix, Goldfinch, and RWA.xyz, represents a groundbreaking partnership encompassing both centralized and decentralized actors with a collective mission to integrate traditional financial assets into the realm of DeFi.

Centrifuge, notably, demonstrated remarkable performance this month, with CFG rallying 42%. This surge followed an announcement at the Real World Asset Summit that Centrifuge would build infrastructure for an RWA lending market on Aave. This market will enable DAOs to acquire tokenized short-duration U.S. treasury bills through Centrifuge’s permissioned liquidity pools and deposit the assets into Aave, allowing DAOs to borrow USDC against their interest-bearing deposits. The initial funding for tokenized RWA pools will come from the Aave treasury, providing access to the ~5% yield generated by overnight financing of U.S. treasury assets. Furthermore, adopting RWAs on Aave could potentially boost the utilization of Aave's stablecoin GHO. This should be top of mind for Aave governance as GHO has witnessed lackluster adoption since its inception earlier this year, with a market capitalization of only $22 million despite its relatively low borrow APR of 2.5%. These emerging markets should also allow MakerDAO the capability to borrow stablecoins against their RWA deposits.

Source: Makerburn.com, VanEck research as of 9/29/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Towards the end of the month, MakerDAO initiated a poll to raise the debt ceiling for their two most extensive U.S. treasury bill vaults, Monetalis Clydesdale and Blocktower Andromeda, from $1.2 billion to $3 billion each. If this poll garners approval, passes a governance vote, and the vaults are fully utilized, the annual revenue for MakerDAO could see a staggering 84% increase, amounting to $159 million. Subsequently, these funds are slated to be used to buy back and deposit $MKR into the Uniswap V2 MKR-DAI pool. The potential expansion of on-chain liquidity and constant buy pressure played a pivotal role in driving MKR's rally over the course of the month.

The amount of DAI deposited in Maker’s DAI Savings Rate (DSR), which pays depositors 5% APR, rose 23% to $1.65 billion. This boosted DAI’s supply to a 6-month high of 5.5 billion, potentially indicating that the bottom is in for DAI as it continues its supply trend reversal from its bear market low in August of 4.4 billion. Additionally, Spark protocol voted to raise the DAI borrow limit on the platform 100% to $400 million after demand for borrowing DAI reached its governance-approved $200 million ceiling.

DAI Market Capitalization Growth Continues

Source: Makerburn.com, VanEck research as of 9/29/23. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

While the RWA narrative has acted as a favorable tailwind for major DeFi assets in this sector, on-chain economic activity has struggled overall. Decentralized exchange volume dwindled this month, experiencing a decline of 30% to $40 billion. Meanwhile, the total value locked in DeFi slightly grew, rising 1.7% to $38.46 billion. However, with the strides made to bring tokenized RWAs on-chain, we foresee significant consolidation in the space, with Maker and Aave expected to capture most of these assets and see their share of the total value locked in DeFi rise accordingly.

Ethereum DeFi TVL: Further Consolidation Expected

Source: Artemis, VanEck Research as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

CRV Rallies After Egorov Repays Aave Debt and Whale Locks CRV on Convex

The Decentralized Finance Leaders index also received a significant boost from the robust rally of CRV, which rebounded by 15% during the month. This resurgence comes after CRV faced a downturn in the aftermath of the Vyper compiler exploit in July. The rally in CRV was further facilitated by Michael Egorov's decision to fully settle his debts on Aave and transfer his assets to other lending platforms, where he anticipates a less aggressive approach to managing his position. The move was prompted by Aave governance's decision to freeze the CRV market and initiate discussions on how to liquidate his position safely due to the bad debt risk it posed to the platform. Egorov's most substantial position now resides on Silo. Finance, where he has deposited $55 million worth of CRV and borrowed $17 million in crvUSD. Following this development, Silo's governance token, SILO, experienced an impressive rally of 76%, surging from $0.025 to $0.044. Furthermore, on the 21st of the month, a fresh wallet was deployed, withdrawing 19.9 million CRV from Binance and using it to acquire Convex's liquid-locker product, cvxCRV. At the time of this purchase, cvxCRV had been trading at a discount relative to its peg, and this purchase signaled strong conviction from the whale that CRV would continue to play a pivotal role in DeFi.

DeFi Protocols Facing CFTC Scrutiny

Opyn, Inc., Deridex, Inc., and ZeroEx, Inc. (0x) were accused by the Commodities and Futures Trading Commission (CFTC) of unlawfully providing leveraged and margined retail commodity transactions in digital assets through their DeFi protocols. Opyn and Deridex are also facing charges for functioning as unregistered swap execution facilities, undertaking activities restricted to registered futures commission merchants (FCMs), and neglecting to carry out know-your-customer (KYC) due diligence. The entities did not confess to or dispute the accusations; however, they have consented to settle by paying fines of $250,000 (Opyn), $100,000 (Deridex), and $200,000 (0x).

The case involving 0x carries potentially broader implications within the DeFi space. Unlike the other projects that faced regulatory actions, it is essential to note that the assets in question were not issued by 0x but rather by a third party. This underscores the regulatory stance taken by the CFTC, which seeks to establish accountability for DeFi projects in relation to the assets traded on their platforms, irrespective of whether these projects exercise direct control over the assets in question. Within this regulatory framework, protocols such as Uniswap may find themselves subject to scrutiny. Notably, the deployment of liquidity pools on the Uniswap platform is characterized by its permissionless nature. Consequently, should these pools involve assets that the CFTC deems necessitate KYC verification, Uniswap Labs could potentially face similar allegations from the CFTC. This highlights the increasing regulatory landscape within the DeFi sector, which investors should closely monitor, especially considering DeFi’s latest push to bring more tokenized securities on-chain.

Friend Tech & Clones Drive the SoFi Frenzy

Friend.Tech Protocol Fees Dominates Clones

Source: Dune: @Cryptokoryo as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Friend.Tech, the social-finance (SoFi) app on Base, continued to see accelerated adoption this month, with unique users growing from 128k to 284k throughout the month. The impressive user growth has caused developers to create clones of the SoFi app on other chains in hopes of seeing a similar uptake in adoption. Post.Tech, Star Shares, Friendzy.gg, and Friend3.group were deployed this month on Arbitrum, Avalanche, Solana, and BNB Chain with slightly tweaked features, but all essentially doing the same thing as Friend.Tech. However, of the Friend.Tech clones, only Post.Tech has seen significant usage. Friend. Tech demonstrates the importance of being the first to market and the moat it creates, as it commands a 96% share of the protocol fees generated by SoFi platforms.

Friend.Tech Key Volume Outpaces Ethereum NFT Volume

Source: Dune: @21co, VanEck Research as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Impressively, the volume generated by trading of Friend.Tech shares exceeded NFT volume on Ethereum for most of the month due to the illiquidity of the Friend.Tech key market. Friend.Tech allows traders to flip their key purchases for a profit much faster than in NFT markets because a pricing curve dictates the price. For example, if one were to buy a key from a user that had 100 keys, this would change the price per key by ~2%. This differs from the NFT market, where most projects have a multitude of NFTs sitting at the floor price, meaning it would take significantly more purchases on average to cause a meaningful change in the floor price. For this reason, we theorize many NFT traders have transitioned to the Friend.Tech market due to the drastically higher volatility.

Friend.Tech Key Pricing Curve

Source: Dune: @21co, VanEck Research as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Metaverse

The Market Vector Media and Entertainment Leaders index declined 6% in September, continuing to underperform ETH and BTC. APE had the worst performance of the index components, falling 18%, while SAND only declined 5%. MANA was the only index component that saw positive price action this month, rising a mild 1.5%. APE’s underperformance comes despite an 8% rally at the end of the month after Yuga Labs released Legends of the Mara, an idle trading card game set in Yuga’s metaverse, The Otherside. The Mara NFTs are also only tradeable on the X2Y2 marketplace, a result of OpenSea’s decision to sunset their operator filter contract in February, allowing creators to have royalties enforced on the platform. In the days following the launch, X2Y2 rocketed 30% but finished the month down 24%.

NFT Volume Continues to Collapse

Source: Cryptoslam! as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

Top NFT Collections in September by Volume

Source: Cryptoslam! as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

NFT volumes have continued their descent, experiencing a decline of 32% to $285 million. This drop marks the lowest levels observed in over two years, reflecting a waning appetite among investors in the sector. Blur has maintained its position as the top NFT exchange by volume traded with $125 million of volume, while OpenSea followed with $58 million of volume. Despite its continued dominance, due to the lack of any value accrual mechanism, $BLUR price still declined X% this month. This is also likely driven by investors speculating that successful NFT collections will only let their NFTs trade on platforms where they can still collect royalties on their sales, as was the case with Yuga’s Legends of the Mara collection.

However, amidst this general decline, specific areas within the market continue to exhibit bullish sentiment. Notably, select gaming NFTs have managed to sustain significant attention. This trend is evident in gaming NFT collections consistently dominating the NFT volume rankings. Collections such as Mythical Games' NFL Rivals, DraftKings Reignmakers, Sorare, and Gods Unchained have consistently secured positions within the top 5 NFT collections by volume. It's worth noting that these NFTs typically have lower price points, so they do not generate massive volumes from just a few high-value sales. But what they may lack in high prices, they more than compensate for in user retention and ongoing expenditure.

Given their speculative nature, the key takeaway is that high-priced NFTs with no utility beyond use as a profile picture rely on bull markets to maintain high sales volumes. In contrast, gaming NFTs derive utility from their integration into gameplay, making them more akin to a purchase for entertainment value rather than purely an investment. Users appreciate these NFTs for their ability to enhance competitive outcomes in their games, and this utility-driven demand contributes to their sustained popularity.

Pudgy Penguins Walmart Partnership Leads to Price Floor Rally

Source: VanEck Research as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

This month, the Pudgy Penguins NFT collection announced that they would launch their plush toys in 2,000 Walmart stores nationwide. Each plush toy comes with a unique QR code, allowing the owner to claim a free NFT trait that can be utilized in the Pudgy World, an online social platform where users can engage with penguin avatars. This launch marks one of the first major partnerships between an NFT collection and a major retailer. The proceeds from the plush toy sales will go to LSLTTT Holdings, Inc., the company behind the Pudgy Penguins brand, run by Luca Netz. Some NFT holders showed dismay at the fact that they would not receive a portion of the revenue, while others noted that it’s a much better alternative than fundraising via dilution, as was done by the Azuki team.

Additionally, if an NFT bull market returns, having the Pudgy brand in one of the largest retailers could attract an outsized proportion of NFT buyers as investors will likely seek out NFTs with the strongest IP. The success of this collaboration will provide valuable insights into the ability of NFT brands to leverage their intellectual property and community to attract new users through NFT rewards tied to physical goods. At present, it is evident that this launch has revitalized investor interest in the NFT collection. The collection's floor price has surged by 18% this month, a noteworthy achievement, especially considering the prevailing trend of declining floor prices across the majority of NFTs.

NFT Enthusiasts Cashing Out Big on Zynga’s Free Sugartown Mint

Sugartown Oras, the inaugural NFT mint from Zynga, a renowned name in casual gaming, was distributed via a free mint on the 13th of the month on the Ethereum blockchain. This move stirred excitement among NFT enthusiasts, who promptly claimed Zynga's initial venture into the web3 realm within the first hour of launch. Their enthusiasm was well-placed, as these free NFTs are currently trading at a floor price of 0.25 ETH, equivalent to $400. Zynga has intentionally maintained a shroud of secrecy around their upcoming Sugartown IP, revealing minimal details to create an aura of intrigue surrounding the project. This strategy seems effective, evident in the considerable prices that NFT traders are willing to pay for these digital assets. In two weeks, the Oras NFTs have recorded trading volumes exceeding $4 million, with this exclusive collection of 6,000 NFTs distributed among 2,374 distinct wallets.

Parallel TCG: A Potential Breakout Game on Base

Parallel TCG, a recently launched game on the Base blockchain, has piqued the interest of many since its beta launch in August. This sci-fi-themed trading card game allows players to align with different factions and engage in PvP battles. Notably, Parallel TCG marks the debut of the Echelon Prime ecosystem, powered by the $PRIME token, which rallied an impressive 14%, finishing the month with a $93 million market capitalization. In previous newsletters, we emphasized the importance of Web3 games, providing players with the flexibility to enjoy the game without the intricacies of blockchain management. Parallel TCG aligns with this perspective. Players seeking pure enjoyment without dealing with NFTs and web3 wallets can utilize apparition decks, which are not tradable as NFTs. However, they still enable participation in ranked games and progression through the monthly battle pass.

$PRIME Performance

Source: Coingecko as of 9/29/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

For players who opt to acquire their cards as NFTs, there's an opportunity to earn $PRIME by achieving victories in ranked matches. This incentive scales with the number of NFT cards in their deck, allowing for up to 5 wins per day. To foster a thriving ecosystem that rewards players, $PRIME is sunk into gameplay pools through various player actions, such as purchasing Glints, the non-crypto in-game currency for Parallel, which has already seen substantial user investment, exceeding $100k during the beta phase.

The pivotal factor for the success of $PRIME lies in ensuring that gameplay mechanics necessitate the sinking of $PRIME at a rate higher than the distribution rate awarded to players for winning ranked matches. Impressively, early results suggest that the team has achieved this balance. In the private beta phase, with approximately 2500 players, around 1.5 million $PRIME (equivalent to 6% of circulating supply) has been sunk, while only approximately 1000 $PRIME has been distributed to players as rewards for ranked victories. With an impressive queue of over 250k players awaiting entry into the TCG beta and support from industry giants like Paradigm, we eagerly anticipate the growth of this ecosystem in the coming months.

Additionally, Parallel Studios, the creator of Parallel TCG, has a significantly more captivating project in the pipeline. Parallel Colony, set to launch in beta within the $PRIME ecosystem by year-end or early next year, introduces AI-powered characters that players can instruct to undertake various tasks to achieve specific objectives. Utilizing ERC-6551 accounts, these AI characters can engage in economic activities, exchanging $PRIME and other digital assets to fulfill their assigned missions. We perceive this development as a groundbreaking leap in gaming, potentially capturing the broader gaming audience's attention and demonstrating the innovative possibilities that blockchain games can offer.

Singapore Leads the Charge in Web3 Adoption

In contrast to the challenging landscape for Web3 adoption in the United States, where regulatory battles with innovators persist, other jurisdictions have shown the way in accelerating the adoption of consumer-facing applications built on blockchain technology. Notably, two significant developments emerged this month in Singapore, illustrating how progressive policy approaches can foster innovation and deliver consumer cost savings.

The launch of KaiKai, a retail shopping app developed by Cosmose AI, offering cashback rewards in their Kai-ching stablecoin, generated a significant surge in daily active users (DAUs) on the Near blockchain when it was introduced in Singapore this month. This user surge was so substantial that Near now boasts more DAUs than Ethereum, Arbitrum, and Optimism combined. This development underscores the untapped potential of the global market when it comes to onboarding users onto blockchain platforms. It also highlights the immense user traffic that consumer-facing apps can channel into blockchains, mainly when they offer a seamless, user-friendly experience without requiring extensive blockchain knowledge and provide integrated wallet functionality. Over time, the increased usage should contribute positively to $NEAR economics, as 70% of the gas fees paid on the network are burned. However, despite the increased user base, NEAR still experienced a notable underperformance compared to ETH this month, with a price decline of 9%.

NEAR DAUs Surpasses Ethereum Optimism & Arbitrium Combined

Source: Artemis, VanEck Research as of 9/27/2023. Past performance is not indicative of future results. Not intended as a recommendation to buy or sell any of the names mentioned herein.

The positive news for Web3 in Singapore didn't end there. Grab, a popular app known for its ride-hailing, food delivery, and digital payment services, announced the pilot launch of its app-based wallet experience on September 17th. Grab claims a user base of over 180 million users and offers services akin to Uber in Southeast Asia. The wallet will be powered by Circle and deployed on Polygon. Notably, the app incorporates NFTs as vouchers that users can redeem for rewards within the app. This move signals ongoing support in Singapore for consumer-facing Web3 products and demonstrates the growing interest in integrating blockchain technology into everyday consumer experiences.

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Please note that VanEck may have a position(s) in the digital asset(s) described below.

Getting started with Ethereum (and cryptocurrency in general) can be a bit overwhelming, especially when faced with jargon like "dApps" and "smart contracts". Think of Ethereum as an online app store. Just like Bitcoin, Ethereum involves digital money, but it offers so much more than just that. In this "app store", developers can create and launch their own applications without any centralized control. The "currency" used to buy, sell, or operate within these applications is called ether. One of the coolest features of this digital app store is "smart contracts", which are like automated agreements or deals. These tools have the potential to change many industries, from banking to art.

If Ethereum sounds complicated, don't worry. In this guide, we'll break things down to help you understand what Ethereum is, its standout features, and why it's such a big deal.

What is Ethereum?

Ethereum is a digital platform that lets people build and use decentralized applications on the internet. Think of it like your smartphone's app store, where you can download all sorts of apps to help you do different things. Just as the app store has a system behind it (like iOS or Android), Ethereum operates as an "app store" for the web, powered by its unique digital currency, ether.

When people talk about investing in Ethereum, they're usually referring to buying its primary digital currency, ether or ETH, much like buying bitcoin means acquiring the cryptocurrency BTC.

To break it down further:

• Ethereum: This is the whole digital system that lets people make and use special online applications and automated agreements, known as dApps and smart contracts. You can think of it as the backbone or the foundation that everything runs on.
• Ether (ETH): This is Ethereum's own kind of digital money. If you're investing, trading, or paying fees on the Ethereum platform, you're using ether. Besides being a form of investment, ether is the "power source" that makes everything on Ethereum work, from running apps to sealing agreements.

So, when someone says they're putting money into Ethereum, they're generally buying ether, hoping its value will increase over time.

Bitcoin vs. Ethereum: What's the Difference?

At first glance, both Bitcoin and Ethereum are cryptocurrencies. But while they share some similarities, they also have fundamental differences:

• Origin: Bitcoin was introduced in 2008, aiming to be a decentralized digital currency or, as some like to say, "digital gold." Ethereum, on the other hand, was launched in 2015 with a broader vision than just being a currency.
• Purpose: Bitcoin is primarily a medium of exchange or store of value. Ethereum, while having its native currency called Ether, is more than just a cryptocurrency platform. It’s a platform that enables smart contracts and decentralized applications (dApps). In simple terms, while Bitcoin offers a new way of transferring money, Ethereum provides a new way of doing business and creating decentralized platforms.
• Supply: Bitcoin's supply is capped at 21 million, making it deflationary. Ethereum doesn't have a max supply, which allows it more flexibility but introduces different economic considerations.

How Do Ethereum's Smart Contracts Work?

The power of blockchain lies in its transparency and security. Because so many people have copies and they always verify new pages together, it's incredibly difficult for someone to cheat or make false entries. The advantage of blockchain is its decentralized nature. When information is stored across multiple nodes, it becomes tamper-resistant. Any malicious activity or inconsistency can be quickly detected and corrected. While Bitcoin introduced the world to blockchain and cryptocurrencies, . As the examples below highlight, Ethereum enhances blockchain capabilities with its smart contracts:

• Decentralized Apps (dApps): Developers can build applications on Ethereum that inherit the security and decentralized features of its blockchain.
• Decentralized Autonomous Organizations (DAOs): These are like digital companies or organizations where decisions are made based on predefined rules in smart contracts, without centralized control. Governance power is distributed across token holders who collectively cast votes.
• Digital Identity: Individuals can have a digital identity on the Ethereum blockchain, ensuring personal data is secure and giving control back to the user.
• Licensing and Royalties: Artists and creators can use Ethereum to ensure they get paid their dues every time their work is used or sold.

Consider a traditional contract, like an agreement to buy a car. Usually, you'd involve third parties like banks or lawyers to ensure everyone keeps their promises. Imagine a digital contract that automatically does what it's supposed to when certain conditions are met without needing a middleman. That's a smart contract! Ethereum is a platform that allows these smart contracts to operate. Its own cryptocurrency, ether, powers these contracts and ensures they run smoothly.

Why Invest in Ethereum?

The investment case for Ethereum is strong and diverse:

• Technological Edge: Ethereum's platform allows for creating smart contracts, programs that automatically execute when certain conditions are met. This feature has huge potential in reshaping industries, from finance to art.
• Market Share: Ethereum's platform supports numerous other cryptocurrencies. Its influence is clear when you consider that, as of September 2023, 10 of the top 20 cryptocurrencies are based on or linked to Ethereum.
• Applications: Ethereum is versatile. Beyond cryptocurrencies, it's used in decentralized finance, games, and by major organizations looking to integrate blockchain technology.

Investing in Ether vs. Ether Futures?

Purchasing Ether directly requires a crypto wallet, which is like a digital version of a regular wallet or bank account, specifically designed to store, send, and receive cryptocurrencies like bitcoin and ether. Instead of physical money, it keeps a pair of digital keys: one public, which you share with others to receive funds, and one private, which you keep secret and use to authorize transactions. Just as you'd keep a regular wallet safe from thieves, protecting your crypto wallet, especially the private key, is essential to ensure your digital money's safety.

But what if you're interested in Ethereum's value and don't want the hassle of managing a digital wallet? That's where ether futures come in.

What are Ether futures?

They're like making a deal to buy or sell ether at a future date, agreeing on the price today. This way, you can have exposure to ether’s price changes without actually holding the cryptocurrency.

Some Benefits of Using Ether Futures:

Simplicity: No need to set up or safeguard a digital wallet. Futures provide a more straightforward and familiar avenue to gain exposure to ether.

Regulation: These strategies are regulated financial products overseen by financial authorities. This regulation offers investors an added layer of protection and security compared to buying and holding crypto directly, which may not always have clear regulatory oversight.

Security: Investors don't need to worry about the risks associated with storing and securing their ether in a digital wallet, such as potential hacks or loss of private keys.

So, while some buy ether directly with a digital wallet, others prefer the safety and simplicity of ether futures.

Ethereum's Growing Role

Ethereum is quickly becoming important in the digital world, with more than 4,000 apps running on its system1. Different sectors, from finance to art, are finding ways to use Ethereum for new ideas and improvements. It reminds some of the early internet days when everything felt new and full of possibilities. More and more people are exploring Ethereum and its currency, ether, because of the opportunities they present. Simply put, Ethereum isn't just digital money; it's a platform for innovation and could be a major part of the future.

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Risks to bonds are multiplying. A Federal Reserve declaring victory on inflation too soon, a US Treasury accelerating borrowing in 2023, a Bank of Japan allowing yields to rise in a market known to fund offshore carry trades, “fiscal dominance” in the US, UK, and other developed markets (DM), and geopolitical facts (to which we continue to see great market denial) – all conspire toward higher yields.

We’ll start with the Fed. At its latest FOMC meeting, it paused rate hikes just after Fed Funds poked its head above its favored inflation measure (core PCE), when normally pauses happen several hundred basis points (bps) above core PCE. And this pause occurred even though commodity and oil prices had risen since the previous meeting. In fact, the bulk of the inflation decline the Fed is declaring victory on might not only not yet be over, but was dominated by goods prices rather than wages or services. Investors should watch labor prices, particularly with labor unions activated and supported largely by the left and right. Regarding Treasury borrowing, we won’t say much because we were early adopters of the “fiscal dominance” framework applied to developed markets. We want to re-emphasize that policymakers and market participants will be unable to accommodate this thinking because it doesn’t fit their frameworks, and humans in groups just don’t change those until they explode, in our opinion. Because US treasuries are assumed, a priori, to be “risk-free”, any curve steepness must be attributed to “term premium” (i.e., basically related to inflation), and not related to credit risk. Many will be looking at a radar screen that is no longer the guide it was, also a favorite of human groupings going back millennia. Good luck. And we know the sellers! The Bank of Japan is in a great position because it can sterilize, or not, its bond market interventions – it can sell Japanese Government Bond (JGBs), but if that pressures the yen or yields too much, they can just sell US Treasuries. China can, too, by the way. Good luck, again.

Good policy in emerging markets generally is an independent driver. As always, EM has plenty of uncorrelated economics and asset prices. High real interest rates in commodity-exporting countries like Brazil, and low inflation in countries like China, remind how EM has generally been weathering these ongoing DM-led adverse scenarios. There are a lot of strong EM setups in the current environment. Brazil is an obvious example. The country is beginning an overdue easing cycle while its balance-of-payments accounts continue to be a juggernaut. Brazil has lower inflation than the UK and Australia, and near 10% positive real interest rates. Unfortunately, a lot of the other EM “majors” don’t pass our tests, but we have found right-sized positions in Peru and Indonesia for other “majors” and in Uruguay, Dominican Republic, Zambia, and Sri Lanka for “minors”. Colombia could be a “major” that wins, too, and we are likely to increase in August. Whatever you think about the Fed, they aren’t thinking about it in Sri Lanka and shouldn’t. Talk about uncorrelated.

Quid nos facere? Everyone got long carry and went on their summer holidays… and now rates are at risk of breaking big levels (4.4% on the 10 year Treasury is our level) to the upside. To us, this means big risks to bonds, especially duration, and extreme duration on EM local currency markets that are correlated with US rates. Mexican local currency looks very vulnerable to us. Cash should be well above average, until the tilt is priced or rejected. “Sheep gotta do what sheep do and cannot do otherwise”, and that is to follow the other sheep while the hyenas make their plans. But even the hyenas have to fear the lion. And the lion is walking about. That lion is rising rates.

10-Year UST Yield and Moving Averages, %

Source: VanEck Research. As of 11 August, 2023.

Exposure Types and Significant Changes

The changes to our top positions are summarized below. Our largest positions in July were Mexico, South Africa, Indonesia, Brazil, and Colombia:

• We increased our local currency exposure in South Africa and Chile. South Africa’s disinflation progress now looks more established, and this should allow the central bank to end its tightening cycle safely. South Africa should also be expected to benefit from the potential revival of China’s reflation trade. Chile is well positioned to policy easing after the inaugural rate cut in July, and the impressive current account adjustment should strengthen the fundamental support for the peso. In terms of our investment process, this strengthened the economic, policy, and technical test scores for both countries.
• We also increased our hard currency sovereign exposure in Mexico and hard currency corporate exposure in China. Our main concern in Mexico is that it is a very popular EM long, however we added to our position in Pemex after the government indicated it was not going to withdraw its support. This improved the policy test score for the country. In China, we focused on tactical longs in selected developer companies, which can benefit from the latest round of the government's targeted support.
• Finally, we increased our hard currency sovereign exposure in Nigeria, Uzbekistan, Israel, and Mongolia, as well as local currency exposure in Israel. Nigeria is fast-tracking some reforms, including FX unification, and this should reduce pressure on international reserves, benefiting sovereign bonds. In terms of our investment process, this improved the policy test score for the country. Mongolia’s exposure is an expression of a possible revival of the China reflation trade (as authorities are stepping up policy support). In Uzbekistan, we were comfortable to increase exposure after the July elections went smoothly. In Israel, there is still a lot of uncertainty on the legislative front, but the political crisis might be getting closer to the resolution. In addition, disinflation is progressing nicely, pointing to the end of the hiking cycle. In terms of our investment process, we saw improvements in the policy test scores in Nigeria, Israel, and Uzbekistan, and in the technical test score in Mongolia.
• We reduced our hard currency sovereign exposure in Malaysia and local currency exposure in Indonesia. We continue to like Malaysia’s fundamentals, but we are concerned about high correlations with China’s growth and currency outlooks. In Indonesia, we decided to take partial profits after a good rally on the back of concerns that external surprises might decline due to downside pressure on exports to China (while domestic demand, and hence, demand for imports) remains solid. These considerations worsened the technical test scores for both countries.
• We also reduced our local currency exposure in the Czech Republic and hard currency sovereign exposure in Romania. Stretched valuations – and hence the deteriorating technical test score – was our main concern in Romania. In the Czech Republic, there is a risk that the national bank will be too hawkish for too long, leading to a policy mistake. This worsened the policy test score for the country.
• Finally, we reduced our hard currency sovereign exposure in Angola, Qatar, Oman, and the United Arab Emirates (UAE). Angola’s bonds were getting quite “rich”, just as the country will be facing higher external amortizations, while still being highly dependent on global oil prices and China’s growth outlook. This worsened the technical test score for the country. The oil “channel” was the primary reason in the remaining countries, in addition to persistent concerns about global duration. This also worsened the technical test score for these countries.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Detecting patterns is an ability we develop early in infancy and refine by experience throughout human life. Categorization is an important part of how humans learn and make optimized decisions when faced with multiple data points. In the crypto world, with over 22,000 coins, there is an increasing need for a rigorous classification system to structure investment decisions.

MarketVector, a VanEck subsidiary, develops, monitors and markets the MarketVector Indexes, a focused selection of pure-play and investable indices. In 2017, MarketVector in partnership with CryptoCompare—an established London-based digital assets data provider—became the first regulated index provider to launch a series of digital assets indices designed to most accurately track the performance of the otherwise fragmented global digital assets markets. These indices were the first to meet investment industry benchmarking standards by providing a public rulebook, industry-wide data distribution, proper identifiers and further standard index governance requirements. Today, MarketVector is regulated under the EU Benchmark regulation directive and is the first index provider with such regulatory status to offer transparent and industry standard digital asset indices.

MarketVector introduces a categorization of digital asset coins into distinct, non-overlapping categories that form the building blocks for a new crypto classification scheme. Categories capture the value and use case related to a coin. Using a qualitative process, each coin is categorized into one category. Coins may change categories over time and new categories may emerge. The MarketVector"Leaders" investable category indices capture the largest and most liquid coins within a category which are also supported by major US crypto exchanges and custodians.

Categories allow investors to group similar digital assets into groups to analyze and proxy targeted exposures. They enable deeper analysis into peers and aggregated performance review. As the basis for investable indices, they provide the underlying components to build an investment solution aimed at capturing the performance of the coins within the category. They allow users to measure, benchmark and capture the performance and characteristics of targeted categories. MarketVector categories will help make digital assets digestible to traditional finance investors while giving crypto native funds additional benchmarking capabilities.

Source: MarketVector Indexes. Data as of 9/18/2023.

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Digitally Native Tokenized Assets vs. Real-World Tokenized Assets

Digitally native tokenized assets are entirely digital, existing solely on blockchain platforms. Examples include cryptocurrencies like Bitcoin or Ethereum but you could also say NFTs are entirely digital tokenized assets if the NFT represents ownership of an image or gives access to an exclusive online community. They derive their value from their inherent scarcity, demand, and utility within the blockchain ecosystem.

On the other hand, real-world tokenized assets are representations of physical assets (e.g., real estate, art, commodities) on a blockchain. These tokens are backed by tangible assets, and ownership is recorded on a blockchain, ensuring transparency and security. Real-world assets are tokenized to enhance accessibility, liquidity, and efficiency in traditional asset markets.

It's important to emphasize the differences in the tokenization's justification. While tokenizing real-world assets is done from the standpoint of efficiency, access to liquidity, and reducing trust and intermediaries, tokenizing natively digital assets is primarily done to promote self-custody, ownership of the user's personal data, and promote decentralization.

Benefits of Tokenized Real-World Assets

Accessibility and liquidity are improved because tokenization removes long-standing obstacles to asset ownership. Investment opportunities that were previously inaccessible are now available to investors thanks to fractional ownership, which enables them to own a portion of valuable assets. Tokens can also be traded round-the-clock on digital exchanges, increasing liquidity.

Global Reach and Interoperability: Assets that have been tokenized are not restricted by geographical boundaries. A global marketplace is created by the participation of investors from all over the world. Additionally, these tokens may be traded between various blockchain platforms, promoting interoperability.

Reduced Intermediaries and Costs: Transaction costs for traditional asset transfers are higher because there are frequently many intermediaries involved. Tokenization gets rid of a lot of these middlemen, which lowers costs and boosts productivity.

Security and Transparency: The immutability and transparency of blockchains are guaranteed by their very nature. A public ledger keeps track of ownership and transaction information, which lowers the possibility of fraud and offers a safe environment for transactions.

Challenges for Issuers

Regulation Compliance: Issuers must juggle a dense web of regulations and compliance requirements since the regulatory environment for tokenized assets is still developing. It is crucial for issuers to maintain legal clarity because different jurisdictions could have different requirements. In the world of regulated securities, for instance, a CSD maintains the records and displays a golden state of truth, but a decentralized ledger is not under the authority of a single party; how can you guarantee that the state of the ledger is always accurate? Token ownership would also require legal recognition in order to be equivalent to asset ownership.

How do you identify the user's wallet for KYC/AML purposes? A straightforward solution would be for the user to demonstrate ownership of the address by sending a message using the related private key and presenting official identification from the neighborhood. The counterparty may then provide the user a KYC NFT passport or store this information in their own local, centralized database. On-chain identity has some unresolved problems and risks, particularly when one loses access to their wallet or the private key is stolen.

Asset Appraisal & Valuation: Accurately estimating the value of real-world assets is essential for tokenization. To provide fairness and openness for investors, this procedure necessitates trustworthy valuation techniques. For instance, Oracle networks like Chainlink could be a crucial data provider for manual pricing or indexes.

Although blockchain technology is fundamentally secure, there are security threats that could arise from trades or smart contract flaws. Issuers must put strong security measures in place to protect against fraud or hacking. One significant distinction is that once implemented, smart contracts are immutable, making it nearly impossible to undo any damage if the issuer loses access for whatever reason. Regular audits and other security precautions could assist in resolving the problem.

Impact on Investors and Native Currency

The network, its investors, and the native currency of the smart contract platform are all significantly impacted by the tokenization of real-world assets:

greater usage (demand for blockspace) = greater transaction fees paid to network validators (network revenue), which is not difficult to understand. As the use of tokenized assets spreads, there may be a rise in demand for the platform's native currency, such as Ethereum's Ether. The value of the local currency may rise as a result of this increased demand. Investors should be aware of the dangers associated with investing in digital assets, such as the dangers of severe volatility and catastrophic loss.

Market Innovation and Efficiency: The tokenization of physical assets encourages market innovation and efficiency, potentially resulting in a more open and accessible global financial ecosystem. This is a presumption that hasn't been proven in practice.

Real Yield Opportunities for DeFi: Financial solutions based on yield- or dividend-bearing real-world assets could provide DeFi with the much-needed boost it requires in the current context of high interest rates. Investors should be aware that this may prevent sustainable or steady yields or returns from digital assets.

State of Tokenized Real-World Assets

Tokenization of RWAs in numbers, starting with market cap growth.

Market Growth (Total Market Capitalization of RWA's)

Source: Messari, VanEck Research, Data as of 31/08/2023. Historic performance is no guarantee for future results.

Source: Messari, VanEck Research, Data as of 31/08/2023. Historic performance is no guarantee for future results.

Platform of Choice

Source: VanEck Research, Data as of 31/08/2023. This should not be understood as financial advice for any particular network or its native currency.

Source: VanEck Research, Data as of 31/08/2023. Historic performance is no guarantee for future results. This should not be understood as financial advice for any particular network or its native currency.

Type of Tokenized Assets:

Source: VanEck Research, Data as of 31/08/2023. This should not be understood as financial advice for any particular asset type.

Conclusion

Tokenized real-world assets represent a significant evolution in the world of finance, offering a myriad of benefits to investors and issuers alike. While challenges persist, the potential for increased accessibility, liquidity, and transparency in asset markets is substantial. As the space continues to mature, the impact on investors and native currencies of smart contract platforms is likely to be even more pronounced, reshaping the way we think about traditional assets and investments. It is not just the assets themselves that are changing, but also the asset managers, issuers, data providers and all other intermediaries that will need to rethink their entire business model. For a while, we will be stuck in a hybrid world (both off-chain and on-chain), much like the theoretical concept of gradient descent, I believe we will slowly tend towards the global optimum of fully on-chain assets and minimize the number of intermediaries.

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Actively Selecting Fitting Companies

Unlike most single themed ETFs that are passively managed and follow an index of companies associated with a certain industry (e.g. cybersecurity, AI), a complex theme like smart home requires active management.

Why? Because a multi-layered active approach ensures that CAVE can provide undiscovered upside by including less obvious beneficiaries of the smart home theme that could be part of another sector or industry. As discussed in the previous blog, the active manager (in this case Seb) can select the right names and adjust the ETF portfolio when necessary.

But active management has still more advantages, as Seb explained to me. It helps to better manage risks, an advantage in the current uncertain time. Based on new information or insights, he adjusts and balances exposure to themes, sectors, factors and stocks. That flexibility enables us to benefit from temporary over-reactions to good or bad news, and to quickly adjust if an idea does not work out or macro-economic circumstances change.

Benefitting From Opportunities

Active management also offers the opportunity to benefit from short-term market over-reactions. Since most smart home themes take a bit more time to materialize – especially in the case of the less obvious second and third order effects – CAVE often buys under-appreciated, or sells over-valued, stocks based on Seb’s thematic view.

AI is a good example. Several companies – including not only the magnificent seven (Apple, Microsoft, Nvidia, Amazon, Meta, Tesla, and Alphabet), but also network equipment company Arista – received a significant stock price boost from AI¹. The CAVE portfolio owned several of these stocks but reduced its holdings at high valuations, reinvesting in other – less obvious or maybe even counterintuitive – companies that will benefit from AI.

Last May, for example, the education sector was hit hard when ed-tech company Chegg (which offers a direct-to-student learning platform) reported that ChatGPT was affecting its subscriber numbers². Other education companies also felt the impact, even if their businesses were completely different, creating buying opportunities. Seb mentions PowerSchool,³ which provides business software running core applications for educational institutions. We recently increased CAVE’s stake in this company since it actually benefits from AI, using it for example, both to identify students who need support and to develop personalized learning solutions. Obviously it is uncertain if the expected benefit will materialize. We may reduce CAVE’s exposure to this company in the future.

Another example is found in music, where music stocks fell back last April when an illegal AI-generated imitation of Drake and the Weeknd went viral before streaming services took the fake down.⁴ As described in the Music Everywhere blog last June, we believe that AI is actually an opportunity for the music industry to improve quality, create new music experiences and increases the value of music made by real artists. This view drove our decision to increase the stake in Universal Music.

At the same time, investors must consider the related risks when investing in CAVE, such as market risk, sector concentration risk and risk of new technologies.

Managing Risks and Rewards

Turning to risk more specifically, Seb uses the shopping theme as an example, which is based on people buying more online. Nevertheless, the uncertainty surrounding consumer financial health is leading to challenging conditions for some ecommerce names. To balance that risk, Seb and his team take into account the whole value chain to lower the risk and still have exposure to the theme.

How does that work out? Well, CAVE still has retailers such as Lululemon in portfolio, but also includes payment companies like Visa, logistics companies such as Inpost and DHL, and companies providing warehouse solutions like Gxo Logistics or Terreno Realty.

Moreover, aside from changing exposure within the theme, Seb mentions that they also shifted exposure to other themes. While CAVE still has shopping companies in its portfolio, we have included more healthcare companies (see also our previous blog on this theme), since health is less reliant on the economic cycle.

Balanced Exposure to Secular Trends

By managing risks and opportunities, CAVE aims to create an attractive long-term investment proposition. Balancing the weights of different themes, sectors and factors diversifies exposure to a multitude of secular trends. At the same time, that balancing game reduces risk, improving CAVE’s risk-return profile.

SMH Performance overview for Q2 2023

VanEck Semiconductor UCITS ETF has had strong performance in Q2 of 2023, up 14.87% over that time period. Performance was largely due to exposure to NVIDIA Corp. ($NVDA) and their exposure to the growing GPU demand for Artificial Intelligence models. Semiconductors continue to be a primary driver of technological innovation globally, whether its complex systems on a chip or basic memory and components, we believe the sector is a long term trend that investors should consider.

SMH Top Holdings as of 30 June 2023

These are not recommendations to buy or to sell any security. Securities and holdings may vary.

Top two contributors for SMH in Q2 2023

NVIDIA Corp. (NVDA) – 11.9% Average Weight | 5.81% Contribution to return

In the second quarter, Nvidia exceeded expectations, achieving an EPS of $2.70 (surpassing predictions by 62 cents) and recording total sales of $13.51 billion, significantly surpassing anticipated figures. This notable success was driven by robust sales in data centers, which outperformed expert estimates by almost 30%, alongside elevated sales in the Gaming and ProViz sectors.

Their forthcoming quarter forecasts appear promising, with anticipated sales reflecting a 27% increase, augmented profitability per sale, and prudent operational spending. Market analysts responded favorably to these outcomes, revising their forward expectations for Nvidia upwards. Acknowledging Nvidia's adept performance in data centers and enhancing the gaming domain, they highlighted the company's strategic efforts to meet escalating demand by diversifying its product portfolio. However, a degree of caution was expressed due to potential challenges related to chip sales in China and subdued performance in the automotive sector.

Broadcom Inc. (AVGO) – 10.01% Weight | 3.37% Contribution to return

In Q2, Broadcom exceeded expectations with revenue up 3.5% and earnings per share (EPS) beating forecasts by 2.0% or $0.30. Analysts were upbeat about strong Networking growth driven by AI demand, boosting the Semi business before the iPhone refresh. Positive factors include an Apple deal, projected AI revenue increase, and optimism about deal closures. This led to raised estimates and a higher average price target of $847.31.

Top two detractors for SMH in Q2

QUALCOMM Inc. (QCOM) – 5.75% Average Weight | -0.56% Contribution to return

Following Qualcomm's Q3 report, shares fell broadly. The company's revenue of $8.44 billion was 0.8% below expectations, while EPS of $1.87 exceeded predictions by $0.06. Across its segments, QCT's (technology business) revenue was below target but EBT (earnings before taxes) was in line, while QTL (licensing business) missed on both revenue and EBT. The management's Q4 guidance indicates that the midpoint of their revenue and EPS goals is below the previous consensus. Analysts have generally labeled the Q3 results and outlook as disappointing, citing challenges from China, Huawei, and inventory adjustments that had a greater impact than anticipated. Despite this, some analysts find the valuation favorable and remain optimistic about the company's longer-term prospects.

Texas Instruments (TXN) – 6.92% Average Weight | -0.3% Contribution to return

Texas Instruments suffered a relatively bad quarter at -2.5% after a weak earnings forecast. The company communicated that they expect EPS in the range between $1.68 to $1.92 per share in Q3, compared to an analyst prediction of $1.90. The analog chip company faced less orders across all of its business lines, except the automotive industry, with the customers turning to existing stockpiles. The company’s inventory is meanwhile on the rise and the trend is predicted to continue into Q3 and Q4 2023. Revenue in Q2 amounted $4.53 billion, 13% lower than the Q1, but outperformed the average analyst estimate of $4.35 billion. The company posted a $1.87 EPS, down 23.7% YoY.

Standardized Performance

Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits.

Gold reacts to Fed, dollar strength

Gold gave back some of its July gains during the month of August. The markets continue to focus on the U.S. Federal Reserve’s (Fed’s) path. Indications that Fed policy may remain tighter for longer, with the potential for another hike this year, supported a stronger dollar and higher bond yields, putting pressure on gold prices. The U.S. Dollar Index (DXY)¹ was up 1.7% in August, and the U.S. 10-year treasury yield touched a high of 4.34%, its highest level since 2007. Gold fell below $1,900 per ounce, trading at a low of $1,889 on 18 August, with persistent outflows out of gold bullion exchange traded funds during the month. But once again, gold showed resilience climbing back above $1,900 only a week later. Towards month-end, reported declines in U.S. consumer confidence and job openings reduced the implied probability of a Fed hike this year. With treasury yields and the dollar easing, gold found some support to close at $1,940 per ounce on 31 August , posting a loss of $25 per ounce (-1.3%) for the month.

