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Each month, we aim to provide investors with an overview of the crypto market events from the past four weeks. While we generally wait until month's end to recap the digital asset landscape, the recent price declines have prompted us to address this development before covering the top crypto stories in July.
A week ago, bitcoin was testing $70,000, buoyed by momentum from the 2024 Bitcoin Conference, with all-time highs in sight. Seven days later the dynamic had shifted significantly. BTC fell below $50,000, ETH dropped 25+% WoW, and altcoins saw greater downturns. We believe several macroeconomic factors external to digital assets have contributed to this sharp depreciation. President Joe Biden’s decision not to run for re-election has led to the loss of momentum of the “Trump Trade,” as polls now expect a more closely contested election between Vice President Kamala Harris and former President Donald Trump. Markets were further spooked on Friday when the U.S. unemployment rate came in at 4.3%, its highest since 2021. While the indicator’s namesake suggests otherwise, the Sahm Rule indicates that the U.S. economy may be in a recession based on the latest unemployment numbers. Internationally, geopolitical uncertainty in the Middle East is causing markets to react based on the potential magnitude of Iran’s response. Lastly, and perhaps most importantly, the unwinding of the carry trade has led to market panic. Last week, the Bank of Japan raised rates above 0% for the first time since 2004, while the Fed signaled potential rate cuts later this year. This scenario poses challenges for investors who have been borrowing yen at low interest rates to invest in higher-yield assets in other markets. Historically, the yen appreciating against the dollar has indicated risk-off sentiments, leading to sell-offs that particularly affect higher-risk assets like cryptocurrencies. Despite these trends, bitcoin continues to be one of the better-performing assets in 2024 when compared to the year-to-date of +5.54% vs. gold, +8.43% vs. the S&P 500, and +10.92% vs. the Nasdaq.
If you’re interested in understanding the latest developments in crypto and their impact on your portfolio, please contact us at Galaxy Asset Management.
Market Commentary
Examining July’s price movements for BTC (+4.29%), ETH (-5.71%), and the BGCI Index (+4.88%) does not capture the significance of this past month’s developments in crypto adoption.
July marked the introduction of spot ETH ETFs in the U.S., making ether the second cryptocurrency, after bitcoin, to be approved for trading in this manner. With spot ETH ETFs beginning to trade on July 23, 72% of the global crypto market cap is now accessible to U.S. investors in ETF form. On their first day of trading, the nine newly launched spot ETH ETFs cumulatively saw $1B+ in trading volume. Excluding the Grayscale trusts/conversions, the ETH funds experienced 28% of the spot BTC ETF day one volume, roughly in line with consensus estimates of the overall market opportunity for spot ETH ETFs. With $590M in first-day flows ($107M including Grayscale outflows), the spot ETH ETFs realized the second-highest ETF launch performance based on flows, following January’s spot BTC ETF launch). Despite the positive start, the Grayscale outflows surpassed the combined inflows into all other spot ETH ETFs by month's end. At market close on 7/31, the spot ETH ETFs collectively held $9.077B in AUM.
One underlying component of the spot ETH ETFs to continue monitoring is the inability to stake. While the SEC has been cautious about approving staking in the ETFs, staking continues to be impacted by the new spot funds. We anticipate that the introduction of spot ETH ETFs will result in long-term upward price pressure given the accessibility to investors through regulated channels. Due to ether’s price appreciation, earning rewards for staking ETH may be seen as more attractive to market participants who can partake in the activity. This is significant given that ether’s liquidity on spot exchanges is approximately 50% of bitcoin’s, implying that the total funds needed to impact the price of ETH are about half of those needed for BTC.
