Market View
The divergence between bitcoin and US equities performance in June has been particularly stark when measured on a risk-adjusted basis (see Chart 1). Our calculations show that US equities (proxied by the S&P 500) have recently moved 1.85 standard deviations above its 40-day average compared to bitcoin, whose nominal price movement has been relatively flat over the same period. In our view, that dichotomy has been captured well by the flattening in the US 2y/10y yield curve. Equity prices tend to be more sensitive to longer-end bond yields, which have been falling faster than front-end yields, with the former reflecting adjustments in the Fed’s monetary policy expectations.
That’s led to a rebound in USD strength (alongside geopolitical developments in Europe and elsewhere), which has weighed on bitcoin specifically and crypto more broadly. Indeed, well-telegraphed rate cuts by many overseas central banks including the ECB, BoC, and SNB have begun in line with expectations, sitting in juxtaposition to the Fed’s position of “higher for longer”. Moreover, election season is well underway in the UK and France, whereas it’s still months away in the US.
Additionally, much of the growth in the S&P 500 continues to be driven by technology driven catalysts (AI in particular). Nvidia briefly surpassed Microsoft as the most valuable company in the world, and Apple gained 9% following their WWDC event and their announcement of an OpenAI integration. Crypto has recently lacked similar widespread endogenous catalysts following the period in mid-to-late May where there was a flurry of legislative activity including the SEC approval of spot ETH ETFs and the US House passage of the Financial Innovation and Technology for the 21st Century Act (FIT21). The period since then has been relatively muted, with market participants awaiting the trading launch of spot ether ETFs – which Bloomberg Intelligence analysts believe could happen in early July.
We also noted in our Midyear Review that while spot bitcoin ETFs continue to attract inflows in the US (including about $0.95B MTD), more of those flows have been hedged with rising short CME futures positions since April. In our view, the ease of putting on the basis trade (because of the ETFs) alongside cheap leverage has likely contributed to greater institutional participation, offsetting expectations that flows could otherwise have positive price effects on bitcoin.
Outside of the US, however, the first spot bitcoin ETF launched on the Australian Securities Exchange (ASX) on June 20 and will passively invest in the VanEck Bitcoin Trust (HODL). Australia has a compulsory superannuation system that requires employers to contribute a percentage of employees’ salaries into retirement savings accounts, making them the world’s fourth largest pool of long-term savings. While bitcoin ETFs may not be automatically included in portfolios, the self-managed sector represents about a quarter of the pension system (about $600B).
Meanwhile, bitcoin has not been not alone in its range bound behavior. Gold, a store-of-value asset often compared to bitcoin, has displayed remarkably similar performance YTD with a surge at the tail end of 1Q24 followed by a similar chopping pattern throughout 2Q24 (see Chart 2). Expectations of higher real rates have slowed the sharp rise of gold prices, although central bank accumulation has yet to abate. For now, however, geopolitical developments that might otherwise support stores of value like gold and bitcoin appear to be in relative stalemate. The Russia-Ukraine conflict continues without a clear resolution in the near term, and there is a likelihood of a similarly drawn out situation in the Middle East. In the South China Sea, tensions remain high, but also don’t appear on the verge of imminent eruption.
This lack of directional macro momentum in addition to the absence of internal crypto narratives have put a pause on major market moves. Indeed, the realized 1-month bitcoin volatility is at YTD lows of 35%. That said, we think that there are a confluence of potential catalysts that are likely to materialize throughout 3Q24 and 4Q24, including the start of US rate cuts and the US presidential elections. Further regulatory updates, such as the SEC closing its investigation into ETH have also begun to materialize.
The withdrawal of SEC enforcement action against ETH has pushed its dominance up from 17.5% to 18.8% of total crypto market cap this week, even as BTC dominance remained flat at 55.5% (though BTC dominance did spike up to 56.5% amidst the sudden market pullback on June 17). This suggests that some altcoin market share has consolidated towards ETH, possibly in preparation for upcoming ETH-specific catalysts that we’ve previously covered.
