June 06, 2024

May 2024 Market Commentary

Galaxy Asset Management

June 6, 2024

Market Commentary

In our last Monthly Market Update, we wrote “The late May final deadline for spot ETH ETF approvals in the U.S. is looking more and more unlikely, given the SEC has yet to seriously engage with issuers.” While Galaxy Asset Management always strives to provide the most accurate market perspective, this is one occasion where we’re comfortable being wrong given the transformative ramifications the SEC’s decision will have on digital assets.

The SEC’s approval of 19b-4 forms for eight spot Ethereum ETF applications, which paves the way for the second largest cryptocurrency to soon join bitcoin as another option for investors seeking regulated digital asset exposure, pleasantly caught many in the crypto industry by surprise. Less than 10 days prior, Bloomberg’s senior ETF Analyst Eric Balchunas commented that approval odds were “slim to none”, the Grayscale Ethereum Trust (ETHE) was trading at a 20+% premium (with the premium serving as a proxy for approval given Grayscale’s desire to convert the Trust to an ETF), and the Polymarket prediction market priced approval chances as low as ~10%.

Approval sentiment began to shift after former President Trump held an event at Mar-a-Lago in early May for buyers of his non-fungible token (NFT) trading cards. During the evening Trump stated "The Democrats are very much against [crypto]. And I say this, a lot of people are very much for it ... and I'm fine with it.” While taken at face value this remark was insignificant, it can be seen as a shift from his presidency when the then President Trump tweeted “I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.” In a political move the presumed Republican Party nominee had begun courting the crypto industry’s vote, of particular importance as a recent Harris Poll found that 1 in 5 battleground state voters deem crypto a major issue in the 2024 election. The Biden administration, which has been regarded as ambivalent at best and hostile at worst to crypto, needed to strategically counter. It is highly likely that the SEC was strongly influenced by the current presidential administration in flipping its stance on spot ETH ETFs.

Forcing President Biden’s hand even more was the pressure coming from members of his own party in Washington. In May both the House and Senate voted to repeal Staff Accounting Bulletin 121 (“SAB 121”), a controversial accounting rule that makes it prohibitive for traditional financial institutions to serve as digital asset custodians due to the requirements to hold cryptocurrencies as liabilities on their balance sheets. In the respective votes 11 Democrats in the Senate and 21 in the House broke rank, signaling their support for more innovation-friendly crypto legislation. While President Biden held true to his promise to use his presidential veto powers to nix efforts to repeal SAB 121, the digital asset industry did capture another victory as last month the House passed the Financial Innovation and Technology for the 21st Century Act (FIT21). The bill, which would provide greater regulatory clarity for the digital asset ecosystem in the U.S., passed in the House with even greater Democrat support. The bill now heads to the Senate where it faces an uncertain fate. What is clear though is that crypto is becoming an increasingly important topic in our nation’s capital, a welcome sign as we work towards greater institutional digital asset adoption.

While SEC Chair Gensler was presumably not enthralled about approving the spot ETH 19b4s, the SEC did obtain a key concession with the removal of staking from all applications. With Ethereum operating a proof-of-stake (POS) blockchain network, many had hoped that the proposed ETFs would enable staking. As we await the approval of the S-1 forms required for launching, staking appears to be off the table for the time being. We anticipate spot ETH ETFs beginning to trade in the U.S. as early as the summer months.

Amidst all the political happenings, crypto prices regained their positive trajectory after April’s downturn. In May, ETH surged +27.94%, the Bloomberg Galaxy Crypto Index appreciated +22.81%, and BTC gained +12.96%. During the month, digital asset funds saw $2B of inflows which pushed the year-to-date totals upwards of$15B. As countries including Australia, Brazil, Germany, Switzerland, and the U.S. saw digital asset investment product inflows in May, another country is looking to follow suit. In late May, crypto ETPs began trading on the London Stock Exchange. As of writing, these products are only available to professional investors.

In the U.S., we gained greater clarity this past month on which institutional investors made the decision to allocate to bitcoin. With Q1 2024 13F filings due in the middle of May, large asset managers had to report their holdings for the first time since spot BTC ETFs were approved. At the time of filing institutions accounted for ~20% of total BTC ETF ownership, holding $11B+ worth of shares. As previously noted by Galaxy Research, the 13Fs provide a bullish signal as institutional demand is already significant, and we are still awaiting many wealth platforms to turn on access to the spot BTC ETFs. With 13F filings detailing many institutions’ nascent bitcoin investments, longer-term holders were also in the news.