Gap remains for gold miners

The NYSE Arca Gold Miners Index (GDMNTR)² and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)³ were down 6.1% and 3.7% respectively during the month. The smaller gold companies outperformed their larger peers; however, the valuation gap between gold equities and gold bullion widened further. Gold prices are up 6.4% year to date, yet the GDMNTR is up only 3.1%. We have been stressing both that the equities are trading at a discount relative to gold, and that they are trading at historically low multiples. An analysis by Paradigm Capital for a universe of large and intermediate gold producers, found that based on consensus expectations, gold miners are trading at a 2024 EV/EBITDA^* ratio representing about a 35% discount to their 10-year historical average.^† For reference, the S&P 500 Index⁴ is trading at a 2023 EV/EBITDA ratio that is over 10% above its 10-year average, and even with estimates coming down for next year, 2024 EV/EBITDA consensus ratio is right in line with the 10-year average. With gold prices near all-time highs, we think investors should take a hard look at gold mining equities and consider the sector’s potential for future stock price appreciation, as compared to other industries.

On the road in Australia

We recently had the opportunity to travel across the continent of Australia. Given the distance travelled, we made sure to maximize the trip by visiting as many operations and meeting with as many companies as we could fit in. We met with the management teams of eight companies and toured six major gold mining operations, including open pit and underground mines. We could not help but be impressed with the size and scale of some operations (e.g., Boddington), and the richness in grade of others (e.g., Bellevue and Fosterville). Across the board we noticed a focus on the latest technology, mining techniques and efficiencies, as well as a laser-like focus on Environmental, Social and Governance (ESG)-related subjects. In our view, Australia remains a leading mining jurisdiction, both in terms of potential and investability (currently, based on company reserves, Australia represents approximately 15% of the portfolio’s total exposure). Key issues that we discussed with management teams include: the focus on de-carbonizing energy usage; skilled labor shortages; and the role of technology in mining to reduce costs, improve efficiency and make mining safer for workers.

For context, Australia was the second (tied with Russia, and only slightly behind China) largest producer of gold in 2022 – mining over 10% of the world’s annual supply according to the United States Geological Survey.^‡ On a reserve basis, the country is reported to have over 16% of the world’s in-ground gold. During our trip, we visited mines representing approximately 22% of Australia’s annual gold output. Increased exploration efforts, regional consolidation leading to efficiencies of scale, continued focus on optimization and cost control along with historically high gold prices should contribute to a vibrant gold mining industry for the foreseeable future.

Here are some of the key takeaways from our trip:

• While raw material input prices now appear to be receding, skilled labor shortages in Australia continue to impact both costs and volumes, despite the reversal of COVID-related impacts last year.
• High bulk material prices (iron ore, coal, lithium) and government funded project stimulus have sharply increased competition for skilled labor. This has led to higher wages in the mining industry as companies raise salaries to retain or attract talent, including for those candidates coming right out of university. Anecdotally, we heard that a salary of A$150,000 for a junior engineer is not uncommon.
• Fly-In-Fly-Out operations, largely in Western Australia (e.g., Bellevue and Gruyere), facilitate ‘mercenary’ type labor behavior. For example, miners, mechanics and engineers based near Perth, can chase the highest compensation without having to move or relocate their families.
• Operations located within driving distance of major population centers (e.g., Boddington, Fosterville) benefit both from lower labor rates and lower turnover.
• Gold miners are attempting to meet this labor challenge through aggressive recruiting/hiring, training of recent university graduates in adjacent fields (such as civil engineering) and through automation and technology.

• Australia leads the industry in technology, with remote control and automated vehicle adoption set to drive continuous improvement in costs, production and safety.
• At Fosterville and Cowal, we had the opportunity to visit the control room and observe above-ground operators controlling vehicles operating underground. This technology is deployed when ground conditions present a safety concern for workers and utilized during shift changes to smooth operations and maximize volumes.
• The most striking technology adoption we witnessed was at Newmont’s (3.60% of Strategy net assets) Boddington operations. There, we saw the largest automated haul fleet in the gold industry. Boddington is currently operating 35 fully automated Cat^® 793 (400 ton) haul trucks and expects to increase the fleet to 40. The full benefits realized by Boddington’s automated fleet compared to a conventional fleet have yet to be quantified, but we expect the gains to be significant.
• At Gruyere, a 50/50 Joint Venture between Gold Fields (0.41% of Strategy net assets) and Gold Road (not held in Strategy), management is considering automating their drill fleet to both gain efficiencies and to reduce labor costs. Operations have been recently hampered by a lack of drilling capacity.
• At Fosterville and Boddington, vehicles are monitored and tracked at all times, including vehicles operating underground, which is something we have not seen before. While this should clearly benefit safety performance, we would also expect improved operating performance and longer equipment life.

• Throughout Australia, we noticed an emphasis on ESG, and specifically, on the mandate to reduce greenhouse gas (GHG) emissions. Gold producers are aggressively pursuing energy efficiency and alternative power generation (largely solar and wind) to achieve near-term 2030 targets using currently available technology.
• The Australian mining industry is generally well positioned to invest in these non-petroleum sources of power due to remote operations currently relying on self-owned, high-cost diesel power generation. The existing diesel power (a sunk cost) has the benefit of supplementing alternative, but intermittent solar and wind generation.
• Power investment decisions benefit from the generally long lives of mining operations, low-cost land availability, declining cost of solar, availability and increasing size of battery storage capacity.
• During our recent trips to both Australia and West Africa, we witnessed current or soon to be installed solar power capacity - incentivized by a combination of diesel price volatility and falling cost of alternative energy projects, as well as the low reliability and/or high cost of grid power.
• We visited a fully operational solar farm at Gold Fields’ Gruyere joint venture. The company appears to be emerging as a leading player in this area, with existing or planned solar and/or wind power generation across its Australian and South African operations.
• Longer-term full de-carbonization challenges remain, as electrification solutions do not yet exist for large haul trucks and long hauls. In addition, battery storage capacity, both mobile and stationary, is insufficient to operate at the required utilization rates.

Metals scams seem to be increasing, after German copper producer Aurubis reported a shortfall in its copper inventories in August that it linked to theft¹. That follows global commodity trader Trafigura booking a USD577 million charge last February²  on discovering some nickel cargoes it had paid for did not contain the commodity.

These scams throw a spotlight on the pressure point of the green transition. Decarbonising the global economy requires huge amounts of copper and other strategic metals for upgrading power grids, as well as building electric vehicles, wind turbines and solar farms.

Supply, however, could struggle to keep up. For example, the supply of copper will expand to roughly 30.1 million tonnes by 2030, according to McKinsey. Yet demand will outstrip it, reaching 36.6 million tonnes and leaving a shortfall of about 6 million tonnes, the consultancy estimates.³

Arguably, that puts pressure on the price of copper and the other metals that the green transition depends on. It also gives the mining companies good reason to seek to innovate, developing new mining and processing technologies.

In an inflationary environment, mining company shares may also prove a good hedge against rising prices. While central banks appear to be winning the battle against high inflation, in the 1970s and 1980s it was typically more stubborn than expected. But mining shares could offer a hedge as metals, too, are subject to inflationary forces.

More broadly, mining shares offer valuable risk diversification in a broader portfolio of shares, due to their correlation with underlying metals prices. With equity markets pricing in what economists term ‘immaculate disinflation’, meaning gently falling inflation, it may be wise to diversify against the risk that inflation does not gently subside.

But not everything is rosy for mining stocks in the short term, as China’s cooling economy has weighed down on stock prices in 2023. China is a top metals importer and its economy has proved weaker than expected during the year.

This could be an opportunity to buy into mining shares, though, in anticipation of a medium-term imbalance between supply and demand during the green transition. As the charts below show, the stock valuations of rare earth miners are significantly lower than just a few years ago, while companies’ financial performance is improving.

Returns on Assets and Equity Increase; Yet Share Valuations Fall

What the metals thieves evidently understand is that the green transition depends on a huge supply of strategic metals. But it also requires innovation from mining companies as they seek to make their mines’ deposits stretch further. One thing is certain – they will be under pressure to improve their performance still further the race to decarbonise accelerates.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Digital assets’ trading volumes & volatility made 2-year and all-time lows, respectively, in August as investor interest dwindled amidst the lure of the beach and the US 10-year treasury bond, the yield on which reached its highest levels in 15 years. Venture capital funds deployed into blockchain projects totaled just $500M in August 2023, compared to $1.9B in August 2022 and $2.7B in August 2021, respectively, while crypto ETPs saw large redemptions.

For the month, Bitcoin & Ethereum fell 9% and 10%, respectively, underperforming the Nasdaq Composite’s 2% decline for the 2nd straight month.

Source: Bloomberg, as of 8/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Layer 1s

August was a typical month in the tempestuous snow globe of digital assets as a blizzard of volatility and uncertainty swirled around crypto markets. Regulatory decisions, smart contract exploits, solvency rumors, and potential liquidation fears all contributed to a substantial decline in prices. The 30-day performance of Smart Contract Platforms (SCPs) was (-10.7%).

The sector was ripe with hope at the end of July after Ripple’s partial victory against the U.S. Securities and Exchange Commission (SEC) when a federal judge ruled that Ripple's programmatic sales to retail investors through exchanges were not securities. It was expected that further regulatory catalysts would materialize in August, including Grayscale winning the right to convert its Bitcoin investment trust into a spot BTC ETF, the potential of other spot BTC ETFs winning approval, and the SEC signaling a potential green light for the launch of Ethereum Futures ETFs. However, prices soured with no approval for any of the ETFs and the SEC announcing its intention to appeal the Ripple ruling.

Additional issues that contributed to negative price action were:

Questions about the solvency of Binance.

• The liquidation of a $200M position by a BNB exploiter on BNB DEX Venus.
• Exploits of staple Ethereum DeFi applications Balance and Curve.
• Concerns that the hacking of Curve might lead to the liquidation of Michael Egorov's $168M CRV position, representing 34% of all CRV supply.
• Rumors about the arrests of Huobi’s executives in China and the potential insolvency of the Huobi exchange.
• Bitstamp's decision to suspend trading of altcoins for US users.
• Outflows totaling $260M from crypto ETPs in August.

While none of the SCPs had a token whose price increased in August, the top performers were ETH (-11.3%) and Tron (-1.6%). Meanwhile, the worst monthly laggers were ATOM (-21.9%), MATIC (-19.3%) and AVAX (-22.1%).

The Neon Glow Coming from Solana

Despite the cascade of negative headlines, the value proposition of blockchain technology to non-crypto native users made some large strides. On August 23, Shopify integrated Solana Pay into Shopify’s online retailer platform—this new addition will allow Shopify’s 1+ million retailers to accept payments in the USDC stablecoins. Solana’s blockchain will be used to execute these transactions, and each payment will cost only $0.00025 per transaction while settling in under one second. This allows online businesses to avoid credit card fees, which range from 1-3%, and international currency interchange fees, which can be higher. Instant access to USDC also improves the working capital position of small businesses by allowing them to forgo revolving credit options and even earn interest on their funds. This new development follows the path of Solana’s drive to smooth consumer adoption by focusing on user experience improvements like cheap NFT minting technology, the Solana Phone, the Solana Mobile Stack, and Solana Pay.

Ethereum’s Layer-2 Performance

Layer-2 Daily Active Users

Source: Artemis.xyz, VanEck Research as of 9/4/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The long-term roadmap of Ethereum is to alter its business model to become a settlement layer while offboarding the transaction processing to Layer-2 (L2s). This drastic change stems from the technological limitations imposed by Ethereum’s focus on “credible neutrality.” The Ethereum Foundation (EF), the entity that maintains and updates Ethereum’s software, contends that Ethereum’s users must believe Ethereum to be inviolably fair for it to replace the existing financial system. The EF concludes that the best way to achieve this impartiality is through decentralizing the network by enabling millions of people to host Ethereum’s open-source software on inexpensive servers across the globe. However, due to internet bandwidth limitations and computer processing costs, Ethereum’s network is handicapped to process only 14 TPS. By contrast, the Visa network can process tens of thousands of transactions per second.

The technical limitations of the Ethereum network spawned Layer-2 blockchains, which execute transactions in a less technically constrained environment than Ethereum’s. In turn, L2s settle these transactions to Ethereum in large blobs of data representing a batch or “roll-up” of transactions. These data blobs use up Ethereum’s limited blockspace, and Ethereum assesses L2s hosting fees for this data. The effect of this arrangement is that many more transactions can take place in the “modular” ecosystem of Ethereum. The total amount of transactions in Ethereum with L2s is expected to scale to 220 TPS, with EIP 4844 coming in 4Q2023. Over the month of August, Ethereum’s full ecosystem averaged around 26.5 TPS. However, these Layer-2s are each a siloed ecosystem. This means that smart contracts and stored value cannot cross Layer-2s. In essence, each L2 is like a distinct excel sheet containing the ledger entries and functions for only that L2.

The consequence of this arrangement is that dozens of Layer-2s have been created to compete for the most important smart contracts (blockchain businesses), total value locked, and users. Over the past 12 months, numerous L2s have become consistent cashflow-generating entities, including Arbitrum, Optimism, Polygon, Starknet, and ZkSync Era. Currently, these blockchains only generate cash for their parent entities and not any of their own tokens. The daily average revenue of all L2s combined for the last 30 days is $680k, which compares to Ethereum’s revenue of $6.4M. L2s also have margins that fluctuate between 20-50% depending upon the L2 and the price of blockspace on Ethereum. The market share of all Ethereum L2 has grown to 9% of all SCP fees generated. From a usership standpoint, the userbase of all L2s has averaged roughly 3-4x that of Ethereum’s, and both the absolute number of users and the ratio of L2/Ethereum users have been growing over time. Consequently, the amount of Ethereum blockspace used by L2s has climbed to between 10-14%.

Total Combined SCP Fees and L2 Market Share of Fees

Source: Artemis.xyz, VanEck Research as of 8/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

August was a strong month for L2 adoption amid negative price action. Optimism's OP token was the best performer of the bunch, which only lost (-14%) of its value over the past 30 days. The price of OP was buoyed by strong usage driven by Worldcoin and its registry of new users through its Worldcoin Wallet. Every time Worldcoin registers a new user on Optimism, a Gnosis SAFE wallet is created. As a result of the onboarding of  through Worldcoin, Worldcoin generated 26% of all fees on Optimism.

Additionally, Optimism’s ecosystem and the OP token have been aided by the launch of BASE. BASE is a Layer-2 built using the Optimism software development stack by Coinbase. While BASE is its own L2, separate from Optimism’s L2, Coinbase has promised to remit a portion of its profits to Optimism. BASE, launched on August 9, has averaged an impressive $143k in fees per day or around $4.6M since launch. This amounts to a market share of L2 fees of approximately 20-30%, and BASE’s fees have only been second to ZKSync over the past 30 days.

L2 Share of Ethereum Activity 30 Day MA

Source: Dune, Etherscan, VanEck Research as of 8/27/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Friend.Tech Overview

One of the most interesting applications on BASE is Friend.Tech. Friend.Tech is a social media application that allows users to access private chat rooms with gated content from famous social media personalities. This access is sold on the open market as “keys,” and users can trade the keys. The content creators get some secondary market key trading fees as revenue. The result has been a flurry of activity that has generated  and 183k unique users since its launch on August 9. Friend.Tech has also catalyzed interest in a new type of application design that allows applications to navigate around the 30% fees imposed by Android and Apple’s app stores. With Friend.Tech, users install the application by adding a website to their phone's home screen rather than downloading an application through a web store. The smooth, simple onboarding process will likely spawn similar application distribution approaches that will be fascinating to see unfold.

Friend.tech’s long-term success will ultimately hinge on whether or not they can attract non-crypto influencers who then return value to their key holders in the form of exclusive content, giveaways, etc. However, based on the “pump & dump” price action of most Friend.Tech keys: it appears that early platform usage has mainly been driven by speculation rather than users acquiring keys for the content they unlock.

Another juggernaut of the L2 space is ZkSync Era, which is a zero-knowledge (Zk) roll-up. ZkSync has been earning around $200k in fees per day since July and has earned $6.5M in fees over the past 30 days. ZkSync is the most profitable, widely used Zk roll-up with over  in bridged value. Unlike Arbitrum and Optimism, which are optimistic roll-ups that post transactions that cannot settle for 7 days until the passing of a challenge period, Zk roll-up transactions are finalized once they are posted to Ethereum. This is because the rolled-up batch of transactions posted to Ethereum includes a zero-knowledge cryptographic proof of their authenticity. As a result, Zk roll-ups provide a much better user experience that allows users to withdraw funds faster. The downside is that Zk roll-ups have higher settlement costs on Ethereum because they include the data-expensive proof of authenticity.

Ethereum Update

Monthly Blockchain Fees vs. Ethereum Market Share

Source: Artemis.xyz, VanEck Research as of 8/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Ethereum maintained its key position as one of the safest digital assets during periods of volatility and saw a slight uptick in users (+3.44%) while seeing its fees drop (-23%) compared to the previous 30 days. Indicative of this decline is Ethereum’s daily transaction fees falling on Sunday, August 27, to their lowest level since December 2022. However, Ethereum retains a greater than 70% market share of all smart contract platform fees, and its dominance persisted in the month of August. Ethereum staking continues to grow with 26M ETH staked, around 22% of the total ETH supply, with 815k validators. Part of Ethereum’s success, despite its fee decline, is that it is no longer simply an execution layer. Ethereum has begun to reap the benefits of also being a settlement layer that generates revenue from hosting L2 transaction data. This business arrangement results in Ethereum benefiting from the success of projects like Coinbase’s BASE.

Another contributing factor to Ethereum’s success is the slow evolution of ETH as a collateral asset. Launched in June, Eigenlayer enables holders of ETH and ETH LSTs to deposit their funds into Eigenlayer and opt into backing various projects that employ the value of those funds. This value can be used to collateralize new protocols, applications, and financial arrangements. Projects like oracles, bridges, or on-chain insurance businesses could back their projects’ trust models with Eigenlayer staked assets. This enhances the potential for new projects to leverage the value rented from Eigenlayer stakers to create novel, trust-based businesses. The result is that ETH is molting from its core use case as the base asset for securing and transacting on Ethereum to being an important collateral asset. This will establish new, permanent demand channels for ETH that make it substantially more useful. Eigenlayer recently upped the limit on the total amount of locked ETH it would accept to 141k ETH worth $23.3M, which will grow again as Eigenlayer becomes more mature.

Ethereum Upcoming Catalyst: EIP 4844

EIP 4844 is an upgrade to Ethereum that will improve Ethereum’s scalability and is slated to occur in 4Q2023. Called Proto-Danksharding, the EIP will allow Ethereum to settle L2 transaction batches in a separate memory storage scheme called a “side car.” The result of this upgrade will be the ability of Layer-2s to settle more transactions to Ethereum and do so with less cost. These data side cars will not be permanently stored on Ethereum but will persist for only about a month. Ethereum will also have more blockspace for its native transactions previously occupied by L2 settlements.

As a direct consequence of EIP 4844, L2 settlement costs to Ethereum will drop significantly. Unless more L2 settlements occur or more transactions happen on Ethereum to make up for the cost difference, Ethereum’s revenue may decline. Another potential side-effect is that more users may migrate to transacting on L2s because the cost of doing so should drop significantly. Interestingly, because L2 businesses costs are mainly settlement fees paid to Ethereum, L2 profit margins may increase if they can successfully capture some of the saved costs.

In EIP 4844, the variable cost of settling transactions will be around 90% cheaper for L2s. With current margin estimates of 30% for an L2 like Optimism, if Optimism captures all of the cost savings as profits, it will see margins jump to 93%. However, competition for L2 power users will likely drive transaction prices lower across all L2s, and where margins will end up is uncertain. Unless Ethereum can find new sources of blockspace demand vacated by L2s in the EIP 4844 upgrade, it could see 10-14% of its revenue derived from L2 settlements decline by 90%. We will discuss EIP 4844 in more detail in an upcoming Ethereum piece.

TRON Update

The fundamentals for Tron continue to be relatively strong amid the backdrop of greater crypto weakness. Tron has been averaging around $1M in fees per day in August, with around $5.27B in TVL, 1.35M daily active users (DAUs), and $44B in on-chain stablecoins (almost entirely USDT). Despite a dramatic 30% loss in DAUs from July, Tron still boasts the highest amount of DAUs among all smart contract platforms, including Bitcoin. Tron’s main use case is the utilization of USDT for payments among developing countries, and Tron averages around $9B transferred each day. While Tron has a functioning DeFi ecosystem, it is not decentralized, as its top applications are controlled by Justin Sun, who seems compelled to add his name to everything he touches. JustLend, JustStables, SUNswap, and the mysterious stUSDT collectively control 99.7% of all chain TVL. Additionally, TRON’s fees exhibit a peculiar seasonality as the majority of fees, and by proxy on-chain volume, occur during the week while weekends see remarkably consistent lulls in activity.

TRX Fees

Source: Tronscan as of 8/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Tron’s activity consistently declines on weekends.

Cosmos Update

Cosmos Developer Market Share

Source: Artemis.xyz, VanEck Research As of 8/14/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The month of August was not kind to ATOM as its price fell (-21.9%) and was one of the worst performers among smart contract platforms. ATOM, which we wrote a  on in August 2022, was grabbing the market share of the crypto developer base. Cosmos’ app-chain thesis was attracting adherents amongst important financial players in crypto. After last September’s Cosmos conference, many were excited to see Cosmos' core contributors finally unveil a value accrual business model for the ATOM token.

This business was termed Interchain Security (ICS), and its economics centered around utilizing the value of the ATOM tokens to back a blockchain called the Cosmos Hub that would lend security to nascent blockchains. This would be accomplished by having each Cosmos Hub validator, all 175 of them, run each security consumer blockchain’s software. If the Cosmos Hub validators reported transactions honestly and provided server uptime, they would receive payments from the consumer chain for running consumer chain software. Effectively, this would allow each consumer chain to piggyback off the security of the staked ATOM because if the Cosmos Hub validators tried to cheat or steal funds, the staked ATOM behind those validators would be seized. In turn, to attract ATOM stakers, the Cosmos Hub validators would reward the stakers with some portion of the revenue from consumer chains.

However, progression towards building this vision has been incredibly slow. At the time of writing, only three chains had been onboarded to the Cosmos Hub, and many of the most important chains by TVL, such as Kava, Osmosis, and Axelar, have opted away from joining the Cosmos Hub. Likewise, the Cosmos ecosystem has been marred by negative sentiment generated by the glacial launch pace of native USDC launch, dwindling user interest in anticipated novel Cosmos DeFi chains such as Sei, Injective, and Bera, and community disagreement on the Cosmos Hub business model. At this point, there are currently several ATOM-funded proposals to change the economics of the Cosmos Hub. While Cosmos has been gaining the market share of developers, it is uncertain if that will contribute to ATOM’s value. Until the economics of ATOM change and more chains opt into the ATOM security model, ATOM would appear to be a token without an economic purpose to justify its $2.1B market capitalization.

Polygon Update

Polygon’s MATIC token continued its underperformance for the month of August, losing (-19.3%) of its value. While MATIC did not see a significant decline in usership (-4.7%) amid a greater crypto drawdown of (-10.3%), it did see the third largest month-to-month fee decline (-29%) among SCPs. Part of the decline in Polygon’s token price can be attributed to the continued underperformance of Polygon’s business development initiatives. Over the past 18 months, Polygon has spent hundreds of millions of MATIC tokens securing partnerships with Nike, Adidas, Starbucks, and Reddit. Despite these initiatives, the spent funds’ contribution to Polygon’s bottom line has dwindled immensely. While usership has increased over 6-, 12-, and 18-month intervals on Polygon, fees are down (-2%) over the past year and (-18%) lower than 18 months ago. Polygon’s chief applications, Planet IX, Chainlink, and Uniswap, have seen their usage, as measured by gas fees, decline (-37.1%), (-28.8%), and (-50.2%) month to month. Part of this decline is strong competition by L2s, attracting new and interesting projects. Another significant portion is due to useability issues with Polygon’s blockchain, including chain re-organizations, network outages, and security concerns. Though there is a substantial upgrade in the works that will address these issues, the timing of the releases is slower than needed. For example, the first upgrade of Polygon’s Mainnet to Validiums is not expected until late 1Q2024. Additionally, there is concern that the SEC may deem Polygon’s MATIC token a security. An indicator of this fear is the Bitstamp exchange delisting Polygon’s MATIC in early August.

Polygon Fees vs. DAU 30 Day Moving Average

Source: Artemis.xyz, VanEck Research as of 8/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The Polygon team is currently addressing the issues plaguing its technical architecture and redesigning its MATIC token's economic model. To prevent Polygon blockchain from having periodic re-org, Polygon will transition its Mainnet, called PoS, to a Validium-based system. A knock-on effect of this move will be that Polygon’s gas fees paid on Ethereum will also decline and make transactions on Polygon. This move is a stop-gap measure before Polygon converts to a true zero-knowledge (zk) ecosystem.

Furthermore, Polygon also introduced a revamped token design that centers around Polygon’s lead in zero-knowledge (zk) scaling technology. In the future set-up of Polygon, the MATIC token will be replaced by the POL token, which will accrue value by backing entities performing “useful work.” The MATIC token will be 1:1 convertible to the new POL token. The new design of Polygon will revolve around a series of bridges connecting various blockchains that will be secured under the aegis of a validator set backed by the POL token. Polygon will provide the tooling and support for entities that want to build their own Polygon blockchains, called “supernets.”

Additionally, a new agent, the zk prover, will play a pivotal role in the system by generating and verifying zk authenticity proofs of Polygon blockchains. The POL token will be used to back these provers as well. The result of Polygon’s design improvements is a host of new token sinks that perform important ecosystem functions for Polygon while providing value for the tokenholders. Finally, to create a sustainable ecosystem fund and security budget for validators, the POL token will implement a 2% inflation, unlike the capped supply MATIC token.

Avalanche Update

Avalanche Gas Usage by Application Category

Source: Artemis.xyz, VanEck Research as of 8/29/2023 Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The price performance of AVAX in the month of August is poor, around (-22.1%), but is better than expected given Avalanche’s dismal fundamental metrics. According to some important measurements of a blockchain’s health, including fees, daily active users, DEX volume, and TVL, Avalanche is dramatically ailing. Compared to its peers, Avalanche saw the largest month-to-month decline in Daily Active Users (-28.5%) and the second worst decline in fees (-40%), DEX Volume (-46.9%), and TVL (-14.1%). The monthly transaction volume on Avalanche is the lowest since August 2022, while TVL is smaller than it has been at any point since August 2021.

While the decline in activity on Avalanche is dismal on a month-to-month basis, it follows a late spring 2023 surge in usage. However, this bump in activity was not organic but resulted from several large traders gaming an airdrop from the LayerZero project. The evidence to support this contention is that much of the activity on Avalanche has revolved around utilizing the LayerZero products such as the LayerZero bridge, the Stargate DeFi application, and BTC.b (bridged Bitcoin using LayerZero). In fact, since May 2023, bridging applications on Avalanche, almost exclusively the LayerZero-associated products, have accounted for 50-60% of all gas fees on Avalanche, 30-35% of all active wallets, and 25% of all transactions. Before the surge, bridging-related applications ranged around 5% of gas fees on Avalanche. However, the most concerning aspect of this decline in activity is that Layer-Zero airdrop-related activity has remained constant as a percentage of gas fees and usership. This implies that the total figures for Avalanche have been declining as a whole, not just from airdrop farmers' pairing back activity.

DeFi: Economic Activity Continues to Decline

The MarketVector Decentralized Finance Leaders Index underperformed BTC and ETH, falling 21% in August as on-chain economic activity dwindled. The underperformance was exacerbated by UNI, representing ~30% of the index, declining 33.5% as investors sold tokens to capture gains from its outperformance in July. Other major index components fared slightly better, with MKR, AAVE, and LDO returning -6%, -14%, and -15%, respectively. The total value locked (TVL) across DeFi fell 8% in August, from $40.8 billion to $37.5 billion, slightly outperforming Ethereum’s 10% pullback. Decentralized exchange volume experienced a more severe decline to $52.8 billion in August, 15.5% lower than in July. While DeFi tokens had a lackluster performance in August, many of the core DeFi protocols experienced positive developments. Uniswap Labs won a class action lawsuit, and Maker and Curve saw TVL growth in their stablecoins.

August DeFi Volume Falls 15%

Source: DefiLlama as of 8/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Uniswap Wins Lawsuit, Sets Precedent for Decentralized Protocols

While the UNI token underperformed its peers in August, the leading decentralized exchange celebrated a major victory when the Southern District Court of New York dismissed a class action lawsuit. The lawsuit alleged that Uniswap contributors, including Uniswap Labs, Uniswap Foundation, Hayden Adams, and multiple venture investors, had violated securities laws by selling unregistered securities on the platform. The court ruled that Uniswap cannot be held liable for any damage caused by third parties misusing the protocol because Uniswap is a decentralized exchange. As such, it does not have control over how its protocol is used. Judge Katherine Failla, who is also presiding over the SEC v. Coinbase case, wrote in her decision that "this case is more like an effort to hold a developer of self-driving cars liable for a third party's use of the car to commit a traffic violation or to rob a bank." The ruling is a huge win for Uniswap and other decentralized protocols, as it sets a precedent that could be used to defend other open-source crypto developers and contributors from unfounded lawsuits.

MakerDAO Drives DAI Adoption by Increasing the DAI Savings Rate (DSR)

DAI Market Capitalization Reverses Trend

Source: VanEck Research as of 8/31/2023. Past performance is no guarantee of future results.

In August, the amount of DAI deposited in MakerDAO’s DAI Savings Rate (DSR) contract increased 278%, settling at ~1.3 billion DAI following the interest rate increase from 3% to 8%. Rune Christensen, the founder of MakerDAO, lauded the success of the rate increase, which grew DAI’s total market capitalization by 19% to $5.35 billion over the course of the month. However, many in the MakerDAO community were uneasy with the results of the rate change due to whales being able to borrow large amounts of DAI at an interest rate below the 8% deposit interest they received for depositing in the DSR. This effectively allowed whales to fill up the DSR by arbitraging the borrow and deposit rates, resulting in a situation where MakerDAO’s treasury was essentially paying whales the difference. To alleviate this, Rune proposed the DAO lower the DSR to 5% and raise DAI borrow rates to match the DSR to disincentivize users from depositing borrowed DAI in the DSR. To prevent capital departure upon lowering the deposit interest rate, MakerDAO implemented the SPK pre-farming airdrop, which will reward Spark protocol borrowers in an upcoming airdrop of the SPK token. The goal here is to attract as much TVL as possible to boost market trust in the product while mitigating the expense of funding the DSR, which, at the current rate and level of deposits, is costing MakerDAO $65 million annually to fund. While this expense should be covered by the revenue generated from Maker’s U.S. Treasury Bond holdings, other stablecoins, such as USDC and USDT, have developed much larger market share without providing high yield to holders, calling into question the long-term sustainability of the DSR, especially once the Spark airdrop concludes. By the end of the month, Spark’s TVL had grown to $455 million, representing a monthly increase in deposits of 712%, with wstETH constituting 78% of deposits.

Curve Update: Recovering from July’s Exploit

Curve Revenue by Source

Source: VanEck Research, Curvemonitor as of 8/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Curve has begun to show signs of recovery from the Vyper compiler exploit last month that caused Curve’s TVL to fall 48% to $1.68 billion. In the first week of August, about $750 million of TVL returned as Frax redeposited its base pool liquidity, and other investors regained confidence in the platform's security. Additionally, crvUSD saw significant growth this month and achieved a new all-time high of $114 million borrowed. The growth of crvUSD has allowed it to become a significant contributor of revenue for the platform, with crvUSD fees exceeding fees collected from all non-mainnet liquidity pools in 3 of the 4 last weeks. Curve’s governance token, however, has not seen promising signs of recovery, with its price falling 24% in August to $0.45. Due to the price decline, investors who bought CRV OTC from Michael Egorov last month are now only 12.5% above the water on their investment, with 5 months left until they can sell. If crvUSD can continue to grow to the point that it offsets the drop in exchange revenue caused by decreasing DeFi volume, CRV price may see some relief. Still, until then, declining DeFi volume remains a solid headwind for CRV appreciation.

High-Interest Rates: A Strong Headwind to Stablecoin Market Growth

Stablecoin Market Capitalization

Source: Artemis as of 8/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Despite Maker and Curve’s success in expanding the supply of their respective stablecoins, the aggregate market capitalization of stablecoins continued to trend down, falling 2% in August to $119.5 billion, according to data from Artemis. This is mainly a result of elevated interest rates in traditional finance, which have incentivized investors to dump their stablecoins and move into money market funds where they can receive ~5% risk-free yield. With U.S. Federal Reserve (Fed) chair Jerome Powell noting that further interest rate increases in 2023 may be necessary, we think it is unlikely the stablecoin trend will reverse in the near term. Until interest rates begin to recede or a stablecoin provider finds a seamless way to bring this yield on-chain, as MakerDAO attempts to do, the risk and opportunity cost of holding stablecoins will continue to drive out capital. PayPal’s launch of their first stablecoin, PYUSD, could also bolster stablecoin adoption. While PYUSD doesn’t offer yield to holders, it could garner broader adoption if it introduces additional utility not offered by other stablecoins, such as the ability to conduct e-commerce payments.

Lack of Metaverse Development & Usership Stifle Performance

In August, the MarketVector Media and Entertainment Leaders Index fell 23.4% as metaverse tokens continued to underperform ETH. APE fell 23%, while MANA and SAND fell 22.5% and 27%, respectively. The selling pressure results from continued token unlock, causing inflation and increasing investor doubt that metaverse platforms can deliver on the vision they promised. Throughout the bear market, data analytics platforms DCL-Metrics and DappRadar have reported declining usership metrics in both The Sandbox and Decentraland, which have 3,600 and 4,500 monthly active users, respectively. Meanwhile, APE’s feature product, the Otherside metaverse, is still developing while token staking rewards continue to inflate supply and drive sell pressure. However, Yuga Labs announced that its Legends of the Mara strategy game will be released in open beta in September, presenting a potential tailwind for APE. We believe these tokens will continue to underperform ETH until there is a strong reversal in the usership trend brought about by significant product enhancements or new releases.

Zynga Enters Crypto Gaming as Usership Stagnates

Zynga, a notorious Web2 casual game developer, announced the launch of their first Web3 gaming platform, Sugartown. Not much information was released about Sugartown as an attempt to bolster interest by maintaining a veil of mystery and slowly releasing information to the public. However, we know there will be an upcoming free mint for “Ora” NFTs, potentially having governance powers within the Sugartown platform. Additionally, Zynga made clear that Sugartown will not be a standalone game. Zynga described the nature of Sugartown as a transmedia IP and a gaming and community-building platform. Since other Web3 products have struggled to create compelling IP to attract gamers, Zynga has leveraged its existing IP by featuring 3 of its Farmville characters in Sugartown. The announcement of Sugartown comes as crypto gaming continues to struggle to bring in new users. In August, the user count amongst the top crypto games increased by 1.6% but is down about 35% compared to the same period a year ago. As a well-established game developer with a strong track record of success, we believe Zynga has the expertise to develop and market Web3 IP that could bring Web3 gaming to the masses.

NFT Volume Hits 2.5-Year Low as SEC Files Enforcement Action & Recur Shuts Down

Monthly NFT Volume Hits 2.5-Year Low

Source: Cryptoslam! as of 8/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

August was a brutal month for NFT enthusiasts, as negative news for the market continued to outpace positive developments. NFT volume fell again in August, marking 6 months straight of declining volume. Cryptoslam! reported that NFT secondary sales in August generated only $390 million of volume, marking the lowest monthly volume for NFTs since January 2021. The 23% drop in monthly volume highlights the growing apathy in NFT markets, where little product improvement has occurred, and a lack of new entrants has inhibited the sector’s ability to drive speculation. Blur continued facilitating most Ethereum NFT volume in August, commanding a 65% market share of total volume and 37% of trades. Meanwhile, OpenSea retained its majority share of NFT trades, conducting 61% of trades and driving 21% of Ethereum NFT volume. Despite Blur’s success in dethroning OpenSea as the leading NFT marketplace by volume, the continued lack of investor interest in the NFT market creates major headwinds for BLUR, which fell 30% in August.

Not only has there been a lack of new entrants to the NFT scene, but existing franchises expected to drive development and adoption are running out of cash. Notably, Recur announced they would close shop over the coming months due to the NFT winter. Recur raised $50 million in Sept. 2021 at a $333 million valuation and garnered market-wide attention after announcing NFT collections for several big brands, including Hello Kitty and Nickelodeon. As part of the winddown process, Recur will migrate all media and attributes for the >380k NFTs minted by the platform to IPFS by November 22, with NFT deposits and other platform actions being disabled in the weeks preceding the IPFS migration. The closure of Recur shows that even well-funded companies are struggling to survive in the current environment.

Furthermore, the SEC launched their first enforcement action against NFTs in August, alleging that L.A.-based Impact Theory sold unregistered securities in their $30 million sale of Founder’s Key NFTs. The SEC alleged that Impact Theory marketed the NFTs as assets that would appreciate with the success project, constituting an investment contract. In a dissent on the Commission’s decision, Commissioner Peirce and Uyeda emphasized that while they worry about people buying NFTs without knowing how their funds will be used, the statements made by Impact Theory were not indicative of an investment contract just as an artist’s commitment to build their brand doesn’t justify labeling their paintings as investment contracts. Impact Theory agreed to settle with the SEC, requiring the team to destroy any NFTs they possess, set up a fund to reimburse investors, and pay more than $6.1 million in penalties.

One NFT-based game that recently found a clear product-market fit is DraftKings’ Reignmakers, which merges card collecting with fantasy sports using NFTs on the Polygon blockchain. Over the next four quarters, we estimate the Reignmakers franchise (an NFT-based fantasy sports game on Polygon) will generate $70M+ in high-margin revenues, accounting for 3% of DraftKing’s top line and 5% of 2022 full-year profits. Please check out our recent deep dive on the platform .

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Please note that VanEck has exposure to Bitcoin.

We often refer to Bitcoin as “digital gold” because, like the metal, it is a potential store of value. Like gold, Bitcoin’s characteristics include:

• Limited supply: Maximum supply of 21 million. This scarcity means that the price could move upward as adoption increases.
• Increasing adoption: Bitcoin has been gaining traction in terms of the number of merchants that accept it as payment. In 2021, El Salvador made headlines by declaring Bitcoin as legal tender. As the first country to do so, El Salvador serves as a good macro case study for Bitcoin as legal tender.
• Potential inflation hedge: Monetary stimulus is currently eroding purchasing power globally and Bitcoin might outperform as it’s not subject to the same inflationary manipulation as traditional currencies.
• Portfolio diversification benefits: Bitcoin is an uncorrelated asset.

However, unlike gold, Bitcoin is:

Divisible and transparent.

Bitcoin’s Limited Supply Creates Scarcity and May Increase Its Value Over Time

There will only ever be 21 million Bitcoin in existence. This supply cap was designed intentionally and is one of the primary characteristics of Bitcoin. Furthermore, Bitcoin has “halvings” programmed into it. A halving is defined as a 50% block reward cut to the Bitcoin production rate, and they occur roughly every four years. This means that the rate at which new Bitcoins are introduced into circulation slows down over time until it eventually reaches zero (estimated to occur around the year 2140).

Bitcoin Halvings are Typically Associated with Explosive Returns

Source: Bloomberg Intelligence. Past performance is not a guarantee of future results. Not a recommendation to buy or sell any of the names mentioned herein.

These halvings increase the difficulty of mining Bitcoin and will occur until the supply cap is reached. In addition, the built-in finite supply of Bitcoin means that it is not subject to inflation in the same manner that fiat currencies are. Central banks around the world have ushered in unprecedented growth in money supply, effectively eroding their currencies’ purchasing value. In comparison, Bitcoin’s limited supply and increased mining difficulty over time may support the idea of Bitcoin as a long-term store of value and as an alternative to gold.

The next halving is expected to occur in April 2024. Historically, the price of Bitcoin has rallied leading up to and following a halving. The chart below indicates that the current cycle is very similar to the previous cycles that occurred in 2013 and 2017.

Previous Cycles Suggest That Bitcoin Could Rally Prior to and After the Next Halving

Source: Morningstar, Arcana. Data as of 6/30/2023. Past performance is no guarantee of future results.

Bitcoin Adoption Continues

In its early years, Bitcoin was largely used by a small group of tech enthusiasts. It was difficult and cumbersome to obtain with limited use cases and very few merchants accepting it as a form of payment. In 2023, Bitcoin adoption has grown substantially as it has become more mainstream. Now, more than ever, merchants and businesses are accepting Bitcoin as a form of payment and infrastructure has been built to make it more convenient for the average person to use. The development of user-friendly wallets, exchanges, and marketplaces has removed the technical barriers to entry that existed in Bitcoin’s early years.

Bitcoin interest among institutional investors has also increased. Hedge funds, asset management firms, and endowments are increasingly recognizing Bitcoin’s potential as a store of value and as an effective portfolio diversifier, specifically, when looking through the lens of an uncorrelated asset that has the potential to hedge against inflation. Approximately $50B worth of Bitcoin are now held by ETFs, countries, public and private companies.

BTC Holdings in Publicly Traded, Private Companies, ETFs and Countries

Source: Buybitcoinworldwide as of 9/7/2023. Past performance is not a guarantee of future results.

Layer 2s (such as Liquid by BlockStream) may be the next step in boosting Bitcoin adoption as they allow for scalability and customizations while retaining many of Bitcoin’s security properties. Built on top of the Bitcoin blockchain, we believe the Lightning Network pushes the boundaries of Bitcoin payment capabilities with lower costs and faster speeds.

One notable upcoming layer 2 development on the Bitcoin network is RGB. This development is important because it enables the creation and management of digital assets on top of the Bitcoin blockchain. Assets such as stocks, bonds, real estate, or even other cryptocurrencies can be issued and traded on top of the Bitcoin network, adding a new layer of functionality. The RGB protocol is designed to be scalable and not resource-intensive, allowing users to create and manage digital assets without requiring extensive changes to the underlying Bitcoin network. It can be integrated into existing Bitcoin wallets and infrastructure, thus making it easier for developers and users to create and manage digital assets. RGB has the potential to expand the use cases of Bitcoin, making it a more versatile and useful platform for developers and users alike, ushering in new opportunities for innovation and growth within the ecosystem.

Potential Hedge Against Inflation

The unprecedented worldwide growth in money supply following the COVID-19 pandemic led to widespread inflation, eroding the purchasing power of established fiat currencies. Bitcoin’s role as a potential hedge against inflation has increasingly become a talking point central to investment decision-making. As previously alluded to, the cornerstone of this idea lies in its limited supply and decentralized nature. Unlike fiat, which can be printed by governments and central banks, Bitcoin has a fixed supply, with supply growth decreasing by 50% every 4 years with the halving events. Bitcoin is not subject to the same inflationary pressures caused by fiat money supply growth, making it an attractive option for investors concerned about the impact of inflation on their portfolios and their subsequent purchasing power.

