The Wolf Den #985 - You Aren't Bullish Enough On RWA
The tokenization of everything...
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In This Issue:
You Aren't Bullish Enough On RWA
Bitcoin Thoughts And Analysis
Legacy Markets
Is Ethereum Similar To Silver?
Fidelity Is Building
Are Rate Cuts Coming?
Bitcoin: Buy The Dip Before This Happens | Macro Monday
You Aren't Bullish Enough On RWA
News may seem quiet, but significant developments are unfolding behind the scenes, particularly in the RWA (real-world asset) space. I believe this three-letter acronym could become the most important narrative this cycle.
Over the past few months, I've been increasingly fascinated by advancements in the RWA space. This innovation is still largely under the radar outside of deep crypto circles.
Two groups are familiar with RWAs: seasoned crypto investors betting on which chains will emerge victorious, and massive institutions quietly exploring what they can build.
One way to think about RWAs is to liken their current presence to NFTs before they went mainstream. However, while NFTs are retail toys, RWAs are institutional tools.
Comparing the peak of NFT mania to the potential peak of the RWA space is misguided; these assets are not playing the same game.
In the context of crypto, RWAs refer to tangible or intangible assets from the physical world represented on the blockchain through tokenization. These assets can include real estate, commodities, stocks, bonds, or even business revenue streams.
The most talked-about form of RWAs right now is tokenized treasuries, especially after BlackRock launched its first tokenized fund on the Ethereum blockchain, prompting other major financial institutions to explore this avenue.
To illustrate the potential growth of the RWA space, consider that the US Treasury market size was $27 trillion as of May this year. In contrast, the global crypto market cap is just $2.54 trillion. RWAs, in their initial form, are tapping into a market ten times the size of the entire US crypto market.
Picture the transformation when real estate and equities begin migrating on-chain, alongside niche markets such as art, revenue streams, sports teams, insurance policies, commodities, and beyond.
Imagine opening your favorite crypto exchange and finding a tab labeled ‘Tokenized Equities.’ Clicking on it takes you to a familiar-looking page, but here you can purchase fractional amounts of TSLA coin, NVDA coin, and Microsoft coin from anywhere in the world, at any time. You can use crypto, stablecoins, or deposited fiat to make the trades. Your purchases are recorded on the blockchain, with the tokenized equities transferred to your native crypto wallet. From there, they can be moved freely and cheaply to various DeFi destinations and swapped for traditional shares at any time through a legacy broker.
The convergence of traditional and digital finance has never been this close. Tokenized equities will transform global investing. Forward-thinking investors speculate about an all-encompassing 'everything cycle,' and if it comes before RWAs go mainstream, it could unlock the 'everything cycle' squared.
Consider the implications for the blockchains that support this technology: Ethereum could truly become the everything app in finance.
If you're interested in exploring the growth of the RWA space, I highly recommend the RWA.xyz dashboard. It's free, user-friendly, and offers tabs for 'Private Credit,' 'U.S. Treasuries,' and 'Commodities,' with 'Real Estate' coming soon.
I anticipate that the Ethereum ETF will drive the development of RWAs by attracting numerous large institutions, prompting them to delve into the underlying asset they hold. There's no better educator than getting off zero, which will only accelerate this technology.
Now is not the time to grow bored and lose faith in this sector. It’s all still just getting started.
Bitcoin Thoughts And Analysis
Bitcoin is looking admittedly sketchy today, with a sizable drop over night. That said, price is still trading in the top half of the range. As I have repeated many times, all of the price action since March is relatively low volume sideways chop, expected in this part of the cycle and especially in the summer. Right now, nothing below $74,000 is particularly meaningful, and neither is anything above $60,000. We are in a range. Better to be in the top half for now, which we still are for the moment.
Legacy Markets
European assets extended their losses as political instability in France continued to unsettle markets. The euro hit its weakest level in a month, and the benchmark stock index weakened for a third consecutive day. French 10-year bond yields reached their highest level compared to German bunds since October 2023. This instability stems from French President Emmanuel Macron's call for a legislative vote to counter the advance of far-right rivals, a move that threatens his economic policies which had previously reassured investors since he took office in 2017.
Investors are also preparing for the US inflation data and the Federal Reserve’s interest rate decision on Wednesday. While the Fed is widely expected to keep borrowing costs on hold, there's significant uncertainty about future rate projections. According to a Bloomberg survey, a plurality of economists expect the Fed to signal two rate cuts this year, while an equal number expect one or no cuts.
BlackRock Global Chief Investment Strategist Wei Li commented on Bloomberg TV, “Even if we just get one cut this year, I think we’re just cashing out. The equity market can take it because we are really focusing on the earnings and growth piece, which has been driving equities rather than rates this year.”
US stock futures dipped after both the S&P 500 and Nasdaq 100 extended their record rallies in the previous session. The 10-year Treasury benchmark dropped about 4 basis points. JPMorgan's trading desk has mapped out a game plan for CPI day, providing scenario analysis for the US stock market to help navigate the expected volatility.
In the UK, an unexpected rise in the jobless rate boosted the outlook for rate cuts later this year. Traders are now fully pricing in a quarter-point reduction by November and see a 40% chance of a second decrease the following month. Additionally, the country attracted over £104 billion ($132 billion) of orders for bonds in a record for gilt sales.
