Crypto investors are having a mild existential crisis as demand for the young asset class dries up in the midst of a bull market. In the past month, search interest in crypto has been muted, network activity has been subdued and futures funding rates briefly went negative. Ether ETFs, which began trading a little over a month ago, have seen net outflows. Even bitcoin ETFs – which helped prices catapult to new highs in March – have logged net outflows. “The ETFs have been a smashing success, [ Donald] Trump ‘s on TV talking about the U.S. government buying bitcoin, bitcoin is sitting just around $60,000 – by all accounts, the headlines would suggest that we’re doing pretty well, and yet sentiment is down so bad in the industry,” said Michael Rinko, an analyst at Delphi Digital. “Over the past four or so months, things have drawn down pretty significantly,” Rinko added. “We didn’t get that everything rally that the market has been conditioned to expect from cycles past.” Usually, in a bull cycle, bitcoin rallies are followed by ether rallies, which are followed by the rest of the crypto market. As of Thursday morning, bitcoin is down 12% since April 1. Ether and Solana have fallen 29% and 27%, respectively. Binance Coin has lost 10% and Ripple’s XRP is lower by 8%. In the same period, the S & P 500 has risen 6% and gold has gained 12%. “Crypto has broadly struggled since spot ETH ETFs began trading on July 23,” Citi’s David Glass said in an Aug. 23 note to investors. “Though other risk assets also saw weakness over this period, crypto has underperformed (on a volatility-adjusted basis) throughout the post-[non-farm payrolls] rebound. Outside of stablecoins, which have seen market caps continue to grow even amid the early August market correction, most crypto demand metrics have weakened.” Recovery in bitcoin ETF purchases is one “essential” catalyst for higher bitcoin demand. Federal Reserve Chair Jerome Powell’s confirmation that rate cuts are in order should help with this as lower borrowing costs should whet the appetite for riskier assets. Additionally, an increase in bitcoin prices is usually associated with a 3% monthly growth rate in whale holdings, according to CryptoQuant’s Julio Moreno. The current rate, however, is at about 1%, down from 6% in February, he added. On the plus side, permanent bitcoin holders – addresses that have never spent or sold bitcoin – are still accumulating, and doing so at an even faster rate than they did in the first quarter, when bitcoin hit its all-time high. Bitcoin’s isolated success Bitcoin ETFs have been hailed as the most successful ETF launches in history, with BlackRock’s iShares Bitcoin Trust (IBIT) now at $23 billion in assets under management, even with many advisors still sitting out . But although demand has been better on the institutional side of the market – bitcoin is still up 44% for the year – there’s little evidence that investors are putting money into new projects and onto smaller networks, which is disappointing for many crypto-natives, according to Rinko. “Bitcoin success is kind of isolated,” he said. “Not a lot of crypto-natives hold bitcoin, so when bitcoin goes up a lot, they don’t necessarily benefit from that wealth effect.” By contrast, he said, he expects a more pronounced wealth effect when ether ETF demand picks up. “A lot of people hold ETH,” he said. “They use it on chain, they borrow against it, so a rising ETH price creates natural leverage in the system, whereas a rising bitcoin price doesn’t necessarily do that.” Trough of disillusionment With the long tail of assets after bitcoin struggling, the disillusionment in the industry is at one of its highest levels ever, aside from maybe the post-FTX period, Rinko said. Crypto, for most in the industry, was always meant to be used for more than speculative trading and bull markets historically are prime time for money flowing in, funding new projects, and watching the market identify the next big app or use case. “We were building the future of finance, we were going to tokenize everything, bring it on-chain – those were the narratives last cycle, and we haven’t had a big breakthrough application yet this cycle at all,” Rinko said. “DeFi is dead, NFTs are even more dead … even meme coins feel very nihilistic and everyone agrees that it’s not some revolutionary breakthrough technology. So we’re kind of lacking that exciting, futuristic technology story that inspires people, and many people are as a result, feeling very disillusioned with the whole space right now.” Whether or not you want to admit it, Rinko said, price speculation is still crypto’s primary use case. The obvious follower is the one bright spot in the current market: stablecoins. The total market cap for stablecoins recently hit a 2022 high after months of stillness. That indicates that money is starting to flow back into crypto, and it could pick up even more when the Fed begins cutting interest rates. “Higher rates mean stables face a higher hurdle rate for capital,” Rinko said. “If investors can clip 5% on good ole ‘risk-free’ dollars, there’s little incentive to move money on chain. But we’re now on the cusp of a rate cut cycle for the first time in four years, which will make crypto yields more competitive.” —CNBC’s Michael Bloom contributed reporting.