May 2024 8DC Market Update

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

“There are decades where nothing happens; and there are weeks where decades happen.” ~Lenin

May was an exciting month in crypto. Plenty of volatility, lots of ups and downs, and loads to keep up with. Let’s dive into a few of the things that happened in May.

TL;DR- Long-term we continue to be very bullish on the markets and where we are at in the current cycle. Market data looks great, positive crypto regulation momentum continues, and 8DC continues to be in great positions. We expect to see really positive gains towards the end of this year, and into next year.

BUYING DIPS

May started where April left off — with a continued deeper price correction. In previous bull markets BTC has seen an average of four 10–20% drawdowns, three 20–30% drawdowns, and two 30%+ drawdowns. Taking advantage of these volatile opportunities is one of the best ways to maximize gains in a bull market. The first week of May gave us one of these opportunities, where we saw a drawdown max at 25% from its previous highs. Fear in the market seemed to peak as price bottomed out at $56.5K for BTC and $2.8K for ETH.

We’ve seen this game before, so on May 1 we were buyers. At this stage in the cycle, these prices are gifts and we were happy to scoop up more crypto at cheaper prices. These positions are strategic long-term investments that we believe will yield significant returns over time. Also, the speed with which price has recovered is indicative that this bull market is still intact and has plenty of strength.

We take a long term approach, and although we are providing commentary monthly we continue to have the goal to outperform the market over cycles not weeks or months.

ALL HAIL THE QUEEN

Any May update really starts with ETH. The biggest and most exciting news of the month was ETH, and the pending Ethereum ETF. In contrast to the optimistic outlook for the Bitcoin ETF in Q4 last year, the market expectations of an Ethereum ETF approval were basically 0%. Consensus was an initial rejection with perhaps an ETF approval on the second attempt later in the year. The depressed ETH price reflected this sentiment. ETH price throughout April/May was slowly grinding lower, down 25% over 6 weeks.

Then, on Monday the week of the ETF decision, one tweet from the Bloomberg ETF Analysts seemed to reverse all the expectations in an instant as odds of approval jumped from 25% to 75%.

With this tweet on Monday May 20th, and subsequent confirmation from other sources, ETH price moved over 20% in one day (25% total over 2 days). By Wednesday morning of the same week, all 19b-4s were amended and submitted, and by Thursday we made history again this year by seeing the second cryptocurrency approved as an ETF, opening up a world of new investors and new liquidity.

We still have a ways to go before these ETFs begin trading, but this is a milestone for several reasons:

• ETH is a commodity — while not explicitly stated as part of this approval, many have pointed to this approval as further confirmation of Ether as a commodity NOT a security. Coinbase Chief Legal Officer Paul Grewal said “ETH is effectively deemed a commodity as we’ve always known it to be.”
• Improved Political Backdrop — the abrupt about face in the Ethereum ETF approvals appears to be indicative of a more favorable environment that will lead to further victories for the digital asset ecosystem going forward. We touch on this more below.
• Paving the Way for Alts — Ethereum is far and away the largest ecosystem in the crypto space in terms of TVL, developers, users, and applications built on top. This stamp of approval for ETH is a great (albeit early) signal for other crypto tech that has been in a gray regulatory area. (See Uniswap up over 50% since this shift started happening on May 20).

Overall, we’re confident that just like the Bitcoin ETF approval set the stage for the first half of this cycle’s bull run, the Ethereum ETF is and will continue to be the catalyst for the second more explosive leg of this cycle’s bull trend.

What a turn of events indeed! As we’ll cover in the next section, given the recent political backdrop and negative sentiment around crypto from Washington, this approval felt more significant than perhaps it should have been. Likely a signal of regulatory tides shifting in crypto’s favor. As always, we think crypto is a huge investment opportunity over the next 5–8 years, and this recent approval validates our view of what is to come down the road.

CRYPTO REGULATION AND POLITICS

Coming off the significant Ethereum ETF approval, there was even more happening with crypto regulation, and a lot of it was very positive.

As we shared in our 2023 Crypto State of the Union, there were a lot of regulatory battles in 2023. From attempts to cripple crypto banks or blatant untruths about crypto financing terrorism, there was a clear political war against crypto ever since Elizabeth Warren started her anti-crypto army. Senator Warren oversees the SEC and Banking Commissions, and so much of the hostility towards crypto has really been led by her efforts. However, despite these efforts, the SEC continued to lose in court in 2023.

Recently however, we’ve seen political push back against this anti-crypto sentiment and support for Warren and her efforts have started to dissipate. Is this shift away from “anti-crypto” due to politics in an election year? Due to continued losses in the court system? Due to a better understanding of the technology?

Everyone has their own opinion, but either way, the result is very positive for crypto!

Without getting into too much regulation commentary, here are some significant moments in May that shifted the previous headwinds of crypto regulation into tailwinds.

• Trump talks about crypto, says he’s pro crypto, and continues to double down on this idea by taking campaign donations in crypto.
• Crypto Twitter personalities who are tired of the over-regulation antics from the SEC over the last year get very vocal on this upcoming US election being about crypto.

