Macro Overview
The MSCI World equity index dropped -2.35% in August, pausing the bullish market momentum observed through July. Nvidia significantly beat earnings expectations and reversed the -12% intramonth price drop, finishing up 20% from those lows to a new all-time high to join the trillion-dollar company market cap club. Economic data reports continued the recent trend of in-line with expectations results and still showed inflation moderating. Yields on 2, 5, and 10-year Treasuries rallied to the highest levels in 15 years only to pull back near month end as the job market showed some signs of cooling. Worries in August of the increased Treasury issuance, overleveraged long equity positions unwinding, and the effect of higher rates for longer drove the initial market selloff. Corporate stock buybacks and the bounce from Big Tech stabilized equities whilst the benign economic data pushed yields off their highs. The small magnitude of the moves by month end kept the soft-landing narrative well intact, even with rates and equities both selling off (circa 2022).
Digital Asset Overview Digital assets finished lower across the board in August despite a brief rally fuelled by Grayscale’s favourable US court decision, with the total crypto market cap finishing the month down -10.0% and Bitcoin dominance remaining relatively flat at -1.0% MoM. After trading between $29K-$30K in the first half of the month, a liquidation cascade mid-month which saw over $2.5Bn worth of open interest clearing in just a few hours (the largest 1-day change in futures open interest since May 2021), pushed Bitcoin below $26K. The sell-off resulted in a sharp repricing of volatility which was at historically low levels, as covered in our August update.
With Grayscale’s positive outcome against the SEC over the conversion of the Grayscale Bitcoin Trusy (GBTC) to an ETF, Bitcoin and digital assets rallied, with BTC jumping near 10% on the news. Market speculation increased regarding the SEC now giving the OK for the issuance of BTC ETFs by large asset managers, however, the SEC chose to delay seven ETF applications (including BlackRock’s) on the final day of August. Bitcoin subsequently erased all gains and closed the month just below $26K.
As highlighted to our investors last week, whilst Grayscale’s suit did not guarantee the imminent conversion of the Trust to an ETF, many commentators believe the court's ruling provides a clearer path for ETFs to be approved. Following the court ruling, Bloomberg Senior ETF Analyst Eric Balchunas said in a post on X that they have raised the chances of a spot Bitcoin ETF getting approved by the end of the year from 65% to 75%, and 95% chance by the end of 2024.
An additional US court case also provided positive US regulatory outlook. In a case in which Uniswap users claimed they lost money due to scam tokens on the decentralised exchange, Judge Katherine Polk Failla not only dismissed the case but clearly labelled both Bitcoin and Ether as commodities. This distinction is particularly compelling given Judge Failla will be overseeing the SEC’s lawsuit against Coinbase.
The disparity of messaging between the SEC and other governing bodies highlights that whilst the US, led by the SEC, has somewhat been making hostile moves against the space this year, it’s beginning to appear that the harsh stance may be confined to Gensler’s SEC. With the high-profile loss against Ripple and now Grayscale, as well as increasing industry scrutiny, some believe that with the entrance of BlackRock, Fidelity and more, the coming months may present the SEC with an ideal time to welcome TradFi juggernauts to the space.
Other jurisdictions continue to make progress on digital regulation, with Swiss bank SEBA receiving approval in principle from Hong Kong's Securities and Futures Commission, the first step in acquiring a full license for SEBA to deal in crypto or virtual assets-related products and traditional securities. Capital and talent will continue to flow to friendly jurisdictions, suggesting the game theory of the US’s hard stance may soon pivot to avoid losing investment and innovation to other jurisdictions.
The tokenisation of real-world assets continues to garner traction, particularly from Trad-Fi participants interested in the efficiency and interoperability features of public blockchains. In August, Swift, the interbank messaging system, announced the successful trial of transferring value across multiple blockchains in partnership with Chainlink and various financial institutions. Chainlink (LINK) is one of the most prominent oracles in the digital asset ecosystem, a crucial piece of infrastructure amongst many of the largest DeFi protocols. Earlier this year, Chainlink announced the release of Cross-Chain Interoperability Protocol (CCIP), a Swift-like messaging protocol for blockchains that facilitates the transfer of assets between different networks. Financial industry participants in the Swift trial included the likes of Citi, BNP Paribas, BNY Mellon and ANZ Bank, with the CCIP supporting Avalanche (AVAX), Ethereum (ETH), Optimism (OP) and Polygon (MATIC) networks. You can read more about the trial on the Swift website.
Tokenisation and the digitisation of everything thematic have the potential to enable the adoption of public smart contract platforms. With more utility being built on top of public blockchains, we expect to see growing adoption and acceptance of this technology. As demand for these new and efficient applications grows, so too does the demand for the underlying network assets that are needed to pay for activity on the public ledgers. Whilst Alt-token prices remain subdued compared to Bitcoin this year, the adoption and utility of the technology continue to gather traction, with Visa’s latest announcement of extending its USDC settlement capabilities to the Solana network.
September has historically been a weak month for Bitcoin price action (along with broader macro assets), recording negative monthly performance in the last 6 years. Whilst in the short term there may be technical resistance (200D MA) and possible exhaustion from long-term holders who have accumulated a record amount of Bitcoins supply, we remain optimistic that medium-term catalysts will drive the next wave of Bitcoin and digital asset growth – being Bitcoin’s halving in April next year, Bitcoin spot and Ethereum futures ETF approvals in the US, as well as potential line of sight on easing macro conditions.
If you’d like to speak with our team about any of the above market views or to discuss our Funds further, please reach out via investor.relations@trovio.io.
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