Market update Q3 2024

We ended our previous quarterly update with the notion that Q3 might see some light at the end of the tunnel after digesting the massive Bitcoin supply overhang that hit the market in Q2. Towards the end of the second quarter, the US and German governments began selling significant amounts of confiscated Bitcoin, amounting to a combined $4.2 billion. Additionally, we saw the largest miner capitulation following the Bitcoin halving, with miners selling off around $3 billion. Unfortunately, it took a significant portion of the third quarter for the market to absorb this and other additional supply, resulting in another underwhelming quarter in terms of digital asset prices.

The main reason market weakness persisted in Q3 was the distribution of digital assets from two large bankruptcy estates to their creditors. After 10 years of legal battles, the infamous Mt. Gox announced it would begin distributing 140,000 BTC (worth about
$8.4 billion) back to its rightful owners. Although this was announced in June, 70% of the assets were actually distributed in July and August. On top of that, the bankrupt crypto lender Genesis distributed around $4 billion worth of Bitcoin and Ethereum to its creditors in early August. The simultaneous release of these supplies disrupted the market’s supply and demand dynamics.

While these volumes may seem relatively small, summer seasonality, combined with muted trading volumes and thin liquidity, made it harder for the
market to absorb. Liquidity, particularly in July and August, hit its lowest point of the year, exacerbated by reduced passive inflows from BTC ETFs, which typically act as a buffer during weaker periods.

Spot Ethereum ETF launch disappoints

At the end of Q2, we saw the surprising approval of the spot Ethereum ETF. After a rumored politically-driven 180-degree turnaround by the SEC, firms such as BlackRock, Fidelity, Grayscale, VanEck, and others were given the green light to launch their ETFs at the end of June. These products officially began trading towards the end of July. Unfortunately, the launch of these Ethereum ETFs
was not as successful as that of the Bitcoin ETFs. The bearish market sentiment in Q3, combined with low trading volumes over the summer, resulted in disappointingly low inflows into the products. In our previous quarterly update, we explained that
the approval of the Ethereum ETF would also lead to the conversion of the Grayscale Ethereum Trust into an ETF, allowing the 3 million ETH that had been stuck for over six years a way to exit and hit the market. When trading opened, ETH outflows from the Grayscale Ethereum Trust significantly exceeded the inflows into the new Ethereum ETFs from BlackRock, Fidelity, and VanEck. As a result,
ETH prices struggled alongside the rest of the market and underperformed significantly.

Image 1. The ETH outflow of Grayscale (in gray) overshadowed the inflow in new ETH ETFs.

Macro shock from Japan

Apart from specific crypto market dynamics, the broader macro markets also introduced challenging volatility to the digital asset space. On August 5th, we saw a sharp increase in volatility and a resulting in market downturn originating from Japan. After the Bank of Japan announced an increase in interest rates, traders began deleveraging their positions. Specifically, there was a partial reversal of the so-called Japanese Yen carry trade. In this trade, Japanese financial institutions borrow Yen at very low interest rates to invest in overseas assets with higher expected returns. Due to the announced interest rate increase in Japan, this trade became less attractive, leading to a widespread sell-off in Japanese and US stocks, which triggered a wave of margin calls. This sell-off also spilled over into Bitcoin and the wider crypto markets, resulting in a single-day decline of 23% in BTC price on August 5th. Nevertheless, by the end of Q3, the market showed signs of resilience. The rebound reflected cautious optimism, supported by expectations of improving macroeconomic conditions for the remainder of the year.

Outlook: a change in macro wind & US elections

Moving into the fourth quarter, we are beginning to see significant changes in global monetary policies take shape. On September 18th, the US Federal Reserve announced its first rate cut in over four years, reducing interest rates by 50 basis points. The Federal Reserve followed other Western central banks, such as the European Central Bank and the Bank of England, in easing monetary policy. With inflation having decreased significantly across the globe, a looser monetary policy is expected to revive the business cycle and create a more favorable environment for equities and digital assets to perform. This trend is already visible in the fixed income markets, as reflected by tightening credit spreads, and we anticipate it will extend into the crypto space. Another major macro event that will impact
markets is the upcoming US elections, scheduled for Tuesday, November 5th. Polls are running very close between Donald Trump and Kamala Harris, and the election will most likely be decided by voter turnout in a few swing states. While many depict the outcome of the election as binary for the digital asset markets - with Trump being more pro-crypto and Harris less so - we expect the outcome to have only a mild impact on the long-term trajectory of the industry. Markets, in general, dislike uncertainty, and historical patterns show
that broader asset markets tend to experience a few strong months post-election, regardless of the outcome. This coincides with Q4, which typically has the strongest seasonality for digital asset markets, potentially leading to a favorable end of the year for crypto prices.

Image 2. The S&P500 tends to derisk in the 2 weeks before the election, but recovers soon after.