Bitcoin is currently in a lull between narratives. The excitement and speculation and fast pace of inflows from the launch of the ETFs has subsided. Not much good news is on the horizon, perhaps until the U.S. election in November. In between, it seems BTC mostly faces crypto and macro headwinds.

In June, BTC nearly reached all-time highs before higher-than-expected non-farm payroll jobs data sent prices tumbling to $58,000, despite lower inflation numbers. The start of the distribution of Mt. Gox’s $9 billion BTC and the German government's sale of seized BTC saw BTC reach as low as about $54,000, but has now rebounded to the low 60ks. Once Mt. Gox distributions are complete over the next few months, it will remove a significant price risk. Despite these negative factors, BTC has shown resilience. The next potential catalyst is the ETH ETF approval. With less liquidity than BTC, strong inflows could drive ETH higher, though a supply overhang like BTC’s might occur.

Politically, we have seen Donald Trump include positive comments about BTC and digital assets in his regular stump speech, taking an America-first stance, aiming to keep jobs and wealth here in the U.S. If Trump is re-elected, the price of BTC is likely to benefit (even though the shape of a Trump Administration’s policy on digital assets is unclear). It’s possible we may see speculative buying leading up to election day as well – a positive narrative on the horizon.

Lastly, we saw a number of major central banks cut rates in June, including Canada and the E.U. As one of the greatest correlates to BTC price is global M2 liquidity, these rate cuts suggest that the trending increase in global liquidity is moving in a beneficial direction. 

At the start of June, BTC nearly hit all-time highs before tailwinds pushed it down to June range lows. Despite lower-than-expected PPI, the market showed signs of buyer fatigue. Later, Mt. Gox announced BTC distributions to creditors in July, and the German government sold seized BTC, causing prices to dip below $60,000. ETH remained more resilient but still down from its May ETF rally.

BTC currently lacks a clear narrative, with only negative events on the horizon, giving buyers little to rally around. In contrast, ETH is anticipating the go-live date for its ETFs, expected to cause market excitement due to its lower liquidity compared to BTC. Many predict the ETF S-1 approval by  some time in July, which could spark interest and demand. Investors will also watch if altcoins and BTC rally alongside ETH.

On the political front, Trump continues to speak positively about BTC and crypto in his stump speeches while Biden remains largely silent on the issue. Later this month is BTC 2024 in Nashville, with several politicians attending, including Donald Trump. This venue would offer a sensible place for a candidate to announce major positions on the topic of digital assets.

- Alexander Blume, CEO of Two Prime

Traditionally in the domain of institutional investors, structured products combine various assets and derivatives to create tailored risk-return profiles. With the advent of blockchain, the potential for this market segment is enormous, promising significant cost reductions, enhanced composability, and improved accessibility. Currently, the global structured notes market is estimated to be worth more than  $2 trillion, and blockchain stands to help widen the breadth of the market from origination to investor base. 

Let’s take a look at this in more detail. 

Streamlining Processes and Cost Reduction

Traditional structured products involve multiple intermediaries such as brokers, custodians, and clearinghouses, leading to operational costs ranging from 1% to 5% of the investment value annually. According to Accenture, blockchain technology can cut infrastructure costs for major investment banks by an average of 30%, translating to annual savings of $8-$12 billion. 

Blockchain's cost-saving potential is particularly significant for structured products due to their complex lifecycle management. Blockchain's enhanced transparency and audit trails can help reduce these regulatory capital requirements.

Enhanced Composability to Creating Customizable Financial Solutions

Smart contracts are particularly compelling for managing complex financial products like derivatives and structured products, allowing for quick and innovative financial engineering. This modularity enables investors to craft tailored products, such as combining yield-generating DeFi protocols, tokenized assets and risk-managing derivatives like options or futures. 

Improving Accessibility for Originators and Investors

Structured products have historically been accessible only to institutions. Blockchain modularity simplifies structuring and origination by eliminating intermediaries, while fractional ownership broadens investor access and reduces friction on both the supply and demand sides. 

Growth of the DeFi Structured Products Market

Structured products offer advanced risk management through mechanisms like principal protection and downside barriers. Over the past year, DeFi structured products like Pendle ($6bn TVL) and Ethena ($3.6bn TVL) have grown significantly, showing strong demand for new derivatives. This trend is expected to continue, driven by maturing market infrastructure and an expanding product suite.

Tokenization Standards: Innovations like ERC-1155, ERC-404, and ERC-1400 are addressing challenges in bond identification, product tranching, and regulatory controls for structured product issuance.

DeFi Prime Brokerage: Platforms like Arkis, are introducing sophisticated margin engines for asset-specific valuations, cross-margining, and cross-chain liquidation.

Risk Management: Institutional-grade risk management systems,  developed by firms like Talos (Cloudwall) and Gauntlet are crucial for facilitating the entry of institutional capital .

Decentralized Option Vaults (DOVs): DOVs are important for on-chain structured products as they provide automated yield generation, risk management, and integration with other DeFi protocols. 

Oracles: Chainlink’s Cross-Chain Interoperability Protocol (CCIP) enhances data reliability and cross-chain functionality, and easing integration between traditional and crypto markets and cross-chains.

Crypto Options: Platforms like AEVO and Hegic provide automated on-chain options, which integrate well with algorithmic structured products.

Benchmark and Index Development: The creation of more benchmarks and indices, such as the Coindesk 20 Index (CD20) and CESR Composite Eth Staking Benchmark, provides investors reliable and powerful references to express their market views and serve as risk management tools.

Tokenization: Tokenization is foundational for bringing structured products on-chain, with TVL reaching $130-170bn (including stablecoins) in 2024 according to RWA.xyz.

One of the pervading sentiments within crypto is that the products often exhibit barbell-shaped risk-return profiles. Structured products solve this dilemma by creating a specific risk-return profile while capturing the substantial upside of this asset class. One example here is principal-protected notes mitigating depegging risk. 

The path forward for on-chain structured products doesn't begin with the technology, but in developing compelling use cases to showcase their potential. As tokenization advances, integrating traditional and crypto assets in structured products will become more increasingly common, further narrowing the gap between traditional finance and crypto.

– Christine Cai (Cicada Partners) and Alexander Szul (Rome Blockchain Labs)

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