In July, BTC’s price fell into the mid-$50,000s during the Fourth of July holiday before rebounding later in the month. This followed the removal of the German government and Mt. Gox overhangs and was further supported by former President Trump’s Bitcoin 2024 appearance. This past month, the German government completed the sale of 48,000 bitcoin, removing sell-side pressure that has affected the original cryptocurrency’s trajectory dating back to June. While market participants will likely welcome the news that the German government has completed its selling, the crypto industry has been anticipating the resolution of another market overhang to dissipate for nearly a decade: the Mt. Gox bankruptcy. Crypto markets have been concerned about potential movements of assets from wallets associated with the Mt. Gox trustee. After 10 years, creditors electing early lump-sum and intermediate-term repayments received their BTC and BCH payments in July. Bitcoin prices responded negatively, however, as we previously noted in our May note, fears of mass selling are likely overstated given that the creditor pool largely consists of bitcoin supporters who are expected to hold onto their returned assets. The Mt. Gox trustee still holds nearly $3B in BTC (using prices as of 7/31), which will be returned to creditors upon the resolution of the bankruptcy, which could potentially take another few years to unfold. For the foreseeable future, a significant uncertainty that has been impacting the crypto markets may be resolved.
Despite the sell-side pressure in July, bitcoin’s dominance, or the percentage of the cryptocurrency market cap it holds, reached its highest level since April 2001 at 52.7%. Another notable trend with bitcoin is the shift in trading hours. According to Kaiko Research, bitcoin’s weekend trading volumes reached all-time lows in H1 2024. While round-the-clock trading has been a hallmark of cryptocurrencies, it appears to be decreasing as spot BTC ETFs direct most trading volume to traditional market hours.
Following market challenges affecting Bitcoin’s price in July, recent developments cleared the path for potential upward movement. At the 2024 Bitcoin Conference in Nashville, Republican Party nominee Donald Trump stated that the U.S. should retain its 210,000+ BTC holdings and propose the establishment of a “strategic national bitcoin stockpile.” The former President also selected Ohio Senator J.D. Vance as his running mate. In Vance, Trump would have a potential Vice President who disclosed bitcoin holdings between $100,000-$250,000 in his latest federal financial disclosure as of 2022. This shift in perspective is notable, especially considering that, despite previous criticisms of cryptocurrency, the U.S. remains one of the largest Bitcoin holders globally. By comparison, MicroStrategy, with bitcoin as the company’s primary treasury asset holds slightly more (226,500 BTC as of 7/31). This contrasts with MicroStrategy as the U.S. has not purchased any of its holdings; rather, they were seized as part of criminal investigations. Regardless of the initial means of obtaining its holdings, the United States potentially committing to creating a “strategic national bitcoin stockpile” would be a significant step towards bitcoin’s mainstream acceptance. Additionally, in July the GOP announced its 2024 platform which included the following language: “Republicans will end Democrats' unlawful and unAmerican Crypto crackdown and oppose the creation of a Central Bank Digital Currency. We will defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control."
With Republicans emphasizing crypto as an issue in the upcoming elections, the pro-crypto super PAC, Fairshake, has surpassed the Make America Great Again super PAC in fundraising for this election cycle. Sensing investor sentiment shifting, Kamala Harris’s campaign has sought to inform the crypto community that the Democratic nominee will be more receptive on topics such as AI and crypto than her predecessor. Of note, Mark Cuban, a prominent crypto advocate, has been in contact with Harris’s team to discuss digital asset policy. In the near term, it is unlikely that we will see much political movement in Washington on the crypto front prior to the election. The outlook for the crypto industry suggests that, regardless of the election outcome in November, the new administration is expected to adopt a more favorable stance compared to the current administration.
To conclude, it is important to consider cryptocurrency investments beyond bitcoin and ether. While the two largest digital assets have experienced gains in 2024, the year has presented more challenges for altcoins. According to Messari, a majority of the top 100 coins by market cap have declined year to date. The crypto venture scene, though, offers a more promising outlook as Galaxy Research’s recent report concluded that in Q2 crypto investing recovered as the capital invested increased 28% compared to the prior quarter. Galaxy’s Alex Thorn and Gabe Parker highlighted how the valuations of VC-backed crypto companies rose to the highest levels last quarter since the 2021 bull market, indicating a competitive environment for crypto startups.
