CryptoKey Q3 Market Report

CryptoKey Q3 2024 Market Report

Overview:

• Current state of the crypto market

• Factors contributing to recent volatility

• Institutions are buying

• Bullish tailwinds building and macro backdrop improving

• Rapid rate of crypto adoption

State of the Market:

The crypto market has been a rollercoaster in 2024, which kicked off with strong Q1 performance and a new Bitcoin all-time high of $74k in March, driven largely by the launch of Bitcoin ETFs. These ETFs going live were a watershed moment for the crypto industry, signaling growing adoption and acceptance from traditional financial institutions, investors and regulators.

The momentum continued into April with the Bitcoin halving, a cyclical event that occurs every four years, reducing the issuance of new Bitcoins by half. This event historically adds bullish momentum, and this year was no exception.

Q2 experienced the start of a choppy price action range as the markets cooled off and macroeconomic & geopolitical uncertainties gained attention. However, this type of volatility has occurred during every single crypto bull market in history and is to be expected.

Despite the recent volatility, bullish tailwinds continue to build for the crypto space, including the launch of Ethereum ETFs, growing crypto user & investor adoption, an improving macroeconomic backdrop, and more.

Fundamentally, crypto has never been in a stronger position and the future is as bright as ever.

Don’t Fear the Volatility

Although this summer has been notably choppy for crypto assets, this level of volatility is typical for crypto bull market cycles. For context, during the 2021 bull market between March 2020 and November 2021, the price of #Bitcoin appreciated 1,132% - providing investors with massive gains in a short period of time. However, holders experienced immense volatility and massive drawdowns along the way up.

Price corrections during 2021 bull run:

• 1/8-1/21 = -26%

• 2/21-2/28 = -21%

• 4/13-4/25 = -22%

• 5/8-7/20 = -49%

• 9/6-9/28= -22%

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A bear market in stocks is typically categorized as a decline of 20% or more. This means that #bitcoin holders experienced the equivalent of 5 bear markets for stocks from trough-to-peak. This type of volatility is not typical when compared to other traditional asset classes such as stocks, bonds, real estate, etc. However, these levels of returns are not typical either. Simply put, you cannot have massive price appreciate in short periods of time without significant choppiness along the way.

The volatility from the 2016-2018 bull market was even more severe, with six drawdowns of ~30% or more. Volatility has actually decreased over time as crypto becomes a larger and more liquid asset class.

Temporary Sell Side Pressure

In addition to some broader macroeconomic & geopolitical uncertainties over the past several months, a handful of notable (yet temporary) instances of added sell pressure have undoubtedly suppressed crypto prices for the time being.

The German Government has paper hands

An agency within the German government sold almost 50,000 Bitcoins over the past couple months. These were previously seized and finally dumped onto the open market so that they could convert and collect revenue in fiat. This was an incredibly short sighted move and will be looked back on as one of the worst financial blunders in recent history.

Mt. Gox Distributions

Mt. Gox, an old Bitcoin exchange that was hacked a decade ago has made steps towards distributing Bitcoin back to original owners, leading to speculation of potential selling pressure once users receive their assets back.

This has been a recurring narrative for years and its impact is likely overblown.

In our view, however, bitcoin's price reaction to Gox-related transfers may have been exaggerated. Gox wallets only transferred a small amount of bitcoin (3k BTC ~ $175m) and final distributions from exchanges to individual creditors likely have not yet occurred, suggesting market participants have been forward selling ahead of creditor distributions. (Galaxy Digital Research)

The Institutions are Buying

The Bitcoin ETFs that were launched at the beginning of this year have had incredible success and are being adopted by institutional investors at a faster rate than any other ETF in history. These products have brought in ~$18 billion in net new capital directly into Bitcoin since launch, absolutely shattering all previous ETF records to date. For context, second place was the Nasdaq-100 QQQ which brought in $5 billion in the first year. Crypto is here to stay and now officially held directly in the brokerages of millions of Americans, pension funds, and retirement accounts. It is reported that 900+ financial firms disclosed holdings of Bitcoin ETFs in Q1. This number is only going to continue to grow over time as more investors allocate to digital gold.

This is not only positive for net inflows of capital, but for recognition and credibility that this magic internet money stuff is the real deal.

Ethereum ETFs

Following the success of Bitcoin officially hitting Wall Street, the Ethereum ETFs were approved and launched at the end of July. Although Ethereum is still only a fraction of the market cap of Bitcoin, these ETFs brought in billions of dollars respectively. These also served as a strong signal of adoption for the rest of the crypto ecosystem by TradFi investors. While Bitcoin is often described as “Digital Gold”, Ethereum can be thought of more as “Digital Oil” as it facilitates the development of a broader use case of crypto and decentralized applications. Wall Street loves to sell narratives and there are no shortage of them when it comes to the budding crypto space.

