Market Update Cryptocurrency Market Update: Analysis and Insights – April 15, 2024

In this session I’ll try to cover what I think are the main market drivers to watch in the coming quarter. As you know there is a growing integration of crypto markets with traditional markets, therefore many of these drivers come from the traditional financial sector.

First of all, we are getting closer to the Bitcoin Halving event. It is expected on April 19th around noon UTC time. As a reminder, the block mining reward will drop then from 6.25 bitcoins to 3.125 Bitcoins per block, effectively halving the supply growth of the main cryptocurrency. So assuming that global demand is sustained, that Bitcoin adoption is sustained worldwide, the halving would drive the Bitcoin price higher in the medium to long run, and in the best-case scenario, we could see a great rally similar to those observed in the past. This is a likely scenario, but there is no certainty of course, and historical performance never guarantees future results. The complexity of the market’s supply and demand dynamics is growing. We have new entrants.

A net amount of more than twelve billion US dollars has been poured into Bitcoin ETFs this year so far. Traditional funds would be progressively gaining Bitcoin exposure, it is nothing new but the phenomenon could accelerate with the ETFs because tracker ETFs are more transparent and accessible to the larger public.

To give you a concrete idea, Fidelity added a while ago a small crypto allocation to their ‘all-in-one’ funds family. The allocation weight ranges from 1 to 3%. These four funds that you see here manage nearly 1.75 billion US dollars today. Exposure was already possible two years ago through various exchange traded products. Exposure was also achieved to some extent through listed stocks of companies involved in the crypto sector such as Coinbase or Microstrategy.

But again, the recent ETFs launched facilitated the investment process because they are now available on every major brokerage platform including Fidelity, Robinhood, Charles Schwab, E*TRADE, Interactive Brokers, eToro and more..

Opening a brokerage account in the US is simple, almost as simple as opening a regular bank account. \ Also, Investment Retirement Accounts (IRAs) have always been able to invest in Bitcoin via special accounts called self-directed IRAs. A self-directed IRA can invest in real estate or commodities, and Bitcoin is conveniently considered a commodity in the US. But with the launch of Bitcoin ETFs, every traditional IRA, 401k plan can now gain exposure to Bitcoin.

There are 13.6 trillion US dollars invested in IRAs as of the end of 2023. 1% of 13.6 trillion is 150 billion US dollars. So if IRAs invest 1% in Bitcoin, obviously the potential impact would be significant. Major asset managers like Blackrock are also considering including a crypto allocation to their diversified funds. The crypto sector has long adopted the codes that govern the traditional financial sector over the years. It grew more and more sophisticated over the years. And the traditional sector almost concluded this transition in January with the SEC approval of Physical Bitcoin ETFs.

Regarding decentralized adoption, there are 46 million addresses holding at least 1$ worth of Bitcoin, but we have an estimated 1 billion people around the world that have used cryptocurrencies already. The more comfortable users are with Bitcoin, the more integrated and useful it can be. And comfort requires a low market volatility and we’re not there yet.

The Bitcoin volatility is still twice higher than the volatility of Crude Oil, 4 times higher than the volatility of the S&P 500, and 9 times higher than the volatility of EURUSD.

Looking into the more recent price action this week, Markets are down over geopolitical tensions. The Bitcoin price was down by almost 18% from the all-time high on Saturday evening as the conflict in the Middle East conflict escalated further.

Before that, markets have been largely swinging. They have been particularly directionless since mid-March, concerned mainly by the US Federal Reserve’s ability to bring inflation down at 2%. We have growing uncertainty over the Fed’s monetary policy. We have a singular macroeconomic scenario in the US right now: low unemployment, high GDP growth, but persistent inflation. The Fed was likely counting on a higher unemployment rate (but still below the 5% threshold) to bring prices down, but this is not happening. Demographics, budget deficits, supply frictions, geopolitical tensions are among the many factors that are keeping inflation well above 3% so far.

More than 6 trillion dollars have been borrowed by the Biden administration so far in the bond market and the US deficit is well above 30 trillion US dollars now. Government spending also contributes to inflation.

The Fed’s tightening policy has been depleting liquidity - more than 900 billion dollars are drained annually by this policy according to JP’s CEO Jamie Dimon. So basically, liquidity will become more expensive on one hand, and the government needs to borrow more. The natural consequence is the weakening demand for the bonds that are auctioned by the US Treasury on the primary market. The US Treasury could find it more and more difficult to raise funds at current yields.

Yields that you can see on this graph, are also pointing higher this week, and since mid-March reflecting the fact that bond buyers are expecting bond prices to be lower.

So what does it have to do with the crypto sector? Low liquidity typically has a negative impact on the crypto sector. A high interest rates, low liquidity configuration has a tendency to curb investments in crypto-assets and in the crypto sector.

Inflation is measured by the Consumer Price Index produced here by investing.com. A CPI above 3% will keep fiat interest rates high. The 1-year Government yield is currently above 5%. The crypto market can still compete.

Some protocols like Ethena offer above 17% annualized on risk neutral cash and carry strategies, but the edge is melting. Other more classic staking protocols like Lido can hardly compete.

Meanwhile, Q1 volumes traded on exchanges soared in Q1. Last week we had more than 56 billion US dollars traded on DEXes.

The Bitcoin future open interest is also very high despite the last severe market correction on Saturday. The market is highly leveraged confirming expectations of extreme volatility in the coming months.

Given all the key events that will unfold this quarter, we’ll likely see highly volatile market sessions. Just looking at the market behavior in January, the bitcoin ETF approval was followed by a 21% market correction in a span of 2 weeks. This pattern has a name: ‘buy the rumor, sell the news’. We could see similar behavior at the end of the week.

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