Bitcoin’s decentralized nature makes it impervious to geopolitical events or economic policies that may lead to currency devaluation, such as QE (quantitative easing) or excessive government spending.

Bitcoin’s Role in an Investment Portfolio

If Bitcoin is increasingly used as an asset with monetary value, what role might it play within an investment portfolio?

Bitcoin may potentially increase portfolio diversification because of its low correlation to traditional asset classes.

Bitcoin Correlation with Nasdaq Has Fallen Considerably

Source: Bloomberg as of 8/31/2023. Past performance is not a guarantee of future results.

An allocation to Bitcoin may also enhance the risk-return profile of institutional investment portfolios. As shown in the chart below, a small allocation to Bitcoin significantly enhanced the cumulative return of a traditional 60% equity and 40% bond portfolio allocation mix while only minimally impacting overall portfolio volatility.

Improved Portfolio Upside From a Small Bitcoin Allocation

(2/1/2012 - 6/30/2023)

Source: Morningstar. Data as of 06/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see important disclosures at the end of this commentary regarding hypothetical performance.

Source: Morningstar. Data as of 06/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see important disclosures at the end of this commentary regarding hypothetical performance.

The chart below indicates the % of digital assets outperforming Bitcoin historically. Digital asset price dispersion has been reaching extreme levels so far YTD. This gap in performance was influenced by two key events. First, on June 2, 2023, Patrick McHenry proposed guidelines for classifying cryptocurrencies as securities or commodities. Then, on June 5, the SEC sued Binance and Coinbase for allegedly operating as unregistered securities exchanges and brokerages, prompting Bitcoin to outperform as speculation grew that other digital assets would de-listed from the popular exchanges.

Bitcoin Outperformance YTD

Source: Bloomberg, Coingecko as of 6/25/2023. Past performance is not a guarantee of future results. Not a recommendation to buy or sell any of the names mentioned herein.

How Might Bitcoin Shine Brighter Than Gold?

While Bitcoin shares some of the characteristics attributed to gold, below are differences that, in our view, potentially make it superior.

1. Divisible: As a physical asset, gold can only be divided into smaller units to a certain extent, making smaller transactions cumbersome and, in some instances, impractical. Bitcoin, on the other hand, is divisible up to eight decimal places (with the smallest unit called Satoshis), making it easier to use for microtransactions.
2. Transparency: All transactions that have ever occurred or will occur are publicly available on the Bitcoin blockchain. This feature makes it difficult to manipulate and impossible to counterfeit Bitcoin, increasing trust in the network. Gold lacks the same level of transparency – when it is traded, the details of the transaction, such as the buyer, seller, and price, are often not publicly available. This lack of transparency may make it more difficult to verify the authenticity of the gold being traded and may lead to an increased risk of fraud and manipulation.

Overall, while gold has been used as a store of value and in transactions for centuries all over the world, its lack of transparency can make it more challenging to verify and track compared to digital assets like Bitcoin. As inflation poses challenges to investors globally, both gold and Bitcoin are likely to come front and center as potential hedges to protect purchasing power. With Bitcoin’s benefits like divisibility and transparency, we see it as a competitor to gold, and believe it is likely to garner even more adoption among retail and institutional investors alike.

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Please note that VanEck has exposure to Bitcoin.

From the gold standard to paper money and now to digital assets, the means by which we transact and invest is constantly changing. Among the latest additions to the financial landscape are cryptocurrencies. While they may have seemed like a futuristic idea just a few years ago, cryptocurrencies are quickly becoming a mainstay in the world of investing. For many, they represent a fresh and potentially lucrative opportunity. However, with new opportunities come new questions and challenges. Where does one start? What are the basics? As a financial advisor, this is your guide to help your clients answer these questions and navigate uncharted waters, providing them with the necessary knowledge and resources.

What is Blockchain?

Imagine a book. Every page of this book records a list of transactions, like a ledger. Now, imagine that thousands of people have this exact book and are always updating it simultaneously. Whenever someone wants to add a new page (or block of transactions), everyone with a copy of the book has to agree that the new page is correct. Once they agree, this new page is added to the book, and everyone updates their copies. This entire book is called a .

The power of blockchain lies in its transparency and security. Because so many people have copies and they always verify new pages together, it's incredibly difficult for someone to cheat or make false entries.

What are Cryptocurrencies?

are like digital gold coins. However, instead of being made of metal, they exist on the blockchain. Blockchain ensures the integrity and transparency of cryptocurrency transactions. Every time someone sends or receives a cryptocurrency, that transaction is recorded on a block. Once enough transactions are recorded on a block, it's added to a chain of previous blocks—hence the term "blockchain." The decentralization of this ledger—meaning it's simultaneously maintained by numerous participants globally—ensures its security. If someone tries to alter transaction data on one block, it would conflict with the information held by others, causing the alteration to be rejected. This feature is what allows cryptocurrencies to operate without a central authority and makes them resistant to fraud.

Bitcoin: The Pioneer

, the first and most well-known cryptocurrency, operates on its own blockchain. People can send or receive Bitcoins (much like money) to make purchases or as an investment.

Bitcoin, introduced in 2009, was the first cryptocurrency and remains the most widely recognized. Think of it as the "gold standard" of crypto. Many investors view it as a store of value, like gold or silver, but in a digital form. Its decentralized nature – meaning it's not controlled by any government or central bank – has made it especially attractive to a broad audience.

Ethereum and Smart Contracts

While Bitcoin introduced the world to blockchain and cryptocurrencies, .

Let’s think of a traditional contract, like an agreement to buy a car. Usually, you'd involve third parties like banks or lawyers to ensure everyone keeps their promises. Now, imagine a digital contract that automatically does what it's supposed to when certain conditions are met, without needing a middleman. That's a smart contract!

Ethereum is a platform that allows these smart contracts to operate. It has its own cryptocurrency called Ether, which powers these contracts and ensures they run smoothly.

Applications of Cryptocurrencies and Blockchain Technology in Everyday Life

The world of cryptocurrencies can seem complex, but at its core, it’s about using technology to enhance trust and simplify transactions. With these expanded use cases, the potential and versatility of blockchain and cryptocurrencies become more evident. They're not just tech buzzwords; they're tools with the potential to revolutionize industries and daily life.

The concept of blockchain as a shared digital ledger has opened up a plethora of opportunities:

• Supply Chain Management: Companies can track products from their origin to the store shelves. This transparency ensures the authenticity of products and reduces the chances of fraud.
• Voting Systems: Elections can be conducted on blockchains to prevent vote tampering, ensuring transparency and integrity in the voting process.
• Health Records: Patients' health data can be securely stored on blockchains, giving medical professionals quick access when needed and ensuring data privacy.
• Real Estate: Property deeds and ownership transfers can be recorded on a blockchain, making processes more efficient and reducing fraud.

The advantage of blockchain is its decentralized nature. When information is stored across multiple nodes, it becomes tamper-resistant. Any malicious activity or inconsistency can be quickly detected and corrected. Ethereum expands the scope of blockchain through its smart contracts:

• Decentralized Apps (DApps): Developers can build applications on Ethereum that inherit the security and decentralized features of its blockchain.
• Decentralized Autonomous Organizations (DAOs): These are like digital companies or organizations where decisions are made based on predefined rules in smart contracts, without centralized control.
• Digital Identity: Individuals can have a digital identity on the Ethereum blockchain, ensuring personal data is secure and giving control back to the user.
• Licensing and Royalties: Artists and creators can use Ethereum to ensure they get paid their dues every time their work is used or sold.

Bitcoin's decentralized nature has made it attractive for several use cases:

• Store of Value: Many view Bitcoin as digital gold, holding onto it in hopes its value increases over time.
• Decentralized Finance (DeFi): Bitcoin can be used in lending platforms, interest-bearing accounts, and other financial services without the need for traditional banks.
• Peer-to-peer Transactions: People can transact directly without the need for intermediaries, leading to quicker and sometimes cheaper transactions.

How Can Someone Invest in Bitcoin?

For investors keen on joining the Bitcoin wave, several pathways exist. Investors can directly purchase Bitcoin through cryptocurrency exchanges using fiat money, keeping their digital assets in . Those wary of direct ownership might opt for Bitcoin futures, trading on traditional futures exchanges, to gain exposure to the cryptocurrency's price movements.

As Bitcoin adoption has grown, so has investor demand for access via a more traditional wrapper, such as an ETF. While a spot Bitcoin ETF is not available in the U.S., investors can access Bitcoin futures through ETFs like the .

Investors interested in Bitcoin can also consider investing in digital asset companies that support the cryptocurrency ecosystem. Digital asset companies are distinctly different than digital assets themselves. The publicly-traded opportunity set of companies operating within the digital asset segment has grown considerably in recent years, boosted by widespread adoption of digital assets across an array of use cases. The  offers exposure to the largest and most liquid companies in the digital assets segment.

Bitcoin Education Resources

VanEck is continuing to play a role in educating investors about Bitcoin and how to participate in the Bitcoin investment story. For more resources, visit our  and catch up on the latest  from our investment team.

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• Over the next four quarters, we estimate DraftKing’s Reignmakers franchise (an NFT-based fantasy sports game on Polygon) can generate $70M+ in high-margin revenues, accounting for 3% of DraftKing’s top line and 5% of 2022 full-year profits.
• In their inaugural year, NFL, PGA, and UFC Reignmakers games collectively generated $52 million in revenue for DraftKings, representing 2% of DKNG's top line over the same period.
• DraftKings' Reignmakers introduced their 2023 NFL collection on August 8th, marking the second year of production.
• Reignmakers' success showcases the advantages of minimizing blockchain components within a game, enabling developers to target wider audiences while optimizing economic factors, such as marketplace fees.
• DraftKings strategically prioritized fantasy sports, leveraging existing user passion to enhance game enjoyment and user benefits without the need for extensive creation of valuable IP.

Intro

What is Reignmakers?

Industry Data

U.S. Online Sports Betting Gross Gaming Revenue

Source: Stifel Research as of 1/23/2023.

Sports NFTs Represent 50% of Top 6 Collections by 30 Day Sales

Source: VanEck Research, Cryptoslam! as of 8/18/23.

NFT Marketplace Fees

Source: VanEck Research as of 8/24/2023.

Revenue & Impact to Top-Line

2023 Reignmakers Revenue Estimate

Source: VanEck Research as of 8/24/2023.

Conclusion

Key takeaways

• Decentralized physical infrastructure projects are proliferating.
• GIANT Protocol aims to bootstrap a marketplace for mobile bandwidth.
• VanEck analysis reveals a $5.4B+ revenue opportunity at 1% global MVNO market share.

What are DePINs?

What is GIANT Protocol?

Source: GIANT Protocol’s Website as of 8/24/2023.

How Does GIANT Work?

Source: GIANT Protocol White Paper as of 8/24/2023.

Problems GIANT Protocol Solves

1. Create cheaper internet access
2. Allow consumers to participate financially in data provision
3. Improve lack of trust with internet access providers fulfilling consumer obligations

Opening the MNVO Business

Source: Cartesian as of 8/24/2023.

Source: Cartesian as of 8/24/2023.

Source: Blazar Capital, Emma Chamberlain’s Chamberlain Coffee Raised $7M in funding in June 2023.

How GIANT Tokens Incentivize

Source: Stackla as of 8/24/2023.

Reducing Data Providers Churn

Source: VanEck Research, Cartesian as of 8/24/2023.

Sizing GIANT Protocol’s Opportunity

Global Past and Projected International Trips 2015 - 2030 (Ms)

Source: UNTWO, VanEck Research as of 8/24/2023.

Source: McKinsey as of 8/24/2023.

GIANT Valuation Framework

Source: Mobilise Global as of 8/24/2023.

GIANT’s Next Steps and Catalysts

Data Consumed (in GB)

Source: Giant Protocol, GIANT Data Network Data Plan Sales as of 7/09/2023.

Source: GIANT Protocol, GIANT Protocol Network Statistics as of 8/24/2022.

GIANT’s Contribution to DePIN

Helium’s Network Presence in Europe

Source: Helium as of 8/23/23.

Source: DIMO, Dimo Network Statistics as of 8/22/2023.

Gold steadies on mixed economic outlook

Economic data releases in July fueled expectations that the U.S. Federal Reserve (Fed) is nearing the end of its hiking cycle, supporting gold prices which were up 2.4% during the month, and putting pressure on the U.S. dollar (down 1.03%, as measured by the U.S. Dollar Index (DXY¹)). Gold climbed back above $1,950 per ounce on 12 July, following the release of June U.S. Consumer Price Index² figures showing a 3% year-on-year increase, compared to 4% in May. Gold advanced further, reaching a monthly high of $1,978.72 on 18 July, as U.S. retail sales for June came in below expectations. The yellow metal held on to most of its gains as the markets digested another interest rate hike by the Fed on 26 July, and a 3% yearly increase in the June U.S. Personal Consumption Expenditures Price Index³ (the Fed’s preferred inflation gauge). Gold closed at $1,965.09 on 31 July.

NYSE Arca Gold Miners Index (GDMNTR)⁴ and MVIS Global Juniors Gold Miners Index (MVGDXJTR)⁵ outperformed gold, up 4.54% and 5.86% respectively, during the month. Q2 2023 financial and operating results for the gold sector have been mixed. Many of the producers had flagged a weaker first half of the year, and most of them have maintained their full year 2023 guidance. Thus, we can reasonably expect an improvement in the second half of 2023, although there is no guarantee of such an evolution. The market is very focused on companies meeting expectations, so any significant misses are likely to lead to poor share price performance.

Why forecasting earnings for gold miners is hard

While we agree that companies must meet their guided targets to gain market confidence in their ability to deliver consistent results, we also understand the unique challenges of the mining industry. As long-term investors looking for value creation, we are less obsessed with quarterly earnings and much more focused on companies’ outlook for free cash flow generation over the next 10 to 20 years. From decades of experience covering this sector, including sell-side experience which entailed issuing earnings-per-share (EPS) estimates every quarter for all companies under coverage, we can comfortably say it is nearly impossible to forecast a precious metals company’s earnings for any given quarter. The challenges come from different sources, most relevantly:

1. The fact that these companies are issuing forecasts based on only estimates of the properties of the gold deposits they are mining. Clearly, we expect that these estimates are a good representation of the gold deposit over the life of the mine. Quarter-over-quarter, it is also very reasonable to expect variations from those estimates that could certainly impact earnings, while generally having no material impact in the net asset value of the mine or the company.
2. Companies issue full-year guidance which tries to account for quarter-to-quarter fluctuations, but analysts must issue quarterly guidance that cannot predict these variations. It is these quarterly estimates that the markets gauge companies against.
3. Earnings are based on complex accounting and reporting standards, including one-off and non-cash items, that make it very difficult to reconcile reported earnings to estimates.
4. Other factors, including the variations in the realized price of gold and other produced metals. While analysts may be able to account for spot price fluctuations during the quarter, predicting the timing of sales and the impact of provisionally priced sales (which later need to be adjusted) is nearly impossible.

Focusing on the longer-term

In our view, focusing on free cash flow generation not just over the current quarter but over the long term, is a much better way to assess the value and investment appeal of a gold mining company. In fact, our internal models generate an in-house metric which we created to capture our approach. We refer to it as “free cash flow per ounce”, and it is the total, undiscounted free cash flow the company generates over its operating horizon, divided by all the gold (or gold equivalent) ounces we estimate it will mine during that period. It is a simple, yet transparent measure that allows us to assess the relative valuations of the companies in our universe.

Enterprise Value/oz vs. Free-Cash-Flow/oz

Source: VanEck. For illustrative purposes only. Enterprise value (EV) per ounce (EV/oz) is the ratio of a company's enterprise value vs the total amount of mineral resources in the ground. FCF = Free-Cash-Flow.

During earning season, EPS headlines move stock prices.. However we believe gold equity investors should demand that companies deliver against their operational targets, while focusing less on quarterly earnings and more on the outlook for good old free cash over the next decade or two. It is also helpful to remember that any gold not mined (or sold) this quarter is not lost, it will still be there the next quarter or year, ready to meet the world’s historical need for the shiny metal, potentially at even higher prices.

When assessing an investment in gold, investors should keep in mind the main risk factors associated with such an investment. They comprise, among others, the risk of investing in the basic materials sector, the risk of investing in gold and silver mining companies, risk of investing in smaller companies as well as the more general market risk.

As we ushered in 2023, our outlook was shaped by the constriction of monetary supply, tight government spending and weaker corporate profits. Do recent events change our high-level view? Not really. So far, it has paid to be invested and we continue to believe inflation will keep rates higher for longer than the market expects. Our macroeconomic outlook remains steadfast. Yet, amid these broader market dynamics, two areas stand out: rising emerging markets stars and Bitcoin.

“New” EM Countries on the Rise: India, Brazil, and Saudi Arabia

Demographics, technology and the rising middle class have transformed emerging markets (EM), where 87% of the world’s population live.¹ 77% of the world’s “Gen Z” contingent resides in emerging markets as well. Emerging markets are estimated to be responsible for ~60% of the world’s GDP by 2026,² yet their equity markets only represent 13% of the market capitalization of all international equities.³ This mismatch creates a once-in-a-lifetime, long-term opportunity for global investors – as emerging markets grow, evolve and transform, the size of their capital markets will become more prominent over time as well.

While China remains a dominant market and has been a major global growth driver, its post-COVID rebound has stalled. Looking beyond China, we explore below the three rising emerging market countries where we see particularly compelling investment opportunities. India, Brazil and Saudi Arabia are leaders in their respective regions, all benefitting from economic reforms and digitization initiatives.

These Three Regional Leaders Will Pass the EU in 10 Years

Share of Global GDP (PPP basis, %)

Source: VanEck Research; IMF; Bloomberg LP, as of July 2023.

India’s Digital Gold Rush Fuels Economic Rise

India's digitization journey is revolutionizing multiple sectors, and economic reforms and demographic trends provide further tailwinds to its growth. India’s 800 million smartphone users and rapidly growing population presents growth opportunities across the digital sector, including e-commerce, digital payments and online entertainment.

India’s Smartphone Penetration Fuels Digital Revolution

Source: TRAI, CLSA, World Economic Forums “Future of Consumption in Fast-Growth Consumer Markets: India” as of June 2023.

India’s government has also launched initiatives to promote financial inclusion and fintech. The rapidly spreading adoption of digital financial services is helping to create an environment more conducive to investment. In addition, the country’s demographic “dividend” may provide it a competitive edge in the global landscape. Its workforce is relatively young, large and English-proficient—particularly compared to China—and combined with a growing consumer base, we believe India is an attractive market for both businesses and investors. Despite that, investments in emerging market countries are still subject to specific risks and securities are generally less liquid and less efficient and securities markets may be less well regulated.

India’s Equity Market Outperforms China

Source: Morningstar as of 30/6/23. Past performance is no guarantee of future results.

The equity market in India is also thriving, significantly outperforming China over the last three years, and its corporate earnings growth outpaces China. We believe this reflects strong economic fundamentals and positive investor outlook towards India’s economic prospects. A look at valuations also reinforce why we believe India presents a compelling opportunity now. After a period of overvaluation during the COVID-19 pandemic, valuations are back within a more normal range.

Valuations in India Back to Normal

Source: Bloomberg as of 30/6/2023.

Brazil’s Booming Investment Potential

The Central Bank of Brazil has embarked on an ambitious journey to modernize its financial landscape. These financial reforms are creating a friendlier environment for both domestic and foreign investors, which in turn is pushing the economic engine of the country forward.

In addition, the Brazilian Central Bank is fiercely independent, and sticks to orthodox policies. By employing an inflation-targeting regime and not hesitating to raise the policy rate to combat price pressures the bank is maintaining a lower and stable inflation rate. This offers a sense of reliability and creates a credible policy backdrop—essential factors for investors. By striving to keep inflation within the target range, Brazil is ensuring the preservation of purchasing power, thereby safeguarding the value of investments.

Brazil’s challenge is to make sure that a new fiscal framework stabilizes and reduces the public debt-to-GDP ratio over time. Finance minister Haddad’s economic measures to reduce the primary fiscal deficit for 2023 in half from the expected $46 billion or 2.1% of GDP to $20 billion or 1% of GDP appears to be a net positive for the stock market.⁴ If successful, these factors could create a positive tailwind for Brazil equities and strengthen the fundamental support for BRL that could add to the real rates of return for international investors. However, as an emerging market currency, BRL could suffer from a high degree of fluctuation. Investors should also be wary of the way the exchange rates could influence their investments in securities issued by foreign entities.

We are particularly excited about the prospects of structural growth opportunities for companies that appear to benefit from improving the valuation of Brazilian equities.

Saudi Arabia's Economic and Social Progress

Saudi Arabia is at the epicenter of transformative economic and social changes. From empowering women to diversifying its economy and enhancing capital discipline, this Middle Eastern powerhouse is making headway. A potential peace pact with Iran further underscores the country's commitment to stability. As a result, Saudi Arabia is beckoning global investors to capitalize on its reforms and to partake in the country's growth story.

Saudi Arabia's liberalization of women's rights could not only impact the social fabric of the nation but also its economic vitality. Women have become increasingly involved in the workforce and entrepreneurial ventures, contributing significantly to the nation's GDP and enhancing the diversity and competitiveness of the business landscape. This socio-economic transformation opens doors for potential investors looking for emerging markets primed for accelerated growth.

Saudi Arabia: Women in the Workforce – Female Participation Ratio

Source: World Bank as of 30/12/2022.

The Saudi Vision 2030 marks a pivotal point in the country's economic history. At its core, the strategic roadmap aims to shift the Saudi economy away from its dependence on oil. Instead, it encourages investment in diverse sectors such as technology, tourism, entertainment, and renewable energy. For investors, this indicates an array of opportunities in rapidly expanding and innovative sectors.

Saudi Arabia's renewable energy sector, in particular, is a notable area of growth, as the country aims to become a global powerhouse in this field. This aligns with the global transition towards sustainable energy sources and provides investors with long-term, socially responsible investment opportunities.

Saudi Arabia's increasing reliance on capital markets has introduced a new dynamism into its economic environment. The country has encouraged competition, enhanced capital discipline, and facilitated an environment conducive for investors. In a region often marred by geopolitical tensions, the potential Saudi-Iran peace pact is a bright spot. By reducing regional tensions and encouraging stability, the pact could significantly de-risk investment in the country. The investors, however, take into account for the relatively high historical levels of instability in the Middle East region when making their decisions.

Now Let’s Turn from Emerging Markets to an Emerging Asset: Bitcoin

In 2017, we identified Bitcoin’s potential to rival gold and were one of the first to file for a Bitcoin ETF in the U.S. We have maintained an unwavering commitment to embracing Bitcoin as an emerging asset class with a role to play in investor portfolios. Our advocacy is deeply rooted in the firm’s mission to offer forward-looking intelligently designed products—which began with our launch of the first gold stock fund in the U.S. in 1968.

Due to its scarcity value, Bitcoin can act as a competitor or companion to gold, representing a store of value and hedge against inflation. We are approaching the next Bitcoin “halving”—which is a 50% block reward cut to the Bitcoin production rate that occurs roughly every four years. This slows the rate that new Bitcoins are introduced into circulation. Historically, Bitcoin has rallied leading up to and following a halving. Bitcoin rallied in the first half of 2023, and we remain bullish for the remainder of the year. However, future regulations and directives may impact the demand for digital assets, and may also affect the ability of digital assets exchanges to operate and for other market participants to enter into digital assets transactions.

Prior Cycles Suggest Bitcoin May Rally Around Next Halving

Source: Arcana. Data as of 4/2/2023. Past performance is not indicative of future results. Not a recommendation to buy or sell any of the names mentioned herein.

In the midst of the Web3 revolution, a distinct lexicon has emerged. The landscape of new terms is evolving so rapidly that even I, a seasoned crypto enthusiast, come across 2-3 new words almost every week. Here, we unveil some of the most commonly used terms in the cryptocurrency sphere, enabling you to partake in conversations and stay updated as VanEck guides you through the latest trends. Here are some of the most commonly used slang terms in the cryptocurrency world, so you can understand the conversation and stay up to date while VanEck takes you on a journey on the latest trends. This is a side some crypto native folks may not be proud of but it is an inherent part of the ecosystem that we should not ignore.

Explaining Crypto Lingo:

• WAGMI (We Are Gonna Make It): WAGMI is an acronym expressing optimism within the crypto community that a particular investment will be successful.
• NGMI (Not Gonna Make It): NGMI is used humorously to acknowledge that something might not turn out as expected, often referring to an investment.
• CT (Crypto Twitter): CT refers to the crypto community on Twitter, where enthusiasts, investors, and experts share news, opinions, and insights about cryptocurrencies.
• Shill: To "shill" means to promote or endorse a cryptocurrency or project, sometimes excessively or insincerely, often with the intention of persuading others to invest.
• FUD: “FUD” stand for “Fear, Uncertainty and Doubt”, a short term to describe a complex set of emotions to describe any form of communication of which its sole purpose is to induce pessimism towards a particular asset or market.
• Rekt: "Rekt" is a playful variation of the word "wrecked." It's used to describe significant financial losses due to bad investment decisions or market downturns.
• Whale: A "whale" refers to an individual or entity that holds a large amount of a particular cryptocurrency, potentially influencing the market due to their holdings.
• Rugpull: A "rugpull" occurs when the creators of a cryptocurrency project suddenly exit, taking investors' funds with them, indicating a scam.
• Moon: "To the moon" is a phrase expressing the belief that a cryptocurrency's value will significantly increase.
• Flippening: The "flippening" refers to the event of one cryptocurrency overtaking another in terms of market capitalization or other metrics, such as Ethereum surpassing Bitcoin.
• Paper/Diamond Hands: "Paper hands" are investors who sell quickly under pressure, while "diamond hands" refers to those who hold onto their investments despite volatility.
• Probably Nothing: A term used humorously to downplay potential significant market events such as a partnership or upgrades
• Degen: Short for "degenerate," it's used to describe an investor showing risky or speculative behavior.
• Few: Short for "few people understand." Refers to a perspective an individual thinks is important but not enough people are aware of.
• Based: A term of approval or agreement within the community. Although more common in online political slang, it is often used in the cryptocurrency ecosystem.
• Fren/Ser: "Fren" is a playful term for "friend," and "ser" is a playful variation of "sir," both used to address others within the crypto community.
• Copium/Hopium: These terms playfully describe irrational optimism about the future of an investment, often despite evidence to the contrary.
• Aping: To invest without much research or due diligence, often following others' decisions.
• Exit Scam/Exit Liquidity: An "exit scam" refers to a cryptocurrency project shutting down and disappearing with investors' funds, while using someone or something as "exit liquidity" refers to selling a significant portion of one's holdings by leveraging an open position or often irrational demand from other market

Now, armed with this crypto lexicon, you can confidently engage in native crypto discussions without feeling excluded, enabling you to join the conversation shaping the evolution of the financial world. Now on a more serious note, let’s talk about myths. From my personal journey, I've observed that the distinction between a crypto advocate and a skeptic doesn't solely stem from misconceptions about crypto’s social system, but also from the persistence of common crypto myths. So, if you find yourself or a fellow ‘’fren” teetering on the edge of entering into the crypto realm but remain hesitant due to "FUD," it's likely due to one of these myths. Note that there may always be some truth in myths, results are easy to misinterpret or misunderstand.

Crypto Myths

• Crypto is Used only for Speculation and Crime: While speculation exists, cryptocurrencies have broader applications, including decentralized finance, supply chain management, and identity verification. While some illicit activity occurs, it's not representative of the entire crypto space.

Illicit Share of All CrytoCurrency Transaction Volume

Source: Chainanalyis, Crime report 2023. It should be noted that this only accounts for crimes that were discovered leading to some uncertainty about the actual values.

• Crypto Does not have Intrinsic Value: Cryptocurrencies hold value as a medium of exchange, store of value, and for powering decentralized applications. While it is true that cryptocurrencies often do no have material value similar to gold, their scarcity and utility provide intrinsic value. For example, the native currencies on smart contract platforms have intrinsic value because they play a vital role in enabling and incentivizing various types of users such as validators, DApp users and developers.
• Crypto is like a Gateway Drug to Illicit Activity: Due to the potential immutable nature of the blockchain, crypto's transparency and traceability may aid law enforcement in reducing illicit activities which could lead to the identification of the ultimate beneficiaries of illegal activities. It's also known as a gateway to innovation, financial inclusion, and efficiency. The technology of Web3 and DeFi has opened the doors for a plethora of use-cases that were previously thought to be impossible or impractical. However, investors should be aware of the risks of investing if digital assets such as market risks (volatility risk, risk of total loss), technology risk and regulatory risks.
• Crypto is used for Tax Evasion: Cryptocurrency transactions are increasingly subject to taxation. Many jurisdictions require reporting of crypto gains, and legitimate tools exist for managing taxes. The important thing to mention is the lack of clarity and regulation regarding holding and trading cryptocurrencies in many jurisdictions creating possibilities for regulatory arbitrage.

Europe Tax Rates for Crypto

Source: VanEck Research, Coincub, 2023. Your personal situation might be different and might not allow you to make use of an advantageous tax rate. This information is not meant as tax advice, please contact your tax advisor to understand what tax applies to your specific situation.

• Crypto is a Bubble waiting to Burst: Blockchain technology has transformative potential, and many projects are solving real-world problems. While markets can be volatile, not all projects are driven solely by speculation. A better way to describe Bitcoin and other cryptocurrencies in terms of their price performance is using market cycles. Clear patterns seem to emerge, strongly correlated with halving time (the algorithmically defined time at which mining rewards decrease). Please note that past performance is not an indicator of future results.

Bitcoin Market Cycles (Centered at ATH and percentage of ATH)

Source: Messari, data as of August 2023. Past performance is not a guarantee for future result.

Bitcoin is increasingly being used as part of a broader investment strategy to hedge against inflation and global political instability akin to gold. That is why VanEck often refers to Bitcoin as a form of digital gold, a store of value and unlike gold, also a convenient payment method and common unit of account in the cryptocurrency ecosystem.

• Crypto will become Illegal: Many countries recognize the benefits of blockchain technology. While regulations may evolve, outright bans are possible, but unlikely due to the technology's potential. Actually quite the opposite, crypto is being embraced as innovative technology on a global level by governments, organizations and individuals. Users and investors of digital assets should be aware that there are countries where crypto generally prohibited.Take for example PayPal’s PYUSD stablecoin, launched on Ethereum recently, contributing to Ethereum’s network revenue and therefore creating demand for the native token Ethereum.

Crypto Regulation in 2023

Source: VanEck Research, Elliptic, data as of 2023. This data may be inaccurate and should not be used as advice.

• All Crypto are the Same: Cryptocurrencies have diverse use cases, from digital payments to smart contracts and privacy-focused transactions. They differ in design, technology, and purpose. Visit our Crypto Academy to learn more about the differences between the various cryptocurrencies, their use-cases and underlying technologies.

VanEck Identified 8 Primary Categories

Source: MarketVector, data as of August 2023.

To conclude, for our readers who feel left out of this fast moving space because its hard to keep up with vast collection of crypto lingo or due to misunderstanding of common myths, I hope this article has been of great value and may have changed your view on crypto in a positive way. Now is a great moment to take some time and learn more about the technology through our Crypto Academy.

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Please note that VanEck may have a position(s) in the digital asset(s) described below.

“The defense against the substitution of sovereign currencies is the maintenance of robust, trusted, and credible domestic institutions.” – IMF Blog, July 2023

After 6 months of dramatic BTC & ETH outperformance, many so-called “altcoins” rallied in July, especially those that had been designated securities in recent SEC lawsuits like SOL (+24%), MATIC (+5%), and ADA (+9%), following Ripple’s victory vs. the SEC on the matter of whether XRP the token (+51%) is a security when traded on centralized crypto exchanges.

For the month, Bitcoin & Ethereum fell (both down 3%), while nearly every other crypto sector we track posted gains, except for the long-suffering Metaverse coins.

In our view, one major challenge for digital asset investors is balancing the winner-take-all characteristics historically evident among digital platforms with the extreme price performance disparity already evident year-to-date. Historically, Bitcoin dominance rises in the early part of a bull market and then fades as investors borrow against those gains to speculate on riskier assets. This time, however, leverage is less available, and the regulatory environment in the US is much more severe. Meanwhile, the Bitcoin halving is still ahead of us, as we explained in a .

Source: Bloomberg, VanEck research as of 7/31/2023. Past performance is not indicative of future results. Not a recommendation to buy or sell any of the names mentioned herein.

Layer 1s

Layer 1 smart contract platforms (SCPs) rose 4% in July, while the sector (MVSCLE) 30-day annualized volatility fell to 34%, the lowest of the 4 major categories we track. Falling volatility has been a trend for much of the past year despite extreme events, including the collapse of FTX, Luna, and 3AC. At the same time, the market cap of stablecoins has moved in lockstep with the falling volatility. This makes sense to us because as opportunities for trading decline due to decreased vol, stablecoin yields should also fall, reducing demand for stablecoins. We think a new leverage cycle is a precondition for the type of absolute returns and volatility that have characterized past cycles. But so far, there is little evidence of rising demand or supply for leverage. Anyway, among the SCPs we track, the best performers of the month were Solana (SOL), up 24%, and Optimism (OP), +23%. This month's laggards included Stacks (STX), down 14%, Fantom (FTM), down 23%, and Ethereum -4%.

Smart Contract Platform Annualized Vol vs Stablecoin MC

Source: Artemis.xyz, as of 7/26/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

In July, Solana yet again proved its resilience by rebounding from major ecosystem FUD. In early June, the SEC labeled Solana a security in its lawsuit vs. Coinbase, and this catalyzed a 25% decline in the price of SOL. Since then, Solana has seen its fundamental metrics improve as ecosystem participants grew amid the rebirth of Solana DeFI. Though daily active users on Solana only saw a slight increase, around 3.5%, Solana applications like MarginFi, Hxro, and Drift catalyzed on-chain activity and caused a 31% bump in DEX volume and a 12.5% increase in TVL. As a result of the increase in usership on Solana, fees increased by 30% compared to the month of June. One interesting announcement in the Solana ecosystem was the concurrent announcements from both Neon, a Solana infrastructure project, and the Solana Foundation. Both entities launched compilers that would enable Solana to run Solidity smart contracts. As a result, Solana now has two credible offerings that will make it simpler for Ethereum developers to move over to Solana without making major changes to their coding language. Such offerings may bolster Solana’s ability to vie for the pie of blockchain developers. Another positive development for the Solana ecosystem was the listing of Helium (HNT) tokens on Coinbase after a successful move to the Solana blockchain. Helium is a decentralized cellphone and wireless communication network which originally ran a purpose-built layer 1 blockchain but migrated to Solana to save development costs and boost performance. Also helping Solana this month was the verdict in the Ripple case, which stipulated that tokens like SOL could be considered both securities and commodities – thus removing the probability that the SOL token would be proven through litigation to be a security under all circumstances.

Share of Fees: Optimism vs Arbitrum vs. Polygon

Source: Artemis as of 7/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Despite increasing competition in the Layer-2 sub-sector of smart contract platform market, with Starknet announcing a major software improvement to enable more throughput, Mantle launching their mainnet Layer-2, and Polygon asserting a compelling multi-chain vision alongside a token revamp, Optimism’s OP token was a top performer in July. Regarding fundamental metrics, daily active addresses were up 23%, fees were up 29%, and daily transactions on Optimism surpassed Abitrum’s for the last few days of the month. Important catalysts came from increased interest in decentralized perpetual futures platforms like Kwenta and the launch of Sam Altman’s (OpenAi founder) Worldcoin, which runs on Optimism. (Colleague Pranav Kanade wrote about the Worldcoin project .)

For background, Worldcoin is a decentralized identity protocol with 2.1M accounts created. With each user onboarded, WorldCoin must create a wallet to hold that user’s identification credentials. Over the last week, WorldCoin employed Gnosis’ Safe product (see more on Gnosis below) to create a new wallet for each newly onboarded user. A significant percentage of these will likely begin using crypto assets on Optimism. The result is that Worldcoin may become a robust onboarding mechanism for cryptocurrency in general and the Optimism network in particular.

Optimism in July asserted its vision for its Optimism Superchain internet of blockchains governance structure and community norms while hinting at potential value accrual pathways. In a post that Optimism titled , the Optimism Collective (a band of companies, communities, and citizens working on the protocol) hinted that social norms should drive all blockchains and that those built using Optimism code should opt into Optimism’s future sequencer set which will be staked with OP tokens. While this declaration is non-binding, it sets the table for increasing community and builder cohesion around driving value back to the OP token to pay the OP team developing Optimism’s open-source software.

Stacks

Stacks (STX) fell 14% in July, underperforming most L1s and L2s. The most telling metric of Stacks’ decline is the significant drop in the token’s daily trading volumes. During the month of June, the STX token averaged $55 million in daily trading volumes, with a monthly high of $120 million traded on June 22nd, coinciding with a local maximum for the token price at $0.82. Conversely, this past month, the average daily trading volume plunged to around $23 million. On the surface level, it appears the underperformance this month is a simple mean reversion back to similar price levels before the few isolated days in June, with the token sitting just under $0.60. In the months of June and May, Stacks had emerged as among the most credible of the Bitcoin L2s, on which Ordinals might be traded. As the narrative dried up, trading volumes and general interest in Stacks also evaporated.

Diving deeper into Stacks’ on-chain data, we notice the number of daily active addresses has continuously declined since the start of the year. In fact, daily active addresses hovered around 1,000 since the beginning of July, which marks the longest consecutive period this year in that range. Whether we are measuring market cap-to-TVL or price-to-active addresses. STX appears to be discounting a high probability of exponential growth in users and deposits. Stacks’ market cap to active address ratio is among the highest since late spring, ahead of the protocol’s “Nakamoto” consensus upgrade scheduled for November, which may increase the usability of the chain.

Stacks Price vs Trading Volume

Source: Coingecko as of 7/27/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Stacks Daily Active Addresses YTD

Source: Artemis as of 7/26/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Stacks Users Dropping Faster than Market Capitalization

Source: Artemis as of 7/26/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Fantom (FTM) suffered immensely this month with the hacking of the Multichain bridge, Fantom’s most important bridge to Ethereum, taking centerstage. TVL of Fantom dropped from $200 million to $67 million following the exploit, during which $126 million was drained from its Ethereum liquidity pools, rendering the wrapped representation of these assets on Fantom worthless. This is because Multichain holds assets on one end of the bridge and mints a backed representation of each asset on the other end. When Multichain was attacked, the hacker took the locked assets on the Ethereum side, which caused the minted representations on Fantom to become worthless. Since Fantom has no native stablecoins, all the value in popular stablecoins on its chain, including USDC, USDT, and TUSD, were bridged representations, with Multichain dominating 80% of this market.

While the actual Fantom token itself was not exposed to the Multichain hack, the hack represents a loss of trust in the chain. As a result of the hack, Fantom saw its most popular lending protocol, Geist, halted and then abandoned as the value of its tokens became zero. While transactions, users, and fees increased for the month, this can be attributed to uncertainty-induced volatility and the rush to exit the Fantom ecosystem.

Fantom TVL

Source: Artemis as of 7/26/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Stablecoins as Payments Infrastructure: Gnosis Pay Deep Dive

The founding vision of cryptocurrency was to create a medium of exchange whose value was unalterable by central authorities who could depreciate the currency, censor what it could be used for, and restrict who could use it. While the first successful cryptocurrency, Bitcoin, fulfills much of the original vision, it fails to be practical for most people. This is because the Bitcoin network lacks the responsiveness, scalability, and simplicity necessary for mass consumer audiences. Also, its volatile value and lack of deep liquidity made it costly to hold and difficult to exchange.

To solve these problems, the next solution was stablecoins which are tokens whose value was pegged to a fiat currency by an algorithm or by being backed by off-chain assets. Stablecoins solve the issue of the risks of holding BTC and the challenges of hedging price exposure. Furthermore, more advanced blockchain designs solved time constraints that enabled payments to be settled in seconds rather than minutes. However, adopting cryptocurrencies for payments has remained elusive because most people simply do not want to deal with the blockchain. Users and merchants did not want to go through the added hassle of learning how to use wallets or the time commitment of exchanging crypto and fiat. Instead, merchants and consumers remained wedded to existing digital payments infrastructure using things like point-of-sale card station devices and credit cards.

The next attempt to solve the payments problem was to tie cryptocurrencies to debit cards. Thus emerged centralized exchanges like Binance, Coinbase, and Crypto.com, each offering debit cards that were linked to user exchange accounts. While users could deposit stablecoins, other digital assets, and fiat into their exchange accounts to be used by these debit cards, users were still shackled to centralized service providers who held custody over the users’ digital assets. At the same time, there was no direct link to a user’s on-chain account.

Now, Gnosis Pay (GNO) has established an innovative product to solve some of these issues. Gnosis Pay is a decentralized payment network that allows someone to pay at any merchant who accepts Visa with the cryptocurrency in their on-chain account. Gnosis Pay can accomplish this feat through its partnership with Monerium and their “EURe: which is a 1:1 Euro-backed stablecoin. On the backend, Monerium creates IBANs (international bank account numbers) for each card which links to each Gnosis Pay user’s on-chain account. Because Monerium is connected to the Euro area’s SEPA (Single Euro Payments Area) payment system, it can accept EURe tokens from Gnosis Pay users’ blockchain accounts, convert them into fiat and transmit them across SEPA to merchants at the point of sale. As a result, any user with EURe stablecoins in their on-chain wallet can use the Gnosis Pay debit card to pay at any merchant that accepts Visa. On the flip side, because each Gnosis Pay account has an associated IBAN, payments remitted in Euros are converted by Monerium into EURe stablecoins and sent to each account holder's blockchain wallet. All a user has to do is to have a balance of EURe stablecoins in their blockchain account linked to their Gnosis Pay debit card.

EURe Supply ($USD)

Source: Defillama.com as of 7/28.2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

To use Gnosis Pay, each user will have to have an account on Gnosis Pay’s Layer-2 blockchain of the Gnosis network. In practice, Gnosis Pay users must port token value from other blockchains, such as Ethereum, BSC, Gnosis, and Polygon, using the  to Gnosis Pay before the Gnosis debit card can use it. Or, they can send fiat payments to their Gnosis Pay IBAN, which will be converted into EURe stablecoins and deposited into their accounts.

When a user sends funds to the Gnosis Pay Layer-2, they are screened for AML behavior and given KYC/KYB check by an identity verification company called . Once authorized and an account is created, a user authorizes the card to automatically draw from her or her blockchain account by linking it with the Gnosis Pay Application. The gas required for the transactions on the blockchain is taken care of by Gnosis Pay. In the future, MakerDAO’s Spark Protocol could enable users to borrow EURe stablecoins against their wallet’s non-stablecoin assets to make off-chain payments. Over time, Gnosis Pay will be available to other geographic regions like North America and Asia. Additionally, other stablecoins will be integrated into Gnosis Pay beginning in 4Q2023. Currently, the sign-up cost is €30, and another €10 for minting the card. There is a physical card, and eventually, a mobile card will be offered.

Capabilities of Gnosis Pay's Architecture

Source: Gnosis ETHCC Presentation.

