May 08, 2024

April 2024 Market Commentary

Galaxy Asset Management

May 8, 2024

Market Commentary

Heading into April all parties were keenly awaiting bitcoin’s fourth halving. The undoubtably positive news: the halving transpired as planned, another notch for Bitcoin as the blockchain network adjusted its own monetary supply policy based purely on code. The less positive: April marked the end of crypto’s seven-month green streak with BTC declining -16.09%, ETH falling -17.80%, and the Bloomberg Galaxy Crypto Index decreasing -22.20%. Despite the market pullback, we are still optimistic that the latest crypto bull market has yet to reach its peak.

While many expected the halving to be a “buy the rumor, sell the news’ event, it is likely that only a portion of bitcoin’s monthly price decline can be attributed to this quadrennial occurrence. Stemming from Iran’s launching of missiles and drones at Israel on April 13, bitcoin experienced a sharp drop. The most likely explanation here is that one of crypto’s most defining traits, its 24/7 accessibility may have hurt it. As fear of war and a potentially escalating global crisis crossed investors’ minds, it led to a rush to safety. With investors seeking liquidity over a weekend, it is fair to surmise that they began to offload crypto, whose markets are always open. To a degree, this pullback can be regarded as healthy for crypto markets given the strong runup we saw in 2024’s first quarter. Additionally, with Tax Day occurring in the middle of the month, we also assume that a non-trivial portion of investors decided to exchange their bitcoin for cash to fulfill their tax obligations. Throughout bitcoin’s 15-year lifespan, the cryptocurrency has typically underperformed during tax season and this year appears to yet another case of history repeating itself. When zooming out, bitcoin has still served as one of the best performing assets in 2024, up 47.51% YTD (compared to 7.99% for the S&P 500 and 6.59% for the Nasdaq respectively).

As we look for catalysts to return bitcoin to positive price trajectory, data associated with the halving presents a promising case. In the aftermath of bitcoin’s block subsidy being reduced from 6.25 to 3.125 BTC, Bitcoin’s difficulty algorithm was revised higher. Prior to the halving, some predicted that this may decline as miners who could no longer profitably operate with the block reward declining would exit the market. That this did not come to fruition indicates the long-term conviction miners have. Further, when examining data from bitcoin’s previous halving, it is evident that bitcoin’s strong post halving gains have not been realized immediately. In 2016, bitcoin was subsequently down -10.16% one month and -7.40% three months after halving before strong gains saw its performance lead to +72.38% nine months and +260.91% a year later. A similar situation played out in 2020 with bitcoin up +13.23% one month later, +35.97% in three months, +332.88% in the following nine months, and +549.21% after a year. While it is fair to contend that the halving is priced in, previous bitcoin cycles suggest that even with the market’s knowledge of the halving, bitcoin has outperformed a year after its respective halvings. One macro aspect worth considering this time around though is that bitcoin’s other halvings happened during vastly different macro environments, when interest rates were close to zero and promoted stronger risk appetites from investors.

Across the globe, other optimistic signs regarding digital assets’ outlook emerged in Asia and Australia. In mid-April, Hong Kong’s Securities and Futures Commission granted permission for spot bitcoin and ether ETFs to launch and cater to both institutional and retail investors. On April’s final day, six ETFs, split evenly between bitcoin and ether products began trading. While the Hong Kong crypto ETF market is smaller than the U.S’, especially with mainland China investors currently not eligible to invest in the products, Hong Kong’s crypto trading ecosystem is more diverse than the U.S.’ and is further expected to grow with the enabling of options on its spot crypto ETFs. Elsewhere on the continent, crypto trading volume in Korea reached the highest levels since 2022. In fact, according to Kaiko, trading volumes denominated in South Korean won outpaced USD-based trading numbers in Q1 2024 ($456B vs. $445B). Later this year, the Australian Securities Exchange also expects to launch its own spot bitcoin ETFs, having already received multiple applications from issuers.

