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October 10, 2023

September 2023 Market Commentary

October 10, 2023 

Market Commentary

Crypto markets continued to trade in a range this September, with BTC up 3.12% [1] and ETH up 0.77% [1]. Following the August 29 ruling in favor of Grayscale’s case against the SEC regarding their proposed BTC ETF conversion, this month has seen a continued flurry of ETF-related news. The SEC delayed decisions on the Invesco Galaxy, Global X, Valkyrie, BlackRock, and ARK 21Shares spot Bitcoin ETF applications ahead of the potential government shutdown on October 1. The delays came just hours after SEC Chair Gensler received a letter from four congress members urging him to approve a spot Bitcoin ETF and a day before his appearance in front of the House Financial Services Committee. While a spot Bitcoin ETF approval is now generally anticipated, the delays come with little surprise as the SEC has typically waited until the final deadlines to approve crypto ETFs, some 240 days after the initial application. In the case of Invesco, BlackRock, and others, these deadlines for a spot ETF will not occur until Q1’24. On a brighter note, the SEC approved a number of ETH futures ETFs, including VanEck, ProShares, Bitwise, and others. These products began trading this week, setting the stage for a potential spot ETH ETF at some point in the future. It is worth highlighting that while market participants are currently focused on ETF-related news, meaningful progress is being made behind the scenes to further integrate traditional finance with digital assets. To name a few examples, Citigroup this month unveiled Citi Token Services, a 24/7 solution to trade finance and cash management needs of institutional clients built on permissioned blockchains. Additionally, Visa announced an expansion of its stablecoin settlement capabilities after promising results from its 2021 pilot program; this move comes just one month after PayPal’s announcement of a proprietary stablecoin. Finally, UBS Asset Management launched its first “live pilot” of a tokenized money market fund on the Ethereum blockchain. 

[1] Month to date returns are calculated based on the Bloomberg Galaxy Bitcoin Index & Bloomberg Galaxy Ethereum Index as of 9/29/2023. 

Portfolio Considerations

A highly anticipated event this fall was the planned distribution of some 142,000 BTC ($3.8b) to the creditors of Mt. Gox, the pioneering crypto exchange that went bankrupt in 2014. This distribution, seen as a major supply overhang for bitcoin and the broader crypto market, was delayed by 1 year to October of 2024. Many believe creditors will opt to sell their distributions immediately upon receipt. However, some of the expected sell pressure may be partially offset as the majority of creditors have already sold their claim interests to investor groups for early payments while the remaining creditors have held off from selling their claims for 5+ years now. In other news, Layer 2 scaling solutions (L2s) have become an increasingly central theme to the crypto space in 2023. Within the past twelve months, the Ethereum blockchain has seen notable advancements in a wide variety of L2 solutions, from progress in zero-knowledge rollups, to Coinbase’s launch of ‘Base’ in August, to Optimism’s token launch. This past month, Galaxy Research published a progress update on Optimism and Arbitrum—Ethereum's two primary L2s--which can be found here. Also in September, rollup provider Eclipse announced the launch of their own Ethereum L2 that executes transactions using Solana’s virtual machine (SVM), ensures data availability through Celestia, uses RISC Zero for fraud proofs, and settles on Ethereum. Eclipse claims this approach offers the best features currently available for Layer 2s. This past month Coinbase announced they will be joining other crypto exchanges supporting the Lightning Network for bitcoin transactions. The Lightning Network is Bitcoin's largest layer 2 protocol used to scale payments by moving computation off-chain. Coinbase's Lightning integration will streamline cheap and fast Bitcoin transactions to millions of users while on-boarding newcomers into the Lightning ecosystem. The Lightning Network is appealing for large retail exchanges as it provides users with cheaper and faster transactions 24/7. As prominent crypto exchanges adopt the Lightning Network, it signals that Bitcoin's largest payment layer has attained some product-market fit. Our view is that exchanges will play a crucial role in Lightning’s adoption as they add liquidity to the network. Finally, Galaxy Asset Management published a report this week diving into Bitcoin’s role in a traditional investment portfolio of equities, fixed income, and commodities. The analysis covers bitcoin’s 5-year correlation to traditional asset classes, the impact of adding various levels of bitcoin to a portfolio, and how investors can optimize their asset allocations. You can access the report here.

Institutional Adoption Highlights

Crypto Performance and Volatility Data

Relative Prices 10-3-2023
Volatility 10-3-2023
BTC-Correlation 10-3-23
S&P500-BondAgg 10-3-23