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May 15, 2023

April 2023 Market Commentary

Galaxy Asset Management

May 15, 2023 

Market Commentary

Crypto markets continued their positive streak in April as bitcoin closed the month up 4%, marking its longest monthly streak of positive performance since 2021. Ethereum (ETH) has outperformed among crypto assets after the successful completion of its “Shanghai” upgrade, which occurred on April 12th.

After much anticipation, the Shanghai upgrade enabled staked ETH to be withdrawn from the Ethereum network. A major question facing investors leading up to the upgrade was the amount of ether supply that would be unlocked and any corresponding market impacts from sell pressure. Just over 1 million in ETH rewards (>$1 billion) became liquid between April 12th and 18th, amounting to approximately 0.82% of total Ether supply.

Despite this supply unlock, Ethereum rallied >15% in the week following Shanghai, as a sign that bearish positioning into the upgrade may have been overblown. Looking forward, now that staked ETH may be withdrawn freely, many anticipate the proportion of total ETH supply that is staked will rise over the next 12 months (currently this number sits at ~15%). An additional tailwind for the Ethereum ecosystem comes from network activity; elevated activity after the Shanghai upgrade has accelerated ETH’s burn rate, as higher gas fees to send transactions over the Ethereum network has resulted in over 100,000 ETH tokens to be removed from the supply in April.

For more information on Ethereum’s Shanghai upgrade, we have published podcasts, articles, and newsletters covering this important milestone.

As our March newsletter highlighted, the regulatory crackdown within the US has shown no signs of abating. As a reminder that crypto is a global asset class, it is worth highlighting the positive regulatory momentum that has been building this year across developed countries worldwide:

  • The European Union approved the Markets in Crypto-Asset Regulation (MiCA) on April 20th, providing a comprehensive framework for digital assets that will encourage innovation and growth within the industry; MiCA will provide clarity around token offerings, stablecoins, custody, among other crypto services.

  • Hong Kong has recently pivoted to a much more favorable stance towards crypto. From announced intentions to legalize all retail trading in June, to a planned introduction of a licensing framework for crypto services providers, the city is signaling it is serious about both regulatory clarity and amplifying its presence on the global digital asset stage. In late April, the Hong Kong Monetary Authority issued an explicit reminder to banks to service licensed crypto entities, doubling down on this stance.

  • Earlier this year in the United Kingdom, HMT published a roadmap for developing a comprehensive regulatory framework for crypto that would fit within existing core securities frameworks. This is part of Prime Minister Sunak’s stated ambition “to make the UK a global hub for crypto asset technology.”

The emergence of the banking crisis in March sparked conversations around bitcoin’s role as a store of value. More than 6 weeks later this narrative has only grown stronger; bitcoin’s correlation to gold continues to rise while its correlation to equities has fallen.

This past month has seen a significant resurgence in the use of blockspace on the Bitcoin network, as demand for transactions on the Bitcoin network has reached historic levels. The rising popularity of Ordinals (roughly the equivalent of NFTs on Bitcoin) has resulted in significantly higher transaction fees and blockspace congestion. For the first time since 2017, a block was minted consisting of a higher transaction fee amount (6.7 BTC) than the current block subsidy (6.25 BTC). Naturally, this network demand has been a boon for the bitcoin mining industry, as average transaction fees as a percent of total block rewards over the past weeks have ranged between 7-15%, compared with the historical 3-5% level.

Portfolio Considerations

Looking ahead, the next 12 months will bring several major supply events for bitcoin:

  • As result of a 2014 exchange hack of Mt. Gox, the Mt. Gox bankruptcy trustee holds 141,686 BTC (~$4 billion) according to September 2019 documents. This supply will likely be distributed to claims holders later this year. While exact payouts and timelines are still unknown, we can expect a large portion of distributions to be paid out upon the early distribution date, slated for September 2023. Understanding the nature of Gox creditors as either very early BTC adopters with low cost bases or large claim investment funds, we expect most BTC will not be sold upon distribution. Further, there will likely be second-order impacts in BTC lending markets if creditors look to lend their BTC either off-chain or on-chain via converting to WBTC.

  • Bitcoin’s 4th “Halving” event is now projected to take place in April 2024. Every halving cuts the amount of new Bitcoin that enters circulation in half. While the total supply of Bitcoin is fixed at 21M tokens, only ~19M tokens have been mined (or created) so far. The remaining ~2M will be awarded to future miners, which dilutes the supply over time. But the level of this inflation is going down, and in 2024, that reward will be cut again from 6.25 btc to 3.125 btc. This will bring the network’s inflation rate below 1% with roughly 450 new bitcoin being mined per day (down from 900 per day currently). Historically, Bitcoin’s previous three halvings (2012, 2016, 2020) have been pointed to as catalysts for subsequent bull-runs, as existing demand quickly outstripped lower levels of new supply. The 2024 halving should remain in focus for the simple reason that bitcoin’s inflation rate falling below 1% will place it among a cohort of historical hard money store-of-value assets such as gold and silver.

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Lastly, we are pleased to share a report by Galaxy’s Research Team covering 10 essential topics including what’s next for Bitcoin and Ethereum, what to watch in DeFI and Web3, the regulatory landscape, and more. The report can be accessed here.

Institutional Adoption Highlights

Crypto Performance and Volatility Data

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