Examining the wider crypto ecosystem, ETH prices dropped to three-year lows compared to BTC as high transactions on the smart-contract focused L1 continue to pose ongoing challenges. The late May final deadline for spot ETH ETF approvals in the U.S. is looking more and more unlikely, given the SEC has yet to seriously engage with issuers. The SEC’s silence on the matter can perhaps be regarded as the loudest signal of all. This probability is reflected in the market as the ETHE discount, which was as low as 8% in March, has now increased again to a 25% discount. While market participants are clamoring for spot ETH ETFs to be next in the continued progression of crypto’s acceptance into mainstream financial markets, there is some merit to the argument that a delayed approval may be fortuitous in the long run as TradFi is just starting to embrace spot BTC products. Solana continues to garner headlines amidst the on-going meme coin bonanza; however, it was not immune to the wider crypto decline this month as SOL fell -33.25%, partially a result of the increased on-chain activity leading to many lost transactions. According to FT Partners’ Q1 2024 FinTech Insights report, digital asset fundraising picked up as 300 crypto startups raised money in Q1. While crypto startups led the way in financing volume across all fintech segments, the median deal size still trailed 2022 peaks by 40%.

As the calendar turns to May, investors should remain focused on the 21 crypto projects set to experience token unlocks and the upcoming 13F deadline. Next month $4B worth of tokens are expected to be released, the majority consisting of AEVO, PYTH and XRP, potentially resulting in downward press pressure. For the first time since spot BTC ETFs launched in the U.S, institutional investors will have to disclose their fillings. While some filings have already started to trickle in, most are expected by the mid-May deadline which could be quite telling regarding which investment managers have made the decision to allocate to bitcoin.

Portfolio Considerations

April marked a historic milestone for Bitcoin due to its halving event. Coinciding with this, the Runes collection debuted on the day of the halving, launched at Bitcoin block 840,000. This collection represents another fungible token standard on Bitcoin, devised by Casey Rodarmor, who also created Ordinals. The surge in bids to "etch" new collections on Bitcoin blocks drove transaction fees higher for miners as well. Notably, one transaction within block 840,000 commanded a fee of approximately 8 BTC ($510,000). This minting activity resulted in a temporary spike in miner revenues from fees, although this surge was short-lived. The Runes collection underscores the potential for using the Bitcoin blockchain for broader applications beyond its original scope, suggesting a shift towards a more versatile blockchain usage.

From an investment perspective, the Runes collection offers two key takeaways. First, it illustrates that miners can tap into revenue streams beyond block rewards. As Bitcoin's utility extends beyond mere payment systems, transaction fee-based revenue is likely to grow, aligning with predictions made by Galaxy's research team ahead of the halving. Second, it highlights sustained interest in fungible assets, including meme coins and tokens with limited practical use, demonstrating Bitcoin's growing relevance in the attention economy.

Meanwhile, the broader cryptocurrency sector saw continued institutional engagement, though regulatory pressures persist. The SEC issued a Wells notice to Uniswap, a leading decentralized crypto exchange, signaling potential regulatory scrutiny for operating as an unregistered securities broker and exchange. Uniswap has disputed these allegations, emphasizing that the tokens and liquidity pools on its platform do not constitute securities or are not considered securities trading. Despite these challenges, UNI's price fell over 10% on the day the notice was issued, reversing recent gains tied to a February proposal to redistribute transaction fees to token-staking holders. Other decentralized exchanges, including Aave and dYdX, also experienced significant price drops, -8.49% and -22% respectively in response to the regulatory news.

In the realm of blockchain and artificial intelligence, NEAR Protocol made headlines in April following its exclusive blockchain representation at Nvidia's March conference. Originally conceived as an AI project in 2017 without blockchain technology, NEAR has since reembraced its AI roots: the protocol has been active in AI-related initiatives, recently announcing the recruitment of AI specialists. NEAR's active addresses have surged to over 2 million, a dramatic increase from last year's 50,000, reflecting significant user adoption and engagement. This momentum is reflected in NEAR's performance, outpacing other major smart contract platforms with a monthly decline of only -14.47%, compared to an average loss of 28.4% among its peers in the Layer 1 sector in April.

Institutional Adoption Highlights

Crypto Performance and Volatility Data