We believe Gnosis Pay has made a substantial step forward that unlocks payments for everyday crypto users and Decentralized Autonomous Organizations (DAOs). DAOs, which are blockchain-based entities that often govern the business operations of on-chain applications, can now seamlessly pay for off-chain services in fiat, including vendor fees, employee wages, advertising, etc. Gnosis Pay has a high potential for adoption because many DAOs use Gnosis’s Safe multi-signature wallet to secure their on-chain treasuries. Collectively, Gnosis SAFE products secure more than in value on blockchains for DAOs, and converting a significant fraction of those entities to Gnosis Pay appears probable.

At this stage, the biggest impediments to mass adoption are Gnosis’s Pay’s limited geographic scope, the necessity of using the Gnosis Pay L2, the low float of EURe, and the lack of support for USD-based stablecoins like USDT and USDC. From the standpoint of usability, the ability to tap into the US financial system will be the biggest ongoing hurdle for Gnosis Pay growing widespread usage. From a regulatory perspective, it will be difficult for them to get partners, but it is almost certainly a top priority for the project’s team.

Another impediment to the greater success of Gnosis Pay is that it requires funds to be on the Gnosis Pay L2. The experience of bridging to Gnosis Pay is risky and time-consuming, and it exposes users to the risks of Gnosis Pay’s L2. Furthermore, because the supply of EURe is small at only $12M, there is not enough liquidity to feed a rapidly growing user base. This relatively small asset base makes it challenging for users to swap other assets for EURe without significantly moving the EURe price away from its peg.

Gnosis Pay is not alone in its non-custodial crypto debit cards, as the competitive marketplace is growing quickly. Some top constituents include Holyheld, BasedApp, , and Suberra. While each of these competitors has shown potential, each is currently limited to its geographical areas due to banking system challenges and regulatory constraints. Holyheld is limited to EU residents, BasedApp is relegated to Singaporeans, and Stables is accessible only to Australians. On the other hand, Suberra, which has yet to launch its card, will be available to users in the US. The biggest drawback of the competing offerings is user experience. In the case of BasedApp, Stables, and Holyhold, users must manually convert stablecoins to fiat currencies to “top-up” their fiat bank accounts to have funds to spend on the card. Gnosis Pay, by contrast, automatically pulls EURe balances when using a debit card. Additionally, the debit card holder must manually convert the fiat from their bank account into crypto to have the value back on the blockchain.

Currently, the fee structure for Gnosis Pay is unknown, as is Suberra’s, but the other competitive products have public fee structures that vary widely. BasedApp charges no fees on transfers but a card create fee and foreign transaction fees. It seems their monetization model relies upon the interest generated by holding the SGD that backs SGD stablecoins. Holyheld, on the other hand, has a deep menu of different types of charges for its product. It tells users to create new cards and charges them for crypto to fiat conversions at 0.75% for topping up the card or exchanging fiat for crypto. Additionally, Holyheld charges for a litany of other account actions, including outgoing fiat payments, fair usage charges, and account pin number change fees. By contrast, Stables does not charge for transfers or card usage but instead charges users a 1.5% fee when they swap between fiat and crypto to “top up” or withdraw from their fiat account.

Going forward, Gnosis has many different pathways it can choose to take that could lead to mass adoption. The chief obstacle it faces today is the strong user experience of the credit card ecosystem. While users love the simplicity of paying for things using credit cards and the rewards generated, merchants dislike the process of obfuscating credit card fees in higher consumer prices and/or paying for credit card charges themselves. Point of Sale devices like Stripe create even more costly overhead for consumer businesses. For example, Strip takes 2.7% on each transaction and a $0.05 fee. Gnosis Pay’s success could be found by unrooting this merchant-imposed, odious high fee structure that credit cards impose on the exchange of goods and services.

Gnosis could cut into this financial services racket by pushing merchants to charge lower fees for users of its cards through discounts to consumers (whether by lower prices for debit card purchases or higher prices for credit card purchases). This is not only because Gnosis would circumvent the credit card fees but also because Gnosis could send merchants rewards for charge activities using Gnosis Pay. This program could be paid for by Gnosis making an agreement with Monerium to remit some of the interest received from the Euros that back the EURe stablecoins to the merchants. While this would decrease Monerium's margin on the EURe business, it could be a catalyst that massively expands the market potential for EURe due to ardent merchant zest for Gnosis’s economical solution. However, this pathway would be the first step towards getting both the merchant and consumer off existing expensive, card-based point-of-sale infrastructure. In the long term, Gnosis will likely push both the consumer and the merchant to accept blockchain payments using wallet-based services, most likely embedded in cell phones. Regardless of the outcome, this initial entry point by Gnosis Pay is genuinely exciting and, if it lives up to its promise, could ultimately spur legislation in the United States on stablecoins. Additionally, the Gnosis architecture could help a “super-app,” such as X.com (formerly Twitter), launch a self-custody-based digital asset payment platform. In July, Twitter received its first three state money service business (MSB) licenses.

DeFi

The MarketVector Decentralized Finance Leaders Index (MVDFLE) ended July +3%, outperforming Ether’s 3% price decline. The performance was mainly supported by Uniswap (UNI), which rallied 20% this month and represented ~33% of the index. DYDX and AAVE both notched gains this month, rising 6% and 1%, respectively, while LDO and CRV held the index back, falling 11% and 21%, respectively. MakerDAO stood out this month as its token, MKR, rallied an impressive 48% after the founder purchased more MKR, and the DAO’s estimated annual profit rose from real-world asset acquisition. Defi TVL dropped from $45.2b to $40.9b in July, driven by the falling price of Ether and the Curve exploit, resulting in many users withdrawing their assets from the protocol. Additionally, overall lending protocol TVL has now surpassed that of decentralized exchanges. This can be attributed to the growing adoption of Ether LSD products and the ease with which users can create negative-interest loans. Such creation is facilitated by the yield-bearing properties of LSD tokens, making them an attractive option for users seeking efficient debt management solutions.

Over the last three months, MakerDAO has undertaken a significant transition in its asset composition. The platform has gradually reduced its reliance on USDC as the main asset backing DAI, decreasing it from 50% to approximately 9%. Instead, MakerDAO has adopted yield-bearing real-world assets (RWA), which now constitute over 50% of its assets, amounting to approximately $2.4 billion, according to data from a Dune dashboard by @SebVentures. This strategic shift has resulted in a remarkable surge in MakerDAO's estimated annual profit. Since the beginning of May, the estimated profit has nearly quadrupled, rising from $23 million to an impressive $86 million, as reported on makerburn.com.

MakerDAO Monthly Profits

Source: VanEck Research, makerburn.com as of 7/31/23.

Furthermore, MakerDAO successfully passed the Enhanced DAI Savings Rate proposal. This new development allows DAI holders to earn up to 8% interest by depositing their DAI into the DAI Savings Rate (DSR). The elevated rate will remain in effect until 20% of DAI is deposited into the DSR, providing a very attractive earning opportunity for DeFi users. Currently, just over $300 million of DAI has been deposited into the DSR, about 6.5% of the circulating supply. MakerDao also introduced the Smart Burn Engine, designed to utilize DAI from the Surplus Buffer. This initiative aims to purchase MKR tokens and pair them with DAI, depositing them into the Uniswap V2 DAI-MKR liquidity pool, providing alternative methods for managing MKR tokens. Despite MakerDAO's remarkable growth, DAI's market capitalization still experienced a decline, falling by approximately $90 million in July to $4.56 billion, as stablecoin liquidity dried up, given the lack of volatility and leverage available to borrowers.

On top of the positive fundamental developments at MakerDAO, Rune Christensen, the co-founder of MakerDAO, sold about 13 million LDO tokens and subsequently purchased 32,637 MKR tokens at an average price of $734. This move has already proven advantageous, with Rune's trade up over 50% based on the current price of MKR. Conversely, observations by anonymous Twitter user @0xSisyphus pointed out that A16Z and Paradigm, two prominent venture capital firms, are potentially selling MKR tokens. This speculation arose as both firms withdrew MKR from the governance contract and transferred it to Coinbase. It's worth noting that A16Z acquired 6% of the Maker supply in 2018 at a fully diluted value (FDV) of $250 million, and Paradigm acquired 5.5% of the Maker supply in 2019 at a $500 million FDV, meaning both investments have underperformed Ethereum significantly over the same period.

Curve & Conic Exploit

The crvUSD market cap briefly rose over $100m in July but retreated below $90m following a ~$5 million exploit of Conic Finance. Then, on the 30th of the month, some liquidity pools using ETH were exploited due to a compiler reentrancy vulnerability in the version of Vyper used to code the smart contracts. The pools impacted included alETH/ETH, msETH/ETH, pETH/ETH, and CRV/ETH. Teams attempted to whitehack as many pools as they could before they were exploited, and at the time of writing, it would appear that ~$50 million was lost. For context, these pools combined held a fraction of Curve’s TVL, but many users and protocols removed liquidity out of fear, and Curve’s TVL fell ~50%. Hopefully, this liquidity will return as things normalize.

LSDFi (Liquid Staked DeFi)

The LSDFi narrative is witnessing a significant surge as the staking of ETH to the beacon chain continues. Users are actively depositing their liquid-staked ETH into protocols that allow them to capture higher yields or unlock new utility. The growing amount of staked Ether – 22M ETH staked across 700k validators, representing 19% of total supply and growing - is expected to yield benefits for these protocols, as they allow users to earn more ETH or create negative interest rate loans with their LSDs. Notably, Pendle, Lybra, and Origin protocols saw significant TVL growth last month. Moreover, the introduction of Yearn into the LSD scene has generated anticipation for the full launch of their st-yETH vault. We count $600M+ in TVL across these LSDFi protocols, up from $200M in May. We share details on three strong competitors below.

Pendle

In July, Pendle introduced Pendle Earn, a streamlined version of their yield trading platform. This new offering allows users to earn an upfront fixed yield on their yield-bearing assets. While retaining the option for speculative and directional trading on variable yield, the protocol now enables users to toggle between Trade and Earn mode on their browser to access either the more comprehensive platform or, the newer simplified version. The rebranding of Pendle Earn has proven highly successful, evident in the significant increase in total value locked, which surged by approximately $30 million to reach $154M million this month, marking an impressive 24% growth.

Furthermore, Pendle has been granted support from ETH L2 Mantle Network, a strong signal of recognition and endorsement for Pendle as a new DeFi primitive. This grant incentivizes Pendle to expand its presence to the newly launched chain, showcasing the platform's growing reputation and appeal within the DeFi space. Pendle's achievements underscore the importance of simplifying user experiences in DeFi, as it often plays a pivotal role in driving user adoption of new innovative financial products in DeFi.

Pendle TVL Growth YTD

Source: VanEck Research, DefiLlama as of 7/31/23.

Lybra

Lybra Finance, who launched their yield-bearing stablecoin, eUSD, continued to grow in July from $276 million TVL to over $380 million. The lion’s share of this growth came from the continued adoption of eUSD, which saw a $56 million increase in market cap from $136 million to $192 million at the time of writing. Additionally, Lybra released their v2 documentation, which will allow for new LSD products to be used as collateral and see LBR and peUSD deployed as LayerZero Omnichain Fungible Tokens (OFT) to be used on Arbitrum, among other protocol enhancements. This should only continue to bolster the protocol’s growth as more LSD liquidity is bridged to layer 2 blockchains to avoid the high transaction costs of Ethereum.

Origin

Origin Protocol saw significant growth in their liquid staked ether product, Origin Ether, which nearly doubled its TVL in July from $44m to $84m. This was mainly a result of the $110k incentive given to vlCVX holders to vote for CRV emissions to be distributed to the ETH+oETH pool on Curve. Additionally, 20% of protocol fees will go to lock CVX so the protocol can continue to incentivize the liquidity of their LSD product. Origin’s success this month highlights how protocols can leverage the existing DeFi ecosystem to incentivize protocol growth. By making it economically worthwhile for vlCVX holders to direct CRV emissions to the ETH-oETH pool, Origin can begin to create a flywheel effect. Users provide liquidity to earn CRV rewards, which grows the oETH TVL and allows Origin to lock more CVX, resulting in more incentives directed toward the ETH-oETH pool.

Yearn

Yearn has commenced bootstrapping its yETH product this month in preparation for its full-scale launch. Following the closure of deposits last weekend, the product is set to launch with a Total Value Locked (TVL) of $3.9 million, having attracted ~$9,500 in monthly incentives from various LSD protocols and centralized exchanges offering LSD products. These entities are vying for significant allocations of the yETH LSD basket. Notably, Swell Network's largest incentive of ~$3,600 has been allocated to bolster swETH's initial weight in the vault, bolstering the product's appeal and potential yield generation. Based on the current proportion of incentives to deposits, it is estimated that the yETH product will provide an approximate annual percentage yield (APY) of ~3% on top of the yield derived from the underlying LSDs. Furthermore, with the inclusion of swap yields, the yETH vault is poised to be highly competitive compared to traditional LSDs.

NFTs

In the month of July, the NFT market experienced its fifth consecutive monthly decline in volume. Blur maintained its position as the leading NFT exchange by volume, accounting for over 70% of the total NFT volume. However, it's essential to recognize that despite its dominance in volume, OpenSea still outpaced Blur significantly in terms of users and trades, indicating that Blur's primary user base still consists mainly of NFT power users. Blur's peer-to-peer NFT lending platform, Blend, also remained a driving force in NFT loan markets, enabling nearly 94% of loan volume in July. However, there was a noticeable decline in NFT loans throughout the month, with the weekly average loan volume dropping from approximately $180 million in June to around $102 million.

NFT Volume: Blue vs. OpenSea

Source: VanEck Research, @Hildobby as of 07/31/23.

Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Metaverse & Gaming: Performance & Fundamentals

The Market Vector Media and Entertainment Leaders Index returned -2% for the month of July, nearly matching ETH’s price decline. APE continued to sell off throughout the month, falling 16%, while its peers, SAND and MANA, recorded losses of only 2.5% and 4%, respectively. APE’s underperformance is magnified by its staking program, which rewards APE holders an unsustainable 49% APY for staking their tokens. Meanwhile, on the Web3 gaming front, active users across the top Web3 games we track fell by 2%, a symptom of the lackluster IP produced and the failure to address the needs of Web2 gamers.

Web3 Gaming: Understanding Gamer Preferences and Industry Trends

In the Web3 gaming industry, a significant problem has become clear: an overestimation of additional features that truly resonate with gamers. The status quo indicates a strong preference among gamers for marketplaces that facilitate the buying and selling of in-game items, as exemplified by the thriving gray markets for trading Counter-Strike skins. We believe contemporary Web3 games must adopt a more focused approach, deploying smart contracts solely for elements that add tangible value to the gamer’s experience. Key aspects include representing valuable in-game items as NFTs on the backend and providing a web2-like interface for seamless item trading on the front end.

At the forefront of utilizing blockchain to deliver value to gamers, ImmutableX has been lauded for its emphasis on aggregating NFT liquidity, creating an intuitive wallet management experience through the Immutable Passport, and leveraging established online gaming marketplaces such as the Epic Game Store and Gamestop NFT marketplace. Mythical Games has also emerged as a prominent competitor by challenging the notion of needing the blockchain for anything other than NFTs representing in-game items. They have adopted a different strategy than many other games, launching their apps on major app stores despite Apple and Google's egregious 30% tax levied on in-app purchases while simultaneously establishing their marketplace, DMarket. This approach allows them to reach a broader audience and naturally incentivizes users to engage with DMarket due to more favorable pricing. Notably, DMarket has executed an impressive $162 million in NFT sales since its inception, as reported by Cryptoslam! Despite this success, the MYTH token has underperformed the broader crypto market.

Another noteworthy trend observed in the Web3 gaming space is the significance of valuable Intellectual Property (IP) tied to existing user interests. Successful games tend to center around popular sports themes, exemplified by Sorare, NBA TopShot, and NFL All Day. Mythical Games follows this trend with their NFL Rivals game, boasting over 1 million players and earning the prestigious position of being ranked as the #1 Sports game on the Apple app store, currently maintaining a strong position at #4.

As the Web3 gaming industry continues to evolve, staying attuned to gamer preferences and industry trends remains crucial for sustained success. Currently, we think the teams that address the most direct concerns from gamers and create games that appeal to things people already have a passion for (such as sports, fashion, and social experiences) will be the most successful. Given the lack of widespread adoption and the less robust monetization models of current gaming tokens, we have limited our investments in the space.

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Morningstar^® US Sustainability Moat Focus Index also had a strong start with a tech rally at least partially contributing to its success. The events of the first half of the year heavily influenced the index composition, which rebalanced on 16 June 2023.

Bull or Bear: Morningstar’s View on Sectors

It is crystal clear that tech stocks were investors’ favorites this year. In 2022, the technology industry faced a challenging period. However, the first quarter of 2023 marked a resurgence, followed by an even more pronounced upswing in the second quarter. This surge can be attributed, at least in part, to the immense excitement and demand for everything related to artificial intelligence. Several companies especially benefited from the trend (a good example is NVIDIA joining the trillion-dollar club), but some valuations of tech stocks, according to Morningstar’s research, might be overheated, especially those with wide moats.

On the other hand, some sectors found themselves traded at a sharp discount compared to their fair value estimates. Amidst concerns over the value of telecom companies, the recent uptick in prices signals positive prospects for wireless carriers. Other subsectors, like Financial Services or Basic Materials, also display growth potential.

Moats might not always be priced-in, but according to Morningstar data, some sector valuations not only accounted for Moats but also overvalued them.

Morningstar Price/Fair Value Metric by Sector Weighted by Intrinsic Value

Figures below 1 are undervalued, while above 1 are overvalued.

Source: Morningstar, Data as of 26 June 2023.

Morningstar Price to Fair Value Metric by Sector for Wide Moat Rated Stocks

Source: Morningstar, Data as of 30 June 2023.

Underweighting Tech Results in a Soft Start

The US Market had one of the strongest half-year marathons in its history, and its main benchmark, the S&P 500 Index, finished the first six months up by 16.6%, overperforming Morningstar US Sustainability Moat Focus Index by close to 460 basis points. Underweighting Communication Services and Consumer Discretionary sectors left the performance of the Moat index trailing S&P while underweighting Energy helped to shorten the distance between the two. Some champions of 2023 (e.g., Meta Platforms returned 138.5% between January and July) were also excluded from the index.

Moat Index Highlights

So Long Tech, Until We Meet Again

The Moat Index saw its technology exposure increase at the end of 2022, following the drastic declines in valuations for the sector. Now, with the incredible rally that many of these companies experienced in the first half of the year, their valuations have become too lofty. Following this trend, the Moat Index shifted exposure to other areas of the market with more attractive valuations. The reduced exposure of this review came by way of software companies and semiconductor companies, with Adobe and KLA Corp being the most notable names removed from the index. Please note that these companies are just examples representing a small portion of the total portfolio.

Communication Services and Healthcare are Shining Again

Healthcare and Communication services were the primary beneficiaries of the above-mentioned valuation-driven shift away from technology names. From the healthcare sector, the new additions are from the biotech, medical technology, and life sciences sub-industries. These additions include Biogen (BIIB), Zimmer Biomet Holdings (ZBH) and Agilent Technologies (A), among others. On the communication services side, names added to the index include Comcast (CMCSA), and Walt Disney (DIS).

Accessing Moat Stocks

VanEck Morningstar US Sustainable Wide Moat UCITS ETF (MOAT) seeks to provide investment returns that closely track the price and yield performance of the Morningstar US Sustainability Moat Focus Index.

Please note that VanEck may have a position(s) in the digital asset(s) described below.

Please note, VanEck has made its first side pocket investment in Hivemapper's HONEY token. This investment was made through a transaction directly with Hivemapper, Inc. Post purchase, VanEck owns less than 75 bps of the fully diluted token supply. Our investment comes with a 1 year lock up.

Hivemapper presents a unique opportunity utilizing cryptocurrency to crowdsource contributions toward building a decentralized mapping network. In the short term, Hivemapper has proven crypto is a transformative means of incentivizing a global network of actors to work toward a common goal. In the long term, Hivemapper may be able to take market share away from incumbent mapping players by offering a better, cheaper product to its clients.

Hivemapper’s goal is to create a decentralized and permissionless global map that anyone can contribute to and utilize however they want. They aim to have more global, street-level coverage than existing players while providing higher-quality data, all for a lower cost.

How it Works

Drivers worldwide can purchase and install a 4k dashcam into their vehicles to record their daily routes. In return for providing constant real-time and high-quality global map data, drivers are rewarded with $HONEY token. Additionally, if you don’t have a vehicle or the cost of the dashcam is prohibitively expensive, you can still contribute to the network as an Annotator. Annotators play a machine learning model training game, labeling traffic lights, speed limits, and other street signs. This is similar to how Google uses Captcha for ML training, except these participants get paid. They too earn $HONEY for bettering the mapping data and training the machine learning model, which will eventually be able to annotate map data itself. These contributors are crucial to the supply side of the Hivemapper ecosystem.

Source: Hivemapper.

The demand side network participants consist of consumers, such as enterprises or developers, who want to purchase the street-level data the Hivemapper suppliers have aggregated. Consumers who may be particularly interested in digital mapping data could include location-based service applications, logistics companies, and automotive manufacturers who require accurate navigation systems.

Interested consumers can purchase Hivemapper Map API services via Map Credits. Credits are purchased in fiat, priced at $0.02/map credit. 50 map credits provide access to 1 kilometer worth of map data. For example, if a customer wanted all of NYC’s map data, it would be 7,837,650 map credits or $156,753. After the consumer purchases map credits, $HONEY tokens are burned equal to the fiat amount of the contract. The burned tokens are then reallocated toward a new rewards pool for contributors. Under this  token structure, the supply of $HONEY stays fixed at 10 billion tokens.

Source: Hivemapper.

Key Performance Indicators

Global map coverage is the foundation upon which Hivemapper needs to build for long-term success. Hivemapper must have just as much, if not more, coverage to compete with centralized tech offerings. Since launching in November ’22, Hivemapper’s network has grown dramatically with coverage across 3.6 million unique road kilometers. For reference, . If unique road coverage continues to grow at its current pace, Hivemapper could reach 10 million km by 2024.

Source: Hivemapper.

Another KPI we can observe is the total number of contributors to the network. As more contributors come aboard, they further map coverage as well as data quality and freshness, increasing value and thus demand from end clients.

Source:  Dune Analytics, data as of 7/3/2023.

Lastly, we can track Token Burn, which provides insight into the demand for Map Credits and, thereby, a measure of Revenue generated by the network. Currently, there are significantly more tokens being newly emitted as rewards for contributing than tokens being burned for map credits. We expect that to change over time as fresher, cheaper, and broader coverage will increase demand for map credits.

Source: Dune Analytics, data as of 7/3/2023.

Key Issues Being Solved

Many issues stem from centralized tech giants’ approach to building digital mapping networks. Namely:

• Price Gouging: Existing offerings upcharge their customers because comparable alternatives largely do not exist. Many customers, especially SMEs, can .
• Maps are not up to date: Company street-view vehicles can only reach most locations on an infrequent basis. Data collection is especially sparce and outdated in emerging market areas where firms believe they will not receive as much economic benefit for providing up-to-date coverage.
• OpEx and CapEx Heavy: Mapping the world is capital and human resource intensive. Gathering data through centralized company vehicles can cost ~$500k each to build and deploy. It is costly to gather mass coverage without deep pockets.
• Freely uses our data: Users are not compensated for data collection.

Source: Messari.

Hivemapper aims to solve these issues. The network’s costs to the end consumer are significantly cheaper because they do not have the high operational or capital expenditures to collect the mapping data. Hivemapper’s data is fresh and up to date as the global network of vehicle dashcams are constantly recording while drivers go about their normal routes. Furthermore, the $HONEY token can incentivize coverage of areas less frequently traveled. $HONEY not only incentivizes and manages behavior on the network, but it also allows for contributors to be compensated for their data as well as be financially aligned in the success of the network.

Source: Hivemapper.

Interesting Use Cases

Currently, Hivemapper focuses on navigational use cases, of which there are many. Advanced Driver Assistance Systems (ADAS) are being implemented into new vehicles for high-level autonomous driving. Up-to-date mapping data is critical to the ADAS system as knowing detailed road object information such as lane definitions, debris, traffic lights, and signage is paramount.

Logistics companies may want to have visuals of loading docks and parking restrictions before delivery, as knowing can save them time and money. Governments want to know where road maintenance is necessary, have traffic intelligence, or the fastest routes available for emergency response times.

Source: Hivemapper.

HONEY Valuation Framework

Based on Hivemapper’s Burn and Mint tokenomic model, whereby $HONEY is emitted to contributors for participating in the network and $HONEY is burned as a receipt for consumer map credit purchases, we can use an  framework to derive its value. The equation used is MV=PQ. M, the size of the asset base, V, the velocity of the token, and PQ, the yearly transaction value. We start by estimating the Total Addressable Market Size for the Digital Mapping Market. Then we need to estimate Hivemapper’s take rate of that market to get an implied revenue (PQ). In Hivemapper’s case, revenue is a product of map credits sold multiplied by the fiat cost of map credits. We envision Hivemapper’s data being integrated into multiple incumbent map players’ offerings as it could lead to 50%+ in cost savings for them and offer fresher, higher quality data to their customers. Due to the cost savings they could provide to their competitors and a superior product offering, we believe Hivemapper will have a considerable market share. Next, we need to estimate $HONEY’s velocity or how often the token exchanges hands each year. As a utility token in the Hivemapper ecosystem, its velocity will be greater than store-of-value assets like Bitcoin but less than a stablecoin which has no speculation over its future value. We can use an average velocity of a basket of utility tokens for this (V). Estimating $HONEY’s Revenue (PQ) and Velocity (V), we can back into its implied market cap (M). Lastly, we must estimate the number of $HONEY tokens circulating, which is a product of emissions to contributors for global map coverage progress as well as token unlocks. Dividing the market cap by the number of tokens circulating, we can come up with an implied value for $HONEY.

Key Risks

Hivemapper certainly doesn’t come without its risks and concerns. The cost of the dashcams, $299, may be prohibitively expensive for many to join on a global scale. However, this could be alleviated as third party dashcam providers come to market offering cheaper solutions. Our other concern lies in the fact that map data collection is only half the battle. The other half is marketing and sourcing clients to sell this data to. While we believe Hivemapper is on the path towards building a superior product, they must compete with the tech giants’ sales teams, who have robust pipelines and headcount. However, we envision a world in which Hivemapper’s data could be integrated into the backend of existing map players’ offerings as it can provide more real-time, street-level data and cut their costs significantly.

Source: Hivemapper.

Closing Thoughts

Hivemapper takes an interesting bottom-up approach to building a mapping infrastructure network traditionally built top-down by centralized tech players with deep pockets. By using a token incentive model, contributors are compensated for their data and are willing to continue to provide coverage to the network as they have an economic motivation to share in its success. With the potential for broader, fresher, and higher quality coverage than existing offerings and lower costs to the end clients, we believe Hivemapper will gain traction and market share over the coming years.

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A Theme is More Than One Trend

One of the first things Peter explained was the definition of a theme. For Peter, a theme consists of multiple trends that interact, connect and reinforce each other. For him, thematic investing is all about identifying changes, assessing various scenarios and valuing them. To assess outcomes and probabilities, he uses pattern recognition, taking inspiration from history, other regions or other industries, relying on academic research and data analytics.

In the case of Smart Home, history serves as inspiration. Technology has been changing our homes for more than 200 years, something we describe more depth in this whitepaper. Since the industrial revolution, our homes have passed through several stages of evolution, characterized by many technologies. These started with electric lights, refrigerators, central heating, radio and television. And they have now progressed to the technologies we call ‘smart’ today.

With each new technology our homes and lives change, as new markets are created along with new industries. Several of these innovations brought functions from outside the home to the inside. Just consider that the TV that partly replaced out-of-home entertainment like cinemas. This led to the multibillion-dollar media and entertainment industries we know today.

Nowadays, even more aspects of our daily lives are brought into our homes – from work and education, to healthcare, entertainment and shopping – creating a smart home ecosystem. Within healthcare, for instance, it is now possible to receive home infusion therapy in the comfort of our home, while we previously needed to go to the hospital. The Smart Home ETF includes a company called Option Care offering this kind of service.

Layers Within Layers

For Peter, a good investment theme always has multiple layers, even layers within layers, though he prefers to call them sub-themes and second or third order effects. The smart home theme is built on these layers. The premise for the ETF is the changing role of the home in our daily life. But while many of these changes are enabled by technology, the investment opportunities are much broader.

For example, many of the smart home’s innovations make it possible to spend more time in and around our homes. That means people are spending more time making their homes comfortable places through renovation, as well as using them for socializing with other people and pets. Which is why CAVE has holdings in DIY stocks such as Home Depot and Pool.com, but also in dating service Match, food company Nestle (which has a large pet food division) and animal care company Zoetis (pet medication).

The layered approach doesn´t stop there, however. Peter and his team always try to look beyond the obvious, to the second and third order effects. He recalls the washing machine. The major beneficiary of that innovation was not the machine itself, nor the detergents; but the clothing and personal care industry. The washing machine made it easier to wash, changing our perception of personal hygiene. Since we washed our clothes more often, we needed more of them, and we also took more care of ourselves, using skincare, haircare, make-up, fragrances and toiletries.

Turning to another example from history, the introduction of the train and later the car and plane condensed the perception of space and time. Suddenly, it was possible to reach places within hours that previously took days or even weeks. This spawned a burgeoning leisure industry with restaurants, vacations and amusement parks. But retail also benefited: Sears, Coca-Cola and many other big brands grew on the broader distribution possibilities enabled by the train and other transport innovations.

A diversified basket

CAVE’s layered approach creates a differentiated proposition for investors. It ensures exposure to many developments around our home, not all tech based. By incorporating companies that could benefit from second and third order effects, CAVE adds undiscovered upside. Based on Dasym’s proprietary investment approach, we believe that CAVE provides a true thematic diversifier.

The semiconductor industry, a cornerstone of modern digital technology, is heavily reliant on semiconductor equipment manufacturing. These companies provide the machinery that enables the creation of integrated devices, often housed within fabrication facilities or ‘fabs’. The diverse range of equipment includes wafer manufacturing and processing, mask/reticle equipment, thermal processing equipment, inspection measurement, as well as assembly and packaging equipment.

These manufacturers are important due to their large contribution to industry growth. Global semiconductor equipment billings have recently reached an industry record of $107.6 billion in 2022, demonstrating a 9% growth year-over-year in Q1 2023¹.This growth is driven by demand for more advanced and efficient integrated circuits, with companies like ASML leading the charge.

ASML (ASML),² a Dutch-based company, is renowned for producing machines that are essential in creating the world's most advanced chips. ASML's sales rose on average over 19% annually from 2020 through 2022³. Despite economic uncertainties and chip export restrictions, ASML forecasts a promising jump in revenue for 2023.

ASML system sales revenue worldwide 2017-2022, by technology

Source: ASML. Data as of February 2023.

Intel (INTC)⁴ and Taiwan Semiconductor Manufacturing Co. (TSM)⁵ are just two of the many companies that purchase ASML's machines to manufacture the chips found in end products such as laptops and smartphones. Even with fluctuating consumer demand, these companies remain confident in the value and necessity of ASML's offerings, with no cancellations of orders reported.

ASML has a unique position as the sole producer of the extreme ultraviolet (EUV) lithography machine, a critical tool for making the most advanced chips globally. These chips find their way into products like Apple's iPhones and have significant implications for military and advanced artificial intelligence applications.

Two additional prominent players in the equipment space are Applied Materials (AMAT)⁶ and Lam Research Corp. (LRCX).⁷ They are known for their advanced technology and expertise and play a vital role in the semiconductor equipment manufacturing industry. Applied Materials offers a wide range of equipment, including wafer fabrication systems and inspection systems, while Lam Research Corp. specializes in wafer fabrication equipment and services. Both companies have seen over a 20% increase in sales on average over the last three years.

The success of semiconductor equipment manufacturers like ASML is essential to the continuation of Moore's law. This law, proposed by Intel executive David House, suggests that the number of transistors on integrated circuits doubles about every two years, leading to a doubling in chip performance. It's the innovation and continual improvement of manufacturing equipment that allows this trend to persist, enabling increasingly powerful and efficient devices.

Source: CircuitBread as of 2023.

Overall, the importance of semiconductor equipment manufacturing companies to the sector and the broader digital world cannot be overstated. The contributions of companies like ASML enable the ongoing march of digital progress, pushing the limits of what's possible in technology. Investing in the VanEck Semiconductor ETF (SMH) is one way to access this opportunity. SMH offers broad exposure to the semiconductor industry, helping to diversify risk while capitalizing on the industry's overall growth potential.

Industry or Sector Concentration Risk: The Fund’s assets may be concentrated in one or more particular sectors or industries. The Fund may be subject to the risk that economic, political or other conditions that have a negative effect on the relevant sectors or industries will negatively impact the Fund's performance to a greater extent than if the Fund’s assets were invested in a wider variety of sectors or industries.

Yet other semiconductor companies, too, have much to gain from the AI fervor currently sweeping the business world. For example, the Asian chipmakers Taiwan Semiconductor Manufacturing Company and Samsung supply most of the world’s advanced chips.

For anyone looking to ride an investment megatrend, it’s often said that a lower risk way to do so is through the ‘pick and shovel makers’ – the companies that supply the companies making the end product. And for generative AI, this undoubtedly means semiconductor manufacturers.

While their share prices have already performed exceptionally well in 2023 (see price chart for the VanEck Semiconductor UCITS ETF), they offer a long-term way to invest in the theme without betting on the fortunes of a single AI platform.

Beyond AI, though, chips are the lifeblood of the digital transition. Without them there will be no highly automated cars, internet of things, supercomputers, quantum computing and automated factories of the future, not to speak of the new generation of AI chatbots. They are also key for decarbonisation, which rests on electrification and naturally involves semiconductors.

Turning to military and space equipment, surveillance, communication and navigation systems depend on chips, making them crucial for national security. They are vital components in satellites, enabling digital communication and Earth observation, including monitoring climate change.

Illustrating just how critical semiconductors have become, all three major economic blocs –Europe, the US and China – are pushing to become self-sufficient, aiming to curb dependence on foreign supply chains. This drive follows the Covid-19 pandemic exposing vulnerabilities in supply, as well as the emphasis on near-shoring in recent years. Notably, the typical semiconductor production process involves steps in more than five countries and three or more shipments across the globe.

Of course, this drive for self-sufficiency is likely to lead to greater chip manufacturing capacity, which could undermine profit margins. Yet demand is also likely to be strong, given not just the likely generative AI revolution but also the fact that chips are now essential for modern technology and even the electrification of the global economy over the next 25 years.

It's hard to argue that semiconductor stocks are cheap after 2023’s rally. But if anyone wants to invest in the AI boom, then its pick and shovel makers accessible through our ETF could offer a lower risk way of doing so. Investing in ETFs involves several risks. Please read the Prospectus and the KID before investing in an ETF.

We now see ETH network revenues may be rising from an annual rate of $2.6B to $51B in 2030. This analysis offers a potential valuation methodology for Ethereum, considering transaction fees, MEV, and "Security as a Service.” We assess market capture across key sectors and explore Ethereum's potential as a store-of-value asset in the evolving crypto landscape.

Ethereum Valuation Methodology: Cash Flow Projections & FDV Calculation

We may potentially value Ethereum by estimating cash flows for the year that ended on 4/30/2030. We project Ethereum revenues, deduct a global tax rate and a validator revenue cut and arrive at a cashflow figure. We then apply multiple estimates by applying a long-term estimated cash flow yield of 7% minus the long-term crypto growth rate of 4%. We then arrive at the fully diluted valuation (“FDV”) in 2030, divide the total by the expected number of tokens in circulation, and then discount the result by 12% to 4/20/2023. You can see our revenue estimates in the table below with more detailed assumptions in the Ethereum Valuation Scenarios table. Please note that these assumptions and estimations should not be understood as facts.

Source: VanEck Research as of 4/30/2023. Past performance is no guarantee of future results. The above is not intended as financial advice, a recommendation to buy or sell Ethereum, or any call to action. There may be risks or other factors not accounted for in the above scenarios that may impede the performance of Ethereum; the actual future performance of Ethereum is unknown, and may differ significantly. Any projections, forecasts or forward-looking statements included herein are the results of a simulation based on our research, are valid as of the date of this communication and subject to change without notice, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

Ethereum’s Business Model: A Digital Mall, Validators, & On-Chain Commerce

To properly unpack our valuation approach to Ethereum, it is important first to understand what Ethereum is, how it works, and why it is valuable. At the most basic level, one can think of Ethereum as a mall that lives on the internet and provides a secure place for internet commerce to take place. Users interact inside Ethereum’s mall by means of wallets, and Ethereum’s mall businesses are made up of batches of smart contract code. The Ethereum software determines the structure and rules of the mall, while validators ensure that the rules are followed, secure the mall, and maintain a ledger of all economic events that occur within the mall. Ethereum also apportions the limited space within the mall by charging users for conducting business and exchanging value.

Ethereum is free software that is hosted on computers distributed throughout the globe. It employs an array of logic, called a protocol, to create a unified understanding of ownership, commercial activity, and business logic. This allows users to engage in commerce without the need to trust any of its participants or counterparties. Ethereum code creates verifiable and unambiguous rules that assign clear, strong property rights to create a platform for unrestrained business formation and free exchange.

The computers that run Ethereum software, called validators, receive inflationary rewards and a portion of the fees remitted by users performing activity on Ethereum. Businesses are created on Ethereum by deploying a series of smart contracts. Smart contracts are computer code libraries that autonomously execute functions when called upon by users without any intermediary. Using smart contracts, developers can build logic that replicates the function of businesses like banks, auction houses, social media companies, video games platforms, cloud computing services, and commodities exchanges. Using Ethereum, a business can keep its treasury entirely on Ethereum and enable smart contract disbursements to employees, vendors, contractors, and suppliers who can also have wallets on Ethereum.

For users to perform on-chain actions to exchange value or interact with on-chain businesses, they incur fees paid to Ethereum. These fees are relative to the computational intensity and spot demand for computation on the Ethereum network. Curiously, unlike most enterprises where businesses pay the overhead of rent, electricity, and the rest, users directly pay the overhead costs of interacting with the on-chain business to that on-chain business’s host and chief vendor - Ethereum. Thus, users pay both the costs of hosting the business and the costs of Ethereum computation, on behalf of on-chain businesses, through their transactions.

The principal medium of exchange on the Ethereum network is the ETH token. For users to conduct activity on Ethereum, they must pay for the cost of performing their actions in ETH, just like at Dave & Busters, where one must buy “gaming points” to play video games. To do anything on Ethereum, a user of Ethereum must utilize ETH tokens. Additionally, validators must post value, in the form of ETH, as collateral against their honesty. If a validator cheats, the ETH is seized. Considering that ETH tokens are the currency used to pay validators (who are selling ETH to cover costs), this marries demand with supply – Ethereum users buy tokens to use Ethereum, and Ethereum validators sell tokens to “supply” Ethereum.

What does it mean to “supply” Ethereum? In essence, it means participating in the consensus mechanism of Ethereum that verifies value transfers, allows for the deployment of smart contract code, or enables calls to Ethereum’s software. All business logic and exchange of assets occur as ledger entries on blocks. Blocks are simply the “to-do list” for the Ethereum computer to complete, and every twelve seconds, the table of actions is executed. The list directs Ethereum to perform an action or a series of actions on behalf of the users. These directions could be as simple as sending value or as complex as buying and selling dozens of tokens simultaneously across dozens of different Ethereum-based token exchanges. Users gain inclusion on the block for their actions by paying a base fee and an inclusion fee. If there is a lot of demand for Ethereum’s “to-do list,” users can increase their inclusion fee, called a “tip,” to ensure their request is fulfilled. Additionally, Ethereum has created a marketplace to auction off the right to order (and add transactions to) the action list on each of Ethereum’s blocks. This is done because there is immense value in ordering the transactions. These two activities currently represent Ethereum’s core business – selling blockspace and selling the right of others to order it. Distilled, Ethereum is selling secure, immutable blockspace that facilitates internet commerce.

Ethereum Revenue Recognition: Exploring Transaction Fees, MEV, and Security as a Service

Because Ethereum is not really a business, we identify revenue as an activity where tokens are used in Ethereum’s core business – the provision of immutable, decentralized computing through the sale of blockspace. As a result, we count transaction fees, both the base fee and the tip fee, as a revenue line. Other analysts only count the base fee because it is burned, which impacts all ETH holders, while omitting the tip because it only is remitted to each leadership slot validator. In their construct, only staked ETH on validators receives the tip fee. However, we count both tip and base fees in addition to base fees as each reflects economic activity on Ethereum related to the sale of blockspace. Therefore, the economic value of those actions flows through to Ethereum as a business.

Additionally, we subtract ETH burned from the base fee from the ETH total supply and derive token value from the end-year, reduced supply total. Admittedly, unlike other components of our analysis, the yearly trajectory of ETH usage significantly influences today’s token valuation through total token supply reduction. Additionally, we do not count inflationary security issuance as a revenue item as it does not relate directly to an outside entity buying blockspace.

Not only do we recognize the transaction fees of the system, but we also recognize MEV as a revenue item to ETH. With entities like Flashbots auctioning off blockspace to builders, a portion of the MEV will accrue to ETH stakers, passed on by validators. Similar to tip fees given to validators, we also believe block-building fees should be included in Ethereum’s revenue calculations as they are economic activity related to the sale of blockspace.

Finally, we assert that ETH may be evolving beyond a transactional currency or a consumable commodity like oil or natural gas. We believe that ETH, while not a complete store of value like Bitcoin due to Ethereum’s demonstrated mutability of code and an evolving social consensus focused on utility, will may become a store-of-value asset for state actors looking to maximize human capital (vs. Bitcoin, which maximizes for stranded energy). Importantly, in this model update, due to smart contract programmability on Ethereum combined with maturing cross-chain messaging technology, we introduce a novel revenue item called “Security as a Service” (SaaS).

Conceptually, ETH’s value can be used both within Ethereum and outside of it to secure applications, protocols, and ecosystems. Using projects such as Eigenlayer, ETH can be used to back entities such as Oracles, Sequencers, Validators, bridges, contractual agreements, and perhaps novel entities yet to be discovered. The result is that ETH approximates a Layer 0 asset like Bitcoin or Polkadot’s DOT and Cosmos’s ATOM claim. These Layer 0 assets can be used to back and bootstrap new blockchains. Since ETH may be a bearer asset, ETH can be locked behind some business or protocol’s guarantees to act honestly. If that honesty is violated, that value can be seized to penalize malicious or irresponsible parties and/or compensate affected parties. This can be thought of as a performance bond or collateral that ensures a damaged party recovers losses while a lousy actor pays for its malice.

Stepping back, this business type relies upon the value of ETH as a token and the safety and persistence of Ethereum’s software. Thus, as Ethereum’s security can be exported, ETH holders who participate in SaaS should be rewarded at some multiple to the summed value of priority fees, tips, block-building fees, and ETH inflationary issuance – the ETH holder’s opportunity cost multiplied by risk. This multiple reflects the average security risks and investment risks involved in offboarding ETH as a security provision asset.

