August 08, 2023

July 2023 Market Commentary

Galaxy Asset Management

August 8, 2023

Market Commentary

Crypto markets remained range-bound in July as BTC and ETH retraced some of June’s positive performance, down -4.06% and -3.70% on the month to $29,174 and $1,856, respectively. Nonetheless, it was not all doldrums, as progress continued to be made on both the regulatory and institutional fronts.

From a regulatory perspective, there were rulings that both clarified and clouded regulatory outlooks, creating a roller-coaster month for the crypto world. On July 13th, a U.S. federal judge declared XRP tokens are not securities. XRP is the fifth largest cryptocurrency by market cap and was launched in 2012 by the company now known as Ripple Labs. The SEC first sued Ripple and its two founders in December 2020, alleging that they had illegally raised $1.3 billion through an unregistered security offering.

This landmark ruling provides some guidance on regulatory ambiguity, potentially spurring institutional investor participation in crypto markets. Additionally, it could pave the way for tokens like Solana and Avalanche to access larger capital pools via exchanges. However, it is worth noting that the SEC claimed a partial win, as institutional sales of XRP were deemed unregistered security offerings. Within the first three hours following the announcement, the total crypto market cap rose nearly 5%, with XRP surging 50%.

But, on July 31st, clarity was blurred when a federal judge dismissed Terraform's motion to dismiss the SEC’s case against them, sparking regulatory confusion. The judge challenged the Howey Test analysis used in the Ripple case, creating an apparent contradiction in the same federal court (Southern District of NY). Now, it's expected that the SEC will appeal the Ripple ruling. However, both judges underscored a key positive point for crypto market participants: they agreed that the status of tokens as investment contracts depends more on how they're sold rather than the intrinsic nature of the tokens themselves.

Currently, while markets may be less focused on bitcoin given the XRP ruling, BlackRock has become increasingly public about its support for the asset class. During a July 14 interview with Fox Business, BlackRock CEO Larry Fink stated “bitcoin is an international asset” that is “digitizing gold... We’re a believer in digitization of products… ETFs was a big revolution from the mutual fund industry… and we do believe that if we can create more tokenization of assets and securities…it could revolutionize again finance.”

As Galaxy’s Head of Firmwide Research Alex Thorn puts it, “BlackRock is the iconic ‘institutional investor.’ It is the world’s largest purveyor of ETFs, the king of democratizing access to investing, and the cornerstone of most investment portfolios. The firm’s promotion of Bitcoin heralds the realization of one of crypto’s longest running mantras: ‘the institutions are coming.’ Now it’s official – the institutions are here. And this institution, BlackRock, is the maven of mainstream adoption.”

Portfolio Considerations

Majors

Range-bound bitcoin price action characterized most of July. Even after several positive news events during the month, the market appeared resigned to the fact that bitcoin is unlikely to break above $31k in the short term. Bitcoin is currently in its sixth week of trading between $28k and $31k, and we expect this behavior to extend through the end of Summer, barring a major news event, especially as volatility continues to remain compressed.

From a portfolio construction perspective, bitcoin continues to be diversifying to traditional assets. When looking at the 45-day rolling correlation of daily returns, bitcoin is currently negatively correlated to the S&P 500 and gold. Ethereum, which celebrated its eighth birthday on July 30, continues to be positively correlated with bitcoin by the same metric.

Ethereum's staking rate, that is the percentage of total ETH supply staked, exceeded 20% for the first time in July. Ethereum core developers estimate that if the validator queue continues to be maxed out for the next 9 months, the ETH staking rate could exceed 50%. There are growing concerns that the increasing size of the validator set could place excessive strain on nodes and lead to complications in future upgrades. As a result, developers are exploring proposals aimed at managing the growth of the validator set. These proposals involve implementing limits on the churn rate and reducing rewards.

Alternatives

While BTC and ETH depreciated during the month, several alt coins experienced large price appreciation on the heels of the XRP ruling. XRP, MKR, UNI, SOL, and OP all surged by over 20% during the month. Today, we’ll delve deeper into two other success stories: LINK and WLD.

The tokenization of real-world assets (RWAs) has emerged as a prominent trend this year, driven by the growing demand to bring Treasury yields on-chain in response to a decline in DeFi yields. Notably, RWAs now constitute more than half of MakerDAO’s assets and generate most of Maker's revenues. A recent report by Bank of America projects that traditional asset tokenization could surpass $16 trillion over the next 5-15 years. Oracles are a critical facilitator for tokenization as the middle-ware connecting smart contracts with off-chain data, and Chainlink has emerged as the leading standard for off-chain and cross-chain compute. Earlier this month, Chainlink launched Cross-Chain Interoperability Protocol (CCIP) for users on Ethereum, Polygon, Optimism, and Avalanche. CCIP is a new cross-chain communication standard built on top of Chainlink's consensus and transport layer that is powered by its oracle network. CCIP facilitates arbitrary messaging and programmable token transfers between different blockchains, enabling developers to program more complex multi-chain tasks. As a result of Chainlink’s now heightened potential to transform and accelerate adoption of DeFi, the price of LINK rallied by over 19% in July.

In other news worth watching, Worldcoin, co-founded in 2019 by Alex Blania and OpenAI CEO Sam Altman, began its global rollout after launching WLD token on Optimism Mainnet. According to the white paper, Worldcoin aims to create a “globally-inclusive identity and financial network” that has the potential to “increase economic opportunity, scale a reliable solution for distinguishing humans from AI online while preserving privacy, enable global democratic processes, and show a potential path to AI-funded UBI." At the current price of ~$2.0, WLD has a fully diluted market cap of $19bn, making it the #7 most valuable token across the entire crypto market. Further, its more than 2 million registered World ID users already account for ~30% of the 7 million unique addresses on Optimism.