Portfolio Considerations
As we enter the low liquidity, slower summer season, the outperformance of mega caps against altcoins has prevailed in July. BTC dominance has risen from May's lows to slightly more than half of the total crypto market cap. The altcoin market remained relatively stagnant in July, lacking strong catalysts for renewed risk-on sentiments in altcoins, and eventually dipped below $1 trillion to $900 billion following the global risk-off event after the July job report.
Despite this, developments within the ecosystem and from small-mid cap coins protocols have not been paused. A positive trend has emerged among established DAOs and protocols: sophisticated and resilient treasury management of their crypto holdings. While not all protocols maintain separate treasury functions, those that do often hold a mix of major cryptocurrencies, their own tokens, and stablecoins. Some are now shifting towards a more balanced and TradFi-like diversification model.
In April, ArbitrumDAO announced the Stable Treasury Endowment Program (STEP), diversifying $35 million worth of ARB tokens (approximately $29 million) into stable, liquid, and yield-bearing assets. The primary goal of this program is to diversify holdings to prepare for crypto market downturns as well as to reflect a community proposal to increase and grow real-world assets (RWAs) within Arbitrum. This initiative aims to enable the ecosystem to trade and build RWAs on top of Arbitrum. From 17 tokenized fund firms that applied, six products were selected, including an $11 million allocation to BlackRock’s BUIDL on Ethereum. The committee also allocated $6 million each to Ondo’s USDY and Superstate’s USTB, two other leading tokenized funds providers.
The selection process mirrored traditional treasury fund selection criteria, focusing on AUM of funds sufficient liquidity, no leverage, and no discretionary hedging or positioning by management firms. This diversification is expected to generate yields of around $1-1.5 million per year. Currently, there is no allocation to medium or high-risk RWA yield strategies such as private credits or real estate, although a small group of voters expressed interest in expanding the investible universe for capital gains in addition to yield. The committee plans to diversify 1% of the treasury into RWAs each year to minimize unnecessary selling pressure.
This is not Arbitrum's first initiative to invigorate its ecosystem. Previously, ArbitrumDAO allocated 35 million ARB to distribute to protocols that could attract new users and liquidity. The price of ARB has remained relatively stable, trading between $0.6 and $0.8 following these developments.MakerDAO, one of the oldest lending platforms on Ethereum, has also announced a $1 billion investment of its reserves into tokenized UST funds. MakerDAO has been diversifying its treasury off-chain since 2022, but this marks its first direct investment in tokenized funds. Ripple followed suit, allocating $10 million into tokenized funds to boost traditional finance instruments on its platform.
The market for tokenized UST funds has doubled to $2 billion since April, with more protocols looking to host these RWAs on their blockchains. Despite the growth, smaller and late entrants struggle to gather significant flow and liquidity. Large funds predominantly reside on Ethereum and Solana mostly, with Stellar as an exception for being a key player in tokenization. The strategy of large treasuries investing in tokenization efforts is just the beginning of the broader adoption of RWAs within DeFi. These experiments could create additional opportunities for these funds to be fully integrated into DeFi, such as lending and borrowing against these funds, or sufficient secondary market liquidity, for compelling use cases for tokenized funds for the broader users.
On the other end of DAO developments, Compound recently faced a potential governance attack by a group of voters attempting to move assets from Compound’s vault to their own. This proposal, from a previously unknown group called “Golden Boys,” narrowly won the vote but was later canceled after an agreement with the broader team. This incident highlighted the vulnerabilities within DAO structures, emphasizing the need for active community participation to prevent governance attacks and ensure the ecosystem's integrity. The recent attack on Compound underscores the challenges of maintaining a democratic DAO structure amidst occasional plutocracy issues. As indications of a renewed DeFi summer emerge, highlighted by the increasing DEX to CEX trading volume ratio, heightened activity from governance token holders following price increases could stimulate renewed participation in DeFi governance.
Institutional Adoption Highlights
Crypto Performance and Volatility Data
