January 2024 Market Commentary

February 12, 2024 

Market Commentary

Digital assets ended January essentially flat, with a slight appreciation for BTC (+1.50%) and minor declines for ETH (-0.52%) and the Bloomberg Galaxy Crypto Index (-3.04%). As always with crypto, the month-over-month numbers do not tell the whole story. The year’s first month was far from a quiet one, with January including a watershed moment for the digital assets industry as spot BTC ETFs began trading in the U.S. With Bitcoin celebrating its 15 birthday at the beginning of the month, it saved the festivities for a week later when the SEC approved 10 spot ETFs. Over a decade after the Winklevoss twins filed for the first spot BTC ETF in this country, the long-awaited market entry was greeted with the biggest all-time ETF launch for a single asset in terms of total volume traded.

Since this is crypto, it would not be true to form without a bit of an emotional rollercoaster. While January 10 will be remembered as the date the SEC finally relented after 20+ application denials, this transpired a day after a fake tweet from the SEC’s verified account briefly convinced the crypto world that spot BTC ETFs had been approved. After a review by X and the SEC’s mobile carrier, the SEC concluded that the hack stemmed from a ‘SIM swap’ attack.

The eventual ‘real’ approval brings greater acceptance to digital assets as trusted TradFi institutions are placing their brands behind the legitimacy of spot bitcoin ETFs. Crypto’s rightful place in portfolios was further boosted by Chainalysis’s findings this month that less than 1% of all on-chain crypto activity in 2023 involved illicit actors, a 19% decline year-over-year.

Overall, January saw $1.3B of net inflows (inclusive of the mass GBTC exodus) into the 10 newly minted products. While bitcoin concluded the month in the consistent $42,500-$43,000 weekly price range it has held the past two months, it did experience volatility in the immediate launch aftermath. Bitcoin briefly surpassed $49,000, levels not seen since December 2021, before retreating under $40,000. As has been historically the case with bitcoin’s price cycles, we expect bitcoin’s volatility to continue to trend lower and stabilize with increased adoption and acceptance. Spot BTC ETFs currently hold the first and second spots on the AUM rankings of all ETFs launched since the beginning of 2023, demonstrating the market demand for access to bitcoin in a regulated investment vehicle. Additionally, in less than a month of trading, the cumulative AUM in all spot BTC ETFs exceeded the dollar amount in silver ETFs, another indicator of investor interest as ‘digital gold’ settled into the top two for commodity ETFs by AUM alongside gold.

In reflecting upon January, we regard the launch of spot BTC ETFs as a positive signal for the crypto industry while believing the outlook for the coming year is even brighter. We are still waiting for many RIAs, platforms, and institutions to begin allocating to the asset class, which we expect to see in the coming 6-12 months as advisers conduct their due diligence and clients vocalize their desire for crypto to be included in their portfolios. With the $48 trillion U.S. wealth management channel largely unallocated to crypto, the ETF race is without a doubt in its early stages.

Now that spot BTC ETFs are officially live in the U.S., the attention turns to spot ETH ETF applications. The SEC delayed multiple filings this month, an expected outcome. Investors should be keenly aware of the May 23 final deadline for the SEC to weigh in on spot ETH applications from VanEck and 21Shares. Using the SEC’s approach with spot BTC ETFs as a precedent, we do not anticipate the SEC opining before the aforementioned spring date.

With BTC dominating headlines this past month, traders seized the opportunity to rotate into ETH. While its price closed January approximately where it began the month, ETH appreciated +9.80% vs. BTC in the week after the ETF launch before paring back the gains. According to Kaiko Research, BTC and ETH’s correlation dropped under 0.70 in January, a level not seen in three years. This divergence is also an important threshold as the two leading cryptocurrencies’ historical average correlation resides at 71%.

While Solana has seen a resurgence over the past year and established itself as ‘the third chain,’ SOL experienced a down month (-6.34%) as investors sought profits after the token gained +400% in 2023’s final quarter. SOL spent January jockeying for positioning with BNB (-3.80%) as the fourth largest cryptocurrency by market cap (after BTC, ETH, and USDT). In January, Solana experienced its highest daily transaction volume since October 2022 according to the Block’s Data Dashboard. As SOL has recaptured public interest, Solana-based protocols have sought to use this opportunity to direct attention to their own products mainly through airdrops. Recent airdrops including JTO, WEN, and most recently JUP can be cited as prominent reasons for daily transaction volume on the Solana blockchain exceeding $40B. Of note, JUP, the native token of a Solana-based decentralized aggregator, saw $700M worth airdropped.

Portfolio Considerations

As highlighted in our previous market commentary, the approval of a spot ETF introduced initial heightened volatility for bitcoin as investors shifted from existing investment vehicles to the new ETFs. The timing of the approval aligns well with favorable macroeconomic conditions for the asset. Looking ahead, the anticipated Bitcoin halving in April is expected to create upward price pressure due to a decreased supply of newly mined tokens. Concurrently, a global decline in both headline and core inflation is raising the likelihood of rate cuts by central banks this year, which has been historically beneficial for risk-on assets such as BTC. In the alternative cryptocurrency space, the race among Layer 1 protocols such as Solana and Ethereum remains intense, with both seeking dominance through technological advancements and strategic collaborations. Ethereum is enhancing its efficiency and cost-effectiveness with innovative Layer 2 scaling solutions, preparing its infrastructure for future challenges. In its effort to compete with Ethereum, Solana has also expanded its existing token standard to enable confidential transfers and enhance privacy. These upgrades are designed to meet the needs of businesses seeking compliance with regulatory standards. The improvements represent Solana's effort to strengthen its position in tokenization and real-world asset (RWA) adoption. Ava Labs, the foundation behind AVAX, is aiming to significantly boost scalability with Vryx, targeting a throughput of 100,000 transactions per second (TPS). Additionally, the upcoming launch of the HyperSDK testnet could enhance network efficiency and attract more developers.

In the Layer 2 space, Polygon has advanced its blockchain ecosystem by focusing on Chain Development Kits (CDKs). CDKs enable the creation of customized and adaptable blockchains, reflecting a growing interest in tokenization from traditional finance. The integration of Celestia (TIA) tokens into Polygon’s CDK has sparked a surge in interest and price, demonstrating the potential for broader adoption and investment in Layer 1 and 2 technologies.

Crypto Performance and Volatility Data