• The FIT21 Bill was passed by the House of Representatives with strong bipartisan support. 71 House Democrats pulled rank and voted for the bill despite clear instructions from Democratic leadership to vote against it and even a threat of veto from the Biden administration.

• SAB 121, a resolution allowing banks to custody digital assets, passed with strong bipartisan support in the House and Senate. Unfortunately, Biden still vetoed the decision, making this the most bipartisan bill to be vetoed by the Biden Administration. But the support from both sides of the aisle is indicative of how much support for crypto is growing in Washington.
• We clearly have a ways to go, but we’re seeing encouraging signs from a typically crypto-hostile Biden Administration issuing this statement stating they are eager to work with Congress to “ensure a comprehensive and balanced regulatory framework for digital assets.”

BITCOIN UPDATE

In many ways, the most positive thing that happened in Bitcoin price action was that price went down. As mentioned above, every bull cycle has several significant dips, so it is healthy to experience this pullback and get those drawdowns out of the way. Pullbacks are also healthy to flush out excessive leverage and form a new range for consolidation and re-accumulation.

We made this comment at the end of Q1 and it has continued to be accurate:

“Nothing goes up in a straight line, so we wouldn’t be at all surprised to see some further consolidation and re-accumulation during Q2. This could result in more modest or flat performance on the quarter before we continue with phase two of the bull market later this year.”

We think it’s historically significant that this ~$60k price level was retested as well. In 2021, this price level was resistance on the monthly time frame. Price got higher in 2021, but price never could close the month above $61k. In 2024, it’s bullish to successfully retest an old major resistance and turn it into a new support level.

While the reaccumulation phase of May will soon be forgotten, the forthcoming months are what will be remembered. The green circles of accumulation in past cycles now just appear as minor speed bumps on the way to new highs.

Bitcoin ETFs

Now that we’ve had time for official Q1 filings to be finalized we’ve been able to learn a lot about who has been buying the Bitcoin ETF. Over 1,000 firms with greater than $100M report owning Bitcoin ETFs. Collectively they own $10.7B and include big names like Wells Fargo, PNC Bank, JP Morgan, UBS, Wisconsin State Pension Fund, Scotia Bank, Mass Mutual, etc.

Speaking of big names, thanks to Q1 data we can now see that over half of the Top 25 Hedge Funds have exposure to the Bitcoin ETFs:

And to name drop a few more:

While these numbers are impressive, and as we’ve said before, even if these were the numbers after one year it would be deemed a success, let alone after one quarter… However, it’s interesting to note that on average, these ETF purchases represent just 0.25% of these firms overall portfolios. These buys are early and small and we expect them to continue to grow significantly over time.

Global Liquidity

While crypto user adoption is the secular technology trend, Global Liquidity is the cyclical macro trend. As shown from the chart below, there is a strong correlation between central bank money printing and the price of Bitcoin. This is true of all assets, but Bitcoin sees an extreme boost when the money printers turn on. The below scatter plot illustrates that each 10% rise in Global Liquidity appears to generate an 87% jump in the price of Bitcoin!

We’ve seen a bit of a short term pull back in global liquidity recently, but from a zoomed out perspective, the central bank money printing is pushing up against long term “resistance” looking ready for a breakout to new highs.

We all know that over time Global Liquidity largely continues in one direction, and any pullbacks in money supply are brief and quickly reversed (see 2022). And as we’ve discussed before, the pace at which this liquidity is being injected is only accelerating. The rest of this crypto cycle is going to be one for the books.

FRONTIER/ALTS

The whole crypto market has seen some turbulent times during the first part of this quarter, but May has been a strong month for Frontier Assets specifically with many breaking above their Q1 highs. TOTAL3, a measure of the crypto market cap excluding ETH and BTC is up ~12% in May, showing a strong rebound off its lows.

Ethereum has always led the way for the rest of the Altcoin sector, and as we mentioned above, this Ethereum ETF approval is a huge unlock to allow investors to feel comfortable investing in the broader crypto ecosystem.

Ethereum has been the brunt of a lot of negativity recently pre-ETF, but it’s important to remember how pivotal a role it plays across the crypto ecosystem. It is by and large the backbone that everything else depends on.

Another way to look at this is the amount of capital and applications that are built on top of the Ethereum ecosystem:

We wouldn’t be surprised if this ETF approval ends up being the catalyst for a broader altcoin rally, with projects in the Ethereum ecosystem leading the way.

As a reminder, Bitcoin tends to lead the market for the first half of the bull cycle, and then momentum begins to shift towards Ethereum and then other Frontier Assets. We’ve seen a few select tokens outperform BTC (less than 10), but by and large Bitcoin has dominated. However, this might soon be shifting. Here’s one possible scenario of where we are in the current altcoin cycle:

We’re grateful to be part of crypto in months like May, and we’re excited for the future of this industry. There is so much going on, and so much innovation happening across so many sectors. Sometimes, it’s just amazing to sit back, zoom out, and see what is happening (regardless of short-term price action). Feels like the future is happening all around us.

~ 8DC Team