August 2024 Market Commentary

Market Commentary

While crypto markets stabilized over the course of August, the large sell-off that occurred in the month’s first week left August as a down month. During August, BTC declined -7.61%, ETH dropped -21.58%, and the BGCI Index decreased -16.88%. Year-to-date, all continue to post positive performance with BTC +40.32%, ETH +10.67%, and the BGCI Index +14.33%.

Dubbed by some as crypto’s ‘Black Monday’, the significant market decline that transpired in early August can be attributed to both macro and crypto-specific factors. We believe that macro events such as President Joe Biden’s exit from the presidential race, higher-than-expected U.S. unemployment rates, geopolitical concerns in the Middle East, and the unwinding of the carry trade following the Bank of Japan’s decision to raise rates catalyzed the selling as noted in last month’s market commentary. Crypto assets, in particular, experienced this impact given some of these events happened over the weekend when crypto markets were the only open outlet for market participants. While we are optimistic that the main reason digital assets declined was because markets were down across the board, we do believe ETH had an additional reason contributing to its weak August.

Over the course of the first weekend of August, Jump Trading’s Jump Crypto division unwound a sizable portion of its ETH and wrapped ETH positions. Despite initial speculation that Jump Trading was looking to distance itself from crypto, we do not believe that was the impetus for systematic selling. Regardless of Jump’s motive, the introduction of $470M of ETH and wrapped ETH into the marketplace resulted in downward price pressure on the world’s second-largest cryptocurrency by market cap. Some investors seized the opportunity to buy the dip as according to CoinShares, net inflows into digital asset flows for the month were positive at $58M. The inflows were led by $114.4M into ETH funds and $68M into multi-asset crypto funds. Bitcoin funds lagged this month, topping outflows with $93M leaving funds.

In August we obtained a second view into how institutional investors are allocating to the U.S. spot BTC ETFs following the release of Q2 13F filings. According to an analyst at K33 Research, the number of institutions holding spot BTC ETFs increased 27% this quarter to nearly 1,200. As of Q2 end, institutional investors own 21.15% of the U.S. spot BTC ETF market, representing a 2.41% improvement quarter-over-quarter. While some had surmised that retail investors would capitulate when market sentiment shifted negative, this does not appear to be the case. NYDIG notes that in the second quarter, non-13F filers accounted for $637.5M of BTC ETF inflows. Both institutional and retail continuing to accumulate during choppy market conditions should be considered a positive sign, one we hope will continue once bitcoin is no longer rangebound. Morgan Stanley’s approval of bitcoin ETFs for unsolicited access on its platform is likely a harbinger of the $48T wealth channel opening up, which could be a boon for the original cryptocurrency heading into the latter part of 2024.

In addition to the potential of new investors investing in crypto ETFs, the political and regulatory environments both appear to be improving in parallel. According to Public Citizen, a nonprofit consumer advocacy organization, crypto companies account for 48% of all corporate money contributed to the 2024 elections to date. Of note the $119M donated has been mainly to Fairshake, a non-partisan super PAC which has endorsed an equivalent number of Democrats and Republicans in congressional races. Despite former President Donald Trump and the Republican Party attempting to make themselves the crypto-friendly party, Fairshake’s bi-partisan support of pro-crypto candidates demonstrates that at its core crypto is a cause people can champion regardless of their ideological views. On the regulatory front, it is the lack of news that is worth highlighting. Compared to the past two years, the SEC has greatly reduced its number of crypto enforcement actions. So far in 2024, the SEC has only brought nine crypto enforcement actions. Annualizing this amount would equate to a 91% decrease since 2022 and a 77% year-over-year drop. While this SEC administration has not been favorable to crypto, a pullback in its regulation by enforcement approach would benefit the digital assets industry going forward.

Examining other sectors of the crypto landscape, stablecoins, XRP, and TON also generated headlines in August. This past month stablecoins’ market cap surpassed its prior highs, reaching a new all-time level of $168.1M. While the current demand for stablecoins is likely motivated by investors seeking stability during the turbulent market, the increase in stablecoin utilization could benefit crypto prices long-term as stablecoins typically are one half of trading pairs, particularly in the DeFi ecosystem. XRP (-8.20%) received a boost when a judge ruled that Ripple, the company that launched XRP, must pay a $125M fine which was substantially lower than the billions the SEC sought. While XRP was down overall for the month, likely due to the overall market conditions, the token rallied 20+% in response to this court decision. TON (-19.73%), the Telegram-linked token, declined following the arrest of Telegram CEO and co-founder Pavel Durov in late August. The homonymous blockchain, which was initially developed by Pavel and his brother, is no longer associated with Telegram, but market participants still reacted negatively to the news of French authorities detaining Durov for enabling alleged criminal activity on Telegram’s platform.