Ethereum Daily Fees

Source: VanEck, Token Terminal as of 4/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Ethereum Transaction Revenue: Assessing Market Capture, Business Categories, & Value Accrual

The base of our calculations comes from the smart contract platform “market capture.” This is the percentage of each business category’s economic activity that we believe will utilize, be derived from, or reside on public smart contract platforms like Ethereum. Our main categories are Finance, Banking, and Payments (FBP), Metaverse, Social and Gaming (MSG), and Infrastructure (I). FBP encompasses financial activity, including consumer and business payments, banking services, and exchanges of value. MSG includes software and internet businesses that revolve around online social media, gathering, gaming, and virtual/online world value creation. Infrastructure encompasses the provision of cloud computing, server space, and distributed storage, as well as telecommunication and the internet. We assume that 5%, 20%, and 10% of finance, metaverse/media, and tech infrastructure activity, respectively, move on-chain. (Our relatively high estimates for metaverse/media contemplate the recent acceleration in information censorship in countries like Brazil, India & Ireland and the high number of open-source social networks currently under development). Please note that these assumption may differ significantly from reality and should not be understood as facts.

Since the precise value accrual from a business deployed to a blockchain is uncertain, we assume a take rate on the business economic activity derived from blockchain deployment. This is not without precedent, as many blockchain-native businesses are currently deployed to smart contract platforms. The businesses themselves do not directly pay fees to Ethereum for the usage of their businesses. The users do. However, over the long run, to simplify the user experience, businesses deployed to blockchain will likely pay fees on behalf of their customers. For example, a coffee roaster whose website is hosted on AWS does not make a customer pay for both the coffee purchase and the roaster’s website costs at check out. Instead, the coffee store abstracts those costs and makes the customer only directly pay for the purchase items. In the future, blockchain-reliant and blockchain-based businesses will likely gravitate towards similar dynamics.

Looking at the cost breakdown to the user for using a blockchain business can inform our estimates of blockchain value capture over the long run. Right now, a user who wants to secure a loan using AAVE on Ethereum will pay both fees to AAVE and Ethereum for this business transaction. Of course, on the flip side, these fees to a user represent revenues to AAVE and Ethereum. If such a transaction occurred in real life, it would look like someone going to a Sharper Image at the mall and paying for his “laser pointer blowtorch back-scratcher” in addition to a portion of the Sharper Images’ monthly rent at checkout. We can see the breakdown of this ratio by examining the gas costs users pay to interact with an on-chain business’s smart contracts (Ethereum’s revenue) versus the costs the user pays directly to the business (AAVE’s revenues) from the same transaction. These ratios vary greatly depending on the type of on-chain business.

On-Chain Business Margin as Percentage of Total Fees Paid by Users (annual)

Source: VanEck, Token Terminal as of 4/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

We can infer from the above chart that over the past year, the average cost split between platform and business for a user of AAVE is shared 6.98% to the platform (Ethereum) and 93.02% to AAVE (application and its lenders). Drawing back to focus on value accrual to smart contract platforms like Ethereum, we feel this relationship will shift over time as off-chain businesses deploy on-chain to reduce costs and seek new revenue. In our model, we assume application take rates will vary between 90% to 97% of revenue depending on the end market, with ETH share falling between 3% and 10% depending on the business category. Please note that these assumptions should not be understood as facts and reality may differ significantly from these assumptions.

We think approximating this take rate is essential because “transactions revenue” is not an ideal mechanism to describe future blockchain value capture. Going by our earlier assertion that the transactions are a “to-do list” of items for Ethereum to compute, many uses of the blockchain cannot be best described as “transactions.” Blockspace is the more fitting unit of measurement and description of the product sold by smart contract blockchains like Ethereum. It is possible that smart contract blockchains package blockspace into a “service level agreement” to other parties to guarantee some present or future amount of compute or transaction activity. This activity will create complex, liquid blockspace futures markets that mirror commodities futures dynamics. However, we will stick with “Transaction Revenue” to keep in line with current conventions.

To deduce future ETH supply reductions from ETH base fee burns that occur from blockspace usage, we begin by applying past Ethereum burn/fee ratios. We employ a figure of 80% for the percent of burned transaction fees. In ETH terms, we then estimate a transaction cost average for both Ethereum and Layer 2 platforms with a very significant cost decline rate of roughly 60%. We speculate that the cost differential for L2s will be 1/100th that of Ethereum. After that, we calculate future MAUs on Ethereum as a function of end-market business MAUs and Ethereum’s capture of those MAUs. Ethereum capture rate of those MAUs is determined by Ethereum’s take rate of those underlying business categories’ economic activity (between 5% and 20%, depending on the end market). We do not project transactions and then extrapolate a revenue assumption from them. We simply assume a declining transaction cost in ETH and project a yearly burn amount from the base fee burn. Again, this burn amount is subtracted from the total running supply of Ethereum and significantly impacts token value as Ethereum’s FDV is spread across fewer tokens. Please note that we make significant assumptions and facts may differ from our predictions and assumptions.

MEV Revenue: Exploring Transaction Ordering, On-Chain Activity, & Long-term Projections

MEV is considered a “bogeyman” of blockchain that many entities seek to stop, distribute and/or suppress MEV. MEV is simply the profits that can be made by ordering transactions within each produced block. In reality, MEV can be limited but cannot be destroyed. We see MEV playing an integral role in securing (paying the validators and stakers) blockchains over the long run because of MEV’s immense value. A corollary of its certain persistence is shelf space at a supermarket. There will always be more valuable shelf space (that at “eye level”), and someone will be willing to pay to occupy that space at the expense of others. Likewise, there will always be value in ordering transactions, and there is immense value to be gained by monetizing that ordering.

Because MEV is highly correlated with on-chain activity, it is difficult to predict. For our estimate, we assume that MEV is directly related to the value of all assets hosted on Ethereum. This gives us a “management fee” for keeping value on Ethereum. Currently, we estimate yearly MEV value approximates ~2.0% of on-chain TVL on Ethereum (not the value of all assets on chain) for the past year. Long term, we assume that MEV as a percentage of assets will shrink as protocols and applications act to reduce its impact, the turnover rate of on-chain assets declines, and applications remit some of its value back to users. Therefore, we see the MEV take rate dwindling to 0.15%. We assume the total value of on-chain assets relates to the total value of all hosted assets on the blockchain, and this value is derived from the share of the FBP that blockchains retain and Ethereum’s market share. Please note that the above mentioned assumptions and estimations should are not based on facts and reality may be very different.

L2 Settlement Dynamics: Scaling Solutions, Revenue Distribution, & Future Margin Projections

As L2 settlement represents the long-term scaling solution for executing transactions on Ethereum, it's assumed to be the most important business line for Ethereum going forward. L2 settlement represents the line item of the transaction batches being posted to Ethereum. We predict settlement revenue as a function of L2 revenue and the margin relationship between “profits” and the cost of security to send batches to Ethereum. In our projections, we assume L2 revenue to be simply composed of MEV and transaction revenues which are both estimated by using the Ethereum framework. We then assume that L2s pay a portion of those revenues as security fees to Ethereum. We have seen the L2 “margins” fluctuate between 15% - 40% depending upon gas costs of Ethereum, although it should be noted that ths figure could be very different in reality. Over the long run, we assert that most revenue from the L2 may still accrue to Ethereum, including MEV on the L2. We assume this to be the case because we project there may be thousands of L2s competing for blockspace on Ethereum and margins. We assert a long-term margin rate of 10% for the L2s versus the current range of 15% - 40%. This estimate is admittedly arbitrary, but we expect that as thousands of competing chains may emerge to compete for Ethereum blockspace, margins for L2s will shrink dramatically. In terms of the value split, we assume that 98% of all transactions are executed on the L2s while 50% of the total value of assets rest on L2s. We assert that Ethereum will still host half of the ecosystem's value because some assets and transactions may necessitate extreme security, composability, and atomicity levels. Please note that any of the above-mentioned assumptions, predictions and projections should not be understood as facts and may differ greatly from reality.

Ethereum's Emerging Security as a Service Model

We define Ethereum’s SaaS business as the revenues received from exporting ETH token value to back outside ecosystems, applications, and protocols. This is a burgeoning and uncertain use case for ETH that is hard to predict. To speculate on what percentage of ETH will be exported to gain fees for security provision, we look to current and past examples of bridged assets. Currently, the total percentage of ETH that is bridged off Ethereum is 0.47%, while the total supply of ATOM off-chain is around 0.5%. In the past, BTC wrapped and exported to other chains was as high as 1.7%, and during the peak of bridging activity on Ethereum, more than 15% of Ethereum’s USDC supply was bridged off the chain. As a starting point, we assume that 10% of ETH is used to provide security off-chain and that for a risk premium, it should command a 2x premium to ETH on-chain. Please note that any of the above-mentioned assumptions, predictions and projections should not be understood as facts and may differ greatly from reality.

The full analysis is available (also as PDF) for website visitors from the US.

Europe’s Leading Role in Crypto

• Europe is home to the highest number of Bitcoin and Ethereum nodes, which are the backbone of the decentralized networks that power these cryptocurrencies. According to Bitnodes, as of July 2023, Europe has over 2,728 Bitcoin nodes and 1,956 Ethereum nodes, accounting for 42.3% and 28.9% of the global total respectively (accounting only for publicly reachable nodes with a known geographical location).
• Europe also has the largest absolute number and relative share of on-chain activity, which reflects the volume and diversity of transactions that take place on the blockchain. According to Chainalysis, in June 2022, Western Europe and Eastern Europe collectively have the largest share of on-chain transaction volume. 

Source: Chainanalysis, data as of June 2022. Past performance is no indicator of future results

• Europe has the most comprehensive crypto-regulation globally, with the proposed Markets in Crypto-Assets (MiCA) regulation that aims to create a harmonized framework for crypto-assets across the European Union. MiCA will provide legal clarity and certainty for crypto-asset issuers, service providers and users, as well as enhance consumer protection and market integrity. MiCA will also foster innovation and competition by creating a level playing field for all market participants.
• Europe hosts two-thirds of global industry jobs, according to a report by Coincub. The report estimates that there are over 61,000 people employed in the crypto industry in Europe, compared to 12,845 in Asia and 12,833 in North America. While overall this is a decrease of -39% relative to 2022, we expect this to recover by the end of 2023 and the beginning of 2024 as regulation effects come into play. The report also ranks US, Germany and France as the top three countries in terms of crypto employment. According to a report of TrueUp, most open positions in June 2023 are from Binance, OKX and Token Metrics. Much like the decentralized nature of cryptocurrencies, over 25% are fully remote. As most jobs in crypto are engineering jobs, it also means that Europe likely is home to the largest number of blockchain developers.

Source: Coincub, data as of July 2023. Past performance is no indicator of future results

• Europe attracts 50% of venture-funded crypto projects globally, according to a study by Pitchbook. This figure is up approximately 7 times compares to Q1 2022. Other countries and regions have seen a significant decrease in crypto startup funding. This may be a leading indicator of a massive growth opportunity in Europe and for crypto in general.

Source: PitchBook, data as of April 2023. Past performance is no indicator of future results.

• Europe offers favourable tax regimes for crypto investors and entrepreneurs, according to a report by PwC. The report analyzes the tax treatment of crypto-assets in 29 jurisdictions around the world and ranks Malta, Portugal and Switzerland as the most attractive countries for crypto taxation in Europe. The report also notes that many European countries have issued clear and favourable tax guidance for crypto-assets, or have adopted a low or zero tax rate for certain types of crypto transactions. The reader should not perceive this as tax advice, please ask your tax advisor what taxation applies to your situation.

The MiCa Effect

These facts show that Europe is at the forefront of the blockchain revolution, and has the potential to leverage this technology to boost its economic growth and competitiveness. As a crypto specialist of a global asset manager, I am excited to be part of this journey and to help our clients navigate this fast-changing and promising landscape. For once, Europe has the chance to lead a major innovation. Our VanEck Crypto ETNs are well-positioned to benefit from the MiCa effect. Leading cryptocurrencies such as Bitcoin and Ethereum, or a basket such as Crypto Leaders or Smart Contract Leaders, is a great way to potentially benefit from the opportunity that this narrative provides. Please note that any historical performance mentioned in this article is no indicator of future results.

What is MiCAR?

MiCAR was published on the 9th of June, 2023. The first draft was created in 2018 following up after the bull run of Bitcoin in 2017. The main goal is to protect crypto users against unregulated virtual assets, fight money laundering and terrorist funding and protect the sovereignty of the Euro. It will make it significantly easier to operate in the EU and provide licensed services under MiCA’s harmonized European regulation. The regulation will apply in all EU member states as of 30 June 2024 for Asset Referencing Tokens (ARTs) and E-Money Tokens (EMTs) and 30th of December 2024 for Crypto Asset Service Providers (CASPs)

Dynamic Energy Use

Energy companies like Nextera Energy, a VanEck Smart Home UCITS ETF portfolio company, are working hard to facilitate the transition to clean energy by adding more solar and wind power. However, with renewables becoming a larger share of the energy production mix, grid operators also have to deal with major fluctuations in energy supply and demand. To prevent disruptions from an oversupply of sun, water and wind energy, they sometimes even have to shut down solar panels and wind turbines. To solve those issues, they are expanding and strengthening the grid, but that process will take years.

In the meantime, they are stimulating people and companies to use energy during the day when supply from renewables is high, for instance through dynamic energy contracts. With a dynamic contract, the price you pay for energy varies by the hour (for electricity) or the day (for gas).

In the Netherlands, for example, when you get up to take a shower and cook breakfast, you pay €0.17 per kWh. By lunchtime, the price has dropped to €0.05¹. In the early afternoon, when sun and wind are at their maximum strength, the price could even turn negative, which means you could get paid for using electricity, for instance by charging your electric car at that time.

Adoption of dynamic contracts is rising as smart meters and renewable energy become more common. In addition, EU legislation stipulates that suppliers with more than 200.000 customers have to offer dynamically priced contracts. While most countries still stick to the fixed rate or double (day/night) rate, in other countries – such as Norway, Finland, Estonia and Spain – dynamic contracts have become the norm.

Storing Power

Smart homes make dynamic contracts possible – since smart meters are an important enabler – and they benefit from it as well. Smart home energy systems take energy prices and your own solar panel power production into account. As a result, your home can pick the best moments to charge your car or home battery. Or use the power from your solar panels to warm your immersion heater to provide hot water. You can use that warm water even when the sun is not shining.

Already solutions become available to benefit from dynamic energy prices, for instance when charging EVs. Several companies are now offering bi-directional charging, a technology that enables electric vehicles to charge the battery when prices are low and push back energy to the grid when prices are high.

Last June, for example, German company The Mobility House collaborated with Renault’s digital transformation and energy transition subsidiary, Mobilize, to roll out this kind of vehicle-to-grid (V2G) technology in France, Germany and the UK². Owners of the Renault 5 EV (launched in 2024) and future EV models can use this technology to minimize their charging costs by selecting off-peak times at which to draw power from the grid.

If you do not have an electric car, you could buy a home battery that uses similar dynamics. Those batteries, however, are still costly; about €3,000 for a smaller low-capacity battery and up to €12,000 for one with higher capacity. Nevertheless, with many countries phasing out feed-in-tariffs (where you sold back electricity to the national grid) and possibly subsidizing home or neighborhood batteries, the market is improving.

SolarEdge – another VanEck Smart Home UCITS ETF portfolio company – is likely to benefit from this trend. It started out with an inverter solution to manage solar panel systems, but today it provides a smart energy ecosystem that includes EV charging, batteries, electric vehicle powertrains and grid services solutions.

Saving Power

Another option to manage your energy consumption is to consider saving opportunities. Since heating and air conditioning accounts for more than half of the energy use in homes (at least in the US),³ it pays to consider investing in a heat pump. The market is growing (see graph) with many governments making heat pumps a key part of their plans to reach net zero, using subsidies to make it more attractive for homeowners to install them. With heat pump manufacturer NIBE in the portfolio, VanEck Smart Home UCITS ETF is positioned for that opportunity.

Aside from heat pumps, savings can also be found in other household appliances, from refrigerators and washing machines to blenders. In part driven by government regulations, these devices are becoming more energy efficient, thus saving us power and money. Last April, the EU adopted new rules that should reduce energy consumption of devices in standby mode⁵, while the US Department of Energy proposed stricter energy standards last February.⁶

Intelligent Home Energy Management

Taking all the possibilities into account, your home can soon become your energy manager. Such a home combines a dynamic energy contract with an AI-based energy management system. It can turn devices on and off or charge and discharge them when most beneficial. It might even advise when to buy a new refrigerator to save energy.

In the meantime, however, my washing machine has finished and I will hang out my sheets to dry in the sun and wind. In contrast to all the solutions mentioned in this blog, that old-fashioned way of using renewable energy requires only a minor investment of time on my part.

What has a rather better forecasting record, though, is the yield curve in government bond markets. This seemingly arcane graph of bond yields across the terms over which governments borrow is now inverted, which means it’s signalling a recession in major advanced economies, like the US, Eurozone and the UK.

In the interests of understanding what to expect from your investments, I think it’s a good idea to understand what the yield curve is and why it’s signalling recession. Then you can decide how to react. Diversifying the portfolio across high-quality investments is the typical answer.

Explaining the Yield Curve and Its Uncanny Forecasting Powers

The yield curve is a curve on a graph in which the income yields of government bonds are plotted against the length of time they have to run to maturity – typically from three months to 30 years. In normal economic periods, the yields at the shorter-term end of the curve are lower than those that have longer to run to maturity, because they are subject to less uncertainty. But, occasionally, the yields at the short end exceed those at the long end: this is an inverted yield curve and it has a remarkably good record for forecasting recessions, which generally follow within 6 to 24 months.

In early July, the US treasury market hit its deepest inversion since 1981; a time when Fed Chairman Paul Volcker was battling to quell inflation. Things aren’t that different today, and the US, Eurozone and UK yield curves reflect financial markets’ concerns that stubborn inflation will force central banks to tip economies into recession.

So, what’s a prudent investor to do? If professional economists are so bad at forecasting what’s likely to happen, especially at confusing times like this, what hope do the rest of us have?

The approach is normally to diversify the portfolios to spread the risk and avoid taking a bet on any single outcome. When doing so, it might also be a good idea to retreat to high-quality investments: the kind that are in a robust position to weather any recession.

VanEck’s ETF offering comprises several ETFs that might be of interest to investors looking for a diversified exposure. VanEck’s Developed Markets Dividend Leaders ETF offers access to a portfolio of the world’s 100 most consistent and largest dividend payers; the Sustainable World Equal Weight ETF provides investors with a portfolio of the world’s largest companies, where the equal weighting provides an extra bit of diversification; while the Global Wide Moat ETF invests in companies that have long-term competitive advantages. Before investing, investors should consider the related risks, such as equity market risk, concentration risk and liquidity risk.

Investors looking for bonds exposure could consider the VanEck Corporate Bonds ETF. Its investment-grade bond allocation might make it suitable for recession-expecting investors, while at the same time offering an attractive 4% yield¹. Finally, for the fans of all-weather investments, we offer multi-asset exposures in conservative, balanced and growth flavours. Prospective investors should consider the risks of investing in multi-asset and fixed income funds such as credit risk, interest rate risk and liquidity risk.

It’s unclear whether the inverted yield curve’s prediction of a recession will come to pass. But the investors could rely on diversification to reduce risks.

Gold was down $43.38 per ounce or 2.2% for the month, closing at $1,919.35 on 30 June. Two- and ten-year treasury yields climbed higher in June, but the U.S. dollar was not to be blamed for gold’s drop this time. The U.S. dollar index (DXY)¹ was also down in June (-1.4%).

Instead, gold was pressured by the relentless strength of the U.S. equity markets, which were undeterred by the outlook for more rate hikes this year, or by the recession signals sent by the most deeply inverted treasury yield curve in decades. The S&P 500² and the NASDAQ 100³ were both up more than 6.5% in June, posting double digit gains for the year with the tech-heavy NASDAQ up a whopping 39% in the first half of 2023. Apple closed the month at a milestone $3 trillion market cap, the world’s first company ever to reach such valuation.

A notable revision to first-quarter GDP annualized growth to 2% from 1.3%, along with other better-than-expected economic releases (e.g., U.S. May retail sales, housing starts, jobless claims, consumer sentiment), slowing inflation and comments from the U.S. Federal Reserve (Fed) chairman and Treasury Secretary downplaying the risk of a recession, likely fueled the optimism.

The NYSE Arca Gold Miners Index (GDMNTR)⁴ and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)⁵ felt the pressure of a declining gold price, down 2.5% and 3.9% respectively during the month of June. Following what was a dreadful month for gold equities in May, we were pleased to see the equities performing much more in line with our expectations in June. We expect strong gold mining sector fundamentals in a year when average gold prices are at record highs ($1,934 in the first half of 2023), will lead to a progressive contraction of the valuation gap between the metal and the stocks.

Gold’s drivers still remain the same

Our outlook for higher gold prices in the longer term is unchanged, supported by the risks imposed by sustained elevated interest rates, sticky inflation, continued global geopolitical tensions, a trend by countries around the world to diversify away from the U.S. dollar and increase their gold reserves, and the pending risk of a U.S. and/or global economic recession. Investors continue to stay on the sidelines of the gold market. Global gold bullion ETF holdings, our proxy for investment demand, declined 1.64% during the month of June, leading to net outflows year-to-date of 1.21%.

Gold failed to hold above $1,950 per ounce. It may now trade sideways around the $1,900 level, until a new catalyst emerges. A Fed skip, signaling the nearing of the end of the tightening cycle, failed to provide impetus for gold and attract investors. But as the end of the hiking cycle approaches, the reasons for a pause (fear to launch the economy into a recession or into a deeper recession) and the implications on inflation, could become important gold price drivers.

SPECIAL – Walking on Gold: Junior Miners in the Alaska/Yukon Region

We divide our junior investments into producers, with mine production of up to 300,000 ounces per year, and developers, with properties under development that we believe can reach an economic reserve of at least two million ounces. We don’t invest in junior exploration stocks because we find them too speculative. While most explorers claim they’ve made a discovery, very few will ever meet our two-million-ounce threshold.

We often travel to exploration and development sites to help determine whether a property has the potential to meet our investment criterion. We recently spent time in the Yukon and Alaska to visit several promising projects in the Tintina Gold Province (yellow on map), where most of the gold deposits occur in and around Cretaceous (145 to 66 million years old) granitic intrusions scattered throughout the Tombstone Plutonic Belt (pink on map). The Tombstone Belt is about 70 miles wide and trends west-northwest through the Yukon. It is offset along the Tintina Fault, a major strike-slip fault that carried the western portion of the belt 300 miles to the northwest into Alaska during the Eocene Age (55.8 to 33.9 million years ago).

Map of Alaska’s Tintina Gold Province (yellow) and Tombstone Belt (pink). Source: Apex Geoscience Ltd. (May 2016).

Kinross’ Fort Knox mine is located in the Fairbanks gold district, Alaska in the western-most portion of the Tombstone Belt. Since 1996, Fort Knox has produced over 8 million ounces of gold from low-grade ores. We visited the Fairbanks district where Freegold Ventures (0.00% of Strategy net assets) is drilling its Golden Summit project. In February, Freegold announced a resource of 20.6 million ounces.ⁱ We also visited Banyan Gold’s (0.00% of Strategy net assets) AurMac property in the Mayo Gold district, Yukon. Banyan announced a 6.2-million-ounce resource in May.ⁱⁱ Both of these properties have good infrastructure with roads and power. However, both are low grade with resources under one gram per tonne (0.029 ounces per ton). The companies are working to further define the resources and their metallurgy (gold process/recoveries) in order to fully assess the economics.

At the eastern end of the Tombstone Belt we visited Snowline Gold’s (0.52% of Strategy net assets) Rogue property. Snowline announced the discovery of the Valley deposit in January 2022. While Snowline has yet to publish a maiden resource, drilling so far indicates that Valley is a multi-million-ounce deposit that crops out on surface. The photo shows Valley core drilled through a granodiorite intrusive that is riddled with gold-bearing sheeted quartz veins. This is classic Tombstone belt mineralization.

Gold-bearing core samples from Snowline’s Rogue property. Source: VanEck (June 2023).

Unlike Golden Summit and AurMac, Valley is remote. The camp is accessed by fixed wing aircraft and the Valley deposit is accessed via helicopter from there.

One of several small aircraft required to visit Snowline’s remote Valley deposit. Source: VanEck (June 2023).

Valley carries higher grades than most Tombstone belt deposits, but getting roads and power to the site will be a challenge. Snowline is working on the challenges while continuing to delineate Valley and explore other targets on the Rogue properties.

We reckon we walked over roughly 30 million ounces of undeveloped gold on our trip. Junior explorers and developers are the life blood of the gold industry. Explorers take the risks and developers do the work of taking a deposit from discovery to reserve and from permitting to production. Quality projects are often acquired by a larger producer along the way. Junior producer Victoria Gold (0.00% of Strategy net assets) and mid-tier producer B2Gold (4.32% of Strategy net assets) have taken strategic equity stakes in Banyan and Snowline respectively. This trip convinced us that there will surely be another major mine built along the Tombstone Belt.

Please note that VanEck has exposure to Bitcoin.

To explain bitcoin to investors, we are offering a series of blogs and podcasts. This blog is the second in a series that covers topics that are important to investors. For more on this topic, please listen to the latest podcast on Bitcoin.

The question “What is bitcoin?” can be answered in many ways. I don’t think investors need to know how bitcoin works technically, but they need to be able to assess the opportunities and risks of . So let us examine the two biggest questions that investors care about. First, how sure are we that bitcoin’s supply won’t increase beyond what is planned? And second, will the technology continue to work?

I think the best way to answer these questions is to understand that bitcoin is software.

But let’s stay away from the technical jargon. Most people already know that bitcoin is a thing of value, a type of electronic money and that anyone can create a wallet, buy, send, or receive bitcoin. They know that a password (or “key”) is needed to access their wallet and shouldn’t be lost. This blog will not explain how these things happen—encryption, hashing, mining, double spend, etc.

And let’s dispose of one bitcoin critique. Some investors, like Warren Buffett, don’t care about store of value assets like gold and disregard assets that don’t generate income streams. But some investors do care about stores of value. They will tell you that all paper currencies, backed by nothing, like the current U.S. dollar, eventually become worthless. This blog is meant for the latter group of investors.

Who’s in Control of Bitcoin Software?

If bitcoin is software, the starting point is to understand who controls the bitcoin software, or Bitcoin Core. Actually, no one is in charge of bitcoin per se. Bitcoin is free, open-source software run by the community on personal computers and servers.

Can software be developed by connected, non-controlling groups? Clearly, yes, there are precedents for this. Linux is shareware that runs smartphones, cars, most of the internet, all of the world’s top 500 supercomputers and the world’s stock exchanges.1 In fact, open-source software is a trend. Conceptually, open source makes sense when there are many potential users and the number of developers who can review and refine the software is greater than what any single company can reasonably afford. The more developers, the more reliable the software.

Developing and Upgrading Bitcoin Software

So, who develops bitcoin software? In the first stage of bitcoin, Satoshi Nakamoto was the lead developer. There have been subsequent lead developers and some important changes. For example, there was a decision to implement a voluntary upgrade in late 2011 and early 2012. Developers wanted to address the issue that bitcoin was being stolen—not hacked—due to security vulnerabilities. In order to do this, they needed confirmation that the upgraded code didn’t have bugs that would crash the network, and the community, a majority of developers and miners, needed to agree to do it.

The argument was not about the desirability of the solution, but rather about what the best technical approach was. The solution ended up being a “soft fork,” an upgrade such that the network would continue to operate whether nodes/processors upgraded to the new software or not.

This story highlights various vulnerabilities, including bugs and getting agreement around upgrades.

Another aspect of bitcoin upgrades is that bitcoin is run on thousands of computers. Users need to accept the software upgrade for it to take effect, which creates an interesting dynamic. Developers don’t want to work on upgrades that users don’t want. In a way, the users are the ones who accept the upgrades by downloading and using the new versions of the software.

The SegWit decision, an upgrade in August 2017, was also contentious. Again, it was a technical decision about how to allow the processing of more data—something generally desirable. Again, there were different technical paths. The resolution again was a soft fork. Bitcoin’s price rose significantly after this upgrade, perhaps a sign of confidence. I would argue that the community is learning how to deal with upgrades.

In 2021, the Bitcoin Taproot update marked the most significant upgrade the cryptocurrency has experienced since 2017 when Segregated Witness (SegWit) was activated. The Taproot upgrade encourages the implementation of smart contracts in the Bitcoin network. Like SegWit, the Taproot upgrade aims to improve the privacy and efficiency of the network but on a larger scale.

Is Bitcoin’s Supply Really Limited?

Now let’s get to the question of bitcoin’s limited supply. Developers could theoretically code an upgrade that expands supply, but users would have absolutely no reason to install such an upgrade. With the explosion of bitcoin community ownership to hundreds of millions of people, it’s almost impossible to imagine that they would damage their own economic interests to increase the supply of bitcoin. So, theoretically possible, but completely unrealistic.

Who Are the Developers?

Let’s discuss the people who work on the software, the developers. Why do developers work on upgrading bitcoin software? Developers do it for free or are sponsored by companies or individuals. Not everyone is driven purely by money! There are not many core developers. Roughly 335 people at any time are working on the code on a weekly basis (Artemis as of 7/11/23). Bitcoin Core lead maintainer Wladimir van der Laan has led many of the recent upgrades. Adam Back, proof of work inventor and Blockstream CEO, leads the largest bitcoin-focused development group. Pieter Wuille and ChainCodeLabs are also working on some of the new developments. John Newbery at Brink (non-profit development group), Marco Falke, Samuel Dobson and Luke Dashjr are other names that do not come up in investment conversations but are crucial to bitcoin development.

Bitcoin Development Continues

Last, investors should know that additional upgrades to the Bitcoin network are likely to continue. In addition, second layer solutions such as the Lightning Network continue to be refined and developed. In the future, by around 2140, no more bitcoins will be produced. Right now, transactions are verified by miners. Miners are profitable when the cost of electricity to run the computers used to approve transactions is less than the price of the new bitcoin earned. When new bitcoins run out, these transaction-confirmers will need to be paid by transaction fees (not new bitcoin) and that will need to be enough to make the network operate but not too expensive to make it impractical.

In sum, bitcoin has both the resiliency and risks associated with open-source software development. But bitcoin also has a sincere community with very high alignment of interests as well as encryption and processing logic that has met every challenge of growth that it has faced so far. It is probably as sturdy as the other important technologies in your life—the internet, bank software, etc. So, in my view, bitcoin is very likely to maintain its limited supply and the technology is very likely to keep working.

To learn more about bitcoin and what investors should understand about the digital currency, listen to the first episode of our special Trends With Benefits No Jargon Bitcoin series, featuring Pierre Rochard, Bitcoin Strategist for Kraken:

To receive more Digital Assets insights, sign up to our Crypto Newsletter and receive a monthly collection of articles and webinars written or moderated by VanEck.

Digital assets price dispersion reached extreme levels in June as Bitcoin gained 12% while every crypto sector we track fell in the month. Two principal events catalyzed the performance gap, in our view. First, on June 2nd, Patrick McHenry, Chairman of the House Financial Services Committee, released the Digital Asset Market Structure Proposal to establish clear guidelines for cryptocurrencies to be classified as either a security or commodity. Then, on June 5th and 6th, the SEC sued Binance and Coinbase, respectively, alleging that both operated as unregistered national securities exchanges and brokerages, that Binance commingled customer assets and named at least 13 crypto assets made available to customers that qualify as "crypto asset securities."

Source: Bloomberg, MarketVector, VanEck research as of 6/30/2023. Past performance is not indicative of future results. Not a recommendation to buy or sell any of the names mentioned herein.

AltSeason - % Assets Outperforming BTC 90 Day Return

Source: Coingecko as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

These legislative and judicial clarifications are important because blockchains whose tokens are classified as securities under US law may struggle to attract developers, many of whom expect censorship resistance and decentralization. Indeed, several exchanges and market makers delisted some of the 13 coins named in the SEC suits, including large-caps Solana, Cardano, and Polygon, all of which fell more than 20% in June. Further illustrating the potential market share losses by “security” token projects, the ratio of open-source “commits” in the Ethereum ecosystem made a 12-month high relative to competing smart contract platforms, even as overall open-source blockchain developer activity plunged to yearly lows.

Total Smart Contract Platform Ecosystem GitHub Commits

Source: Github as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Analyzing the House Financial Services’ Digital Asset Market Structure Proposal

Many open-source blockchain project participants have argued that decentralization is not binary but a spectrum comprising a handful of fluid factors, including network architexture, team makeup, and tokenomics. But the spectrum claim only applies until one faces a lawsuit. At this point, more specific distinctions are acquired. With that in mind, we took a close look at the House Financial Services’ Digital Assets Market Structure Proposal, proposed legislation which posits that if a token meets the four guidelines below, the digital asset can be considered ‘sufficiently decentralized’ and fall under the CFTC’s oversight as a digital commodity.

No issuer or affiliated persons can prevent anyone from using the digital asset or operating computational infrastructure related to the blockchain network (applies to the past 12 months)

No issuer or affiliated person owns or has voting rights to 20% or more of the circulating supply (past 12 months, excludes fully decentralized DAOS)

No issuer or affiliated person has marketed to the public the digital asset or blockchain network (past 3 months)

All issuances of digital assets have been end-user distributions (past 12 months)

To clarify the legal jargon regarding the first stipulation, we interpret computational infrastructure as applied to operating nodes, validators, or anything related to blockchain architexture that requires hardware. An affiliated person is anyone who directly or indirectly controls 5% or more of the circulating supply. End User distributions refer to the process of how tokens are issued or earned. Essentially, tokens must be distributed in a non-discretionary manner that can be satisfied by any participant in the network for activities directly related to the operation of the network. This means absolutely no exchange of cash or other assets in exchange for the token.

In response to the proposed legislation, we applied these guidelines to classify the top 100 tokens by market cap as either securities or commodities. We excluded stablecoins and did not consider the marketing rule since the courts could argue that any network with a Twitter account is ‘marketing.’ From our analysis, just 25 of the top 100 tokens could potentially be considered ‘sufficiently decentralized’ to avoid the disclosure requirements of the proposed law.

We then analyzed the simple average and market-cap-weighted returns for the 30- and 365-days ending on June 28th. The data reveal a clear pattern: tokens classified as 'sufficiently decentralized' digital commodities exhibit superior returns and lower volatility, particularly when weighted by their market cap. We are happy to share our specific token analysis upon request.

Source: VanEck as of 6/28/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Layer 1s June 2023 Performance Overview: Best and Worst Tokens

For the fourth consecutive year, the “June Witch” emerged from the swirling waters of the cryptocurrency markets and “rekt” countless financial mariners. After the melee and subsequent decline in meme coin trading in May, June began with record low crypto volatility as Bitcoin’s implied vol sunk into the high 20s, on par. As is typical in the space, that lull did not last long, and by June 15ththe total market cap of all layer 1s smart contract platforms (SCPs) had fallen 16% to $289B. After that, the market recovered somewhat, thanks to momentum generated by Blackrock Bitcoin ETF filing, but SCPs still ended the month down 6%. For June, the best-performing tokens were Arbitrum (+3%), ETH (+3%), and Polkadot (-4%). On the flipside, Polygon (-26%), Cardano (-26%), and Matic (-26%) fell the most.

SCP June Monthly Returns: 2020 - 2023

Source: Artemis.xyz as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Arbitrum

Arbitrum set a new high with 2.7 million monthly unique active addresses, becoming so popular that the chain  for an hour on June 7th. The halt occurred when the centrally controlled sequencer ran out of ETH necessary to pay the gas fees required to post updates to Ethereum. Whether due to increased user traffic or a lack of oversight from the team, the halt was negligible, and Arbitrum experienced one of its most profitable months to date, with monthly profits of +38% to $1.29M, even as revenues (fees paid by users) declined by 54%. This is an interesting dynamic that relates to how Layer-2s business economics work. Layer-2s host separate transaction environments from Ethereum. Applications and value, in the form of tokens, operate on the L2s, and the L2s then post the history of activity to Ethereum. Because most blockchains tend to experience usership at the same time, revenues and profits for L2s can diverge. While revenues may increase because of increased activity on an L2, profit margins and even total profits can decrease. That is because the main cost to L2s, posting to Ethereum, can also increase substantially with more activity on Ethereum. In the month of June, gas fees on Ethereum were lower due to decreased activity, so the profit margins of L2 should logically increase, all else equal, because their main cost of revenue has declined. However, Arbitrum did not just have higher profit margins in June; they actually saw profits increase, meaning that the margin surge more than compensated for the decrease in revenues. This implies that there was high demand for users to transact on Arbitrum. On a relative basis, Arbitrum distinguished itself as a hub of activity versus its main competitor, Optimism. Optimism's profits and revenues decreased by 24% and 50%, respectively.

Arbitrum vs Optimism Profit Margins

Source: Token Terminal as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Thus, the Arbitrum ecosystem has seen a positive feedback loop, with both user base and profits rising faster than the competition. Despite announcements that Coinbase's layer 2, , and BNB chain's native layer 2, opBNB, will be built on the Optimism tech stack, Arbitrum has managed to increase its Total Value Locked (TVL) at a pace significantly faster than Optimism. While starting the year with roughly twice the TVL, it reached 3x OP’s TVL by July, thanks to a much more developed DeFi ecosystem. Popular Arbitrum-based DeFi projects GMX and Radiant have attracted roughly the same TVL as the Optimism ecosystem combined. The success of these applications in Arbitrum can be attributed to the generation of yield from substantial usage, which in turn attracts higher-value users in a positive flywheel.

Arbitrum vs Optimism Growth

Source: Artemis.xyz as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Ethereum

As the base asset by which all other tokens are compared, ETH tends to outperform in bear markets. The month of June was no exception to this general rule as ETH rose 3% while the broader index of SCPs lost just over -6%. The biggest story of the month for Ethereum was the SEC’s conspicuous omission of ETH from its list of securities in both the Binance and Coinbase lawsuits. Additionally, ETH supply dynamics have vastly improved, with supply of ETH on exchanges falling to an all-time low of 13% of total supply. Likewise, ETH staking has climbed to nearly 20% while ETH locked in smart contracts has surpassed 30%. While the ETH staking growth can be attributed to greater comfort spurred by the Shapella upgrade that allows staking withdrawals, smart contract locking can be attributed to the proliferation of yield-generating protocols using ETH and stETH (liquid token given to ETH stakers by liquid staking providers). On the horizon, many more use cases for ETH are emerging, like Eigenlayer, which will allow ETH holders to stake both on-chain and off-chain protocols with ETH. This may include things like oracles, blockchains, computation networks, bridges, and more. These new use cases will likely draw yield-seekers to lock more ETH into smart contracts, which will further diminish liquid supply. As a reminder, we tackled all of these revenue drivers in our  for ETH.

ETH Supply Dynamics

Source: Etherscan.io as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Total Monthly Fees SCPs vs ETH Market Share of Fees

Source: Artemis.xyzas of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

While blockchain activity on Ethereum remained robust, average ETH gas prices (gwei) sunk to their lowest level since January, 26.33 gwei, which was 64% less than May’s average, which was unusually high due to some memecoins (PEPE “the most memeable memecoins” according to its website, peaked at $1.6B market cap in May before falling to $333M in June). Still, Ethereum increased its monthly average daily active user count by 10.5%, from 328k to 363k, while maintaining its share of the layer 1 fee market above 70%.

Ethereum Gas Price (gwei) vs Transaction Costs in USD

Source: Etherscan.ioas of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Polkadot

Breaking a long streak of monthly underperformance, Polkadot (-4%) was able to weather the June Witch a bit better than its peers. As a refresher, Polkadot is a specific type of smart contract platform, called a Layer-0, that does not directly host any smart contracts on its platform. Instead, it is called a sharded blockchain, where the functionalities of smart contracts are outsourced to other blockchains that connect to Polkadot. In return for connecting to Polkadot, these blockchains tap into the security of Polkadot and gain the ability to securely trade messages and assets with other connecting chains. This vision, which pre-dates Ethereum, essentially has solved all the current pain points experienced by Ethereum – high fees, low throughput, messaging between blockchains, and state management. Despite its promise, Polkadot has lost momentum since 2021 as network issues emerged, Polkadot’s Web3 Foundation failed to implement pro-growth policies, and a  bridge hack destroyed its nascent community. As a result, Polkadot, though a top 7 asset by market capitalization, is down -90% from all-time highs, while its most successful parachains tokens are down as much as -98.5%. However, despite poor price action, Polkadot still has enormous potential as it retains the second largest full-time developer community, at 775, outside of Ethereum, representing 21% of all blockchain developers.

Polkadot’s outperformance in June can be partly attributed to its exclusion from the SEC’s securities lists. In mid-January, the foundation behind Polkadot, the Web3 Foundation, declared publicly that DOT was  a security. Then, at Polkadot’s annual conference in June called “,” Founder Gavin Wood laid out a blockspace-centric vision for Polkadot, including: increasing transaction output capabilities by 10x, creating pay-as-you-go parachains, constructing an active blockspace market, and creating novel low-latency parachains. Another important development was Polkadot's massive change to its governing bodies called “,” which democratizes and decentralizes control of Polkadot’s business, software, and economic update processes. Also contributing to the relative positive sentiment for Polkadot was the recent raise of $37M by , who is building a Polkadot blockchain for gaming and NFTs.

Polygon

Polygon (MATIC), which lost -26% in the month of June, was the worst performer amongst smart contract blockchains. The price action of Polygon was not encouraging before the month of June, as it was already one of the weakest performers YTD. Despite a slew of positive partnerships with prominent partnerships over the last year with entities like , , Draftkings, , and , Polygon has not seen the follow-through to its bottom line. While Polygon’s userbase, in terms of daily active users, has increased 40% since June 2022, its 3-month moving average for fees has decreased by 13%. This implies that the value of its users has simultaneously reduced, and the costs of running the chain, as Polygon must post data to Ethereum, have increased.

Polygon Daily Active Users vs. Monthly Fees

Source: Artemis.xyz as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Polygon’s issues increased in June when the SEC cited it as a security in the cases against Binance and Coinbase. Exacerbating matters, Polygon Labs, the entity that designed Polygon, did not directly deny the SEC’s  by curiously contending that they “did not target the US at any time.” As a result of the SEC action, both  and ICE’s Bakkt exchange announced they would delist MATIC. Furthermore, Robinhood announced that any MATIC left on its platform after June 27 would be market-sold and the customers refunded in USD. eToro also followed suit in  MATIC. Amid the flurry of bad news and price declines, a large MATIC holder unstaked and liquidated 115.27M MATIC ($95.71). Finally, Polygon’s future for scaling, its Layer-2 zero-knowledge project called zkEVM, is showing extremely tepid adoption compared to its main competitor zkSync Era. Polygon’s zkEVM has only 1/17th of the TVL of zkSync’s Era.

TVL: Polygon zkEVM vs zkSync Era

Source: Dune @tomanhh, @0vix_wizards as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

To stem the longer-term token price decline and refresh the Polygon network, Polygon has launched what it calls . In their official blog posting, on June 12, they announced a series of upgrades that create “the value layer of the internet.” Implementation would consist of addressing tokenomics issues with MATIC while increasing network throughput and efficiency. The first step was announced on June 19, which was the revamp of Polygon’s main network, called Polygon PoS, to improve transaction throughput and prevent  that have plagued Polygon. Going forward, Polygon is set to announce changes to its token structure and new developments for its planned network of blockchains it calls Polygon “Supernets.”

