Market View
Crypto trading volumes ticked higher this week, with daily spot activity for BTC and ETH up 37% over September 11 to 13 compared to the rest of the month. In part, market players were reacting to FTX’s plans to liquidate around $3.4B in digital assets, alongside $2.6B in (debtor and non-debtor) cash and $1.3B in brokerage and government recovered assets. That adds up to $7.3B total, valued as of August 31. On September 13, the US bankruptcy court in Delaware formally approved FTX’s motion to sell these assets.
According to the court filing, the firm holds around $1.16B in SOL (Solana), $560M in BTC, $192M in ETH and $1.49B in various other tokens. After some selling pressure early this week, markets later recovered, which we believe implicitly recognized that there are several mitigating factors that should reduce the risk of market shocks when these tokens are eventually sold:
- First, it’s unlikely these tokens will flood the market because liquidations are bound by weekly sell limits of $50M per week across digital assets in the initial phase, before increasing to $100M in subsequent weeks. Approval from two committees representing FTX debtors is required to later permanently increase this to a maximum limit of $200M.
- Second, there are strict controls in place for selling certain “insider-affiliated” tokens that require 10 days advance notice to these same committees.
- Third, a major part of FTX’s SOL holdings are locked up until around 2025 due to the token’s vesting schedule, as are some other tokens up for sale.
- Fourth, FTX will be able to hedge its sales of BTC and ETH as well as other debtor-identified assets through an investment advisor, assuming it receives prior committee approval.
Macro outlook
US headline and core inflation data surprised economists’ expectations slightly to the upside in August (at 3.7% YoY and 4.3% respectively), but the resulting choppy price action in traditional risk assets had almost no noteworthy impact on crypto markets. Correlations between digital asset returns and changes in exogenous macro factors have risen of late but remain very low, indicating no significant relationship has re-emerged. The coefficient between daily bitcoin vs S&P 500 returns is 0.19 based on a 90-day window, for example.
Although CPI isn’t reflecting the disinflationary momentum of previous months, the Wall Street Journal had reported (prior to the data release) that the Federal Reserve is more likely to pause at its FOMC meeting on September 20-21, which we believe is still the most likely outcome. However, August’s inflation data may affect the board’s dot plot, which may be scrutinized by market participants and add to volatility more broadly in the next two weeks. Already Fed funds futures are pricing in a 50% probability of a hike in November.
That said, we still expect the Fed to ease monetary policy in late 1Q24/early 2Q24, which should support crypto markets as this will coincide with some important idiosyncratic catalysts. As we said in our August Monthly Outlook, we believe expansionary fiscal policy is pro-cyclically keeping the US economy preternaturally strong for the time being. But underneath the seemingly healthy top-level indicators, labor markets have peaked, credit conditions have tightened, loan delinquencies are rising and student loan repayments will restart in October. We think a dual expansionary fiscal and monetary regime should be very supportive for bitcoin in particular as an alternative to the traditional financial system.
