- A down month for digital asset valuations ended with a spark of optimism after a court ruling raised the prospects for spot Bitcoin ETF approval.
- The drawdown earlier in the month likely began with macro catalysts–virtually all asset classes declined in August–and then accelerated due to exchange liquidations.
- The month brought other structural positives, including strong early adoption of a new social media platform, and PayPal’s entrance to the stablecoin race.
- In our view, the combination of improving fundamentals and low speculative positioning have created a favorable environment for long-term holders to add to crypto portfolios.
Exhibit 1: All major asset classes faced drawdowns in August
Exhibit 2: Heavy Treasury borrowing may be weighing on long-end bond prices
Exhibit 3: Wave of exchange liquidations sent Bitcoin’s price sharply lower mid-month
While the Court decision does not imply immediate conversion of GBTC to an ETF, it does represent a major step toward spot Bitcoin ETF approval in the US market. Many investors believe that a spot Bitcoin ETF has been a long time coming, and Grayscale has repeatedly said that the spot Bitcoin ETF is a matter of “when, not if.” According to Bloomberg data, there are already about 150 exchange-traded cryptocurrency products listed globally, with assets totalling more than $7bn.4 Other developed market economies–including Canada, Switzerland, Sweden, and Germany–have approved spot cryptocurrency exchange-traded products, including for Bitcoin, Ethereum, a variety of other digital assets (e.g. SOL, XRP, BNB), as well as digital asset indices. In the US market there are eight existing products, and all of these products hold Bitcoin futures as the underlying asset, including a short strategy, a 2x leveraged fund, and a product using option overlays. There are currently ten applications for a spot Bitcoin ETF awaiting SEC approval, including Grayscale’s application that was the subject of the lawsuit.
Exchange-traded funds now account for about 30% of the US fund market for corporate equities and capture the lion’s share of new investment flows (Exhibit 4).5 Providing access to digital assets through this type of investment vehicle will likely attract new participants. Although futures-based products are available in the market today, many investors are aware of their negative “roll yield,” and therefore may be awaiting more direct Bitcoin exposure.
Exhibit 4: ETFs capture the lion’s share of new investment in public equities
August included a number of other positive developments aside from the progress on spot Bitcoin ETFs. For example, social media platform friend.tech emerged as a notable application on the Base Layer 2 blockchain. The app enables users to sell unique access—referred to as ”keys”—to their followers. Holding these keys grants the right to exchange private messages with the main profile of the user. On August 21st, friend.tech saw an impressive spike in daily revenue, reaching nearly $850,000, although this fell back to a range of $100,000 to $200,000 by the 26th. This surge in popularity was so significant that it contributed to Base Layer 2 overtaking both Ethereum and Bitcoin in daily transactions on the same day, with a total of 1.37 million transactions. Of these, friend.tech alone accounted for nearly half, with 530,000 transactions (Exhibit 5). Despite its successful rollout, it remains to be seen whether the app will have staying power among users.
Exhibit 5: New social media application friend.tech caused surge in Base transactions
Exhibit 6: Engagement from short-term traders notably low
1. We use the generic term “ETF” to refer to exchange-traded investment vehicles, including those that are required to register under the Investment Company Act of 1940, as amended (the “‘40 Act”), as well as other exchange-traded products which are not subject to the registration requirements of the ‘40 Act.
2. Since the start of QT, the US government has run a cumulative budget deficit of about $2.5 trillion, but public investors have only needed to purchase around $1 trillion in additional bonds and notes with greater than 1yr remaining maturity. The difference has been made up by higher bill issuance, a drawdown of the government’s cash reserve, and other sources. Financing of government spending from these alternative sources is now limited, and long-term bond issuance will need to increase. These plans were disclosed with the Treasury’s Quarterly Refunding Announcement at the start of August. Source: US Treasury, Bloomberg, Haver Analytics, Grayscale.
3. Prices based on 5pm NY close. Source: Bloomberg.
4. As of August 31, 2023.
5. Including mutual funds, closed end funds, and ETFs, and excluding money market funds. Source: Federal Reserve’s Flow of Funds statistics.
6. Bitcoin futures expire, and therefore must be periodically “rolled” into new contracts. Because the Bitcoin futures curve is upward sloping (i.e. in “contango”), the process of rolling involves a sell-lower/buy-higher transaction, which can be thought of as a negative yield for the futures portfolio.
7. Tether (USDT) also returned to its $1 peg after wobbling early in the month.
8. PR Newswire
9. Demand Sage
10. The Block
13. The Block
14. Coin Gecko
15. Coin Gecko
17. Venture Beat
19. For example, Bitcoin price returns have been greater than 150% for every three-year holding period since July 2010. Source: Bloomberg, Grayscale.
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There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.