BNB

BNB had its worst month to date this year, marked by a 23% drop in token price. This decrease was primarily driven by a combination of funds exiting the ecosystem and reduced fees generated. Over the past 30 days, the Total Value Locked (TVL) on the BNB chain declined by nearly $1B, settling at just $3.4B. This latest June TVL figure contrasts starkly with last year's figure of $5.3B and represents a 36% YoY drop. Compared to other ecosystems, in percentage terms, the decline in BNB chain’s TVL was twice as much as Optimism's and 14x as much as Ethereum's. The key trigger for the abrupt decrease in TVL was multiple government enforcement actions against the associated Binance exchange.

TVL Drawdown: June 2023

Source: Artemis.xyz as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Earlier in the month, the SEC filed a  against the Binance exchange and its founder, Changpeng Zhao, for listing unregulated securities, including BNB. After the lawsuit, it also received a  to freeze Binance's US customer assets. In Europe, Binance failed to acquire an operating license from  and was ordered to stop all operations in . Moreover, the number of daily active addresses has remained relatively stable over the past two months. This suggests that the decrease in TVL is not due to a collection of smaller retail users but rather larger holders managing their risk due to the close connection with Binance. Alongside the outflow of user funds, transaction-related fees and revenue have dropped by 25% over the past 30 days. Currently, 10% of BNB gas fees are burned and removed from the circulating supply, so this reduction in fees generated is a significant factor driving the recent depreciation of the token.

As the price of BNB has declined, it has approached the  point of a levered trader with $236M worth of BNB on Venus protocol, the top lending platform on the BNB chain. If the price of BNB drops to $218, the position will fall below its collateral requirement and can be liquidated. This would lead to a market-sell order and almost certainly trigger a large drop in the token price. Luckily for BNB holders, the situation has been alleviated with a governance proposal passing that enables the BNB ecosystem team to execute the liquidation spread over a period of time rather than one immediate transaction.

Cardano

Cardano, whose ADA token fell 25% in June, suffered gravely from June Witch’s wrath. The SEC lawsuit against Binance hit Cardano especially hard due to follow-on effects, including Robinhood selling off all ADA, MATIC, and SOL by June 27th. Simultaneously, Celsius also  various customer altcoins, including Cardano, by converting them into Bitcoin and Ethereum. The combined $56 million ADA held by Celsius and  represent 25% of the daily average volume for ADA (though it can be sold over a years-long winddown). Likewise, the citation by the SEC enhances the possibility of direct action by the agency against Cardano. Adding further to the downward pressure was the  and layoff of staff from Cardano developer entity IOG.

Coming into the month, Cardano, though buoyed by the charismatic leader Charles Hoskinson who has cultivated a diehard Cardano community, had been beset by the slow pace of functionality improvements on its platform, resulting in a lack of user share growth vs. competing blockchains. For example, Cardano has fallen below 2% of all SCP users. And while Cardano’s TVL has grown enormously since the start of the year, from $49M to $153M, it has lagged mightily behind ETH layer 2s like OP & ARB, whose combined TVL has surged by more than $1.4B. Similarly, the lack of development pace has also stunted the growth of Cardano’s DEX ecosystem, as Cardano hosts about 50% of the volumes of Optimism and about 8.5% of the activity of Arbitrum.

Cardano Fails to Grow Share of Total Users

Source: Artemis.xyz as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Though prices declined, Cardano has positive developments as its DEX activity, though small and lagging, continue to grow amid contract upgrades. DEX volume on Cardano increased DEX volume by 20% in June compared to May, which was the highest increase amongst comparable blockchains, as most others were negative. This activity increase resulted from Cardano’s 8.1.1  Upgrade, which offered significant performance improvements, enabling more DEX transaction throughput.

DeFi June 2023 Updates: Ethereum Claims Larger Share in Volume

The Market Vector Decentralized Finance Leaders Index fell 1% in June. The total value locked in DeFi protocols dropped 4%, with Curve and Convex recording slightly larger drops than other protocols with more than $1B TVL. MKR led DeFi tokens with a 30% end-of-month rally while UNI and AAVE each rose about 10%, YFI gained 2%, and CRV fell nearly 7% as shorts piled in mid-month to try and liquidate the founder’s CRV position on Aave.

June DeFi Protocol TVL & Price Movement

Source: Artemis.xyz as of 6/30/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Decentralized exchange volume fell slightly, but Ethereum’s share rose about 6% in June, according to DeFiLlama. Arbitrum and BNB are the only chains other than Ethereum enabling over 10% of decentralized exchange volume (14.5% & 16.5% in June). Next is Polygon with 5.5%. Solana, Arbitrum, and Polygon are the best chains to provide liquidity, supporting more volume relative to liquidity than other chains. But when controlling for liquidity, Arbitrum appears to be still the preferred chain to trade on, supporting about 1/3 of the weekly volume of Ethereum with only 1/6 the liquidity.

Source: DefiLlama, VanEck research, as of June 30th. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein. Dex Volume refers to the total decentralized exchange volume for the respective blockchain. Dex TVL refers to the Total Value Locked in decentralized exchanges. Liquidity Efficiency refers to Dex volume/Dex TVL.

Some notable Defi events in June included:

• Uniswap Foundation released details regarding the functionality and vision of Uniswap V4. Specifically, the plans laid out a vision for programmable liquidity strategies via “hooks” and their new singleton contract, consolidating much of the repetitive code in deploying liquidity to standardize the ecosystem development that will undoubtedly occur on top of the Uniswap framework. This could lead to increased business lines for protocols that thrive on providing users with advanced yield strategies, such as Yearn and Beefy Finance. That being said, we expect that a plethora of new applications for this framework will be discovered as the top minds in smart contract development audit the code and brainstorm the products they can build from hooks.
• Halfway through the month, Tether’s USDT depegged by almost 50 bps as investors feared continued SEC enforcements could eventually lead to Tether or its largest users being criminally indicted. This fear led to the Curve 3pool USDT concentration rising above 70% as investors sold their USDT. However, it soon returned to normal as investors regained conviction and arbitraged the pool back to normal. The USDT concentration in the 3pool is 34% at the time of writing.

Important Governance Activity:

Aave:

• ARFC: GHO Mainnet Launch - receiving final feedback before an AIP can be voted on by the DAO
• Temperature check on Integrating MakerDAO’s DSR into Aave V3 Ethereum pool - results!

Uniswap:

• Temperature check to deploy V3 on Fantom and Filecoin’s FVM - both passed.

Yearn:

• Activate veYFI rewards with oYFI gauges - in discussion.

Synthetix:

• Add stETH/USD to synthetic perps - passed.

Stablecoins

crvUSD supply grew 340% throughout the month, from $10M to $44M at the time of writing. Additionally, fees generated from crvUSD have surpassed $125k in just a month and a half since launch. The growth can mainly be attributed to the addition of wstETH, wBTC, and wETH debt markets and the incentivized crvUSD liquidity pools that essentially allow users to be paid to take out loans. For example, many users have deposited interest-bearing collateral such as sfrxETH or wstETH, which yield 4-5% APR intrinsically, borrow crvUSD at 7-8% and deposit it in Conic Finance’s crvUSD omnipool to earn 13% from the compounded CRV emissions. Beyond incentivization, crvUSD also provides value to users through the soft liquidation method that reduces volatile asset exposure as price declines, and collateral is called and increases exposure as price moves retraces up.

With the final comments rolling in on Aave’s proposed GHO launch, we expect an AIP to be proposed and passed in July, approving GHO’s mainnet launch. Meanwhile, MakerDAO increased the DAI savings rate to 3.49% to provide DAI holders a higher risk-fee yield and the ability to hold yield-bearing DAI via the new ERC-4626 vault token, sDAI. The change prompted a reversal in DAI’s market capitalization from its mid-month low of $4.59 billion to $4.69 billion at the time of writing. Borrows on Spark increased 50% to $15m, lagging behind the growth of crvUSD partially due to less incentivization and having only a $20m debt limit.

Reserve protocol (RSP) initiated a $20 million acquisition of Curve assets, a process that will span the summer and serve as an incentive for liquidity in their tokens. The protocol facilitates the decentralized creation of asset-backed stablecoins known as "RTokens." By investing in Curve assets, the Reserve team demonstrates their confidence in the long-term significance of the Curve ecosystem within the decentralized finance (DeFi) landscape. The acquired SDT, CVX, and CRV will be locked and utilized to direct emissions toward their respective RTokens' pools. Noteworthy early investors in Reserve include Sam Altman and Peter Thiel.

As the end of the month neared, stablecoin TUSD lost its peg on Binance.US, falling briefly to $0.80, and grew to over 70% concentration in its Curve liquidity pool as investors feared TUSD’s exposure to Prime Trust could make it insolvent. The reserve reports later stated a mere $26k of TUSD assets were impacted. Unlike USDT, however, the TUSD Curve pools still remain imbalanced, with the TUSD 3pool at 65% TUSD concentration at the time of writing, indicating investor fear still hasn't fully subsided.

Metaverse, Gaming, & Web3

Investors had hoped for an upward trend in metaverse tokens during June due to the unveiling of Apple's latest headset, Apple Vision Pro. However, their expectations were left unfulfilled as numerous prominent metaverse tokens were classified as securities due to the SEC lawsuits targeting Coinbase and Binance within the same week. Consequently, the Market Vector Media and Entertainment Leaders Index (MVMELE) fell 22% in June, primarily driven by 4 out of 5 index components, accounting for 76% of the index's weight, being designated as unregistered securities in the SEC's latest enforcement actions (MANA, CHZ, SAND, & AXS).

APE was the sole token in MVMELE not designated an unregistered security in SEC lawsuits. However, in June, the Yuga Labs ecosystem encountered challenges when MachiBigBrother conducted a market dump of over $1 million worth of BAYC NFTs via Blur. Moreover, Machi initiated a defamation lawsuit against well-known on-chain investigator @zachxbt for an article published in June 2022, which garnered negative reactions within the crypto community. This incident underscores the concentrated ownership of even the largest NFT collections and their influence on market movements. Additionally, the APE token staking rewards, which commenced in December and were previously highlighted in an article, likely intensified selling pressure. APE fell 28% in June.

Unique active wallets interacting with the top Web3 games remained fairly stagnant in June, decreasing about 3%. Still, despite the overall lackluster activity, venture investors continue to fund projects at relatively high valuations, with Mythical Games successfully securing $37 million in funding through a Series C1 extension round. The funding was led by Scytale Digital, with participation from ARK Invest, Animoca Brands, MoonPay, and existing investors. This recent investment follows the company's previous $150 million Series C round in November 2021, led by Andreessen Horowitz, which valued Mythical Games as a "unicorn" at $1.25 billion. Since its launch, Mythos Chain has been steadily climbing the CryptoSlam NFT volume rankings and currently holds the 4th position in monthly NFT sales, with a total volume of $30 million. Due to the established user acquisition channels and strong investor conviction demonstrated in the recent investment round, the Mythos web3 gaming ecosystem could be web3’s breakout gaming chain.

Meanwhile, as the crypto community continues to try to build decentralized social media alternatives to web 2.0 giants, one leading contender encountered a familiar obstacle in June: Damus, an emerging decentralized social media application built on Jack Dorsey's NOSTR protocol, faced the possibility of being removed from the Apple app store unless its BTC tipping functionality was eliminated. The inclusion of this tipping feature had raised concerns during Apple's App Store review process. Apple perceives these tips as in-app purchases for digital content, thereby requiring them to be processed exclusively through Apple's in-app purchase system. This action by Apple reflects their ongoing commitment to regulating user access unless they can obtain a share of economic activity through their in-app purchase system. This potential “delisting” from the app store illustrates the challenges web3 apps face in gaining adoption while further reinforcing the justification for social media apps to be built on decentralized networks in the first place.

NFTs June 2023 Updates: Overall Decline in Volume

In June, the aggregate volume of NFTs experienced a decline of approximately 4.5% to $706 million, as reported by CryptoSlam! Bitcoin Ordinals activity continuously declined throughout June, with volume dropping nearly 50% to $100 million. Despite reduced buying activity overall, Bitcoin remains the second-highest chain in terms of NFT volume over the past 30 days.

Within the Ethereum NFT market, Blur's market share in volume grew from 69% to 75%, while Blend maintained its dominant position in the NFT lending sector with over 90% market share. BLUR investors eagerly await August 14th, when they can vote on implementing a fee for the protocol's services, which will determine Blur's ability to sustain its dominance and generate revenue. Notably, Azuki and Bored Ape Yacht Club (BAYC) NFTs have accumulated significantly higher outstanding debts as collateral, with 6.4k ETH and 5.9k ETH outstanding, respectively.

June NFT Volume

Source: CryptoSlam, as of 6/30/23. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The Azuki Elementals NFT mint tripled the original Azuki supply, adding 20,000 NFTs to the existing 10,000. The collection drew criticism due to its disproportionately large supply and the lack of uniqueness in the revealed NFTs, leading many on crypto Twitter to view it as a dilutive mechanism. Consequently, the Azuki floor price plummeted by 50% following the reveal and has since stabilized around 8.5E, with Azuki Elementals trading well below their mint price of 2E at around 1.5E.

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Bitcoin's Characteristics:

Limited Supply: Bitcoin has a maximum supply of 21 million coins, creating scarcity in the market. This scarcity could potentially contribute to an increase in price as adoption grows. However, it's important to understand that market factors and regulatory changes may impact the value of Bitcoin negatively. Investing in Bitcoin involves risks, including volatility and market fluctuations.

Increasing Adoption: Bitcoin has gained acceptance by merchants as a form of payment. In 2021, El Salvador recognized Bitcoin as legal tender, providing an interesting case study. However, it's crucial to recognize that the acceptance of Bitcoin by merchants may vary, and regulatory developments can influence its usage. Risks associated with Bitcoin adoption should be carefully evaluated.

Potential Hedge against Inflation: Bitcoin is often considered as a potential hedge against inflation due to its limited supply. Unlike traditional currencies, Bitcoin is not subject to the same inflationary manipulation. However, it's vital to acknowledge that Bitcoin's value can be influenced by various market factors and its own inherent volatility. Investors should carefully consider the risks associated with Bitcoin.

Portfolio Diversification Benefits: Bitcoin is commonly regarded as an uncorrelated asset, meaning it may not move in tandem with traditional financial markets. Including Bitcoin in a diversified portfolio can potentially provide diversification benefits. However, the volatility and uncertainties associated with Bitcoin should be carefully evaluated before making investment decisions. Diversification does not guarantee profit and may not protect against losses.

Distinguishing Factors of Bitcoin

Unlike gold, Bitcoin offers certain unique characteristics

Divisibility: Bitcoin is divisible, allowing for smaller units to be transacted. This divisibility enhances its potential for usage in day-to-day transactions. Nevertheless, it's important to be aware that Bitcoin's divisibility does not eliminate the risks associated with its volatility and market fluctuations. Investors should be cautious of the potential risks involved.

Transparency: Bitcoin transactions are transparent and recorded on a public ledger called the blockchain. This transparency brings accountability to transactions, reducing the risk of fraud and enhancing trust within the network. However, it's essential to note that while transactions are transparent, the identities of the individuals involved are typically pseudonymous. Investors should be aware of the limitations of transparency in the Bitcoin network.

Bitcoin's Limited Supply and Its Potential Value over Time

Bitcoin's supply is capped at 21 million coins, and halvings are programmed into its protocol. Halvings, which occur approximately every four years, reduce the block reward for Bitcoin miners, ultimately slowing down the introduction of new coins into circulation. This built-in scarcity and limited supply differentiate Bitcoin from fiat currencies that are subject to inflationary pressures imposed by central banks. Nonetheless, it's important to recognize that Bitcoin's value is still influenced by various factors, including market demand, regulatory developments, and technological advancements. Investors should carefully evaluate the potential risks associated with Bitcoin's value over time.

Continued Bitcoin Adoption

Bitcoin adoption has expanded significantly since its early years when it was primarily used by a small group of tech enthusiasts. Today, more merchants and businesses accept Bitcoin as a form of payment, and user-friendly wallets, exchanges, and marketplaces have improved accessibility. It's worth noting that while Bitcoin's adoption is increasing, it remains important to consider the potential risks and uncertainties associated with the cryptocurrency market. Investors should be aware of the risks involved in adopting Bitcoin.

Furthermore, institutional investors, such as hedge funds, asset management firms, and endowments, have shown growing interest in Bitcoin as a potential store of value and portfolio diversifier. However, it's essential to remember that investing in Bitcoin involves risks, including its volatility, regulatory uncertainties, and the potential for losses. Professional guidance should be sought before making investment decisions.

Bitcoin's network value is demonstrated by the significant number of daily transactions, exceeding 570,000 permission-less transactions per day. It's crucial to understand that network value does not guarantee future performance or eliminate the risks associated with investing in Bitcoin.

Daily Bitcoin (BTC) Transactions (12/1/2012 - 5/8/2023)

Source: Y-Charts as of 5/8/2023. Past performance is not a guarantee of future results.

Layer 2 solutions, such as Liquid by Blockstream, have the potential to drive Bitcoin adoption by addressing scalability and allowing for customizations while preserving the security properties of Bitcoin. The Lightning Network, built on top of the Bitcoin blockchain, further enhances Bitcoin's payment capabilities with lower costs and faster transaction speeds.

An upcoming layer 2 development called RGB holds significance as it enables the creation and management of digital assets on the Bitcoin blockchain. This development adds a new layer of functionality, allowing assets like stocks, bonds, real estate, or other cryptocurrencies to be issued and traded on top of the Bitcoin network. The RGB protocol is designed to be scalable and resource-efficient, making it easier for developers and users to integrate digital assets without extensive changes to the underlying Bitcoin network. This expansion of use cases makes Bitcoin a more versatile and valuable platform, fostering opportunities for innovation and growth within the ecosystem.

Bitcoin's Potential Hedge Against Inflation:

The global increase in money supply due to the COVID-19 pandemic has resulted in widespread inflation, eroding the purchasing power of established fiat currencies. Bitcoin's potential as a hedge against inflation has gained attention in investment decision-making. Its limited supply and decentralized nature form the basis of this idea. Unlike fiat currencies, which can be printed by governments and central banks, Bitcoin has a fixed supply that reduces by 50% every four years through halving events. This characteristic makes Bitcoin resilient to inflationary pressures caused by fiat money supply growth. Consequently, investors concerned about the impact of inflation on their portfolios and purchasing power find Bitcoin an attractive option.

Bitcoin's decentralized nature also shields it from geopolitical events and economic policies that can lead to currency devaluation, such as quantitative easing (QE) or excessive government spending.

Bitcoin's Role in an Investment Portfolio:

As Bitcoin gains recognition as an asset with monetary value, its potential role within an investment portfolio comes into question. Bitcoin may enhance portfolio diversification due to its low correlation with traditional asset classes, including broad market equity indices, bonds, and gold.

Source: Morningstar. Data as of 3/31/2023. S&P 500 is measured by the S&P 500 Index; US Bonds is measured by the Bloomberg Barclays US Aggregate Index; Bitcoin is measured by the MarketVector Bitcoin Benchmark Rate Index; Gold is measured by the S&P GSCI Gold Spot Index; US Real Estate is measured by the MSCI US REIT Index; Oil is measured by the Brent Crude Oil Spot Price Index, Emerging Market Currencies is measured by the Bloomberg Barclays EM Local Currency Government Index. Indices are not securities in which investments can be made. Correlation is defined as a statistic that measures the degree to which two or more securities move in relation to each other.
Please see important disclosures and index descriptions at the end of this presentation. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

An allocation to Bitcoin may also enhance the risk-return profile of institutional investment portfolios. As shown in the chart below, a small allocation to Bitcoin significantly enhanced the cumulative return of a traditional 60% equity and 40% bond portfolio allocation mix while only minimally impacting overall portfolio volatility.

Improved Portfolio Upside From a Small Bitcoin Allocation (2/1/2012 - 3/31/2023)

Source: Morningstar. Data as of 03/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see important disclosures at the end of this commentary regarding hypothetical performance.

Bitcoin Growth of $100 (2/1/2012 - 3/31/2023)

Source: Morningstar. Data as of 03/31/2023. Past performance is no guarantee of future results.

Previous Cycles Suggest That Bitcoin Could Rally Prior to and After the Next Halving

Source: Arcana. Data as of 2/4/2023. Past performance is not indicative of future results. Not a recommendation to buy or sell any of the names mentioned herein.

How Might Bitcoin Shine Brighter Than Gold?

1. Divisibility: Gold is a physical asset that has limitations when it comes to division for smaller transactions. In contrast, bitcoin is highly divisible, allowing it to be used for microtransactions. With bitcoin, transactions can occur even at the smallest unit called Satoshis, which makes it more practical for day-to-day usage.
2. Transparency: Bitcoin transactions are recorded on the public blockchain, providing a high level of transparency. This transparency makes it difficult to manipulate or counterfeit bitcoin, enhancing trust in the network. On the other hand, gold lacks the same level of transparency. When gold is traded, the transaction details, such as buyer, seller, and price, are often not publicly available. This lack of transparency may increase the risk of fraud and manipulation in the gold market.

What happened?

Terra Luna was a blockchain network that used a dual-token system to maintain the stability of its algorithmic stablecoin UST. UST was supposed to be pegged to the US dollar, meaning that one UST should always be worth one dollar. However, unlike other stablecoins that are backed by real assets or fiat currencies, UST was backed by its sister token Luna, which was used to pay for transaction fees, stake in the network, and participate in governance.

The mechanism behind this system was that whenever there was more demand for UST than supply, new UST would be minted and sold for Luna, which would increase the price of Luna and decrease the supply of UST. Conversely, whenever there was more supply of UST than demand, UST would be burned and Luna would be minted and sold for UST, which would decrease the price of Luna and increase the supply of UST. This way, the market forces would always keep UST close to its $1 peg.

However, this mechanism relied on two assumptions: that there was enough liquidity in the market to facilitate these transactions, and that there was enough confidence in the system to maintain the demand for UST. Unfortunately, both of these assumptions were violated on May 7th, 2022, when a massive sell-off of UST triggered a downward spiral that eventually led to the collapse of Terra Luna.

According to various reports the sell-off was initiated by a large whale who unstaked over $2 billion worth of UST from Anchor Protocol, a DeFi platform built on Terra that offered high interest rates for depositing UST. The whale then proceeded to liquidate hundreds of millions of UST for other cryptocurrencies, creating a huge imbalance in the market. This caused UST to lose its peg and drop below $0.9.

As UST fell below its peg, more and more users started to panic and sell their UST for other stablecoins or cryptocurrencies, creating even more selling pressure. This also triggered a massive amount of Luna to be minted and sold for UST, as per the protocol's design. However, this only flooded the market with more Luna tokens, which drove down its price even further. At one point, Luna was trading at less than $0.1, down from its peak of $118 in April.

The situation was exacerbated by several factors that contributed to the lack of liquidity and confidence in the system. First, there was a lack of arbitrage opportunities due to high transaction fees and network congestion on other blockchains such as Ethereum and Binance Smart Chain, where most of the liquidity for UST and Luna was located. Second, there was a lack of transparency and communication from Terraform Labs , the company behind Terra Luna, which failed to address the issue or provide any reassurance to the community. Third, there was a lack of regulation and oversight from authorities , who later issued an arrest warrant for Do Kwon , the co-founder of Terraform Labs, on charges of fraud and market manipulation.

The result was a total meltdown of Terra Luna and its stablecoin UST, which lost 99% of their value within a week . The collapse also had a ripple effect on other cryptocurrencies and DeFi platforms that were connected or dependent on Terra Luna . According to some estimates , over $60 billion worth of value was wiped out from the crypto space due to this event.

Why did it happen?

The collapse of Terra Luna exposed several flaws and risks inherent in algorithmic stablecoins and DeFi platforms. Algorithmic stablecoins are essentially experiments that try to achieve stability without relying on any external collateral or authority. They rely on complex mathematical models and game-theoretical incentives to maintain their pegs. However, these models and incentives are not foolproof and can be easily disrupted by external shocks or malicious actors.

DeFi platforms are also highly experimental and innovative, but they come with their own challenges and trade-offs. They offer high returns and opportunities for users, but they also entail high risks and vulnerabilities. They are often unregulated and untested, and they operate in a highly volatile and competitive environment. They are also subject to various technical issues, such as network congestion, bugs, hacks, or exploits.

The combination of algorithmic stablecoins and DeFi platforms creates a powerful synergy, but also a dangerous dependency. When one of them fails, the other one suffers as well. This creates a positive feedback loop that can amplify the effects of any shock or disturbance. This is what happened with Terra Luna and its stablecoin UST, which were both heavily integrated with other DeFi platforms such as Anchor Protocol, Mirror Protocol, or Curve Finance.

What were the consequences?

The collapse of Terra Luna had several consequences for the crypto ecosystem, both positive and negative. On the negative side, it caused a huge loss of value and trust for many users and investors who were holding or using UST or Luna. It also damaged the reputation and credibility of algorithmic stablecoins and DeFi platforms in general, which were already under scrutiny and criticism from regulators and skeptics. It also created a liquidity crunch and a market panic that affected other cryptocurrencies and DeFi platforms that were connected or dependent on Terra Luna.

On the positive side, it also created a learning opportunity and a catalyst for innovation and improvement for the crypto community. It exposed the flaws and risks of algorithmic stablecoins and DeFi platforms, and prompted many developers and researchers to find solutions and alternatives. It also stimulated the demand and adoption of other stablecoins and DeFi platforms that were more reliable and resilient. It also inspired new projects and initiatives that aimed to create more decentralized and scalable platforms for stablecoins and DeFi applications.

Where are we now?

A year after the collapse of Terra Luna, the crypto ecosystem has shown remarkable signs of recovery and innovation. Many projects and platforms that were affected by the event have managed to bounce back or reinvent themselves, this shows the resilience of the decentralised crypto ecosystem.

Other projects and platforms that were not affected by the event have also thrived and expanded their offerings and user bases. For example, MakerDAO , the oldest and largest algorithmic stablecoin platform, has maintained its dominance and stability in the market with its Dai stablecoin , which is backed by various types of collateral such as cryptocurrencies or real-world assets . It has also launched new features

and products such as Maker Vaults , Maker Oracles , or Maker Improvement Proposals . It has also integrated with other blockchain networks such as Polygon

Important Information

We publish this newsletter to inform and educate about recent market developments and technological updates, not to give any recommendation for certain products or projects. The selection of articles should therefore not be understood as financial advice or recommendation for any specific product and/or digital asset. We may occasionally include analysis of past market, network performance expectations and/or on-chain performance. Historical performance is not indicative for future returns.

The price may be down, but how is the network utilization doing? Last month we looked at active addresses and total addresses in Ethereum and Bitcoin. The number of addresses only reveals the tip of the iceberg when it comes to network utilization measures. Firstly, we can differentiate between utility and utilization measures. While a utility measure shows how much utility a network has, utilization measures show how much a network is really used for a specific utility.

It is actually surprisingly difficult to find a utilization measure that can be used cross-chain, mostly due to the protocol-level differences between blockchains. The most simple and intuitive one is total on-chain volume normalized by market capitalization. We normalize by market capitalization to understand whether there is relatively more volume on one blockchain versus the other. We could take this one step further and use our concept of last week to look on the average normalized on-chain volume per active unique address to understand how many unique users are actually using the chain for value transfer. As we know, value transfer through native (such as ETH on Ethereum) or non-native tokens (such as DAI, an ERC20 decentralized stablecoin)  is one of the key utilities of blockchain. The final metric can described as the total on-chain volume divided by the market capitalization divided by the number of unique active addresses.

Luckily for us, all these metrics are readily available from on-chain data providers or even by yourself in case you’re running your own node. For unique active addresses we are using active addresses with a balance higher than 1$ (i.e. excluding insignificant accounts, zero balances). Since this number may be meaningless without comparison we calculate the ratio between Bitcoin and Ethereum. One disadvantage of this metric (could be seen as advantage as well) is that it doesn’t show adoption. It is merely a metric of how much value is transferred per unit of market capitalization per active address.

What does the graph show? Apparently almost no trend, there seems to be some periodicity in the metric. That is not what we are interested in; let’s take a closer look at the ratio and try to understand what is going on. A ratio of 1 would suggest that the value transferred per unit of market capitalization per active user is the same on Ethereum as it is on Bitcoin. A value higher than 1 would suggest that Bitcoin fulfills the value transfer utilization better than Ethereum and vice versa for a value lower than 1. In other words, Bitcoin seems to be consistently undervalued (value above 1) when it comes to value transfer utilization. There is a slight negative slope trend (which is in favor of Ethereum). It remains to be seen whether Ethereum will at some point consistently beat Bitcoin it terms of this metric. One thing that could complete this picture is to also include on-chain volume from layer-2’s on Ethereum (and Bitcoin). I will leave this as an exercise to the reader

Source: Messari, data as of 19-6-2022 to 19-06-2023. Past performance is no indicator of future results.

Post Shanghai Analysis

It has now been a couple months since full implementation of the Shapella (Shanghai and Capella) upgrade. Through on-chain analysis everyone is capable to review Ethereum’s transformation in quantitative terms and see if it matched our expectations, if not, we try to understand why it did not develop the way we think it would. To quickly recap, the Shapella upgrade allowed Ethereum stakers (i.e. validators) of the proof-of-stake network to withdraw their full or partial stake, it also allowed them to withdraw previously earnt rewards. Pre-update, the market expected initially significant withdrawals followed by even more significant deposits hence Shapella having a net-positive effect on the staking ratio of Ethereum.

Unsurprisingly, the day after the Shanghai/Capella upgrade 14,249 validators exiting, which remains the largest daily count. After this peak, exit events quickly tapered off, having levelled off to between 300 and 700 per day. Overall, this update seemed to have a positive effect on the network so far.

Source: Glassnode, data as of 08-06-2023. Past performance is no indicator of future results.

Please note that VanEck has exposure to Bitcoin.

I personally did a deep dive on bitcoin in early 2017, determined it was “real” and then stopped paying close attention to the industry until 2021—a little bit of a Rip van Winkle situation. I can’t believe how much has changed in the past six years! I tried to communicate this to a friend a couple of weeks ago and recommended a bitcoin podcast to him that I thought was easy to understand. But to him, it was Ancient Greek. So, here’s a jargon-free update about recent developments to the best of my abilities.

What Has Led to Bitcoin’s Rise?

The first answer is that more and more investors are buying bitcoin. Even if you haven’t opened an account at a crypto exchange, you can increasingly buy bitcoin on apps that you may already have on your phone. Cash App from Square has over 50 million users1, PayPal has 429 million active users2, and Venmo now offers a credit card product that lets you earn up to 3% back in Bitcoin. This has broadened access beyond the large crypto exchanges such as Coinbase which has over 100 million users globally.3

Second, institutional investors have been buying bitcoin. A U.S. public company (MicroStrategy) holds about $4 billion in bitcoin,4 and Elon Musk’s Tesla added Bitcoin to its balance sheet in 2020. Tesla continues to be one of the top Bitcoin holders among publicly traded companies. Well-known investors are speaking in its favor, which facilitates bitcoin’s legitimacy.

And if one wants to be bullish, bitcoin’s total market value is about $513 billion (almost $27,000 per coin as of June 6, 2023)5, compared to Tesla at $694 billion6 and gold outstanding at $12 trillion.7

Many of the millions of individual and institutional investors that own bitcoin most likely own it primarily as a store of value or a form of digital gold. They want to own a currency that has limited supply, not “paper” money, whose supply governments are increasing without limit.

But What Has Changed Since 2017?

The first thing worth mentioning is that you can now earn interest on bitcoin and other cryptocurrencies. The ability to lend or stake crypto for a yield will attract many people to the crypto world, as they offer a potentially high-yield alternative to government bonds, bank deposits and gold. Accessing this income stream is technically difficult and not without risks, but it is clear how this can and probably will become available to more investors.

From its early days, crypto enthusiasts believed that Wall Street could be rebuilt better and cheaper using a completely secure technology that wasn’t controlled by a single party.

The conceptual building block that would enable the building of a new Wall Street is the ability to build logic into software—the “smart contract.” Something like, “Pay Jane X if Jane delivers Y to Jack.” The delivery of Y would have to be verified independently. “If” is the key word in that sentence because it means there are several moving parts. “If” logic has been around since probably the first lines of software—but making a network that is unhackable and reliable is another thing entirely.

In 2017, there wasn’t much built using this concept; The concept of a smart contract was widely celebrated, but no one knew whether it would be actually applied. The only thing happening was people trading bitcoin and other coins on unregulated exchanges, just like one could trade sneakers on eBay, but that activity didn’t require smart contracts.

Now there has been progress in the build-out of an independent, reliable data infrastructure to support smart contracts. Remember, using the “if” logic in finance usually refers to a price. Well, that price better be reliable! And data problems are rife on Wall Street. This data infrastructure isn’t fully proven, but a lot of important progress has been made. Firms valued in the billions of dollars are directly addressing this problem.

In sum, I believe the emergence of lending and staking digital assets as an alternative to traditional fixed income and rapidly developing data infrastructure suggest growing chances that a new digital asset Wall Street is being built—and that we are still in the early days of that.

To receive more Digital Assets insights, sign up to our Crypto Newsletter and receive a monthly collections of articles and webinars written or moderated by VanEck.

ETHDam on Privacy

One of the key discussions revolved around the legal pursuit of Tornado Cash and its developer, Alexey Pertsev. The question of whether someone should be held liable for writing and maintaining open-source code sparked intense debate. While the purpose of the code can influence the answer, it becomes more complex when the same code can be utilized for both legal and illegal activities. Privacy tools, much like curtains, can serve legitimate purposes, but they can also shield bad actors from regulatory oversight. Striking the right balance is essential.

Financial privacy is sought after for various reasons, but it often clashes with Know Your Customer (KYC)/Anti-Money Laundering (AML) and anti-terrorist funding regulations in the traditional financial sector. Cash-based businesses, such as laundromats, vending machines, and hairdressers, have been historically associated with money laundering schemes, acting as intricate privacy tools for the ultimate beneficiaries of the funds. However, not every cash-based business should be considered suspect.

In the case of Tornado Cash, its use is more akin to providing privacy and obfuscating the exact source of income. There are proposals to implement functionality that allows users to prove, using zero-knowledge technology, that a withdrawal does not include a specific deposit. Developers should carefully navigate the intersection between privacy tools and KYC/AML regulations to create applications that offer financial privacy while satisfying regulators.

While privacy is a fundamental aspect of cryptocurrencies, it is crucial to remember the core ethos of transparency in the crypto space. Despite using privacy tools, bad actors eventually face restrictions or high costs when converting crypto into fiat currencies. In fact, cryptocurrencies' transparency often deters illicit activities.

Regulatory Developments and Market Performance

In the wider landscape of cryptocurrencies, recent regulatory actions have dominated the headlines. The SEC has intensified its scrutiny of Binance US, Coinbase, and potentially other platforms. However, amidst the regulatory challenges, Asia and Europe are embracing cryptocurrencies with open arms. Beijing has published a whitepaper on Web3 innovation and development, while both Beijing and Hong Kong are striving to become prominent crypto hubs. In Europe, the European Commission has introduced the final version of MiCAR (Markets in Crypto Assets Regulation), signalling the ongoing convergence of regulation and adoption. The dichotomy between those pushing for adoption and those grappling with its implications is apparent, but it's crucial to recognize that early adopters will unlock opportunities inaccessible to others. Regulation is becoming increasingly significant in the crypto space, and broader adoption of Web3 and DeFi is likely to occur once regulatory frameworks are established.

Turning to the market performance during this eventful period, Bitcoin faced a significant setback in May as prices dipped below $28,000. Uncertainty surrounding regulatory measures contributed to this decline. However, Bitcoin showed resilience and stabilized towards the end of the month, aiming to finish above $27,040. It is important to note that despite this recovery, Bitcoin's current prices remain more than 60% below its all-time high of $68,789 recorded in November 2021. Similarly, Ethereum experienced a volatile ride in May. The second-largest cryptocurrency witnessed a dip, with prices plunging as low as $1,740. However, Ethereum demonstrated resilience and stabilized, heading towards the end of the month with the potential to finish above $1,860. This bounce-back is commendable considering the challenges faced by the broader crypto market. However, it is worth noting that more recently, in early June, several cryptocurrencies experienced a downturn due to regulatory actions by the SEC.

As the crypto industry continues to evolve, the role of privacy in DeFi and the interplay between regulation and financial privacy will remain crucial topics of discussion. It is an exciting time for the crypto space as it strives to strike a balance between innovation, privacy, and compliance with regulatory frameworks.

Today, music is everywhere, in our homes and on the go. Of all the forms of entertainment within our smart homes, music is omnipresent, both in itself and as part of our other activities. Technology has profoundly changed the way we consume and produce music, but it hasn’t changed who we listen to: people making music. Will AI change that as it becomes capable of generating music?

We Are Engaging With Music Everywhere

We use music on our personal devices during our daily activities. It energizes us when exercising or cleaning our homes and it helps us to relax and fall asleep. Moreover, with music accessible on our personal devices and through smart speakers, our homes and lives are filled with music.

Source: IFPI, 20221M¹

We engage with music in more ways than ever: through streaming services, social media platforms, short-form video apps, live music, but also live and on the radio or TV (see graph). According to the IFPI (the organization that represents the interests of the recording industry worldwide), music fans listened to an average of 20.1 hours per week in 2022 (up from 18.4 hours in 2021).

Those hours are not just spent listening to music on streaming platforms; music is also an important part of other entertainment forms. Music-focused TV shows or films are very popular, with 58% of people watching those, according to IFPI1. And 44% of gamers watched a virtual music concert on a gaming platform in the last three months1. On social media, music is used to make reels more engaging, a practice that is made even easier with most social media platforms licensing popular music from the major labels.

When looking at all innovations, it is striking that each one has resulted in us consuming more music. From vinyl to cassettes to CDs to MP3 players and most recently to streaming, each new technology increased the number of accessible songs, the quality of the music, and the ease with which we could get to the song we wanted to hear.

Everyone Can Now Create Music

Today, with AI, the number of tracks is increasing faster than ever. Luminate², who monitors the entertainment market and provides insights, recently found that in the first quarter of 2023, streaming services added on average 120,000 new tracks per day, up from 93,400 per day in all of 2022.

According to Universal Music Group’s CEO Sir Lucian Grange³, AI contributes in part to this oversupply. While most of this content is of poor quality created by prior generations of AI, newer generations are getting better at making music. In April, an AI-generated track called "Heart On My Sleeve" mimicked the popular artists Drake and The Weeknd so well that it went viral before it was taken down for copyright infringement.

However, Will We Listen to All That Music?

Back in 2004, Chris Anderson published an article in Wired (later turned into a book) about the Long Tail. He described how the democratization of production and distribution in combination with a reduction in search costs would reshape how we consume content by driving more attention away from traditional hits and to the long tail of niches and small publications and creators.

When applied to music, we indeed see a long tail. And with the help of AI that long tail of niche content will probably get longer. Nevertheless, this long tail mostly applies to production, but not so much to consumption. In his book Tarzan Economics, Spotify's former chief economist Will Page points out that people spend 90% of their time listening to less than 2% of all songs on streaming platforms. It is the left side and not the long tail that drives music consumption and contains most of its value.

When considering all the innovations that music has incorporated, all the technology that has upended the value chain, the one person who remains standing is the artist. In a sea of artificially created content, they are likely to stand out even more. Moreover, these artists will probably use AI. In a recent interview, Neil Tennant from the Pet Shop Boys⁴ said that AI is a useful tool in a songwriter’s kit, for instance to help overcome writers’ block

It's not so long ago that the internet and digital piracy could have been the death of the music industry. Yet another innovation, streaming, saved it. Similarly, AI and other innovations could potentially improve quality and create new music experiences, in and out of our homes.

In recent years, the semiconductor industry has experienced a notable departure from its traditional cyclical patterns, embracing a more secular behavior that defies the ups and downs tied closely to economic cycles. This transformation can be attributed to a range of factors, including the ever-expanding presence of technology in our daily lives and the surging demand for semiconductors across diverse sectors. Unlike its past volatility, the semiconductor market now exhibits remarkable resilience, driven by long-term trends such as artificial intelligence, Internet of Things, and cloud computing. This shift reflects the industry's capacity to adapt to evolving market dynamics, sustaining consistent demand and fostering innovation even amidst economic fluctuations.¹

As we continue to ride the wave of technological advancement, semiconductors, and artificial intelligence (AI)—stand at the forefront of this evolution. Together, they drive each other's growth, propelling us into an unprecedented era of technological revolution. As these two domains deepen their relationship, they're heralding a new surge of innovation. The future of AI is anchored in the creation of new, AI-optimized semiconductor chips—a dynamic we believe is poised to fuel significant growth in the next half-decade. This blog examines the interdependence of semiconductors and AI, the technological advancements driving their integration, and the future outlook of this thriving industry.

• How Are Semiconductors Behind ChatGPT’s Success?
• NVIDIA's Q1’23 Earnings Highlight AI and Semiconductor Market Capture
• Is AI Accelerating Semiconductor Design and Manufacturing?
• AI Design Tools’ Growth Rate Projected to Surpass Chip Sales by 3x?
• Semiconductor Industry Interlude: 4 Key Categories of Participants
• How Will US CHIPS Act Benefit Large Semiconductor Producers?

How Are Semiconductors Behind ChatGPT’s Success?

Machine learning and its insatiable appetite for data heavily rely on semiconductors for processing and storage. The growing complexity and demand of AI applications mean that semiconductors, particularly graphic processing units (GPUs), are increasingly important. With their multitasking capabilities, GPUs are crucial in managing the massive data required for AI model training, ensuring applications like ChatGPT operate efficiently.

As the applications grow increasingly complex, the demand for advanced semiconductor chips will escalate. This growing demand represents a significant and promising opportunity for companies in the semiconductor industry. For instance, graphic processing units (GPUs), are the powerful engines that drive companies like OpenAI and its applications, including ChatGPT, are in high demand. With their capability to handle multiple tasks simultaneously and more importantly proficiently, GPUs are the perfect fit for the heavy-duty processing required by machine learning. These processing engines manage the vast data needed for training generative AI models that use generative pretrained transformers (GPTs), enabling quicker responses and better language understanding. Simply put, semiconductors are the foundational support structure, ensuring the smooth operation of AI applications such as ChatGPT.

GPUs also play a pivotal role in a broad spectrum of AI applications, including:

• Natural language processing: GPUs decode the intricacies of human language, finding their place in applications such as voice assistants and machine translation.
• Facial recognition: GPUs identify individuals in images and videos, a tool with applications in sectors from security to marketing.
• Autonomous vehicles: GPUs adeptly manage sensor data, guiding vehicles safely through city streets.

NVIDIA's Q1’23 Earnings Highlight AI and Semiconductor Market Capture

NVIDIA (NASDAQ: NVDA) recently posted strong earnings, with both revenue and earnings per share surpassing analyst predictions.² The rise in demand for NVIDIA's GPUs, used extensively in AI applications, is driving the company's growth. As the demand for AI-powered applications rises, so will the demand for semiconductors and we believe NVIDIA is well-positioned to benefit from this growth. It is a leading GPU supplier for AI applications and is reaping benefits from partnerships with AI companies like OpenAI and Google AI.

Global Semiconductor Market Growth and Forecast

Source: World Semiconductor Trade Statistics and Mckinsey’s projected yearly growth. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, or as any call to action. For illustrative purposes only. Actual future semiconductor market growth is unknown.

