Market View
Crypto markets haven’t performed as well as US stocks and other macro assets in the last few weeks, following the widespread deleveraging in early August. In fact, on a risk-adjusted basis, bitcoin price is currently 0.50 standard deviations below its three-month average compared to the S&P 500, where index levels are actually 1.41 standard deviations above their three-month average. For what it’s worth, the Nasdaq is also trailing the broader index with a positive z-score of 0.25. Bitcoin performance has been choppy, trading inside a fairly tight range, consistent with the outlook we laid out in early July, as we were wary then about the lack of (new) idiosyncratic narratives.
However, what’s interesting is that the macro backdrop has been disproportionately more favorable to traditional assets, as evidenced by the stronger market move in stocks following Fed Chair Jerome Powell’s dovish tone at the Jackson Hole Economic Symposium. (Note: our base case is that the Federal Reserve will cut by 25bps rather than 50bps on September 18; Fed funds futures are pricing in 33bps or a 32% chance of 50bps.) We believe there are two key factors driving this divergence.
First, the inflows into US spot bitcoin ETFs that supported BTC strength in 1H24 were heavily frontloaded, and they have slowed in August compared to previous months. That said, things could change after Labor Day in the US, as this is typically when many market players return from vacation. Moreover, labor data in the form of JOLTS job openings (release date: September 4) and nonfarm payrolls (release date: September 6, with a Bloomberg median survey forecast of 160k) may have the power to move markets and attract some liquidity.
Second, bitcoin-specific supply overhangs like Mt. Gox repayments and US government selling continue to weigh on sentiment, although the market is steadily working its way through these. According to Arkham Intelligence for example, the Mt. Gox Rehabilitation Trust only has another 44.9k BTC left to distribute – around a third of the original amount. It’s not clear how long the trust may take to repay these bitcoin to creditors in future rounds, as the distributions to partner exchanges thus far have been to those creditors specifically seeking early payouts. Consequently, we think this should open up a better technical (i.e. supply-demand) environment as we approach late 3Q24.
That said, over the last week, we’ve gotten additional pressures on crypto, such as the recovery in the multilateral USD index. The USD’s downside may have bottomed as of 2-3 days ago and may be acting as a drag on crypto performance. It’s also possible that market players may be concerned about a more inhospitable crypto regulatory environment following the news that Telegram founder Pavel Durov was arrested in France on August 24 (now released from custody). This has had a negative impact on Telegram's related (though now independent) Open Network token (TON) specifically but also the overall asset class more broadly.
Among the crypto majors, ether has also continued to underperform bitcoin, reaching new YTD lows of 0.042 ETH/BTC (with the exception of a quick liquidation driven move down to 0.040 on August 4 that quickly rebounded after a few minutes). This divergence in net buyer interest is embodied in US spot ETF flows in our view. ETH ETFs have had nine consecutive days of outflows between August 15 and 27 totaling $115M, while BTC ETFs had inflows eight of those nine days netting to $427M.
Moreover, US spot ether ETFs have had cumulative outflows of $476M since inception, a sharp contrast to bitcoin’s $17.8B in inflows to date (albeit, those outflows were concentrated in the first week that ETH ETFs launched). In fact, bitcoin’s US ETF complex never reached a point of cumulative net outflows despite the rotation out of the Grayscale Bitcoin Trust (GBTC). Chart 2 shows the cumulative flows into/out of BTC and ETH ETFs aligned by the number of trading days since launch. When US spot bitcoin ETFs reached their 27th trading day on February 20 (spot ether ETFs reached 27 trading days on August 28), it had received $5.2B in flows.
The market environments between January and July may help explain some of the difference in flows we’ve seen. However, we also think the relative difficulty in educating new investors on Ethereum’s supply schedule and smart contract utility, combined with the absence of staking yields, may be contributing to the lack of ETH ETF appetite. Furthermore, we think sentiment around ETH among more crypto-native investors may have been dampened by the apparent transience of previous bull cycle narratives (e.g. deflationary “ultrasound money”) as well as the rise of strong technological competitors in Solana and other next-generation chains.
Recent debates within the Ethereum community have also surfaced over the utility of DeFi protocols, which constitute the majority of onchain activity today. Vitalik Buterin, the co-founder of Ethereum, stated that “finance isn’t enough” and that he thinks the “intersections between decentralized finance and other decentralized tech are going to be very important,” giving examples of private payments for VPNs or Farcaster fees as blends between the two. More importantly, Vitalik was skeptical of pure DeFi as a crypto growth driver, suggesting that “it’s fundamentally capped” without being “rooted in something external”. This has led to some criticism over his views and support of DeFi, a sector which has played a large role in Ethereum’s growth to date.
This divide between thought leaders in the Ethereum community may make it challenging to understand ETH’s narrative and direction, particularly for those not familiar with the sector. In our view, this is a byproduct of Ethereum’s decentralization, which is one of the core value propositions for Ethereum and gives the system greater resilience. At the same time, however, it can also make having a cohesive vision more challenging. Regardless, we think that Ethereum remains one of the most credibly neutral developer platforms today and that the growth of DeFi-adjacent sectors like the tokenization of real world assets (RWAs) is making promising progress in spite of these debates.
