The Funding: Is crypto's bear market finally over?

• This is the main section from the 58th edition of The Funding sent to our subscribers on August 23.
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Just over a week ago, crypto data platform Santiment flagged growing chatter across social media that the market was "dead." Bitcoin had stayed range-bound with low volatility, trading activity dried up, and investors were looking elsewhere, such as AI stocks.

Then the market suddenly moved higher. Bitcoin posted its biggest weekly dollar gain ever — up $14,264 (+22.7%) to close at $77,387. A U.S. Treasury bond buyback announcement, regulatory developments in Washington, and $2.7 billion in record short liquidations drove prices higher.

"The main driver was the U.S. Treasury announcing it would increase purchases of longer-dated Treasuries, considered a key catalyst for BTC as a debasement hedge," said Martin Gaspar, senior crypto market strategist at prime broker FalconX, likening the move to Federal Reserve quantitative easing. "Other developments supporting the rally were the SEC's proposed crypto fundraising rules, which could potentially pave the way for ICOs [initial coin offerings] to return to the U.S., as well as constructive headlines from the White House meeting with crypto executives, such as the CFTC's efforts to onshore Hyperliquid."

Who's buying and how funds are positioned

The first action was from short sellers, then fresh capital entered, according to Maxime Seiler, co-founder and CEO of crypto trading firm STS Digital. "The first impulse was pure short covering; the second wave was the market rebuilding longs. Institutional participants were the fastest to re-engage," Seiler said.

Trading desks are seeing more activity. Paul Howard, senior director at crypto market maker Wincent, said volumes have "exploded 5x" since last Sunday, ETF buying has resumed, and local chatter on the ground has returned, focused on the market continuing to go higher, especially for the major cryptocurrencies.

"Strongest bids have been in BTC and ETH with others such as XRP and BNB trailing," Howard said. "This spot buying has the hallmarks of setting a new floor in pricing as a lot of trading has been versus OTC spot and not leveraged speculation."

Some crypto hedge and liquid funds had already positioned themselves before the rally.

Leigh Drogen, general partner and chief investment officer at Starkiller Capital, said the firm closed its entire short book in mid-July after spending much of the year neutral or bearish. By early August, the fund had increased its market exposure, with about 32% of its portfolio in bitcoin, 16% in Lighter (LIT) and 15% in Hyperliquid (HYPE), and a mix of other altcoins, Drogen said.

The fund held no cash or short positions when the rally began. Drogen said it added more exposure to lower market cap tokens once prices started moving higher.

Syncracy Capital co-founder Ryan Watkins similarly said the firm was expecting a rebound and positioned funds accordingly, without disclosing specific bets.

What investors are betting on next

Watkins said money is becoming more concentrated in a smaller number of stronger assets. He is focused on fast-growing businesses that lead their categories and generate strong revenue, pointing to Hyperliquid as an example.

Drogen expects a wider gap between tokens tied to protocols that generate revenue and use it for buybacks, such as LIT and HYPE, and older tokens such as Cardano (ADA) and XRP, which he calls "garbage assets."

He also expects opportunities to short those assets as the market turns more bullish. Starkiller has also allocated to the Robinhood Chain ecosystem.

STS Digital's Seiler is watching projects that could tap into larger institutional markets as regulation becomes clearer. Wincent's Howard is seeing more interest in exchange tokens and perpetual trading platforms with real businesses behind them.

Ryan Connor, a partner at RockawayX, is not writing off memecoins. He sees the return of memecoin trading as one of the early signs of a market recovery and thinks volumes and revenue could reach new highs this cycle.

He is also watching onchain yield, crypto and equity perpetuals, and real-money gaming markets.

What the rally needs to keep going

Watkins sees the rally as the early stage of a new cycle, while Connor thinks the market has already bottomed.

Seiler remains cautious. He is looking for continued spot and ETF buying, as well as progress on the Clarity Act ahead of its expected procedural vote, which could come as early as Sept. 15.

Gaspar is also looking for signs that the rally has staying power, including strong spot trading volumes and a sustained rise in the premium on CME bitcoin futures, which would point to more institutional activity.

Starkiller, for example, has not seen new limited partner interest return yet. Drogen expects investors to start coming back over the next few months, once the market recovery becomes clearer.

As for risks, geopolitical events, a major crypto-specific failure, and a U.S. recession came up in conversations. "So far, there's no recession in sight. But if politics change in the U.S. and regulation hamstrings the datacenter boom, we risk a real slowdown and recessionary environment, which will hit crypto hard," Connor said.

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