October 07, 2024

September 2024 Market Commentary

Galaxy Asset Management

Market Commentary

As the weather began to cool with the onset of fall, crypto markets began to heat up again in September. After mostly slumping through the summer months, digital assets performed strongly to end the third quarter with BTC +8.19%, ETH +4.25%, and the BGCI Index +7.99%.

During the last full week of September digital asset funds realized their largest weekly inflows since July, with $1.2B entering funds. U.S.-based products constituted 95% of these inflows, suggesting a positive shift in sentiment following the Federal Reserve’s recent rate cut since the pandemic-induced cuts in 2020. Market momentum has likely been further boosted by the People’s Bank of China’s recent rate cut, which was announced among a set of measures to jumpstart China’s economy. The 30 bps rate cut is one of the most significant since China’s central bank started utilizing interest rates in 2016 as part of its monetary policy toolkit. Globally, 21 central bank rate cuts transpired in September, the highest number since April 2020. With interest rates decreasing, the incentive to borrow increases, which can contribute to the growth of the M2 money supply. These central bank actions are particularly noteworthy for crypto investors, as Sam Callahan and Lyn Alden’s recently published research indicates that between May 2013 and July 2024, bitcoin’s price exhibited a 0.94 correlation with global M2. Bitcoin’s price demonstrated the highest average correlation with M2 on a rolling 12-month period dating back to 2014, greater than gold, the SPDR S&P 500 ETF (SPX), iShares MSCI Emerging Markets ETF (EEM), Vanguard Total World Stock ETF (VT), Vanguard Total Bond Market ETF (BND), and iShares 20+ Year Treasury Bond ETF (TLT)’s correlation with global liquidity. Further, bitcoin also moved directionally with global M2 83% of the time over the course of 1-year periods. With additional rate cuts potentially on the horizon, Callahan and Alden’s conclusions could be interpreted as bullish for bitcoin’s price trajectory going forward.

In September, bitcoin surpassed $65,000, returning to levels not seen in nearly two months. Bitcoin’s monthly performance can be segmented into two parts: From the beginning of the month until the Fed’s rate cut announcement on September 18th, bitcoin’s price remained relatively stable. It dropped to $53,000 during the first week of September before rebounding, and it stayed flat from September 1st to September 17th (-0.8%). The largest cryptocurrency by market cap’s monthly gains in September occurred following the Federal Open Market Committee’s decision to lower rates by 50 bps. Bitcoin’s positive September was a historical outlier as the original cryptocurrency tends to underperform during the year’s ninth month. Bitcoin’s green September marked only the fourth time that its price ended the month higher than it started. Investors can regard bitcoin bucking this trend as a catalyst, especially heading into October which traditionally is one of bitcoin’s best months. Since 2013, bitcoin has only finished October twice in the red, averaging monthly gains of +21.08%. While October’s documented strong returns could appeal to investors, examining the options markets is proof that past performance is not an indicator of future results. Options traders appear to be anticipating that a bitcoin rally will not transpire until after November’s elections based on their current positioning.

As the U.S. presidential election approaches, the two leading candidates both garnered attention in September with digital asset-related stories. Vice President Kamala Harris indicated her support for digital assets on the record, stating on separate occasions that her administration would “encourage innovative technologies like AI and digital assets” and that she seeks for the United States to “remain dominant” in blockchain and other emerging technologies. Galaxy Research’s Alex Thorn and Gabe Parker note that while the Democratic nominee for president mentioning digital assets is a win, Harris’s campaign has yet to offer any concrete policy positions. Thorn and Parker suggest that the Democrats’ strategy is to signal support for the industry to avoid alienating voters without straying too far from the Biden administration’s stance. Former President Donald Trump continued his courting of the crypto community when he visited PubKey, a bitcoin-themed bar in Manhattan. In what is assumed to be the first-ever purchase with bitcoin by a current or former U.S. President, Trump treated PubKey patrons to 50 burgers and sodas.

