Market View
Price action in crypto markets this week seemed to be trapped between supportive technical developments and weak macroeconomic factors. On the former, the Mt. Gox Rehabilitation Trust confirmed that they would delay the repayments deadline by one year from October 31, 2023 to October 31, 2024. Ostensibly, this news should have been positive for bitcoin specifically and crypto more broadly, as it delays any potential BTC or BCH selling pressure in the near term. (The process should distribute up to 141,686 BTC and 142,846 BCH to creditors whose funds were lost by the defunct exchange nine years ago.) However, as we’ve alluded to in the past, we think market expectations were already aligned with the high likelihood of a potential deferral, thus mitigating the upside impact on performance after the fact.
Meanwhile, the US Federal Reserve kept rates unchanged as expected at 5.25-5.50%, but as we anticipated last week, market volatility materialized from a revised dot plot suggesting a higher-for-longer stance. We think the hawkish tone in the statement was less relevant to markets than the forward looking rate path, as Fed funds futures further priced out cuts in 2024 to below 75bps total for next year. The subsequent selloff in both traditional risk assets and cryptocurrencies affirmed that the macroeconomic outlook is still a headwind, particularly amid poor seasonals. Nevertheless, we remain constructive on the crypto space in 4Q23 even if we expect the next few weeks to be choppy.
Separately, crypto performance also continued to be bogged down by a general atmosphere of regulatory uncertainty in the US. The crypto enforcement office within the US SEC said at the Securities Enforcement Forum (Central 2023) that more investigations and litigation of actors in this space should be expected in the future. The New York Department of Financial Services (NYDFS) proposed updated guidance for crypto firms seeking to list or delist tokens in NY, asking these entities to establish risk assessment standards and obtain written approval for coin-listing policies from regulators. Central bank digital currencies (CBDCs) also remain a hot topic after Republican House Majority Whip Tom Emmer reintroduced the CBDC Anti-Surveillance State Act to prohibit the Fed from issuing a CBDC due to privacy concerns.
Finally, one of the more closely watched headlines to emerge from Mainnet 2023 was the unveiling of Eclipse’s mainnet architecture. Eclipse is a “universal” layer-2 scaling solution that relies on a modular architecture: (1) Solana Virtual Machine (SVM) for transaction execution, (2) Celestia for data availability, (3) Ethereum for settlement (security) and (4) RISC Zero for zero-knowledge fraud proofs. Fees on the network are paid in ETH, though the project intends to launch a token in the future. According to the developers, the design allows the L2 to enjoy higher throughput and lower fees than many of its competitors.
