June 06, 2023

May 2023 Market Commentary

Galaxy Asset Management

June 6, 2023

Market Commentary

Crypto markets sold off over the month of May (BTC: -7.5%, ETH: -1%) amid tepid performance in broader risk assets and strength in the U.S. dollar. Summer appears to have come early for financial markets, but especially for crypto, as monthly crypto exchange volumes of $424b are down to the lowest level of the year, down 72% compared with May of 2022. It is worth remembering, however, that May of last year marked the beginning of the great crypto deleveraging, as algorithmic stablecoin UST famously broke it’s peg on May 11th, 2022, wiping out more than $60b of value within hours.

With that being said, this past May has been marked with optimism from builders, politicians, and nation states, despite the lackluster spot volumes.

From the builders: Elevated activity on the Bitcoin network has brought a resurgence in focus on Bitcoin’s scaling solutions. The Bitcoin blockchain is currently only capable of facilitating 7 transactions per second. In order to scale the network to the mainstream, Layer 2 solutions such as the Lightning Network have been implemented to facilitate much higher throughput. This month, Lightning Labs, a major builder of tools for the Lightning Network, released an updated proposal to issue traditional assets on the Bitcoin network. Known as TARO, this protocol will enable product market fit for fast payments across many asset types and is slated to be adopted by the network in 12-24 months.
From the politicians: The two leading U.S. presidential candidates outside of Joe Biden and Donald Trump both voiced support for Americans’ right to use bitcoin and digital assets this past month. Democrat Robert Kennedy Jr gave a keynote speech at the annual Bitcoin conference in Miami, while Republican Ron DeSantis supported people’s right to use digital assets during his campaign announcement on Twitter Spaces. While neither of these candidates are currently leading in polls, it is still extremely notable that presidential candidates from both political parties are expressing support. Meanwhile, the Biden administration has actively and specifically targeted crypto, going so far as to invoke “tax loopholes for crypto bros” in its debt-ceiling negotiations. Its Council of Economic Advisors has written harshly about Bitcoin and crypto, its National Economic Council has called for crackdowns and “mitigation” of crypto’s impact on the economy, its allies in Congress have repeatedly criticized the industry and called for crackdowns, regulators it has appointed at the SEC and OCC have embarked on expansive campaigns of regulatory enforcement and discouragement, and on and on. In positive news, Biden's proposed 30% tax on Bitcoin miners has been rejected (for now).
From the sovereigns: The Kingdom of Bhutan is raising a $500m fund to expand its existing bitcoin mining operation which has existed since 2019. It’s no surprise that a nation state with large amounts of hydroelectric power is seeking ways to monetize that baseload efficiently. In addition, amassing credibly neutral money makes sense given Bhutan’s geopolitical situation, nestled between much larger and more powerful nations such as China and India. When El Salvador formally adopted Bitcoin as legal tender in 2021, we wrote that we would likely see more nation states get involved in Bitcoin and bitcoin mining due to both the profitability and the sovereignty it can offer. The world didn’t know Bhutan was mining bitcoin until recently, and it’s possible there are already other nation states doing the same. And we still expect we’ll see more in the future.

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What does the post-FTX state of crypto look like?
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Portfolio Considerations

While broader crypto markets experienced lackluster performance in May, the ETH/BTC ratio exhibited a notable uptrend gaining ~8%, over the course of the month to 0.069. This is the highest level since the Shapella upgrade on April 12th when the ratio hit 0.071. While the two largest crypto assets were modestly down over the month, there have been several recent developments within digital assets that paint a constructive outlook over the near-term.

First, Tether, the largest stablecoin issuer, announced that it will start investing up to 15% of its net profits into BTC on a monthly basis. Not only does this help to diversify Tether’s reserves, but it will also create a consistent buying cadence which is supportive for BTC prices. According to their first quarter financials, Tether had $1.5 billion in net profits which would equate to over $200 million worth of bitcoin added to their balance sheet over the period. We expect this trend to continue as the stablecoin market continues to grow and t-bill interest rates remain elevated.
Next, staked ETH increased by 2.7 million over the course of May, bringing the total number of ETH staked to over 21 million (17.5% of total supply). This highlights the demand for liquid staking protocols like Lido, which allow users to pool their funds to become validators on Ethereum, bypassing the 32 ETH minimum requirement. Lido’s token ($LDO) was able to benefit from this narrative, up +5.3% in May. Further, Lido launched the mainnet version of Lido v2 on May 15, enabling stakers to redeem from the protocol. Now, ETH stakers can burn their stETH (staked ETH) and exit the protocol at a ratio of 1:1 (ETH:stETH). Despite this liquidity unlock, the total amount of staked ETH is continuing to rise, further securing the network.
Finally, Hong Kong’s securities and futures regulator announced plans to allow retail traders to invest in crypto as soon as June 1st. Licensed exchanges will be allowed to sell digital assets that meet certain requirements, likely including BTC and ETH. Stablecoins will not be permitted for trading. Some have speculated that Hong Kong’s framework for crypto trading will serve as an experiment for China to potentially remove their 2021 ban on crypto trading. China is the second largest economy, so this would be a major development for digital assets access globally.
While these intra-crypto developments may prove to be tailwinds for crypto assets, it’s important to keep in mind the variety of intra-crypto headwinds that are on the horizon, such as the expected Mt. Gox bitcoin selling or the regulatory uncertainty for alt coins as potential unregistered securities. However, we believe that the current macroenvironment will prove to be a larger catalyst than these idiosyncratic crypto stories over the coming months. The ongoing U.S. debt ceiling negotiations have put investors on edge, with Fitch putting the U.S.’s AAA credit rating on watch negative. The ongoing banking crisis and “global de-dollarization” narrative can potentially continue to push Bitcoin’s adoption forward, especially as we enter the next halving of BTC in April 2024.

Institutional Adoption Highlights

Crypto Performance and Volatility Data