Market View
Bitcoin 2024 Conference. The Bitcoin 2024 Conference in Nashville on July 25-27 unveiled several new market narratives, leading to a BTC rally that briefly reached the $70,000 mark, the highest level in more than a month. (BTC last traded above $70,000 on Coinbase on June 11). In our view, the most substantial announcements were those supporting a potential US strategic bitcoin reserve. Two presidential candidates speaking at the event, former President Donald Trump and independent Robert F. Kennedy, both claimed they would support the formation of said reserve if they were elected into office.
On the legislative front, Senator Lummis (R-WY) similarly announced a bill at the conference to implement a 1 million BTC purchase program aiming to reduce the national debt. The Boosting Innovation, Technology and Competitiveness through Optimized Investment Nationwide (BITCOIN) Act was formally introduced to the US Senate four days later on July 31, and seeks to diversify existing funds within the Federal Reserve System and Treasury department to purchase bitcoin.
Democrats are also seeking to strengthen relations with the crypto community after 28 party members (both sitting members of Congress and candidates) sent a letter to the Democratic National Committee (DNC) asking them to take a more “forward-looking approach to digital assets and blockchain technology.” They argued that crypto should be added to the party platform, pressed for a “pro-innovation” SEC chair, and requested a vice presidential candidate “sophisticated in digital-asset policy.” Democratic Representative Wiley Nickel (NC) also spoke at Bitcoin 2024, emphasizing his belief that crypto is an issue that should transcend party lines.
These developments represent a meaningful shift in the narrative for bitcoin in our view. Bitcoin received spot ETF approvals in the US less than eight months ago, and is now being seriously discussed for its utility as a possible national reserve asset in the context of growing national debt (which recently exceeded $35T). That said, the formation of such a reserve is an involved process, which for a start would require the Federal Reserve to adapt its broader monetary policy and reserve management strategies. Moreover, even if enacted, the Secretary of the Treasury would still be required to “establish a decentralized network of secure Bitcoin storage facilities distributed across the United States”. Proper analysis and buildout of such infrastructure – as well as the strategic purchasing methodology itself – could take years to construct, minimizing its direct impact on near term flows in our view.
Macro. Meanwhile, up until recently, macro has been less relevant for crypto performance, with prices showing little sensitivity to the massive bull steepening move in the US 2y10y yield curve over the course of July. But now, jitters over US economic growth seem to be weighing on investor sentiment far more than optimism over potential Fed rate cuts later this year. At its July 30-31 FOMC meeting, the Fed signaled rate cuts were coming. However, not only have market participants already priced in two 25bps cuts this year (in September and November), they recently added a third cut for December – as implied in Fed fund futures – due to concerns surrounding weaker economic data. Indeed, ISM manufacturing for July fell deeper into contractionary territory to an index reading of 46.8 points, below the Bloomberg median forecast of 48.8.
Disappointing earnings results from some members of the “Magnificent Seven” have also added to the rout in stocks, contributing to perceptions of tightening demand and contaminating the price action in crypto. This was combined with large onchain movements on July 29 that ignited concerns that $2 billion in previously-seized crypto that the US government reportedly moved to new wallets could be headed for the open market. As a result, BTC fully retraced its gains leading into the Bitcoin 2024 conference. Crypto markets continue to be choppy, in line with our outlook for the quarter.
ETH ETF Flows. Separately, spot ETH ETFs in the US have seen gross inflows of $1.5B, but netted $483M in outflows in their first seven business days. This was driven by $1.98B in withdrawals from Grayscale Ethereum Trust (ETHE). Note that the ETHE outflows have been declining day-to-day, which reinforces our belief that these outflows have been front loaded compared to what we saw with Grayscale Bitcoin Trust (GBTC) earlier in the year. Structural factors contributed to shares of GBTC that were locked and unable to be sold until later in the cycle, whereas no such impediments exist for ETHE. Moreover, several nuances may be factoring into still healthy but comparatively thinner inflows into the other funds to start. For example, ProShares’s spot ETH ETF did not launch alongside its peers, which may be limiting capital rotation out of its large ETH futures ETF, which was not the case for its bitcoin product.
Seasonality. Looking ahead, seasonality hasn’t typically worked in crypto’s favor for the month of August, with bitcoin averaging a decline of 2.8% during this month over the last five years (-0.5% over the last ten years). August has often seen lower market activity in the past, as evidenced by a drop in BTC spot volumes by 19% in August vs June 2023, while BTC futures volumes were down 30% over the same period (across global centralized exchanges). Lower liquidity and trading volumes can lead to increased volatility. With fewer crypto specific narratives anticipated for the rest of the summer, it’s very possible that we may see the same lackluster behavior this year.
