Having successfully navigated a choppy, illiquid and largely negative northern summer, we are headed into what has historically been a more favourable period for crypto and other risk assets.
For September, both the Digital Asset Fund and the Market Neutral Fund ended the period approximately flat, despite significant volatility. A combination of good crypto news and macro headwinds conspired to balance each other out, leaving the potential for a crypto rally if the macro backdrop brightens. For the month, the Digital Asset Fund was up 3.01 while Bitcoin was up 8.03%, and the Market Neutral Fund 0.04%.
- The month started soft for all risk assets, and crypto was no exception, with macro headwinds the main focus for all. Bitcoin fell to the US$25,000, a level not seen since May 2023.
- This trend reversed for the crypto market and particularly our funds due to Grayscale’s legal win against the SEC, briefly pushing Bitcoin above US$28,000 and compressing the Grayscale discount. Essentially, the courts ruled that there was no good reason to disallow Grayscale a cash ETF having already approved one for futures. The result was as we expected and validates our decision to hold both Grayscales’s BTC and ETH equivalents to capitalise on the narrowing of the discount as ETF’s get approved. As a result, the Grayscale Trusts experienced a sharp uptick (and compression of their discounts). Some of those gains were then lost at the back of the month as the SEC deferred its decision on the spot ETF.
- It should be noted that this is a timing issue, and not an indication that they will not approve. We are still holding both Grayscale positions as we believe it a matter of when, not if, the spot ETF gets approved.
- At the same time, the macro focus had shifted to the Federal Open Market Committee (FOMC) meeting, where the discussion on benchmark interest rates took centre stage. Despite a strong U.S. economy and rising energy costs, it was widely expected that the Fed will keep interest rates unchanged, with the market anticipating no rate reductions until July 2024. This expectation led to a bullish sentiment in the market going into the meeting, particularly in Bitcoin, which saw a strong recovery from the US$24,800 support level to US$27,500. As expected, the Fed did not raise rates, but indicated that they were not yet done and that rates would stay elevated for longer than the market expected. This took some heat out of equities and crypto alike and started a procession of strengthening in USD – which is not good for risk assets. The back half of the month was also plagued with worry about another US Government shutdown which was only averted at the last minute on September 30th, leading to a 5% increase in the price of Bitcoin.
- Looking towards the next few months until year-end, the markets are very illiquid, and USD is at levels that continue to constrain investor appetite. From a geopolitical point of view, worries of a Government Shutdown continued to put strain on the banking sector and the prospect of higher interest rates for longer have kept a lid on price appreciation. Notwithstanding, we have seen a lot of good news specific to the crypto market around regulation, the fight with the SEC and the announcement of partnerships with significant traditional market and real-world participants.
- Though we don’t see the macro headwinds turning into tailwinds until next year, we do believe that any macro good news will be greeted with significant upside in crypto.
- Moreover, we believe that the biggest short-term risks to global markets currently revolve around both sovereign and bank credit. With the value of long dated bonds continuing to fall and bank customers continuing to move their money out of deposits and into money market funds, we expect to see further stress in the banking system. This is not good for most markets, however as we saw during the Silicon Valley Bank and Signature Bank credit debacle earlier in the year, we may well see a significant positive response for BTC pricing.
- Moving into next year, we have frequently spoken about the Bitcoin Halving event which is expected to occur in March 2024. Some debate revolves around whether the halving is in fact the catalyst for the pronounced market upswings that crypto sees every four years. Some argue that it is, in fact, a liquidity cycle that emerged from the GFC. Central banks must flood the markets with liquidity to finance the debt that matures every four years having been issued in the wake of the GFC with an average maturity of four years.
- Added to the four-year cycle is the likely launch of a Cash Bitcoin ETF in the USA and increased Government spending to buy votes in an election year, and we may well see some macro tailwinds. Don’t be the last one on the bus and position yourself early for what could be a wild and exciting ride.
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