While the focus remains on November 5th’s outcome and its implications for digital assets, crypto did obtain two regulatory wins in the last month. The Securities and Exchange Commission (“SEC”) provided an accelerated approval for the trading of options on IBIT, BlackRock’s spot bitcoin ETF. While it is unknown at this time when spot bitcoin ETF options might begin trading, the introduction would be a welcomed addition. Per Galaxy’s Kelly Greer, many U.S. retail investors, who comprise 44% of the equity options market, cannot partake in trading bitcoin options due to the requirements of having $10M+ in assets or needing to be offshore. If/when bitcoin options become more readily accessible to investors, it will likely result in greater liquidity and provide a new avenue through which to execute the bitcoin basis trade. Galaxy founder and CEO Mike Novogratz highlighted on Squawk Box how MicroStrategy options tend to be some of the most active given investors’ desire for bitcoin leverage. MicroStrategy, whose stock is often regarded as a bitcoin proxy, can therefore serve as a benchmark in seeking to estimate the potential demand for spot bitcoin ETF options. In other news, BNY Mellon became the first U.S. bank to approve the offer of crypto custody services. BNY receiving a “no-objection” from the SEC is considered at least a partial breakthrough, given that the limitations imposed by SAB 121 have to date prevented banks from entering the crypto custody space. The New York state-chartered bank will be allowed to custody bitcoin and ether, with SEC Chair Gary Gensler conveying that other cryptocurrencies may be allowed in the future. Enabling BNY Mellon to serve as a custodian for bitcoin and ether spot ETFs adds TradFi competition to the formally crypto-native dominated space (Coinbase and Gemini act as the custodian for almost all U.S. spot crypto ETFs). Given that Bloomberg surmises the crypto custody market to be approximately $300M in size with nearly a 30% CAGR, it is clear why BNY Mellon and other banks have been lobbying the SEC. The spot bitcoin ETF options and crypto custody approvals should both be viewed as part of the larger picture: Slowly but surely crypto is being institutionalized.

Portfolio Considerations

On another regulatory enforcement blow to Uniswap, one of the largest and oldest Defi applications, the Commodity Futures Trading Commission ("CFTC") has fined Uniswap Labs $175,000 for offering illegal leveraged commodity transactions through its decentralized protocol. Uniswap facilitated trading in leveraged tokens on BTC and ETH without registering with the CFTC. Despite Uniswap’s efforts to block certain tokens following prior enforcement actions, the charges covered activities before these changes were made. This case highlights the CFTC’s growing use of "regulation through enforcement" rather than providing clear guidelines for DeFi protocols. Critics argue this approach stifles innovation and risks pushing responsible DeFi developers out of the U.S. Uniswap's cooperation with the investigation led to a reduced penalty, but the decision underscores broader concerns about regulatory clarity and the long-term impact on the DeFi industry. This is not the first time Uniswap has had friction with regulators in the US. In April this year, Uniswap also received a Wells notice, which typically precedes an enforcement action, one year after Coinbase received a similar notice. In August, several VC funds that invested in Uniswap Labs received letters from the SEC regarding their involvement with the DEX, Uniswap. What differentiates the implications of the Wells notice to Uniswap from the one issued to Coinbase is that the smart contracts, where the actual exchange occurs, are not owned by Uniswap Labs. Unlike Coinbase, where the infrastructure, technology, and wallet custody are in fact controlled by the exchange itself, Uniswap Labs does not own the smart contracts or the assets within the liquidity pools. This news of the fine by the CFTC had little impact on the price of $UNI.

Polygon transitioned its ticker from MATIC to POL earlier this month, which was accompanied by a series of changes and a new vision for the blockchain. This ticker swap is part of Polygon's 2.0 roadmap, which aims to shift from being an Ethereum-specific Layer 2 solution to becoming a multi-chain platform. A proposal from 2023 outlines the goal of making POL the main token across the entire Polygon network, with the vision for POL to become a "hyperproductive token" capable of providing valuable services to any chain. Despite its ambitious plans and strong ecosystem, MATIC has declined by more than 60% year-to-date.

As highlighted in our previous notes, the growth and development in the tokenization of real-world assets (RWA) has been one of the biggest trends this year. A common challenge raised by skeptics of widespread RWA adoption is the lack of activity in secondary markets, with most progress and attention focused on the primary market. Assetera, a marketplace for RWAs built on Polygon and powered by Chainalysis and Fireblocks for AML compliance, plans to provide a solution for this and recently became Europe’s first blockchain-based regulated secondary market for RWA assets. This isn’t Polygon's first RWA marketplace project, as Polytrade was launched in 2022. However, unlike Assetera, Polytrade has its native token, $TOKEN, a stakeable utility token that allows holders to earn staking rewards and enjoy transaction discounts when settling trades using $TRADE. Additionally, Assetera’s focus leans more toward financial RWAs, such as private equity funds, stocks, and ETFs, while Polytrade has concentrated on non-securities and collectible RWAs, including music rights and unique assets like diamonds. The challenge of organically increasing liquidity for tokenized assets remains a hurdle for many issuers. As of now, Assetera does not have a native token.

Institutional Adoption Highlights

Crypto Performance and Volatility Data