In summary, the markets are experiencing a mix of political and economic pressures, with significant events and decisions on the horizon that could impact global financial stability and investor strategies.
Key events this week:
China PPI, CPI, Wednesday
Germany CPI, Wednesday
US CPI, Fed rate decision, Wednesday
G-7 leaders summit, June 13-15
Eurozone industrial production, Thursday
US PPI, initial jobless claims, Thursday
Tesla annual meeting, Thursday
New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday
Bank of Japan’s monetary policy decision, Friday
Chicago Fed President Austan Goolsbee speaks, Friday
US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 fell 0.4% as of 10:26 a.m. London time
S&P 500 futures fell 0.2%
Nasdaq 100 futures fell 0.2%
Futures on the Dow Jones Industrial Average fell 0.3%
The MSCI Asia Pacific Index fell 0.5%
The MSCI Emerging Markets Index fell 0.3%
Currencies
The Bloomberg Dollar Spot Index rose 0.2%
The euro fell 0.2% to $1.0748
The Japanese yen fell 0.1% to 157.27 per dollar
The offshore yuan was little changed at 7.2716 per dollar
The British pound was little changed at $1.2726
Cryptocurrencies
Bitcoin fell 3.3% to $67,336.27
Ether fell 4% to $3,523.32
Bonds
The yield on 10-year Treasuries declined four basis points to 4.43%
Germany’s 10-year yield declined two basis points to 2.65%
Britain’s 10-year yield declined four basis points to 4.28%
Commodities
Brent crude fell 0.1% to $81.51 a barrel
Spot gold fell 0.3% to $2,304.07 an ounce
Is Ethereum Similar To Silver?
Bitfinex’s head of research conducted an interview with The Block, stating, “Forecasts show that spot Ethereum ETFs could capture between 10-20% of the flows that have been going into spot bitcoin ETFs,” but “a lot depends on clarification in the future regarding staking being allowed or denied by the U.S. Securities and Exchange Commission for spot Ethereum ETFs.”
Following these statements, a comment suggested that studying silver ETFs might offer valuable insights into understanding Ethereum's upcoming performance relative to Bitcoin. Intrigued by this idea, I dug up some historical data to compare the dynamics between silver and gold with those between Ethereum and Bitcoin. Here’s what I found:
GLD launched in 2004 with a global market cap of $1.5 trillion.
SLV launched in 2006 with a global market cap between $10 billion to $20 billion.
Within the first year, GLD accumulated approximately $4.5 billion in AUM.
Within the first year, SLV accumulated approximately $1.5 billion in AUM.
Despite silver having a market capitalization just 1% of gold's at the time of their respective ETF launches, silver managed to attract inflows at a ratio of approximately 1:3 compared to gold in their first year. The reasons for silver's impressive performance are multifaceted. Silver offered a high-beta alternative for diversification, had significant industrial applications, and was easily accessible through the new ETF structure. These factors combined to drive substantial investor interest and inflows into silver ETFs.
Side by side, Ethereum and silver are fundamentally very different assets. However, I believe Ethereum could potentially see a surge in inflows for reasons similar to those that drove silver's growth over two decades ago. Institutions enthusiastic about Bitcoin may find Ethereum appealing due to its high-beta nature, relative affordability, and newer status, offering diversity in their portfolios. Additionally, Ethereum's staking mechanism could be considered a form of industrial use, potentially attracting more investors once it is widely adopted.
Fidelity Is Building
Fidelity International, a London-based funds management firm, has selected JPMorgan’s Ethereum-based Onyx Digital Assets to tokenize shares in a money market fund. That was a mouthful, but essentially, institutions are continuing to tokenize treasuries, which is the first step in tokenizing real-world assets including stocks, bonds, real estate, and collectibles.
Fidelity International's involvement in tokenization extends beyond this recent project, as the firm has been actively exploring digital assets with other major global players. In collaboration with Swiss bank Sygnum and more recently with JPMorgan, Fidelity International is embracing blockchain technology to enhance efficiency and reduce transaction costs and operational risks.
“Tokenizing our money market fund shares to use as collateral is an important and natural first step in scaling our adoption of this technology. The benefits to our clients and the wider financial system are clear; in particular, the improved efficiency in delivering margin requirements and reduction in transaction costs and operational risk.” — Fidelity International's head of debt capital markets
Are Rate Cuts Coming?
For the first time in nearly five years, the European Central Bank (ECB) has lowered interest rates, a move that applies to all 20 countries that use the Euro, bolstering market sentiment across European markets. The ECB's rate cut aligns with a trend among major banks globally, including the Bank of Canada, the Swiss National Bank, Sweden's Riksbank, and the Bank of Mexico, which have also lowered rates in 2024.
In light of recent developments in other countries, investors have once again turned their attention to the U.S., especially with the next Federal Open Market Committee (FOMC) meeting scheduled for this Wednesday. The CME Fed Watch Tool indicates divided opinions regarding a rate cut in September, while November is now strongly favored for a 25 to 50 basis points reduction in the target rate. While the expectation of future cuts is not new, Jerome Powell's commentary during this meeting will be particularly interesting, especially given the recent rate cuts by other central banks.
Bitcoin: Buy The Dip Before This Happens | Macro Monday
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