Parsec Weekly #78
Private<>Public Arbitrage in Crypto and Wider Market Commentary
The end of Private<>Public Arbitrage in Crypto?
Many of the assets and communities we know to be successful today (Bitcoin, Ethereum, Solana) share the fact that early buyers in liquid markets have been rewarded massively. In these cases, this has had the effect of creating a cult-like following, a group of evangelists who form the base of the community and even contribute to the respective open source technology stacks.
The way the market operates currently is almost the opposite to these examples. The majority of price discovery occurs in private markets. By the time assets list on the secondary market, there is very little upside left in most cases. This leaves no room for an organic community to be born.
Take Starkware (STRK) as a prime example, with the token going live at roughly a $20bn valuation, what prospects are there for the buyer in liquid markets? Yes I recognise that their zk technology is unique and extremely impressive from an engineering perspective but still, it is hard to build an upside case in today’s market solely based on technology. The market needs to see usage growth metrics, a path to sustainable economics and importantly for a L1/L2 - a community or an identity, none of which Starkware had.
Unsurprisingly, the token has traded more or less directly downwards having launched at such a precipitous valuation:
The token is now trading almost 50% below the last private round:
Starkware isn’t the only example, in fact the huge majority of coins which have launched at eye-watering FDVs have bled 70-80% since their TGE in the recent past. Hoards of wide-eyed retail participants aren't returning en masse to act as exit liquidity from VCs creating a supply<>demand issue for a large contingent of VC-backed tokens. If anything, it seems as though many retail participants have been burned one too many times and have become somewhat nihilistic about crypto - viewing it purely as a vehicle for speculation. Signals of heavy retail participation in memecoins (like memecoin trading volumes on Robinhood) confirm that many new retail participants are no longer “buying into the technology” as they might have looked to do in prior cycles but instead hopping straight into memecoins.
Previously, there has almost always been a private<>public arbitrage in Crypto markets whereby buying in private markets and selling in public markets has historically been a profitable strategy regardless of the success of the project or company in question. With so many tokens trading below their most recent private valuation before vesting even begins, this historical precedent is being challenged. We might be seeing the death of the low circulating, high FDV, private<>public arbitrage meta in a movement towards a more efficient Crypto market.
In a world where the huge majority of startups fail, participating in private markets should be difficult. With this in mind, perhaps Crypto is converging to a more rational economic state of affairs. For liquid market participants this should be welcomed as a healthy development, for private market investors this likely makes their job harder!
The current market dynamic would likely reward projects which launch as much of the circulating supply as early as possible, allowing the market to find its footing and enabling equal access to all participants not just private investors who would be trading locked tokens OTC either way.
Unique token distribution mechanisms could be another solution to the issue of circulating vs FDV and private<>public investor alignment. The way Arweave are distributing AO is a pertinent example that comes to mind.
In which ever way the market does evolve, there is a clear need for change. We look forward to monitoring these changes on-chain at parsec.fi - join us:)
Good morning, where to begin? To be honest it’s getting pretty tough to keep a light and optimistic tone in these market conditions, but we spot soldier on.
After a brief bounce and rejection at the 100d EMA, BTC is on its 4th red daily candle with a drawdown of 15% from the high. This comes off the back of the German government relentlessly selling large amounts of BTC into relatively thin books around a major US holiday.
That may sound a little harsh so let me say that they are definitely not the only ones to blame.
In the last two weeks the German government has sold 8000 BTC
Just a few hours ago 47,000 Mt Gox coins were moved, and just a few minutes ago db tweeted this along with an official statement from the Mt Gox rehabilitation trustee
The real problem is that in a post ETF world lacking external narratives to counteract bad price action, there are more sellers than buyers, go figure huh. Aside from this we also have a pretty barren onchain landscape. Feels like a cop out to say ‘The vibes are worse than in the bear market’, but I really do feel that in some ways. It’s just a very boring market at the moment. Memes and majors whilst last cycles darlings turn to dust.
Mass dispersion, veil lifted from high FDV/low float coins, NFT’s and even this cycles NFT’s (Ordinals) performing terribly, hundreds of new L1’s and L2’s, ‘consumer apps’ without the consumers, you get the picture.
So the market has given its participants good reason to be fearful, cool. “But kez, what about the good news?”, the good news is these supply overhangs are slowly getting resolved, the question is how priced in are they.
Mt Gox have an outsized amount of Bitcoin to distribute to their creditors because it happened so long ago. So long ago that Bitcoin was trading at less than $1000 at the time. This has been a cloud over our heads since the first whispers of ‘making creditors whole’ were uttered. US and German Govt Bitcoin is the same story.
I’m not going to make guesses about how priced in these overhangs are or how long it will take for them to fully resolve. But what I will say is that these things that are happening that seem like terrible things, are actually great things for the long term health of crypto.
And then on the other side? It’s still an election year with crypto now a political topic, inflation is still decreasing which leads to eventual rate cuts, and we have a positive supply overhang - FTX creditors receiving their billions of dollars denominated this time in USD instead of coins. Also, I think the second ever crypto ETF goes live in the next couple weeks?
In case you haven’t seen it enough in the last few days, here it is one more time.
And here’s the 24h perp liquidations caused by this nasty move.
Alas, our onchain brethren didn’t escape the clutches of this down move either. Over $65m in onchain liquidations today.