The need for increased computing power, AI, and digital connectivity has resulted in significant semiconductor market growth. McKinsey estimates that semiconductor revenue could double from $550 million in 2022 to over $1 trillion by 2030.³

Is AI Accelerating Semiconductor Design and Manufacturing?

AI is not just benefiting from semiconductor power; it has emerged as a significant driving force in the evolution of the semiconductor industry. Through its ability to redefine chip designs, identify defects, optimize processes, and predict chip failures, AI is enhancing efficiency and profitability within the sector. And there's more to the story—AI is catalyzing the creation of a new lineage of chips tailor-made for AI's distinctive requirements and needs. These aren't your regular chips, but one’s tailor-made for AI's unique demands. Think of Intel (NASDAQ: INTC) and its pioneering work crafting AI-optimized chips that excel in speed, efficiency, and power management.

AI Beats a Human at Chess and Go, Now Watch It Design Chips

Chips have exponentially more configurations than chess or Go⁴

Source: Deloitte Insights adapted from Synopsys, “What is Design Space Optimization?” as of July 2020.

AI has previously proven its capability by outperforming humans in complex board games like Chess and Go, but now it's stepping into an even more intricate field: chip design. With an astronomical number of potential configurations, far surpassing those in Chess or Go, the ability to optimize and innovate in chip design could be a game-changing application of AI technology. As the relationship of AI and semiconductors deepens, they're paving the way for a fresh surge of technological innovation. The forthcoming progression of AI is heavily dependent on the creation of new semiconductor chips that are specifically designed for AI applications. We believe this trend is likely to fuel significant growth in the next five years.

AI Design Tools’ Growth Rate Projected to Surpass Chip Sales by 3x?

5-year CAGR for chips, EDA tools, and advanced AI design tools (2023-2028)⁵

Sources: WSTS; Global Markets Insights; and Deloitte Global as of November 2022.

AI's imminent growth largely hinges on the development of semiconductor chips optimized explicitly for AI functionality. According to Deloitte, it is very plausible that this factor can trigger substantial growth over the next half-decade.

Semiconductor Industry Interlude: 4 Key Categories of Participants

The semiconductor industry is principally composed of four key categories of participants. The initial category comprises foundry operators, for instance, Taiwan Semiconductor Manufacturing Company (TSMC). These are businesses that undertake the production of semiconductor chips based on the specifications given to them by other companies. They can be thought of as factories crafting chips for different companies. The second category is filled with integrated device manufacturers (IDMs), with companies like Intel serving as examples. IDMs are unique because they handle the entire lifecycle of a semiconductor chip within their own facilities, from the initial design to the final manufacturing phase. The next category includes companies that only design chips also referred to as fabless companies. NVIDIA and Advanced Micro Devices (AMD) fall into this category. Fabless companies concentrate on designing and developing semiconductor chips but outsource the manufacturing to foundry operators since they do not have their own fabrication capabilities. The final and fourth category encompasses equipment manufacturers such as ASML. These businesses are responsible for creating the necessary machinery and equipment used in the manufacturing of semiconductor chips. They supply the crucial tools needed for both foundry operators and integrated device manufacturers to construct the chips.

How Will US CHIPS Act Benefit Large Semiconductor Producers?

Remember the US CHIPS Act? Since semiconductors are critical for the economy, the U.S. aims to become self-sufficient in semiconductor production and reduce dependence on foreign supply chains. The Covid-19 pandemic highlighted vulnerabilities in the supply chain, often including steps in over five countries and multiple global shipments. The Department of Commerce reports that in 2021, semiconductor shortages cost the U.S. economy nearly a quarter trillion dollars.

To increase domestic manufacturing of semiconductors, the US Chips and Science Act will channel $50 billion in investments into the industry over five years, including $11 billion for advanced semiconductor research and development, and $39 billion to accelerate and drive domestic chip production ($6 billion of which can cover direct loans and loan guarantees)⁶.

Budget To Expand Domestic Manufacturing (Advanced Semiconductor R&D and Chip Production)

Source: McKinsey⁷ as of October 2022.

Among the main beneficiaries of the US CHIPS Act are the U.S.’s large semiconductor producers. Instead of trying to pick individual stock winners in the sector, investors can gain exposure to the 25 largest most liquid, U.S. listed semiconductor companies in The VanEck Semiconductor UCITS ETF (SMH).

In closing, we believe semiconductors could be the 'picks and shovels' way to play the AI landscape and present a compelling way to capitalize on the growing AI sector, particularly when direct access to private AI companies is limited for many investors. The VanEck Semiconductor UCITS ETF (SMH) provides a way to invest in the entire value chain of the semiconductor industry, from chip design and fabrication to the machinery used in the manufacturing process. As semiconductors are the essential components that power AI innovation, we believe they are poised to gain value amid the potential deflationary impact of AI's efficiency—they also provide a unique opportunity to ride the wave of AI's transformative impact.

Gold showed strength to start the month, climbing to a new yearly high of $2,063 per ounce on 4 May, a day after the U.S. Federal Reserve (Fed) took rates another 0.25% higher. Expectations that this past rate hike may be the last one in this tightening cycle supported gold in early May. However, through most of the month, the U.S. dollar gained and gold fell as the narrative shifted to a more hawkish view and the probability of further rate hikes in 2023 increased. Gold breached the important $2,000 per ounce level on 16 May. An upwardly-revised, first-quarter U.S. GDP growth figure, an above-expected May U.S. flash PMI composite figure, along with artificial-intelligence-fueled strength in U.S. equity markets put further downward pressure on gold. Market uncertainty brought about by the U.S. debt ceiling debacle, mentions of a potential technical default as soon as 1 June and even a warning of a potential U.S. credit rating downgrade by Fitch failed to become a true catalyst for gold prices from these levels. Gold dropped $27 per ounce (-1.4%) during the month, closing at $1,962.73 on 31 May.

Gold’s high still seems well within reach

Gold seems to be forming a new base around the $1,900 level, averaging $1,933 per ounce year to date. It has traded consistently above $1,900 for longer than ever before. Gold is showing resilience despite a strong stock market and recent U.S. dollar strength. Gold bullion exchanged traded products outflows have subsided this year, with net inflows, albeit small, resulting in a 0.38% increase in holdings year to date.

Total ETF Holdings of Gold vs. Gold Price

Source: Bloomberg. Data as of 31 December, 2022.

Gold bullion ETF holdings are 8% lower than they were in March 2022, and 13% lower than in August 2020, when gold reached its all-time high. Can a Fed skip or pause this year be the next catalyst for gold, unlocking investment demand that drives gold higher? The $2,075 per ounce all-time high seems well within reach, in our view. We see a macro backdrop that continues to be supportive of gold in the longer term.

Still waiting on that rerating…

Gold producers as a sector continue to demonstrate their commitment to disciplined capital allocation, focused on value accretive growth, enhancing shareholder returns, profitability and maintaining healthy balance sheets. They are also responsible operators, running sustainable businesses aiming to deliver benefits to all stakeholders, while carefully managing the impact on the environment. In our view, a re-rating of the gold mining equities from historically low valuations at present, is well supported by the industry’s strong fundamentals.

Our recent visit to Pueblo Viejo mine is a good example of the sector’s success in delivering growth and creating value in a sustainable and responsible manner.

***SPECIAL – On the Road in Pueblo Viejo***

Visiting one of the world’s largest gold mines

We recently visited the Pueblo Viejo (PV) gold mine in the Dominican Republic. PV’s ownership is split 60%/40% between Barrick (5.42% of Strategy assets) and Newmont (3.61% of Strategy assets), respectively, and operated by Barrick. Getting to the site was as easy as it gets: a direct commercial flight from New York to Santo Domingo followed by an under-two-hour coach bus ride to the mine (which may be why so many people were surprised that we were going to the Dominican Republic for a mine tour, and even more surprised to hear that this mine is, in fact, one of the largest gold mines in the world).

PV ranks among the top 5 gold mines, globally; a Tier 1 asset by all measures in terms of production (an average of 800,000 ounces of gold over the life of the mine), reserves (20.6 million ounces), remaining life of mine (over 20 years, until about 2044) and all-in sustaining costs (2023 guidance of $960-1,040 per ounce). PV is currently expanding its operations to deliver this remarkable profile. Due to declining grades, without this major expansion project, production would have progressively declined and PV would have ceased operations by 2031. The processing plant is being expanded to increase its throughput capacity significantly, allowing the mine to sustain production by processing a larger amount of lower grade material. In addition, a new tailings storage facility will be built to support the expansion.

Key takeaways

We were very interested in visiting PV given the ongoing expansion and, we have to say, we were very impressed. Here are some of our main takeaways from the visit:

• Onsite visits still provide invaluable insight. We had read about the project progress and completion status, but the level of advancement we perceived from touring the processing facility, the open pit, the tailings facility, and our discussions with the mine management and technical staff, surpassed our expectations. A lot of the equipment was already up and running, with a noticeable level of knowledge and confidence from the technical leaders—a very reassuring sign. The mine seems well on track to start the ramp-up of the expanded plant by the second half of 2023.
• There continues to be significant benefits to pursuing brownfield (over greenfield) projects. This expansion is unlocking 20 million ounces of gold reserves; effectively giving PV a second life with much lower risk compared to the building of a new mine. There is no debate here: an asset that can deliver significant growth organically, utilizing existing infrastructure and teams is far more attractive and should command higher valuation multiples than the building of a mine from scratch.
• Environmental, social and governance remain a top priority for large producers.
• We highlight the composition of PV’s workforce: 98% Dominican; 52% local; 23% women (including the mine’s general manager). The mine enjoys an impressive 1.5% turnover rate. The depth of experience and extensive knowledge of the operations displayed by the mine leaders we got to interact with during our visit showed the benefits of talent retention and development, one of Barrick’s strategic priorities.
• We had the opportunity to visit several of Barrick’s sustainability initiatives in the communities around PV, including a primary health care clinic, a sports training program, an agribusiness project for high production and income diversification, as well as a technical job capabilities and competencies development program. We were impressed not only by the programs, but also by the systems Barrick has developed to closely track its involvement, engagement and initiatives, and the impact on the communities.
• Barrick has committed $75 million for remediation of historical (pre-Barrick) environmental liabilities. We were able to visit an old tailings dam and a water quality testing point and observe the radical improvements achieved by Barrick’s ongoing rehabilitation work.

We visited a world class gold mine, which is growing and extending its life, and in doing so, it is also without a doubt growing and extending the benefits it delivers to the host country and communities where it operates. It was great to experience this relationship firsthand.

Pueblo Viejo’s Partnership with the Dominican Republic

Source: Barrick. Data as of 31 May, 2023.

Total global military expenditure increased by 3.7% in real terms in 2022, to reach a new high of US$ 2,240 billion, according to data from the respected Stockholm International Peace Research Institute. Military expenditure in Europe saw its steepest year-on-year increase in at least 30 years – Russia and Ukraine accounted for the bulk of this but other countries too were shocked into higher spending.

Unhappily, the world has changed from the years when countries celebrated the peace dividend, a term used to describe the economic benefits of a decrease in defense spending. Instead, they’re ramping up military expenditure and equity investors would do well to adapt to the likely reality that this will keep rising in the years ahead.

Take Germany, the EU’s largest economy. After years of under-investment, its Bundestag, or lower house of parliament, approved a one-off €100 billion fund to help re-build the military following years of neglect. On top of that, the country is poised to increase its regular defense budget by approximately €10 billion in 2024¹.

The fund should enable Germany to meet the NATO target of spending 2% of its economic output on defense each year, making it the world’s third biggest military spender behind the United States and China. But Germany’s not the only country to have neglected its armed forces. Many NATO countries have regularly spent less than the 2% target and are now rushing to catch up.

It's for this reason that VanEck launched its Defense ETF last March. As geopolitical relations deteriorate, the issue of security and defense has once again become one of the top concerns for governments. Our ETF provides investors with diversified access to at least 25 leading defense technology companies, large-scale cyber security firms and defense-relevant service providers based in NATO countries or NATO-friendly countries.
Please also consider the related risks before investing.

What our ETF doesn’t invest in is controversial weapons. These include the types of weapons banned by the Oslo Treaty and Ottawa Convention.

The Ukraine war has prompted a rethink of whether defense companies could be thought of as socially sustainable. EU proposals in 2021 to label defense as socially harmful were quietly ditched. Meanwhile, several investors are moving back into the sector. For instance, Saab AB, which makes Sweden’s Gripen fighter jets, had found itself shunned by funds until 2022². Since then, investors have reinvested, recognizing that democracies must have strong militaries if they are to deter aggression.

Saab’s share price and those of other defense companies have rallied recently, as reflected in the rising price of our ETF. Investors are returning and order books filling. With an eye to the longer term, though, defense is being recognized as an essential industry that needs to grow and increase its capacity in order to make the world a safer place.

Handheld Power Redefined

Edge computing, which brings computation closer to data sources for real-time interaction and responsiveness, holds massive upside for the gaming industry. Gamers could enjoy faster load times, near-zero latency, and an overall improved gaming experience. But perhaps even more exciting is the possibility of players creating their own games in real time. This potential shift towards player-creators could redefine the boundaries of creativity and player agency, signaling a future where anyone could become a game developer. An example of this is Legend of Zelda: Tears of the Kingdom which leverages user-generated content (UGC) to foster creativity and engage its community. This freedom of creativity coupled with the tangible impact of players’ actions on the game world has boosted sales, driven engagement and created a viral wave on social media.

Free Guy is Paid Guy IRL

Simultaneously, AI advancements are opening innovative avenues in game development. Machine learning and natural language processing are breathing new life into Non-Playable Characters (NPCs), creating advanced AI NPCs that can conversate more naturally and make intelligent decisions. This level of immersion is clearly in high demand, with a recent study revealing that 99% of gamers believe advanced AI NPCs would enhance gameplay.

While these advanced AI NPCs can enrich gameplay, they also present a valuable revenue opportunity for publishers. The same study found that 81% of gamers were willing to pay more for games with advanced AI NPCs, suggesting additional untapped income streams for these features. For aspiring publishers and indie developers, this is an opportunity to meet the growing demand for immersive experiences while driving additional revenue.

Source: Reddit.

Pac-Man Growth Strategy

Though AI and edge computing could diversify game development, they also have the potential to influence M&A activity in the gaming industry. As more non-traditional developers use these technologies to create innovative games, bigger publishers could start focusing their growth strategies on acquiring emerging new titles. This might lead to a surge in M&A activity in the medium to long term, fueling industry growth while also nurturing innovation.

As we continue into this exciting future, it's clear that the boundaries between players and creators are set to blur, paving the way for an industry that is more innovative, inclusive, and dynamic than ever before.

One way for investors to access the space in a diversified way and to capture the future potential of the industry is through the VanEck Video Gaming and eSports ETF (ESPO). ESPO is a passive product that tracks the MarketVector Global Video Gaming and eSports ESG Index. The index targets the 25 largest most liquid companies in the industry that drive 50% or more of their revenue from said industry.

Equity market risk, industry or sector concentration risk, risk of investing in smaller companies. Please refer to the KID and the Prospectus for other important information before investing.

Small and mid-cap coins continued to underperform, down 12% and 11%, respectively, vs. large-caps, down only 4%. We observe a similar ‘consolidation’ theme in both protocol activity & centralized exchange fundamentals: ETH monthly fees and fee share of all smart contract protocols both hit 12-month highs; meanwhile, Coinbase & Kraken aggregate market share of US centralized exchange trading rose to 83%, a YTD high. We count 16 centralized exchanges closing or exiting certain jurisdictions year-to-date, half of whom are leaving the US. Overall, centralized exchanges’ aggregate market share fell to an all-time low vs. decentralized exchanges, a topic we will discuss further below. We think this reflects an acute lack of traditional financing available to crypto exchanges, reduced counterparty exposure appetite by speculators, tougher compliance standards, and improved functionality in DeFi.

Layer 1s

The total market cap for Smart Contract Blockchains (SCB) fell 4% in May from $346B to $333B. Ethereum (-1.5%) and Tron (+11%) outperformed dramatically. Every other token amongst major SCBs was down between 5-35% for the month. The weakest performers in our coverage zone for the month of March included Optimism (-35%) and Avalanche (-15%). Still, despite the muted performance of SCB tokens, fundamental usership was strong as daily active addresses across all SCBs grew 8% from 4.3M to 4.7M. Solana and Starknet, who grew by +75% and 160%, respectively, in May, were the largest relative gainers in daily active users. Likewise, value accrual also showed strong gains, with total fees by SCBs growing 41% from $368M to $518M.

Average Daily Active Users

Source: Token Terminal as of 5/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Ethereum was again a notable outperformer, posting exceptional on-chain usership metrics for the month. Additionally, positive news events materialized that improved the Ethereum supply picture by attracting millions in newly staked ETH. At the same time, Ethereum cemented its status as a usage-driven, deflationary monetary system. On the economic activity side, over $438M in fees were generated on Ethereum in the month of May, and this total represents Ethereum’s highest level of fee generation since May 2022. This fee bonanza drove Ethereum’s market share of smart contract blockchain fees to 80%, which also happens to be the highest fee share of Ethereum since May 2022. While overall crypto price volatility was muted, most of Ethereum’s fee increase resulted from meme coin speculation as Ethereum daily fees surpassed $30M a few days in early May. As a result of the trading melee, the average fee for transactions on Ethereum ballooned from $6.15 in April to $9.79 in May.

Smart Contract Platform Fees vs Ethereum Market Share of Fees

Source: Token Terminal as of 5/31/2023.Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

While Ethereum increased its market share of fees and set a yearly high in monthly fees, its usage feats were accomplished amid the inauspicious backdrop of potentially substantial ETH token unlocks. Because Lido, the leading liquid staking provider on Ethereum, enabled its validators to both exit their ETH staking positions as well as unlock their stacking rewards, there was tremendous FUD about the potential for over  dollars of staked ETH to be withdawn and sold. There was also concern that Celsius, the troubled crypto lender, would be dumping an additional  ETH worth $781M into the public markets.

However, while 949k ETH were withdrawn from staking in the month of May, this figure was dwarfed by the 3.7M ETH that was staked during the same time period. The supply picture in May was further improved by a burn of 200.4k ETH which contributed to an overall reduced total supply of ETH by 140k ETH in the month. If May’s pace of ETH burn is maintained, it will result in an annual drop of 1.4% in the total supply of Ethereum. Circulating supply, or ETH, which is not locked in staking contracts like Lido, also decreased in the month of May, moving from 100.64M to 96.85M ETH. At the time of writing, 19.4% of all ETH is locked in staking contracts.

ETH Supply Dynamics

Source: Dune as of 5/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Ethereum’s month was not without its blemishes as an unusual bug in the consensus software caused network issues causing significant block production lapses, resulting in temporary delays in finality on May 12th. In fact, 47 and 149 blocks were not produced in the two incidents, which caused the validators who would have held those leadership slots to miss out on block rewards. The roots of the problems were traced back to a coding error in one of Ethereum’s three consensus clients. But, because Ethereum has three, the network was able to progress past the incidents without terminal consequences for the network requiring drastic intervention by core developers. These issues and their quick resolution may prove to be strong testaments to Ethereum’s potential as a global financial settlement system. The existence of multiple clients helped Ethereum remain resilient throughout the issues as no funds were lost, and block production quickly resumed without issue. Bitcoin and Ethereum are the only blockchains with more than one client to run their networks.

In summary, an unforeseen surge in economic activity on Ethereum driven by speculation, coupled with vastly improving tokenomics and removing ETH liquidation FUD, enabled ETH’s price to outperform despite technical issues and other SCBs faltering.

Market Share of SCB Fees ex Ethereum

Source: Artemis.xyz as of 5/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Tron, the only other major SCB whose token was positive for the month of May, continued its trend of market share gains. For May, Tron grabbed 77.2% of the fees ex-ETH, and this dominance was up from 75% for April and 50% in June 2022. For example, Tron’s fees in May were 4.7x those of Tron’s most similar competitor – BNB Chain. Tron appears to have carved out a market niche, particularly in emerging markets, as an inexpensive access point where users can cheaply send and interact with stablecoins like Tether (USDT). At the time of writing, Tron held around  worth of Tether on its blockchain, which is about $9B more USDT than is secured by Ethereum. As a result of growing adoption, Tron hit an all-time high for monthly daily average transactions at 8.58M, which edged out the second-highest total ever, which was April 2023, with 8.47M transactions per day. This makes Tron the second most active blockchain, in terms of transactions, behind Solana. Though, Tron’s figures can be considered even more impressive because the vast majority of Solana’s transactions are either consensus vote transactions, oracle updates, or arbitrage bot trading orders “quote-stuffing” to capture arbitrage opportunities.

Market Share of Transactions of SCB ex Solana

Source: Artemis.xyz as of 5/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Additionally, Tron is the most used Smart Contract Platform, by daily active users, with an average daily user base of 1.8M unique users for the month of May. This is also the highest it has ever been in Tron’s history, and this number overtakes the previous all-time high set for Tron that was set in the month of April. Additionally, Tron’s daily active user base is more than 4x that of Ethereum and around 40% higher than BNB, its closest competitor. Tron’s usage is most likely driven by funds transfers between users’ wallets rather than a more complex financial activity like swaps, trading, and loans. Tron, for example, averages around 50-60% of its transactions as transfers of stablecoin USDT, while 89.7% of all its on-chain activity are simple wallet transfers. Ethereum, by contrast, averages around 8-15% of its transaction volume in stablecoin transfers, and 30-40% of its transactions are wallet transfers. To further highlight the differentiation of Tron’s product market fit, despite having $45B in stablecoins to BNB’s $5.8B, Tron’s DEX volumes average 1/60ththat of BNB’s in 2023.

Optimism showed dramatic under-performance in the month of May as it was the worst-performing token, not only among our set of smart contract blockchains but also among the top 100 tokens by crypto market capitalization. The biggest dark cloud hanging over Optimism was the substantial token unlock of OP tokens that more than doubled the circulating token supply. On May 31, more than 386.5M tokens were unlocked for investors and core contributors, with some of these early investments up , including seed round funders Paradigm and IDEO. This unlock brings more than $550M worth of OP tokens to the market that can be sold. Additionally, the underperformance of OP can be attributed to decreased on-chain activity and operating income declines. Despite a slight increase in the market share of DEX volume, absolute DEX volume was down 34% between April and May, and the total transaction count was also down 28% for the month of May.

For Ethereum Layer-2s, their net margin before incentives is an important component of their financial picture. While Layer-1 blockchains count transaction fees as a revenue item and security fees, paid to validators, as a cost, Layer-2s have a slightly more complicated setup. Since L2 blockchains do not have validators and consensus mechanisms but instead have sequencers to process and order transactions, they must pay their host Layer-1 security fees to settle transactions. Essentially, they must bundle their transactions into a compressed piece of data and post that as a transaction to Layer-1. This transaction must still compete in the gas auction for blockspace, subjecting it to wildly varying transaction costs. A rough measure of L2 profitability can be termed “Operating Income Before Incentives” (OIBI) as it is derived as the transaction revenue earned by an L2 less the settlement fees paid to the L1 for posting the rollup data.

Ethereum L2 OIBI

Source: Token Terminal as of 5/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

While the fees generated on OP were up in the month of May, the OIBI accruing to Optimism was down 13% month to month. This is because the fees paid to Ethereum spiked as the demand for Ethereum’s blockspace surged. When competition for blockspace is high, the cost of settling transactions increases, and L2 OIBI margins will decrease. As the month of May was one of the great demand for Ethereum blockspace, L2s like Optimism saw OIBI drop significantly. Of course, Optimism was not alone in declining profitability due to Ethereum gas costs; Arbitrum’s OIBI declined 63%, while Polygon saw the same line item decline 33%.

Considering the OIBI margin of these L2s, Optimism margins have historically been slightly lower than those of Arbitrum or Polygon. Because Polygon is not a true L2 but rather a side chain, its settlement fee structure from Ethereum is much lower. Polygon, because it has its own validator set, uses a technique called state sync to send a snapshot of Polygon’s blockchain state to Ethereum. On the other hand, Arbitrum has achieved higher margins than Optimism because it uses a better-designed virtual machine to process transactions and a more data-streamlined fraud-proof mechanism. As a result, in its current form, Arbitrum has a slight margin advantage over Optimism. From a cost standpoint, rollups like Optimism and Arbitrum have two costs embedded in their fee structure – the cost to roll up all the transactions and post to Ethereum and the cost to transact on the L2. More detailed, the cost for transactions on Optimism breaks down as such:

Optimism Transaction Fee = +

Despite the massive token unlocks, the future for Optimism still looks bright to us. With the announcement of the OP Stack, a software development kit to create Layer-2 blockchains, projects such as Coinbase’s  and Kinto intend to build using Optimism’s technology. While these projects may not directly add value to the OP token, the OP token will act as a governance token of the whole ecosystem, which will govern the progression of the SDK software updates going forward and the process towards a decentralized, shared sequencer. This sequencer set will utilize the tokens for governance and potentially even for staking. Additionally, Optimism is on the cusp of releasing an update called Bedrock which will reduce transaction costs by up to 90% through better data compression to minimize costs. Bedrock also reduces deposit times and enables the separation of the roll-up node and the client to create a modular L2 set-up.

L2 Monthly Margin

Source: Token Terminal as of 5/31/2023.Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Avalanche was the other noteworthy underperformer for the month of May, as declining blockchain fundamentals and a large token unlock dragged down AVAX price by 18%.

The fundamentals of Avalanche paint an initially deceptive picture. Though monthly active users posted an all-time high on Avalanche, further inspection of the activity driving that figure suggests that the activity is “astroturfed.” Of 732k monthly unique active users recorded on Avalanche in the month of May, 470k, or 64% of the total, interacted with Stargate. If these Stargate users were removed, the MAU total would be only 302k Avalanche monthly active users, which would be the lowest number for Avalanche since September 2022. Despite being the second highest in the last twelve months at $1.34M, monthly fees on Avalanche were a 34% decline from April’s fee total.

Additionally, though Avalanche's fees were relatively high, over 10% of the fees were incurred by Stargate, and another 29% were incurred by wallet transfers of AVAX. These figures corresponding to Stargate and the wallet transfers are notable, given that there is great speculation of a Stargate token airdrop. As a result, these figures, and, as a result, the topically positive figures for Avalanche on-chain activity, should be looked at with suspicion.

Likewise, there has been a tremendous decline in DEX activity in May compared to April and a drop in TVL. While TVL dropped 11.36%, DEX volume was down a whopping 46%. Avalanche TVL and DEX volume were the lowest monthly figures on record since the doldrums of July 2021 following the Chinese Bitcoin mining ban. The month-to-month drop in DEX volume for Avalanche was the worst among all tracked smart contract blockchains for the month of May, and the TVL decline was the second largest. Additionally, despite all the bridge activity generated by Stargate, bridged tokens to Avalanche fell $65M from $470M to 405M, losing 13.84% of the bridge’s value. To add salt to the wound of deteriorating fundamentals, on May 29, 9.5M AVAX, around 3% of supply, was unlocked, of which 6.2M went to the Avalanche Team and the Avalanche Foundation.

Some encouraging developments for Avalanche in the month included the deployment of a Euro stablecoin called EUROC, the announcement of AvaCloud to enable businesses to build no-code blockchains that launch in minutes, the creation of the GoGoPool, which will reduce the cost of  a validator node, and the transition of the Avalanche X-Chain to the blockchain data structure to smooth the way to future exchange and asset integrations.

Avalanche DEX Volume and TVL

Source: Artemis XYZ as of 5/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

DeFi

MarketVectors Defi Leaders Index (MVDFLE) fell 9% in May as investors allocated to larger-cap coins amidst weaker overall price performance. Among constituents, UNI fell 3.5%, AAVE -7%, CRV -8%, MKR -9%, and YFI -19%. The total value locked (TVL) in DeFi fell slightly from $48.6B to $47.4B. This decrease can be attributed, in part, to the decline in the price of Ether (ETH), the primary collateral used in many DeFi protocols. As the price of ETH dipped, the overall TVL mirrored the trend.

One of the most developments in DeFi during May was the substantial rise in decentralized exchange volume compared to centralized exchanges. According to data from The Block, decentralized exchanges accounted for only 14.1% of crypto volume in April. However, they witnessed a significant surge in May, capturing just under 22% of the total volume. This shift was driven by a decline of approximately 30% in centralized exchange volumes, juxtaposed with a growth of around 10% in decentralized exchange volume. The increase in volume was mainly captured by PancakeSwap, which saw an 87% increase in volume this month. Despite the volume growth, the price of PancakeSwap’s governance token, CAKE, fell 36% in May.

DEX % of Crypto Spot Volume

Source: The Block as of 6/1/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

Lending rates in DeFi remained stagnant throughout the month, with the average stablecoin borrow APR hovering around 3.5%. Despite introducing new decentralized stablecoins, their development has not reached a level catalyzing meaningful increases in leverage across the space. This is primarily because these teams have intentionally limited the size of their initial products as a precautionary measure. For instance, Curve's crvUSD recorded $8.77 million in open loans at a 4.99% APR on $12.93 million of sfrxETH collateral. Similarly, Maker's newly released Spark protocol attracted just over $10 million of wstETH collateral and enabled $5.1 million in loans. As these protocols mature, they are expected to raise deposit caps and incorporate additional collateral types, thereby fostering wider adoption.

One emerging trend we monitor in the DeFi market is the release of liquid-staked ETH-backed stablecoins. This innovation essentially creates a self-repaying loan for investors, as the staked ETH generates yield above that which the investor is paying for their loan. With the growth of liquidity and increased confidence in the peg-resilience of liquid-staked ETH tokens, we think this trend may gain further adoption. We see Yearn (YFI) as one of the best protocols for building interest-bearing collateral due to its unique design. The project’s forthcoming yETH vault could capture a significant share of the liquid-staked ETH lending market. A forthcoming blog post will explain this thesis more fully.

Metaverse & NFTs

Metaverse tokens lagged severely in May, with the MarketVectors media & entertainment leaders index down 17% and little user traction in most of the projects we track. Leading metaverse tokens experienced notable percent changes in May as APE declined by nearly 20%, MANA dropped by 13.2%, and SAND witnessed a decrease of 5.4%. Usership of the top metaverse platforms remained relatively stagnant throughout the month, indicating the need for further catalysts to drive growth and engagement. On the other hand, Apple's entry into the metaverse space with its upcoming headset has the potential to be a significant catalyst. As the release of Apple's headset draws near, interest in augmented reality (AR) and virtual reality (VR) has re-emerged, and this anticipation could reignite investors' desire to gain exposure to metaverse tokens once again. Apple's recent announcement, encouraging creators to prepare for building new worlds, has reinvigorated metaverse enthusiasts online and, if their product lives up to the rumors, could revive the “going to work in the metaverse” dream.

Among gaming projects, Illuvium (ILV) released its highly anticipated private beta 2, introducing a range of new features that sparked some renewed investor interest. ILV rallied off its mid-month low but still ended the month -3% with no significant increase in NFT trading volumes. We have been monitoring the development of this project for over a year now. While determining its viability is hard to make pre-release, the progress and thoughtfulness that we have seen from the team so far are impressive.

Overall, NFT sales volume rose 4% in May to $730M from $700M in April. Ethereum maintained its lead with $395 million, Bitcoin followed closely with $192 million, while Solana enabled $44 million in NFT sales volume. These figures highlight the continued dominance of Ethereum in the NFT market and signify the increasing interest and adoption of other blockchain platforms, specifically Bitcoin.

May NFT Sales by Blockchain

Source: VanEck, Cryptoslam! as of 6/1/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

However, the real standout was the booming NFT lending scene, with Blur’s Blend leading the way. Blend recorded over $335M in borrow volume and $130M in loan repayment volume. Blend's borrows accounted for about 80% of the ETH borrowed on NFT collateral in May. This surge in NFT lending showcases the increasing demand for leveraging NFT assets to unlock liquidity and create new financialization opportunities. In a move to compete with the existing NFT lending platforms, especially Blend, Binance announced the development of its own NFT lending marketplace. The platform, launched at the end of May, provides users with an alternative option for utilizing NFT collateral. Binance's entry into the market adds an exciting layer of centralized competition and is expected to bring further innovation and accessibility to the NFT lending space. Specifically, the cost and success of Binance’s user incentivization should provide interesting data compared to Blur’s airdropped rewards method.

Blend: First Month Results

Source: Dune: @ahkek, VanEck as of 5/29/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities named herein.

The conclusion of the month brought news of Kellogg's potential expansion efforts into the metaverse, as the renowned American cereal giant filed a dozen trademarks for its portfolio of brands. Documents revealed that Kellogg's has strategic plans to utilize its intellectual property by creating branded NFTs. This move signifies Kellogg's recognition of the growing significance of the metaverse and its intention to leverage its brand assets within this emerging digital landscape.

Overall, the Metaverse & NFT market remains highly dynamic, with Blend's success in NFT lending and Binance's entry into the space demonstrating the industry's drive for innovation and accessibility. And while Ethereum continues to lead in sales volume, other platforms like Bitcoin are carving their own paths in the NFT landscape. We are hopeful that Fortune 500 companies like Kellogg and Apple will eventually catalyze mass adoption of NFTs as a direct-to-consumer loyalty protocol or B2B as a ticket to unlock subscriptions and other services. Ethereum upgrades, such as account abstraction, should help unlock this utility. On the other hand, most gaming & metaverse tokens are plagued by lackluster user traction and still-inflated valuations. We are on the lookout for users before deploying more aggressively into this space.

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Before any further confusion commences, LSD stands for Liquid Staking Derivative. LSDs are derivatives based on staked tokens (such as ETH) but are liquid, unlike staked tokens. In exchange, LSDs yield only partial staking rewards to compensate for the increased risk of the LSD issuer. The tokens behind projects like Lido Finance  and Rocket Pool have soared over the last few months. The reason? Ethereum developers have rolled up their sleeves for a key upgrade to the network that happened back in March 2023: Shapella (Shanghai + Capella) .

But first, what are LSDs and why are they so hyped? Liquid staking derivatives (LSDs) like Lido Finance, Ankr and Rocket Pool have emerged as one of the hottest new trends in the DeFi world. They enable investors to maximize their earnings potential by validating transactions on the Ethereum network without giving up liquidity. LSDs are the tokens produced by centralized services or DeFi protocols. The LSDs pool investor funds until they're big enough to meet the 32 ETH requirement for the pool to run a node by itself. The earnings generated from the validator node is then shared between participants and the LSD platform.

What does that have to do with Ethereum’s Shanghai update?

Until recently, many investors have been reluctant to contribute to Ethereum's security or participate in staking ventures due to the uncertainty about when and how funds can be un-staked. When funds are staked, it usually means that funds are locked for a defined amount of time. Since the deployment of the Beacon Chain (the Proof-of-stake chain), no one could tell you exactly when you could get your funds back. Ethereum’s Shanghai upgrade is a hard fork that happened in March 2023. One of the biggest developments associated with the Shanghai Upgrade is that it enabled stakers and validators to withdraw assets from the Beacon Chain.

Shanghai Aftermath

According to an industry report by Coingecko: “As of April 30, 2023, an all-time high of 19.2 million ether (ETH) has been staked. This represented a 24.2% increase from the end of 2022, which had 15.9 million ether staked.”. As of May 2023, more than 15% of all ETH is staked of which. Over 35.5% of the staked ETH is staked through LSD protocols, an increase of 19% compared to the staking ratio of the end of 2022. This historic performance is not an indicator of future results. The aftermath of the Shanghai Upgrade confirms that despite the fears of massive withdrawals, most Ethereum stakers continue staking and keep depositing more ETH into the Proof-of-Stake based blockchain. This is beneficial to the security of Ethereum’s network and its monetary policy.

Gold Moves Higher Heading Into May

Gold continued its trend higher in April. It reached a yearly high of $2,048 per ounce on 13 April, which coincided with the U.S. dollar’s (DXY Index)¹ low for the year. It then traded in a tight range at around the $2,000 level, pressured by a bounce back in the U.S. dollar in the second half of April. With the banking crisis “under control”, markets turned their attention to the U.S. Federal Reserve’s (Fed’s) next policy meeting, looking at current economic releases for clues. The monthly releases were quite mixed, maintaining market opaqueness. The Consumer Price Index (CPI)² reading for March did show inflation declining; however, Core CPI (CPI excluding food and energy items) was up 5.6% from a year ago, above the overall measure, which was up 5%. Meanwhile, the Core Personal Consumption Expenditures (PCE)³ reading, the Fed’s preferred inflation gauge, increased to 4.9% in the first quarter of 2023. Manufacturing and services Purchasing Managers Indexes (PMIs)⁴ in the U.S. surprised to the upside, while first quarter GDP for 2023 came in at 1.1%, well below expectations of 1.9%. Gold and the U.S. dollar fluctuated as market participants, and members of the Fed, assessed the data and expressed their views on monetary policy outcomes. Gold closed at $1,990 on 28 April, a $20.72 per ounce (1.05%) advance for the month.

Banking Crisis: Contained?

It is likely a bit too early to say whether the banking crisis is contained or over. The collapse and rescue of yet another bank, First Republic Bank, this past weekend, is clear evidence that risks remain. Once again, regulators intervened, and a more catastrophic failure was averted. However, it is another sign of the fragility of the global financial system at present. Even if this was the end of the banking turmoil, which appears unlikely, these recent developments bring to light the significant stress imposed on the economy by higher interest rates and certainly worsen and accelerate the chances of a recession or hard landing. It also makes it very clear that just like the banks, other sectors of the economy may be vulnerable, increasing uncertainty and volatility in the markets. This is supportive of gold prices.

With inflation significantly above the Fed’s target, the Fed is stuck between a rock and a hard place. The fight against inflation is clearly not over, but the Fed may be forced to stop its rate hiking program before another crisis develops somewhere else. Historically (think of the 70s), a stop-and-go approach to fighting elevated inflation has not been successful. Unfortunately, controlling inflation without causing significant damage to the economy may not be possible. A Bloomberg article quoted former treasury secretary Lawrence Summers saying that taming inflation will likely lead to a “meaningful” economic downturn.ⁱ Some estimate that the effects of the recent banking crisis may be equivalent to one or two 25 basis points rate hikes by the Fed, suggesting that even if the Fed pauses, worsening credit conditions will slow down the economy and cool inflation. This is speculative, of course, as there is no way to quantify these effects. But it does seem logical that lasting ramifications from banking sector turmoil may continue to impact the economy. “Under control?”, perhaps, “Contained?”, likely not yet.

Fed Pause Benefits Gold

Gold may be in a privileged position at present. A Fed pause raises a flag: the economy is so weak that the Fed is afraid of causing too much damage by increasing rates further; this is gold positive, both because a weak economy sends investors running to gold and because lower rates make gold more attractive to own. The longer-term implications of a Fed pause on inflation expectations could also support gold: will inflation remain elevated? Is there significant risk that it may accelerate again? Gold is considered a hedge against inflation and its historic performance in high inflation periods confirms this role.

Gold Historically Rallies in Periods of High Inflation

Gold nominal and real returns in US dollars as a function of annual inflation^*

^* As of 31 December 2022. Based on y-o-y changes in US dollars for 'gold': LMBA Gold Price PM and 'inflation': US CPI since January 1971.

Source: World Gold Council, Bloomberg, ICE. Data as of 31 December, 2022.

Furthermore, a Fed pause should lead to weakness in the U.S. dollar. The reversal of the strong dollar trend of 2022, we believe, should continue to be an important driver of gold prices in 2023. The U.S. debt ceiling debacle and mentions of a potential technical default as soon as June 1 weigh heavily on the dollar. Needless to say, an actual default would be disastrous. Diversification away from the U.S. dollar and into gold is a topic we have been covering recently in the context of record net purchases of gold by central banks in 2022, with continued strength into 2023. Coverage of the de-dollarization theme has picked up recently. A report by Bank of America highlights research that shows a series of gold technical patterns supporting gold prices in the range of $2,078 all the way to possibly $2,543 per ounce. In that same report, they point to fear of dollar debasement as another driver of gold demand, as other nations look to reduce their reliance on the U.S. dollar by transacting in other currencies.

Everyone is Talking Down the Dollar

Source: BofA ETF Research, Bloomberg.

Global De-Dollarization

Shifting the U.S. dollar’s dominance as the world’s currency to other currencies, if it happens, is obviously something that would take a long time. However, de-dollarization efforts around the world today are without a doubt negative for the U.S. dollar. A weaker dollar alone is supportive of gold prices. In addition, because gold is so underheld, even a small shift in investment away from the U.S. dollar and into gold would lead to significantly higher demand for gold. Gold have been chosen by central banks; others may follow.

Source: https://insights.glassnode.com/bitcoin-supply-distribution-revisited/. Past performance is no guarantee of future results

One of the key activities of an on-chain analyst is to keep track of those with large holdings, also known as whales. The full spectrum of sea creatures can be found in the definition of this on-chain metric. Unlike traditional finance, public ledgers such as Bitcoin and Ethereum are fully transparent in terms of how many coins rely on a specific address, how much value is transacted and what fee was paid to the validator. This information helps on-chain analysts to better understand the dynamics of the market at grand scale. What does the composition tell us exactly? As years have passed by, the number of shrimps, crabs and octopus have significantly increased their share of the Bitcoin distribution. This is a good sign of decentralization of wealth and increases the security as a universal monetary system. Arguably, there is still a long way to go if you consider the median amount of cash an adult holds (e.g. Americans under 35 is just $3,240, according to MarketWatch). We expect the number of addresses with less than 1 BTC (shrimps) to continue to increase as time goes by.

Definition:

Account Sizes:

Shrimps (<1 BTC)

Crab (1-10 BTC)

Octopus (10-50 BTC)

Fish (50-100 BTC)

Dolphin (100-500 BTC)

Shark (500-1,000 BTC)

Whale (1,000-5,000 BTC)

Humpback (>5,000 BTC)

Ethereum versus Bitcoin Adoption: Active Address Perspective

Source: https://www.theblock.co/data/on-chain-metrics/comparison-bitcoin-ethereum. Past performance is no guarantee of future results

The number of unique addresses that were active in the network either as a sender or receiver. Only addresses that were active in successful transactions are counted. Chart uses 7-day moving average.

Source: https://www.theblock.co/data/on-chain-metrics/comparison-bitcoin-ethereum. Past performance is no guarantee of future results

The number of active addresses is one of the many possible adoption metrics available to an on-chain analyst. It provides an intuitive and simple method of comparing the adoption across multiple blockchains. For example, the ratio of the Bitcoin/Ethereum marketcap is approximately 2.36 (May 2023) while the active address ratio is closer to 2. This metric suggests that based on active addresses alone, Ethereum (ETH) is undervalued compared to Bitcoin (BTC). However, the number of new addresses paints an opposite picture.

Alternatively, one could observe that Ethereum has more active addresses per new address created. This could be explained by their core values, Bitcoin is usually described as a store of value (i.e. it does not need to be active) while Ethereum is usually described as a smart contract platform where ETH is constantly on the move.

The big question is of course whether this is a lagging indicator or a leading indicator when it comes to historical performance, not just in terms of price performance but also other performance metrics such as trading volume or number of transactions processed by the network. I will leave this as an exercise to the reader. Keep in mind: historical performance is not an indicator for future results.

The number of unique addresses that appeared for the first time in a transaction of the native coin in the network.

