September 11, 2023

August 2023 Market Commentary

Galaxy Asset Management

September 11, 2023

Market Commentary

Crypto markets sold off along with other risk assets in August, with BTC & ETH down ~10.48% to $26,117 and ~10.92% to $1,653, respectively. A mid-month selloff came abruptly on August 17 with bitcoin trading as low as $25,250 and ether as low as $1,540, after more than $1bn in long liquidations on futures markets. The decline was exacerbated by low liquidity and record-low volatility leading into the event.

Then, on August 29, a panel of three judges of the US DC Circuit Court of Appeals unanimously ruled in favor of Grayscale in their suit against the SEC, by vacating the SEC’s denial of Grayscale’s application to convert GBTC to a spot ETF. BTC was up 7.5% on the news along with other cryptoassets. The ruling is a rare and harsh rebuke for the SEC, although it certainly does not mean that a GBTC conversion is immediately forthcoming. The outcome of the case, in practical terms, kicks Grayscale’s application back into the SEC’s bitcoin ETF queue, and increases the perceived odds of a spot Bitcoin ETF approval this year. Galaxy believes a spot Bitcoin ETF would provide safe, transparent, efficient, and simple exposure to Bitcoin for large swaths of investors who currently lack sufficient market access vehicles. The U.S. is lagging behind other nations in this space, with at least 13 jurisdictions already offering spot-based Bitcoin ETPs, including major economies like Canada and Brazil. As expected, on August 31, the SEC delayed their spot BTC ETF decisions by 45 days.

Even before the Grayscale decision, bitcoin and ether had held up in the first half of August in the face of wild moves in bond markets that had markets reeling. Further, despite the doldrums of late-Summer, institutional adoption of crypto continues at a steady pace with a few notable headlines from August:

PayPal announced the launch of a new U.S. dollar-denominated stablecoin, PayPal USD (PYUSD) on Monday, August 7. PYUSD is a stablecoin built on Ethereum that PayPal will roll out to customers gradually over the coming months, allowing them to transfer the stablecoin to external wallets, transact in person-to-person payments, fund purchases with PYUSD at checkout, and convert the stablecoin to and from any of PayPal’s supported cryptocurrencies.
An entrant of the size and stature of PayPal will act as an accelerant to the adoption of dollar-based payments over blockchains. Even now, stablecoins account for over 70% of on-chain transactions, a number than may increase further after large payments companies such as PayPal lean into the innovation. Further, PayPal’s entrance may be welcomed by many within the industry in that they may advance efforts towards more regulatory clarity around stablecoins in the U.S.
Coinbase approved by National Futures Association (NFA) to operate as a Futures Commission Merchant (FCM). The designation allows Coinbase to act as a broker for CME futures products (such as BTC and ETH futures) and offer those products to eligible retail users on its platform. The approval is significant in that Coinbase is the first crypto-native firm to achieve FCM status, signaling the industry’s continuing integration and acceptance into the regulated financial world.
The Fed issued new guidance on banks’ crypto activities (read our full write-up from Galaxy Research here). On August 8, the Federal Reserve published two separate notices, each focused on supervision of member banks involved with cryptoassets. The first notice expands on Jan. 27 guidance from the Fed and explains the specific process that state-chartered Fed members will need to complete to be approved to issue, hold, or trade in stablecoins. The second notice is an initial announcement of the creation of a wholly new supervisory regime covering “novel activities,” which includes cryptoasset activities but crucially also formalizes the Fed’s interest in scrutinizing banks that support mainstream fintechs. Neither notices prohibits nor approves any type of activity. It’s hard to know at this point whether these notices signal any shift in behavior from the Fed. However, given that these notices do not materially alter the status quo but do formalize and provide “written” clarity on the Fed’s positions on these issues, they can be seen to be a marginal net positive. It is unlikely that these new supervisory regimes will result in an increase in crypto activity at banks in the near term, but the formalizing of this guidance does open a path for banks to press the Fed to allow them to do these activities.

Portfolio Considerations

Almost 6-months after Ethereum’s Shanghai upgrade which allowed for all staked ETH (then locked in a smart contract) to be voluntarily withdrawn, the amount of ETH that is staked has only grown, now standing at 28mm ETH, more than 20% of the total supply. This figure is almost double the amount of ETH held on exchanges (14.7mm), according to Glassnode. In addition to this encouraging on-chain behavior, several asset managers including VanEck, Grayscale, and ProShares, have outstanding Ethereum futures ETF applications awaiting approval with the SEC. Important to watch will be the mid-October deadline for a wave of these applications. Increasingly, market participants have been encouraged by the possibility of an approval, with promising headlines such as a New York court calling ETH a commodity in a suit against Uniswap.

On Wednesday, August 2, at block height #2,520,000, the Litecoin network completed its third halving (read our full write-up from Galaxy Research here). Halving events are scheduled reductions in block rewards that occur automatically on Litecoin every 840,000 blocks, approximately 4 years. These events are modelled after Bitcoin halving events, which similarly reduce issuance of coins by 50% every roughly 4 years. As the “silver to Bitcoin’s gold,” (an old narrative whose popularity has waned over the years), Litecoin shares many of the same features as Bitcoin, the main difference between the two being block times. Due to the impact on coin supply, halvings are major events for cryptocurrency traders that often spark increased trading activity and speculation. Halvings are also important events impacting the mining economics. Miners are the stakeholders of a proof-of-work blockchain who compete with computation to append new blocks and earn block issuance rewards. A recurring question in both the Litecoin and Bitcoin communities is whether miner economics will continue to be sustainable over the course of several more halvings still to come. Bitcoin’s next halving is expected to occur in April 2024. To learn more about the fee dynamics of Bitcoin, read this Galaxy Research report.

Institutional Adoption Highlights

Crypto Performance and Volatility Data