Last month brought us closer to resolutions in two prominent crypto bankruptcies. As Mt. Gox prepares to make distributions a decade after declaring bankruptcy, $9B worth of bitcoin was transferred from Mt. Gox’s wallets. While bitcoin prices fell on the news due to fears of downward price pressure, Head of Galaxy Research Alex Thorn anticipates these concerns to be overstated as many Mt. Gox creditors are early bitcoin proponents who will be ideologically driven to hold onto their recovered coins. Additionally, Gemini Earn customers received ~97% of their assets back in-kind. The returned assets, recovered out of the Genesis bankruptcy, totaled $2.18B. Galaxy Research is similarly surmising that these distributions will result in less-than-expected selling pressure across crypto markets. With these industry dark clouds soon to be dissipated and political headwinds softening, we are optimistic about crypto’s outlook.

Since our ETH ETF approval prediction in last month’s edition failed to transpire, we’ll leave you with another one this time: While January will likely be remembered as crypto’s banner month in 2024 with the passage of spot BTC ETFs, it is quite possible that the impacts of what transpired in May will end up being more important in crypto’s long-term adoption story.

Portfolio Considerations

With spot ETH ETFs set to launch in the near term, U.S. investors will have an additional avenue through which to invest in digital assets. The introduction of spot ETH ETFs will enable investors to incorporate crypto basis trades with both BTC and ETH, widening the horizon of potential strategies in which to obtain alpha through crypto.

Despite all the U.S. spot ETH applications excluding staking, Ethereum’s largest liquid staking protocol, LDO, still benefited from the news, peaking around $2.66 and now trading between $2.20 and $2.50, roughly 30% higher than pre-19b-4 levels. Other liquid staking protocols like RocketPool experienced similar rallies around the news but have since retraced.

Tokenization of real-world assets also progressed behind the scenes. Following Stripe’s decision to work with cryptocurrencies again on Ethereum and Solana, PayPal made headlines by announcing its PYUSD on Solana. Due to its higher scalability and throughput compared to Ethereum, Solana has emerged as a winner for stablecoin transaction volume so far this year. The trend of using Solana-based stablecoins, which began in November 2023, continues despite Ethereum’s Dencun updates. These updates have increased Ethereum's potential as a main contender for more transactions, but new stablecoins and more real-world assets (RWAs) continue to emerge on Solana.

Ondo Finance, one of the largest RWA protocols, has seen favorable market movements driven by such RWA trend. The price of the $ONDO token rose by 50% during May as the market evolves and sees more adoption. Despite larger TradFi issuers having more AUM on tokenized funds, Ondo’s USDY, a tokenized note backed by short-term U.S. Treasuries and bank deposits, boasts over 900 holders—more than double Franklin Templeton’s $BENJI. USDY’s strong market positioning demonstrates the potential for non-TradFi issuers success in the tokenized funds market. The total market capitalization of $ONDO has surpassed $1.8 billion, comprising more than 33% of total RWA-related tokens.

As RWA and tokenization ventures continue to emerge, the importance of oracles has risen as well. Oracles are primarily tokens that connect off-chain data to on-chain environments, playing a crucial role in bridging these two worlds and facilitating wider crypto adoption. A notable development includes a successful partnership with DTCC, completing tests with major U.S. banks such as JPMorgan and Franklin Templeton to accelerate fund tokenization. The Smart NAV pilot project tested a process to distribute fund data across multiple blockchains, with additional participants including American Century Investments, BNY Mellon, Edward Jones, Invesco, MFS Investment Management, Mid Atlantic Trust, State Street, and U.S. Bank. The report highlighted Chainlink CCIP as an open blockchain interoperability standard, preventing future fragmentation by providing a secure abstraction layer between DTCC and blockchains. The market exhibited a robust positive reaction to the news, propelling LINK’s price above the $16 mark. This strong upward momentum persisted through the end of May, resulting in the asset closing the month at a two-month high of $19.21.

Institutional Adoption Highlights

Crypto Performance and Volatility Data