What are Airdrops?

Airdrops, as the name suggests, involve the free distribution of tokens to a particular set of users, often existing holders of a specific cryptocurrency. This distribution can be based on various criteria, such as wallet addresses, transaction history, or community participation. Airdrops are gaining popularity due to several factors, including regulatory crackdowns on ICOs and changing dynamics in the crypto market.

In March 2014, Iceland launched its Auroracoin as an experiment to potentially replace the Icelandic Króna and Bitcoin. The first airdrop in crypto history saw each citizen receive 31.8 AUR, then 318 coins, and finally, 636 coins. The reasoning behind this and subsequent airdrops was to create an initial market and promote the token. The airdrop strategy has since been used by various crypto projects to raise awareness, build communities, and distribute tokens. This involves sending free tokens to holders of a specific cryptocurrency, incentivizing them to learn about and invest in the new project.

Airdrops to Replace ICOs?

One of the key reasons for the rise of airdrops is the regulatory scrutiny on ICOs. ICOs were previously used by many projects to raise funds by offering tokens to investors in exchange for cryptocurrency or fiat investments. However, due to increasing regulatory scrutiny and concerns around fraud and scams, many jurisdictions have imposed stricter regulations on ICOs. This makes ICOs a more challenging and costly option for fundraising. In contrast, airdrops provide a way for projects to distribute tokens without conducting a formal sale, thus bypassing the regulatory hurdles associated with ICOs.

The other reason for the rise of airdrops is the changing dynamics of the crypto market. With the maturation of the industry, investors and users have become more discerning. Simply raising funds through an ICO is no longer sufficient. Airdrops provide an opportunity for projects to incentivize users, reward early adopters, and create a strong community around their project. By distributing tokens for free, projects can generate interest, engagement, and loyalty among users, which can be valuable in the long run.

In addition to phishing and hacking risk, it is important to note that airdrops can also have tax and legal implications. Depending on the country you reside in, airdrops might be considered taxable income. Thus, failing to report them could result in penalties and fines.

Tokenomics and token distributions are also critical factors to consider when evaluating a crypto project. Tokenomics refers to the economic system of a cryptocurrency. This includes the token's supply, distribution and utility. A well-designed tokenomics model can create incentives for users to hold, use, and participate in the ecosystem. This can drive demand and value for the token. Token distribution, on the other hand, refers to how the tokens are allocated and distributed among stakeholders Stakeholders include team members, advisors, investors, and the community. Some projects opt for a fully community owned token. Others prefer to keep significant portions reserved for early backers, team members and treasuries to ensure long term sustainability of the project. In reality, we don’t know which model is better as each comes with its own advantages and drawbacks.

Projects that have a well-thought-out tokenomics model and a transparent token distribution plan are in my opinion more likely to succeed in the long run. Airdrops can help significantly as an awareness campaign, everybody likes a free lunch. While it is not entirely free (users are expected to contribute to the network activity or test software), it definitely turns heads on popular crypto media channels such as Twitter, Discord and Telegram.

Supply distribution refers to how a token's total supply is distributed among different entities. This distribution must be fair, or it can lead to centralization, manipulation, and market volatility. From time to time, a new project or layer-1 comes by (this time it was SUI that triggered me to write this story), which becomes a textbook example of how not to distribute tokens. 

Imagine you’re in line for pizza, and you see that the people in front of you are getting a slice for just $1. Now you come up to the counter and they charge you $10 for the same slice! I know most people would be quite upset about this, but unfortunately, this is the reality that both traditional finance, and crypto live in. I have always been a strong supporter of crypto. Not just for the sake of decentralization or self-custody, but also for the ability to offer the same financial opportunities regardless of who you are. I always like to say that everyone buys Bitcoin for the price they deserve. Relative to future generations acquiring you may be better off taking the chance to be an early adopter. I think this is especially relevant for layer 1 cryptocurrencies, which aim to be a universal currency on and beyond their open-source platform.

For many new tokens this analogy doesn’t work anymore, because token distributions and supply schedules have gotten a lot more complicated. Let’s use Sui (SUI) and Aptos (APT) as examples, both layer-1’s well known for being spin-offs of the failed Meta project “Diem”. A significant portion of tokens are reserved for the team, venture capital investors, early contributors and test net participants (largely comprising of VCs). It is only afterwards that the token is introduced to public sales, This can be done in a variety of ways, such as through investment tiers or lock drops. What does the initial token distribution look like for some well-known cryptocurrencies?

Initial Token Distributions for the Top 5 Blockchains

Source: Messari, data as of 30/04/2023.

Clearly, there is not just one recipe for success as all the top blockchain networks and their tokens are relatively successful compared to their competitors further down the line. Ethereum has a strong and community-driven development team which makes up for the lack of incentives. Solana has high incentives to build and use the technology but it lacks in terms of community relative to Ethereum. 

For SUI, half the supply of the tokens is allocated to the Community Reserve—a fund managed by the Sui Foundation. This is significantly more than what we have seen in previous projects. Most of the remaining tokens will be allocated to those who contributed to the project, and 14% will be allocated to investors according to the Sui Foundation. SUI is meant to be a currency on the Sui network, but potentially outside of the network as well. Imagine if the ECB would do the same when developing a Digital Euro, it would create some social unrest. I know that this isn’t an entirely fair comparison because tokens are also used as a funding method and for their utility on the network. Perhaps projects should find other ways to reward team members, early contributors and the community as opposed to diluting the supply of the network’s currency.

Next, we should look at the supply distribution schedule. This is how the token supply is released over time, which can be done in various ways, including pre-mining, airdrops and lock drops. Pre-mining can give early investors and the project team an unfair advantage. Airdrops can artificially inflate the perceived value of a token, leading to market manipulation. Seed investments from venture capitalists can be a good sign, but they can also raise funds without selling tokens to the public. In most recent token drops, not all tokens are released at the time of sale. A significant portion of tokens are vested (essentially meaning that they are locked), and a portion of tokens become available periodically in a pre-programmed manner.

Investors should look for projects with a fair supply distribution that is diverse among different entities. This can help prevent centralization, market manipulation and create a sustainable ecosystem. Investors should also look for projects with a transparent supply distribution schedule that outlines how and when the token supply will be released over time. This transparency helps investors understand a project's long-term viability and gain confidence in its potential for success.

In conclusion, examining a token's supply distribution and supply distribution schedule is a useful way to evaluate a project's long-term viability. It ensures that a project is fairly launched and that its founders and developers are incentivized to see it through to completion. So, let's hope for a pizza party where everyone gets a fair share of the pizza. As always, investors should do their research before investing in any project. 

Increasingly commercially-available smart-home devices are enabling people to age in their homes, while providing their caregivers (family and professionals) peace of mind that help is near should anything happen.

Smart Home Hubs Support Aging in Place

Aging-in-place technology doesn’t have to be complex. For example, movement sensors in combination with smart lighting can illuminate dark hallways and entryways. Smart plugs with timers can ensure that heaters or fans are turned on and off at appropriate times of day. And smart doorbells provide a feeling of safety by knowing who is at the door.

Smart home hubs, such as the Amazon Echo, Google Nest, or Samsung SmartThings, can connect the sensors mentioned above, helping elderly users to use voice commands to turn the lights on or off, but they can also assist to make a phone call, set reminders (e.g. to take medication), or play music or video. According to the 2023 AARP Tech Trends and Adults 50+ report², one in three 50+ adults in the US now owns a home assistant and 60% of them use it daily.

Most 50+ Owners of Home Assistants Use Them Daily²

Frequency of using home assistants among those 50+ adults who own one (2022)

Moreover, these hubs also cater to ageing people and caregivers with specific services. Amazon, for instance, created the remote caregiving subscription service Alexa Together³ that – in addition to common Alexa services, such as reminders and calls – lets caregivers see activity feeds (e.g. when someone gets up and starts to interact with Alexa). In the case of an injury or fall, the resident can ask Alexa to call for help.

Smart phones and watches increasingly include features to support ageing in place. Smart watches from Apple and Samsung, for example, include an emergency button and accident detection. They also warn people about abnormal heart rates. The iPhone, meanwhile, can detect an unsteady gait that might later lead to a fall and warn increasing risk⁴.

More Companies Enter the Aging-in-Place Market

Caregivers and healthcare providers are increasingly aware of, and more open to, the use of smart home technology. AARP found in its 2023 survey² that more than half of caregivers are very interested in using tech that helps them to perform their tasks. Healthcare providers, meanwhile, are using trials to test available technology that can give caregivers more peace of mind.

More Than Half of Caregivers Are Very Interested in Using Technology to Help With Caregiving Needs²

Interest in using technology to help with caregiving needs among those currently providing unpaid adult care by age range (2022)

In Canada, for example, a trial recently took place for people with dementia. Researchers created a test environment using commercially available equipment to create a monitoring service focused on caregivers. The study found that caregiving participants reported lower levels of anxiety and depression⁵.

The Canadian project was such a success that several participants asked to keep the equipment and a separate company – Esprit.ai – took over the installation of smart home systems, using the study’s setup. Esprit.ai is one of several companies that cater to the aging-in-place sub-group of smart home services. Their deep understanding of the needs of elderly people and the capabilities of technology enables them to create specific smart home setups.

Such a setup could include a pressure sensor that sends an alert when someone gets out of bed, connecting it to movement sensors to light up hallways to minimize the risk of stumbling. When someone is safely back in bed, the sensor tells the system to switch off the lights again.

Overcoming Adoption Barriers

However, many older people have trouble using the latest technology. AARP² found that many of them find using today’s technology challenging due to complex designs, underlining the importance of making technology easy to use. Thankfully, elderly homeowners often get help from younger people (aka their (grand) children) when choosing and setting up smart home technology.

Despite this adoption barrier, smart home technology has a lot of potential to help people age comfortably. Homeowners, caregivers and smart home companies are all exploring the space, resulting in more solutions and services coming to the market.

In recent times investors have needed strong nerves. Take 2022: European equities reversed much of the previous year’s gains, with the MSCI Europe Index falling 11.86% (in euro).

I started investing as a student over 30 years ago, since when I been fortunate enough to benefit from the long equity bull market but have also sweated through severe bouts of market volatility. Think of the dot-com stock market crash in 2000; the global financial crisis (GFC) of 2008-2009; the Covid-19 pandemic of 2020.

Volatility is an integral part of investing. You can’t make gains over the long term without some nervous moments. It’s also a personal thing: you need to decide how much volatility you can bear, in the knowledge that the most volatile investments are generally (not always) the ones that bring the greatest gains over longer periods of time.

It helps to understand volatility. The most common way to measure it is through standard deviation. This is a statistic that measures the degree of variation of the investment’s returns compared to its average returns. The more volatile the investment, the more it deviates from the average.

From Statistics to Sleepless Nights

Looking back over the last 15 years of financial data gives a picture of the volatility of different types of investment. You can see that real estate equities have been the most volatile investments with an annualised standard deviation of 19.3% and equities as a whole have recorded 17.3%. Meanwhile, bonds normally have a far lower standard deviation. In other words, bonds would have given you far fewer sleepless night but at the cost of lower expected capital gains.

You can also look at the chart below to see how these different types of investment have reacted to the market shocks of the past 15 years, from the GFC in 2008 to the pandemic in 2020.

Interestingly, volatility characteristics are fairly persistent. So if a type of investment has performed with a certain level of volatility in the past, it’s likely to continue to do so in the future.

Matching Volatility to Your Nerves

You could tailor volatility to your own appetite for risk. One way of finessing this is to mix different asset classes, dialling up or down the levels of volatility through diversification across different types of investment. Often known as the only free lunch in investing, diversification lies at the heart of how big institutional investors adjust levels of volatility to their own risk appetites. It works because different types of asset generally have low correlations to each other, meaning they mainly don’t all fall at the same time. As with anything, though, there are exceptions to this rule, such as in 2022’s fall in financial markets, when equities and bonds declined together.

Our multi-asset ETFs illustrate how you can use diversification – in this case through differing blends of equities, real estate equities and bonds – and how it has tended to work over long periods, even if this cannot be guaranteed for the future. Going back over the 14 years since the launch of these funds in 2009, the chart below shows how the volatility – of standard deviation – of their prices varies from one to the next. However, it’s also worth noting that the most volatile also has the highest returns. Conservative has an annualised return of 2.9%, Balanced 4.0% and Growth 5.1%.¹

Ultimately, normally the appetite for risk-balance comes with the appetite for returns. Young people, who normally have a long-term investment horizon, usually have the risk capacity to weather more volatility and ride out the crises in the quest for longer-term gains. Older people, who might need to cash in their investments relatively soon, probably want to start trimming back risk.

Speaking personally, I am about to turn 52, have seven children and two grandchildren. I invest across our range of VanEck ETFs, but have less nerve than I did as a 20-year old student with no ties.

• Wishful thinking from the IMF. The IMF expects slowing global growth and slowing global inflation to eventually return developed market interest rates down to levels that make sovereign debt sustainable. Any other scenario is unthinkable.
• Wishful thinking from markets. Banking problems in the US and Europe result in slower credit growth, but are otherwise contained; markets can be saved by validating the interest rate cuts currently priced. Unfortunately, growth and inflation data do not corroborate this scenario.
• Wishful thinking on US power relative to China. China does not want to play along with the IMF’s debt restructuring agenda despite the invention of new forums (the Common Framework and the Global Sovereign Debt Roundtable) to coerce it to do so. China has a strong hand, both economically and geopolitically, and the US does not have a good strategic response.
• Hope in EM. There are good reasons for EM debt investors to be optimistic: countries with high real interest rates, declining inflation and strong growth outlooks buoyed by China’s reopening and commodity prices. The US may default on its ballooning debt stock, but this isn’t an issue for most emerging markets that have low debt and modest fiscal deficits.

There was a lot of wishful thinking among policy makers and market participants. The IMF’s April World Economic Outlook paints a picture of still-high global inflation in 2023 of 7% that will only converge to inflation targets in most countries by 2025. The disinflation process is driven by tight monetary policy and a high unemployment rate, but also by lower oil prices. These three assumptions are all wishful thinking. Monetary policy in developed markets is hardly tight with ex-post real rates negative and ex-ante real rates barely positive. Additionally, developed market monetary policy is being effectively neutered by the extraordinary actions of central banks to shield both markets and the real economy from any pain. Labor markets remain extremely tight, not only due to strong demand but also by a shortage of labor supply. Oil prices are buoyed by strong global demand, aided by robust tourism from China and an OPEC that is assertive in its desire to keep oil markets tight.

Policy makers have good reason to wish for inflation to return quickly to target and for interest rates to decline back to pre-COVID levels due to one key initial condition: excessive debt burdens. The IMF dedicates Chapter 2 of the World Economic Outlook to the natural real rate of interest (the interest rate that neither stimulates nor contracts the economy, and the real rate assumption underpinning the IMF’s debt sustainability analyses). Debt burdens in advanced economies are unsustainable at higher real interest rates and there is no political will to make the necessary fiscal and structural adjustments. Since the IMF cannot say that its major shareholders are not solvent, the baseline assumption is for interest rates to decline to levels that solve the problem. Any other conclusion would be sacrilege. In fact, the need for global capital to finance investment in the green transition, combined with ageing populations (which tend to consume more than save) will likely raise the global cost of capital for a generation.

There was a lot of hope that a contained banking crisis would solve investors’ inflation and Federal Reserve concerns. The failure of Silicon Valley Bank exposed to the US consumer major inconsistencies in central bank policy and regulation that have led depositors to slowly exit zero interest bank deposits in exchange for US Treasury bills yielding over 4%. The “hope” is that the decline in funding to the banking sector will lead to a decline in lending and a gradual contraction in economic growth. Any bank failures along the way to this desirable soft landing will be contained by extraordinary policy measures by the central bank. The modest growth slowdown will help inflation moderate and the Fed will not need to hike more. In this twisted logic, banking failures lead to goldilocks for markets. But by removing any pain from the economy and market, monetary policy loses effectiveness, while the labor market remains tight and inflation sticky. The Fed will need to hike more to compensate, and the market is not pricing these additional rate hikes.

There was a lot of concern about the looming US debt ceiling deadline and a firm belief in last-minute resolutions. The market expects politicians to do the right thing for the economy at the last minute, just like in 2011. The problem is that House Speaker McCarthy made extraordinary concessions to secure his position last year, including a provision that allows for any one member to ask for a vote of no confidence. Several congressmen from the far-right wing of the GOP will only vote to increase the debt ceiling if the budget is balanced. If McCarthy were to bring any compromise legislation to increase the debt ceiling up for a vote, the publicity that comes with forcing a default could be more valuable for some of his key supporters than “doing the right thing” for the economy. The US Treasury will soon provide an update of when it expects to not have enough cash to meet all obligations and if that date is not moved past mid-June due to favorable tax receipts, the market will start to worry. Many speakers viewed the risk of default as greater than 10%. Before defaulting, the US Treasury would cut other expenditures and the immediate fiscal contraction would push the economy into a deep recession. The market implications of an actual default would be even more severe as many institutional investors can not own defaulted debt and there would be panicked selling.

There was a palpable frustration with China’s unwillingness to restructure bilateral sovereign debt. There was talk of a lost decade for debtors stuck in limbo because of China. IMF programs cannot move forward without an agreement from China and private sector investment needs to know how capital will be treated before moving forward. The Paris Club framework took time to develop and there is hope that, as the West better understands China’s needs, debt relief agreements that are acceptable to all creditors can be achieved. China is averse to principal haircuts but comparable treatment in net present value terms using maturity extensions is a potential solution. However, China did a lot of its lending to emerging markets for geopolitical influence, specifically to secure access to critical commodities or trade routes, and restructuring its debt gives China’s influence away. The Zambia debt restructuring, if and when it arrives, will show the path forward. Zambia has been the perfect student for the IMF, putting the onus to forgive debt squarely on China.

There was a lot of discussion of the US decoupling its trade from China, but little evidence of it. For national security purposes it makes sense for the US to build supply chains that rely on domestic production or production from close allies. If China were to invade Taiwan, supplies of critical imports such as pharmaceuticals and even some inputs into military aircraft would be at risk. However, China’s economy is too large to avoid and it is profoundly expensive to divest from existing production facilities. Even when building new facilities in neighboring countries, a Chinese firm often has some value-added role. The most recent trade data showed the China trade surplus with the US reaching a new record high.

From China’s perspective, there are also national security considerations to make regarding its investments in the US. This other side of the coin was surprisingly not discussed at the IMF. China’s record US dollar trade surplus needs to be invested somewhere and the one place it is most clearly not being invested is US Treasuries. China watched as the US froze Russia’s access to its own holdings of US dollar denominated debt. If China is heading toward conflict with the US, it is simple risk management to decrease its exposure to assets the US could seize first.

There was hope that Japan would finally exit yield curve control and that it would be positive for markets. Japanese growth is forecasted at 1.3% for 2023, which is above potential growth of 0.5% and the output gap should close this year. The labor market is tight and with inflation above 3%, the Bank of Japan’s (BoJ) extremely accommodative stance risks pushing inflation even higher. The market expects the BoJ to drop yield curve control this year. The yen is cheap, and when interest rates on Japanese government bonds (JGBs) rise without the BoJ’s intervention, the yen could appreciate substantially. However, the yen’s gain is the US dollar credit market’s loss as Japanese investors’ appetite for US credit should decline substantially. China and Japan are the two largest foreign holders of US Treasuries; without their purchases, more US Treasuries will need to be purchased domestically and this should raise the cost of capital for the US private sector.

The Ukraine-Russia war and ESG were out of the limelight. Frozen conflict was the collective wisdom of how the war would end. There was some skepticism about starting reconstruction while bombing was still taking place. Ukraine sessions were less well attended than in the past as investor focus has shifted.

ESG was also less discussed and where it was, the conversation was more balanced. There were complaints from the rest of the world that the US Inflation Reduction Act was making green investment less competitive in their own country and that the legislation is not consistent with World Trade Organization (WTO) rules.

There was a lot of investor pessimism due to specific bad credit investments and underperformance. Egypt stood out as having been a consensus favorite overweight by investors that had performed poorly and was now a source of angst. Egypt borrowed an unsustainable amount of external debt while under an IMF program and yet it has been unable to reduce its external financing needs meaningfully. The currency is under large devaluation pressure, but it has no policy anchor as real rates remain extremely negative and there is no one willing to bring new capital onshore. There are major maturities coming due towards the end of the year that could catalyze a default.

Aside from Egypt, many Sub-Saharan Africa sovereigns along with Ecuador, Tunisia, and Pakistan have also disappointed. But the impact on the indices is not material. The performance of the broader EM asset class has been stellar with the GBI-EM up over 5.2% and the EMBIG up 1.9%. Given the strong performance, one would expect investors to be more upbeat. However, the majority are underperforming their benchmarks as they are overallocated to high yield, which has underperformed and under allocated to EM local debt which has outperformed. The outlook for EM local debt is very positive as EM investors view it as being the most likely top performing EM asset class this year and they are underinvested.

Most of Latin America hiked early and high enough to set inflation on a declining path, while also benefiting from improving terms of trade due to high commodity prices. In Mexico, high real interest rates and the near shoring narrative have attracted a lot of hot money inflows. However, the Mexican peso is expensive and foreign direct investment (FDI) has not lived up to expectations, leaving the currency vulnerable to a downturn in the US economy. The Chilean central bank was more hawkish than market expectations in terms of how long it would keep rates high and when it would undo its FX intervention program as domestic consumption remains uncomfortably strong. Colombia’s high growth and high deficits look to be a thing of the past as central bank policy and responsible government policy cool the economy. There is a good chance the Peruvian government survives until 2026 as the population has grown tired of changing its government every year, which is welcome news as the country benefits from higher copper prices and a credible central bank. The Brazilian central bank knows real interest rates are too high, but it is afraid to give in to the Lula administration’s pressure for fear of upsetting inflation expectations. The Lula administration is trying to say just enough of the right thing to get the central bank to cut rates without affecting growth too much. The two are still figuring out their relationship, but the market has become accustomed to this dance.

Emerging Europe was harder hit by the fuel price shock emanating from the Russia-Ukraine war and inflation there remains uncomfortably high. The lack of consistency between Hungary’s fiscal, monetary, and regulatory policies could mean higher for longer inflation, while the timing of European Union (EU) fund disbursements remains uncertain. Poland’s monetary tightening has started to impact growth, but it remains to be seen whether this is enough to tame inflation. The labor market is structurally tight, and the fiscal gap is likely to widen further in the run up to the elections. Romania contrasts favorably due to its great relations with the EU, which paves the way for very large capital inflows. The key challenge is to address price pressures that go beyond base effect/energy, and stem from stronger GDP growth than in the rest of the region, pro-cyclical fiscal policy, and high real wages.

In contrast to Europe, the most Middle Eastern countries have modest inflation and strong external positions due to high commodity prices. UAE’s fundamental outlook remains very solid, supported by high oil prices, and authorities are using this opportunity to implement structural reforms to diversify the economy in the medium term, implement green transition, and the rest of the ambitious reform agenda for the post-hydrocarbon future. UAE is playing the geopolitical fragmentation card well, including partnerships with China and India. Qatar managed to avoid the World Cup host country curse with continued strong growth along side large fiscal and current account surpluses and debt on a declining trajectory.  

While Africa also benefits from strong commodity prices, excessive debt burdens and lack of affordable financing makes the outlook more challenging. The market is waiting for change to come in Nigeria where the incoming government has promised to raise the value added tax from 5% to 8% and to eliminate fuel subsidies. Still, there are no easy answers to the overvalued exchange rate and a new central bank governor has not yet been appointed. Mozambique’s authorities are working hard to keep the IMF program on track – and they’ve been successful so far – but security risks are non-trivial and hard to predict. The recent OPEC+ move to curb oil production is good news for Angola, albeit a longer-term outlook for the sector is not very optimistic. The government’s liability management operations eased near-term concerns for the country’s debt. Cote d’Ivoire’s relatively good performance in 2022 came at a cost of widening “twin” deficits (fiscal and current account), and the international reserves might have fallen more than desired. The significant upfront fiscal consolidation would be a huge improvement (both near term and structurally), as authorities are scheduled to have their IMF Board review in May. Morocco remains a solid macro story with a good track record in reforms, and it might soon join other countries in getting the IMF’s brand-new Resilience and Sustainability Trust (RST) facility.

Emerging Asia benefits from a China that is growing sharply due to a V-shaped consumption led post-COVID recovery. Thailand benefits the most from surging Chinese tourism, but other regional economies have seen their growth upgraded as well. Indonesia’s balance of payments is extremely strong with coal exports to China and nickel exports booming combined with surging FDI and portfolio inflows. The central bank is enjoying the FX strength and the lack of inflation pressures, though there is risk of food inflation if El Nino impacts rice crops adversely. The Philippines is the one ASEAN economy that remains overheated and the central bank has not yet taken forceful enough action. 2022 growth of 7.6% exceeded expectations and 2023 growth is forecasted to be near 6.5%. January inflation came in at 1%, which would be a 12% annualized rate, though the central bank forecasts inflation to slow to 6% for the full year.

What is AI?

AI, a field of computer science that focuses on creating intelligent machines capable of performing tasks without human intervention, has been rapidly advancing. With breakthroughs in machine learning, natural language processing, and data analytics, AI has found applications in various industries, including finance. Most recently, LLMs (large language models) such as ChatGPT (formally known as GPT3.5) have taken the world by storm. The cryptocurrency market, with its intricate algorithms, data-driven decision-making, and volatile nature, seems to be a perfect playground for AI.

How is AI Applied in Crypto?

One of the primary roles of AI in the crypto space is data analysis. Cryptocurrency markets generate massive amounts of data, including historical price data, trading volumes, social media sentiment, and on-chain data. Analyzing this data manually would be impractical, if not impossible by a single individual. This is where AI comes into the force. AI algorithms can analyze vast amounts of data in real time, identify patterns, and make predictions based on historical data, technical indicators, and market sentiment. This can assist traders and investors in making informed decisions, managing risks, and optimizing their trading strategies. One example enabling this use-case is The Graph (GRT) by indexation of blockchain data through subgraphs.

Another potential use-case of AI in crypto is fraud detection and security. The anonymous and decentralized nature of cryptocurrencies can attract fraudsters and scammers. AI can be employed to detect suspicious activities, track transactions, and identify potential fraudulent behaviours. For instance, AI algorithms can analyze transaction patterns, identify unusual activities that may indicate money laundering or other illicit activities, and raise alerts. This can help enhance the security and integrity of the cryptocurrency ecosystem and protect investors and users from fraud. This is especially interesting for decentralized applications such as Web3 and DeFi. For example, SingularityNET (AGIX), is a blockchain platform that allows anyone to build, share and monetize AI services for any application, including Web3 apps.

AI's Limitations

The biggest limitation is the major differences in the required infrastructure. AI requires mostly centralized infrastructure as every operation needs to be as fast as possible. AI requires billions if not trillions of calculations per second. This is why a crypto-native AI cannot exist, at least not in crypto’s current state. Cryptocurrency, as we know, is decentralized and primarily optimized for security and public access. This generally means much slower operations than what would be possible on centralized infrastructure. Besides limitations, AI in crypto also comes with risks that are often overlooked. AI is far from perfect, this means that AI could misinterpret data, make wrong decisions based on that data and missing cases of fraud or abuse. We see that complex large models like chatGPT are often confidently wrong, “hallucinate” and come up with sources that don’t exist. This presents a massive risk to users, especially when used in a financial setting like crypto.

The significance of the AI narrative in crypto is in my opinion heavily overestimated. In the past months, a handful of projects doing something with AI have skyrocketed due to the explosion of growth ignited by ChatGPT. Opportunities for AI that I am currently looking at are, for example, distributed ownership of AI models, multi-party computations to decentralize the execution of AI models and token incentive models to utilize users’ processing power to enable AI.

Several governments have been known to hoard cryptocurrencies, with varying reasons behind their actions. One primary reason is the potential for capital appreciation. Governments may also view cryptocurrencies as a hedge against inflation or currency devaluation, particularly in countries with unstable fiat currencies. Another reason governments hoard cryptocurrencies is to gain strategic advantages. Cryptocurrencies can enhance a government's technological capabilities and competitiveness in the digital economy.

So, what do governments do with their crypto holdings? The answer varies depending on the government's objectives. Some governments may hold cryptocurrencies as a long-term investment, similar to how they hold stocks or bonds. They may wait for the value of cryptocurrencies to appreciate further before deciding to sell or utilize them.

Other governments may choose to actively utilize cryptocurrencies for various purposes. For example, some governments have started accepting cryptocurrencies as a form of payment for taxes, fees, or government services. This can be seen as a way to promote adoption and integration of cryptocurrencies into the mainstream economy. Some governments may also utilize cryptocurrencies for remittances, international trade, or as a means of circumventing traditional banking systems.

However, governments that do not see cryptocurrencies as a viable option or face regulatory challenges may choose to offload their crypto holdings. Governments may sell their cryptocurrencies on public exchanges, private OTC markets, or through auctions. It's important to note that the offloading of cryptocurrencies by governments can impact the market. Large sell-offs of cryptocurrencies by governments or other entities can affect the price and volatility of the market, potentially leading to market disruptions and impacting investor sentiment. For example, the US government holds a significant amount of Bitcoin by seizing operations of Silk Road, the infamous dark web marketplace. The US government currently holds over 1.06% of the circulating Bitcoin supply. Occasionally, the Bitcoin held by the US government is on the move, startling the market with the fear that a liquidation may follow.

The relationship between governments and crypto is complex, with governments making diverse decisions based on their objectives and the evolving landscape of the crypto market. The top holdings of crypto by governments are mostly derived from seized assets. This may change when regulation around trading, usage and holding of crypto is formalized.

When the Lawrence Livermore National Laboratory’s scientists confirmed in December 2022 that they had achieved energy gain through a nuclear fusion reaction¹, they made history. This breakthrough focused attention on a technology that has the potential to provide almost limitless zero-carbon power.

Once a nuclear fusion reactor is connected to the grid, which is still at least a decade away, it could transform the drive for decarbonization. But nearer term technological developments, too, are leading to a new era of safer, cheaper and more widely used nuclear power.

Coming at a time when the world is urgently seeking ways to decarbonize power generation, these developments are leading to a renaissance for the nuclear industry. Nuclear power is now seen as part of the net-zero solution, providing a base load of power to balance out renewables when the wind does not blow and the sun does not shine.

This sudden transformation of the nuclear industry’s prospects led us to develop a VanEck Uranium and Nuclear Technologies ETF earlier this year. While nuclear fusion is unlikely to affect the profitability of the uranium miners and companies developing nuclear technologies any time soon, evidently their prospects are looking brighter.

Part of the net-zero energy mix

Indeed, the EU decided in 2022 to include nuclear power in its taxonomy of sustainable activities, effectively giving it a green light as part of Europe’s energy mix. Against that backdrop, European countries such as France and the Netherlands have plans for new nuclear power stations. So, too, do the two biggest developing economies: China and India.

To see why, look at the tiny greenhouse gas footprint of a nuclear power plant. As the chart below shows, it’s similar to solar and wind, far less than that of coal, oil and gas plants.

¹ Source: Financial Times. https://www.ft.com/content/65e8f125-5985-4aa8-a027-0c9769e764ad

Safer and more efficient

The industry is becoming safer, seeking to put the disasters of Chernobyl in 1986 and Fukushima in 2011 behind it, although many of the older plants remain in action so risk remains. The new liquid-metal cooled and gas-cooled reactors are safer than their water-cooled predecessors. What’s more, new methods for treating nuclear waste reduce the time that they are dangerously radioactive.

Nuclear power is also becoming more flexible and cheaper. For instance, small modular reactors can be built in a factory and then assembled on site. With a far lower cost of construction, nuclear energy is becoming more affordable.

Yet despite all of these developments, nuclear is part of the low-carbon energy future that’s often overlooked by investors in renewable energy. That’s likely to change as new power stations start to be built and further breakthroughs in the wonderful science of nuclear fusion attract attention to its possibilities. And those who want to gain diversified exposure to the sector can do so through our new Nuclear ETF. Keep in mind that investing in equities is risky.

According to the annual cybersecurity report¹ from CUJO AI, over 67% of home networks are exposed to at least one online threat every month. Computers and internet protocol cameras are particularly at risk (see graph), but storage and video devices like digital video recorders and smart TVs are also vulnerable to unauthorized access, malware, data breaches or other cyber-attacks.

Distribution of Threats by Device Type

Source: CUJO AI.²

Smart Home Security Can Be a Struggle

Preventing cyber-attacks involves a multi-layered approach that addresses potential vulnerabilities at every level (hardware, network, application), as well as educating home owners about the risks they face. Keeping up with basic network security measures (e.g. firewall and anti-virus software) goes a long way to prevent attacks, as does using strong passwords and updating device firmware.

Unfortunately, most homeowners lack the technical expertise to protect their devices and home networks; some are unaware that they need to. Even something as inconspicuous as a smart switch can be a security risk, allowing hackers access to a home network and all the associated (personal) information on it. Hackers use that information for burglary, identity theft and other forms of privacy violations.

As the World Economic Forum noted in a recent article³, security weaknesses often occur. Some devices, for example, are released with outdated and unsupported versions of operating systems and no options to update them. According to CUJO AI⁴, a provider of AI-powered security for the home, such devices are most at risk, with hackers using automated scripts and specialized search engines to scan for such devices and attack when they find one.

The Market Is Simplifying Security

Fortunately, governments, device manufacturers, internet service providers (ISPs) and employers are acting to address the increasing threat. They are helping people to make their homes cyber secure.

Last September, EU lawmakers proposed a new set of product rules to compel electronics manufacturers to pay more attention to devices’ security⁵ throughout their lifecycles (this includes security support and updates to patch emerging vulnerabilities). Moreover, the draft regulation wants the manufacturers to ensure that buyers can understand security considerations and set up devices securely.

The smart home standard Matter can also help a lot with security. In fact, the standard is “secure by design”. It has measures in place that prevent unauthorized persons from penetrating a network, intercepting commands or planting “hostile” products in the smart home that compromise security from within.⁶

Platform companies also have a role to play. CUJO AI¹ notes that Apple is one of the safest smart home brands; only 6% of all threats affected its devices. This shows the value of Apple HomeKit’s strict security specifications. Consumer electronics companies such as Belkin use this as a unique selling point. Belkin’s family of Wemo products including smart plugs, switches and dimmers integrate with Apple HomeKit, using the association to stand out against cheaper and less secure products.⁷

As our homes’ trusted cyber gatekeepers, many ISPs now offer security as an added service. Indeed, making people more aware of the risks they face could turn security into one of the core features of the ISP service instead of the add-on it is today.

With a growing number of people working from home, employers are also taking their responsibility, using security companies such as ZScaler of CrowdStrike to respond to cyber threats, and ensure that employees have fast access to all their applications from any device and network.

Together We Take Care of Security

Even with governments and industry players making devices and networks secure by design, home owners themselves can perform some simple actions. Start with using strong passwords. Change the standard name of your router and wifi network. And, keep your devices and software up to date.

The smart home brings great benefits. Keeping it cyber secure takes a joint effort from all parties involved.

Gold set a new high for the year on 20 March, trading at $2,009 per ounce. This represented a $200 move from its monthly low of $1,809 on 8 March. Gold climbed its way higher as the markets tried to digest the news and assess the ripple effects of the rapid collapse of Silicon Valley Bank (SVB) and Signature Bank over the course of a weekend. The metal found further support as the risks spread to Europe, with major bank Credit Suisse ultimately needing a rescue, which included the surprise wipeout of $17 billion of the bank’s AT1 bonds. Panic and fear subsided as governments, regulators and central banks worldwide intervened and/or reassured investors in an effort to restore market confidence.

Next, attention turned to the Federal Open Market Committee (FOMC) rate decision on 22 March. The U.S. Federal Reserve (Fed) increased the federal funds rate by 0.25% to 5.0%. Rate increases are generally viewed as negative for gold. However, treasury rates, which fell sharply following the banking turmoil, actually fell further after the Fed’s last hike, as did the U.S. dollar. This was positive for gold, which managed to hang on to most of its gains, closing at $1,969 on 3 March – a $142 per ounce (7.8%) advance for the month.

The U.S. dollar (DXY Index)¹ fell 2.2%, while the 2-year and 10-year treasury rates dropped 0.79% and 0.45% respectively, during March. Gold stocks outperformed the metal. The NYSE Arca Gold Miners Index (GDMNTR)² was up 18.7%, and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)³ was up 18.2% during the month of March.

Effect of higher rates in full display

“We believe the market is currently ignoring the negative effect of sustained higher rates on the global financial system.” This was the main message of our gold outlook in our February commentary. There, we provided an example of the recent defaults by two large office owners caused by this higher interest rate environment, and highlighted potential for more problems from the record levels of debt held globally. The collapse of SVB was triggered by the banks’ need to recapitalize as its large portfolio of treasury bonds declined in value due to rising rates. Most would agree that this past month’s events are textbook examples of why one should own gold, so how did gold do? Here are some of our observations:

1. One of the most important observations we can make from the events of the last 3 weeks is that trying to time the gold market is futile. Because of its attributes, we believe that gold should be considered a core component and enjoy a permanent allocation in any portfolio. In particular, its low correlation with most other asset classes make it an effective portfolio diversifier. Black swan events cannot be predicted, but investors can be proactive and maintain a gold allocation that offers some protection when these events do happen. In a recent meeting, perhaps one of our clients put it best: “you always own some gold in case everything else is going down; and when everything else is doing great, that’s fine too, because in that scenario you don’t need gold to do great.”

With that said, gold’s performance over the past +20 years is not too shabby:

Source: Morningstar. Data as of 31 March, 2023. U.S. Stocks represented by S&P^® 500 Index; U.S. Bonds represented by Bloomberg Barclays U.S. Aggregate Bond Index; Gold ($/oz) represented by LBMA PM Gold Price; U.S. Treasuries represented by the Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index.

2. In March, gold did what we would expect it to do in times of crisis. Gold outperformed the U.S. dollar, the S&P 500, the NASDAQ, crude, copper and bonds.

Source: Morningstar. Data as of 31 March, 2023. U.S. Stocks represented by S&P^® 500 Index; Gold ($/oz) represented by LBMA PM Gold Price; U.S. Treasuries represented by the Bloomberg Barclays U.S. 1-3 Year Treasury Bond Index.

3. Also, as expected, gold stocks demonstrated their leverage to the gold price by significantly outperforming the metal. It is worth mentioning that gold equities are coming from oversold levels relative to gold over the last two years. Despite the strong performance in March, the equities still have some ways to go to close that gap. For reference, when gold was last $1,970 per ounce in April 2022, GDMNTR was approximately 1,350 vs 1,110 at present.

Source: Bloomberg. Data as of 31 March, 2023. Gold Stocks represented by the NYSE Arca Gold Miners Index (GDMNTR).

4. Gold sustained its gains even as the Fed hiked one more time. Gold has increased more than 20% over the period of the last three rate hikes – rallying well ahead of a Fed pause or pivot, as it did during the previous rate hiking cycle.

5. Global gold bullion ETF holdings, our best proxy for investment demand, finally registered their first month of net inflows since April 2022, with holdings up almost 1% in March. There is a strong positive correlation between the gold price and the holdings of gold ETFs. However, up until March, the recent strength in the gold price had been met with persistent outflows from the gold bullion ETFs. March inflows certainly signal improved gold market sentiment, but current holdings are well below historical levels. The last time gold was $1,970 per ounce, in April of 2022, global gold ETF holdings were more than 12% higher than they are today.

6. Gold COMEX net long positioning also picked up. As of 31 March, 2023, COMEX net long positions stood at approximately 482 tonnes, according to the World Gold Council. This compares with approximately 819 tonnes in April 2022.

Gold: doing what expected, when expected

In short, we would say gold and gold stocks performed precisely how we would expect in this environment. Moreover, we think this performance reaffirms gold’s role as a safe haven investment and as a legitimate form of portfolio insurance. Last month’s developments should act as a wakeup call to those lacking exposure to the gold sector. And the entry point isn’t terrible either. Think about it: despite the heightened level of risk in March, gold didn’t even hit its all-time highs.

We don’t believe the market is fully reflecting the risks ahead. The Fed came to the rescue once again. The crisis seems contained for now. Consumer confidence actually ticked up in March, and the U.S. stock market managed to finish the month with gains. Complacency set in. This market action would suggest the equity market party isn’t over yet. No one wants the party to end, and certainly, no one ever wants to leave too early and miss out. But when there is broken glass on the floor, everyone knows it is time to start figuring out your ride home. Gold may be the perfect vehicle.

Financial stresses still remain

We were assured time and again of the strength and resilience of the banking system after the improved regulatory and supervisory regimes that followed the 2008 financial crisis, and yet here we are facing the biggest U.S. banking failure in more than a decade. The resulting banking crisis exposed the fragility and risks facing the global financial system. We believe this is supportive of higher gold prices in the longer term. These risks include (in both the U.S. and globally) persistent and elevated inflation, a weakening economy, debt service strains, elevated geopolitical risks and black swan events.

Last year, we posed these questions:

• Rapidly rising rates bring significant risks to the financial system. The liability-driven investing (LDI) market crisis in the UK is a clear example of this. Could there be more cracks in the system that start to show under the stress of higher rates, increased volatility and market weakness?
• The world has been operating in a zero-rate environment for a long time, what do higher and rising rates mean to a world consumed in debt?
• How do we service that debt at the same time as we are dealing with slowing growth and high levels of inflation?

These questions are more relevant today than ever. They were reasonable questions to ask in 2022 as the Fed embarked on its aggressive rate hiking cycle. There were and there likely continue to be more cracks in the system – something else could break. A black swan event is generally described as having three main attributes: it is unpredictable; it results in severe and widespread consequences; and after its occurrence people (and markets) will rationalize the event as having been predictable (known as “hindsight bias”). No one saw the failure of SVB coming, it certainly had severe consequences and, of course, now everyone is wondering how management and regulators could have possibly missed it! There may be more black swans flying or swimming around out there.

Market’s underestimating a hard landing?

Worsening financial conditions are expected to lead to the end of the Fed’s rate hiking cycle. The market is already pricing in cuts in 2023. This is gold positive. However, we believe the market has yet to price in the negative impact of a policy change in the fight against inflation and the increasing likelihood of a hard landing or recession. Gold’s appeal increases under these scenarios. Investors would have yet to come back in full force to benefit from gold’s role as an inflation hedge, as a safe haven in periods of economic, financial and geopolitical volatility, and importantly, as a portfolio diversifier. What happened in March should crystallize the need to add gold exposure to every portfolio. However, please always consider the risks as well: risk of investing in natural resources companies, industry or sector concentration risk, risk of investing in smaller companies.

One strange thing about this uncertain time is how little it seems to have changed people’s investing habits. With inflation high and the possibility of recession mounting, you would expect to see investors increasing their holdings in shares paying out high dividends.

After all, it’s at times like these that companies with high dividends come into their own. When interest rates are low and the future looks exceptionally bright, it’s difficult to match the returns of more speculative stocks in sectors like technology. But when the cycle turns, the solid reliability of a company paying out high dividends is hard to beat.

Quite simply, a bird in the hand is worth two in the bush. Strong companies normally tend to carry on paying their dividends to shareholders, even while stock markets are volatile. Indeed, companies paying out high levels of dividends have a record of even increasing their dividends in line with inflation.