Market View
In our view, the macro environment continues to be a key driver for crypto performance, as evidenced by the rebound in BTC prices following a slightly lower-than-expected April CPI print. The 3.4% YoY figure is consistent with our out-of-consensus view that we’re still operating within a disinflationary trend that could take inflation growth to within the mid-2 handle by year-end. That’s not to say that the sticky shelter portion of the index doesn’t concern us, but the stagnation in retail sales last month contributed to our view that the economy may be peaking. Taken together, we think that the two 25 bps rate cuts being priced by Fed Funds Futures starting from September 2024 seems appropriate, as is the cyclical move lower in the multilateral USD index.
That said, questions around the Fed’s monetary policy, while important, may be a distraction from the more pertinent issues of industry regulation directly affecting the crypto asset class. One of the most anticipated decisions in the near term is the Securities and Exchange Commission’s ruling on spot ETH ETFs, with a final deadline of May 23 and 24 for the VanEck and Ark-21Shares applications. In our view, the odds of approval haven’t materially changed, but there’s been more speculation recently that the SEC could declare ETH a security and reject these applications. We disagree but have covered our views on this here and here.
Meanwhile, both the US House of Representatives and the Senate have voted to repeal Staff Accounting Bulletin (SAB) 121 in a bipartisan move. The SEC introduced SAB 121 in 2022 and “suggests” that publicly traded companies (such as banks) should record custodied crypto assets on their own balance sheets (as a liability) – rather than in the accounts of their owners. But banks have separate capital provision requirements which means they need to offset those balance sheet liabilities with cash, making it prohibitively costly for them to custody crypto assets. Although President Biden has already declared that he would veto the bill if it made it to his desk, we think that decision may have room to change given the bill’s bipartisan support. We think that crypto will continue to gain political importance going into the election, representing the interests of the more than 52 million Americans who own crypto.
In fact, we think that some of crypto’s next major catalysts are likely to be regulatory-driven. The Financial Innovation and Technology for the 21st Century Act (FIT Act) may be voted on in the House later this month, which critically provides a clear process to determine which digital asset transactions are subject to the jurisdictions of the SEC vs the CFTC. It also outlines disclosure requirements for digital asset developers, which would enable clearer paths for compliance. In addition, the increasing discussion and understanding around stablecoin benefits (e.g. Stripe’s integration with USDC payments) are also a massive step forward for industry adoption. Potential stablecoin legislation, such as the Lummis-Gillibrand Payment Stablecoin Act, could also accelerate this adoption cycle.
Separately, the May 15 deadline for 13F filings has arrived, revealing major institutional holders of the spot bitcoin ETFs as of March 31. The appearance of traditionally conservative funds in these filings, like the State of Wisconsin Investment Board (that manages $156B for the Wisconsin Retirement System and the State Investment Fund among other state trust funds) are positive signals for the adoption of bitcoin in well diversified portfolios. Approximately 21.4% of the US spot bitcoin ETFs were held by more than 950 institutional investors on March 31, representing a wide base of interest. (13F filings are only required for institutional investment managers with over $100 million in assets under management.)
That said, these filings are not a measure of the state of the current market and not all positions are created equal. For example, we think that some of the positioning in hedge funds may have been the spot legs of basis trades. Furthermore, the 45-day filing deadlines means that positions could have changed greatly during that time given. Still, the breadth of investment advisory firms reporting exposure to spot bitcoin ETFs is a promising indication of growing crypto adoption in TradFi, and we think ETF inflows will remain strongly net positive throughout the rest of the year.
Onchain: Airdrop Aversions
Airdrops have been a recurring theme throughout in the past several months and have been bolstered by the market rally led by US spot bitcoin ETF approvals in 1Q24. Earlier airdrops like Celestia, Jito, and Jupiter saw significant positive performance in the weeks following their release. That said, the tailwinds behind this narrative have lost steam as ETF inflows have tapered, and more recent launches have generally encountered heavy selloffs immediately post launch. Chart 1 depicts the first week’s trading performance of major token launches that occurred within the previous 30 days. (All of which occurred after BTC retraced below the 70k range.) We observe heavy initial outflows over the first 24-48 hours of trading before some price stability and/or recovery.
Absent a meaningful move in BTC price, we think this pattern will continue as attention (and liquidity) is increasingly splintered across protocols. In a consolidating market with low levels of euphoria and speculation (as measured by low perp funding rates), airdrop recipients looking to recoup costs associated with airdrop farming (e.g. transaction fees or foregone yield) may be incentivized to sell ahead of their peers. At the same time, the well-telegraphed nature of these airdrops via points or general speculation means that most would-be buyers are also able to earn their own allocations instead of immediately buying on the open market. This dynamic results in a soft “fair-value” price floor being discovered in the first day or two post-launch that tends to hold through the rest of the first week of trading. Beyond that timeframe, however, individual performance begins to vary and in some cases has even traded lower amidst the weaker altcoin market.