Portfolio Considerations

The trend of going more mainstream and growing integration has been most pronounced this year within the payments and manufacturing sectors. This trend aligns with the fundamental use cases of digital assets, primarily payments, and the enhanced transparency blockchain offers, particularly beneficial for supply chain management. However, Sony's latest initiative marks a notable divergence from these conventional applications, showcasing a broader scope of blockchain and Web3 adoption within a global conglomerate.

Sony Group, consisting diverse entities such as film, finance, semiconductors, and gaming, has developed the “Soneium” blockchain. Soneium aims to address the current barriers to mainstream blockchain adoption by facilitating existing Sony’s user interactions with Web3 games and NFT marketplaces. Despite a decline in trading volumes and interest post the 2021 NFT boom, the core utility of NFTs—interoperability across various digital environments—remains intact. As the manufacturer of PlayStation and the studio behind franchises like Spider-Man and James Bond, Sony possesses a wealth of content that could be leveraged across multiple platforms, potentially creating synergistic value and novel use cases for its existing user base.

Soneium operates as a Layer 2 solution on Ethereum, utilizing optimistic roll-up technology for scalability. Optimism, an industry leader in the Layer 2 space recognized for its expertise in roll-up technology, and Chainlink, a leading oracle provider bridging real-world data to blockchain, have partnered with Sony for the testnet launch. Following the announcement of their involvement, Chainlink (LINK) rose by 2.2%, and Optimism (OP) by 4.5%, slightly outperforming Bitcoin and Ethereum, which were down 1.2% and 0.3%, respectively.

Further positive developments for LINK included its listing on HashKey, one of Hong Kong's two fully licensed crypto exchanges, alongside Avalanche (AVAX). Previously, HashKey's offerings for retail clients were limited to Bitcoin and Ethereum. The expansion to LINK and AVAX was attributed to their minimal regulatory conflicts. This move coincides with new regulatory frameworks introduced by the Hong Kong SFC for digital asset trading platforms. Currently, only two exchanges hold SFC licenses, and regulatory complexities concerning mainland investors have prompted withdrawals of applications by local affiliates of China-linked exchanges such as OKX and Huobi. Despite headlines from the Hong Kong Monetary Authority's stablecoin pilot program in July, overall sentiment for HK to be the regional hub for crypto trading, both OTC and on exchanges, remains subdued.

In the DeFi sector, MakerDAO has announced a rebranding initiative under the name SKY, aimed at simplifying the user experience. The rebranding is one of the phases of MakerDAO’s “Endgame” plan approved in Oct 2022. Maker’s DAI, the third-largest stablecoin with a market cap of $5.34 billion, is distinct from other major stablecoins due to its algorithmic nature. Unlike centrally issued stablecoins backed by fiat assets, DAI leverages smart contracts and diverse collateral to maintain its peg to the USD. Such approach has been hailed as a more decentralized way of issuing stablecoins. The upcoming version of DAI, which is to be renamed as USDS, will include a freeze function, allowing the suspension of wallet transfers—a feature commonly seen in centralized stablecoins like USDT and USDC, typically used to address illegal activities and AML concerns. The market response to MakerDAO's rebranding announcement was positive, with a modest 4% gain in MRK. Other phases of the endgame includes creation of SubDAOs to reduce the workload of and improve governance processes from the current model and the launch of AI tools.

Institutional Adoption Highlights

• The state of Wyoming is planning to launch a US dollar backed stablecoin, WST, in the first quarter of 2025

• ZKB, one of Switzerland's largest banks, is entering the crypto market by offering services for institutional clients. This move shows a significant step towards integrating traditional finance with cryptocurrencies

• PayPal's $PYUSD stablecoin recently hit $1B in market cap – just 383 days after launch

• Nasdaq is seeking SEC approval to introduce Bitcoin index options, offering institutions a new way to manage crypto risk. The options would be based on a real-time index, potentially further integrating Bitcoin into traditional finance

• South Korea’s National Pension Service invested nearly $34M in MicroStrategy shares as part of its strategy to gain indirect exposure to $BTC. The fund, which also holds Coinbase shares, sees the move as a long-term play on the future of digital assets​

Crypto Performance and Volatility Data