 Investors are realizing the opportunity of Ethereum as a tech platform fostering the growth of the Web3 economy: DeFi, tokenization, stablecoins, gaming, NFTs, DAOs.  The digital economy has grown 2.5x faster than the physical world's GDP over the past decade, and already accounts for more than 15% of global GDP.  Ethereum has the potential to supercharge this growth and become the backbone of the 21st century digital economy. (Juan Leon, Bitwise)

Improving Macro Backdrop

Inflation cooling down

Although your grocery bill is still significantly higher than it was a few years ago, inflation has slowly been coming down.

The Federal Reserve raised interest rates in 2022 to combat high inflation, which had surged due to the trillions of dollars in new money printed in response to Covid. By increasing rates, the Fed aimed to cool down the economy by making borrowing more expensive, thereby reducing spending and slowing inflation. As inflation has gradually come under control, the Fed's rate-hiking cycle is expected to end, with the possibility of rate cuts starting as soon as September 2024. These cuts would aim to support economic growth as inflationary pressures ease.

As inflation moderates for the moment, and as the labor market softens, the Fed’s mandate is shifting from being entirely focused on fighting inflation, to a more balanced approach of managing employment vs inflation. Therefore, they have signaled that they could begin to cut interest rates even as inflation remains above their 2% target, which is what some other developed market central banks have already done. (Lyn Alden)

Rise in Global Liquidity

Rising global liquidity, which occurs when central banks and governments inject more money into the economy, often leads to an increase in Bitcoin and crypto prices. As more money becomes available, investors seek out assets that offer higher returns or serve as a hedge against inflation, which can happen when too much money is printed. Cryptocurrencies, especially Bitcoin, are seen as attractive options because they are decentralized and have a limited supply, making them less susceptible to inflation compared to traditional currencies. As more investors pour their excess capital into crypto, demand increases, driving up prices. Additionally, the increased liquidity boosts market confidence and trading activity, further supporting price growth in the crypto market.

Government Debt

The US government currently has a national debt of over $35 trillion dollars which is growing at an exponential rate. While politicians on either side of the aisle continue to point fingers at one another and promise free stuff to potential voters, the real issue at the end of the day is that the government continues to spend way too much money. This is an issue that has been compounding for decades and is unlikely to change anytime soon as there is zero incentive for those in charge to make any impactful changes to reduce to the deficit.

That said, it is pretty much a certainty that the Fed is going to monetize this debt into the future through currency debasement (printing money to buy our own debt). Devaluing the dollar is a feature, not a bug. Therefore, the value of scarcer assets such as stocks, real estate and crypto, are going to continue to go up in price as the dollars we use to price them in lose value.

Crypto Adoption Rates

Crypto is currently being adopted at a faster rate than the early days of the internet. While many people view crypto strictly as a speculative asset class, arguably the most important use case is “banking the unbanked”. The United States has the best banking and capital markets system in the world, however there are billions of people around the globe that still have no ability to access a bank account. Considering that more people now have access to a smartphone/internet access than a traditional bank, it isn’t difficult to see why the strength of adoption is beginning to go parabolic.

Stablecoins - are a type of cryptocurrency designed to maintain a stable value relative to a specific asset or a basket of assets, most commonly a fiat currency like the US dollar. Unlike traditional cryptocurrencies such as Bitcoin or Ethereum, whose values can fluctuate significantly, stablecoins aim to provide price stability, making them more practical for everyday transactions and as a store of value.

Stablecoin usage is currently hitting all time highs:

Recognition of stablecoin utility from US government rep Paul Ryan:

Tether - the company that created the stablecoin USDT, is one of the most interesting stories in crypto as they have quickly become one of the most profitable companies in the world. Tether generate profits primarily by charging fees when issuing new USDT tokens or when users redeem USDT for cash. Additionally, Tether earns money by investing the reserves they hold to back up the USDT in circulation, such as placing these funds in low-risk financial instruments like government bonds. This combination of fees and interest income allows Tether to operate profitably while offering a stable and widely-used digital currency in the cryptocurrency market. 

Tether’s $97.5bn in US treasuries would position it as the 18th largest owner of US debt, ahead of countries including Germany, UAE, and Australia. (Galaxy)

Stay bullish!

-Tommy Sullivan