Despite Onslaught Of Positive Fundamental News, Crypto Assets Continue Their Recent Drawdown
The past week has seen disappointing price action for crypto assets, despite a number of fundamentally positive developments for the industry. Bitcoin has failed to bounce at $60K, which is the the bottom of its 4-month long trading range, and has broken down to test the bottom it formed in early May, around $56,500. A break through this level could see bitcoin test the $50K level of support.
Figure 1. Bitcoin has broken out of its recent trading range and is testing the last line of support around $57K.
It will be important for bitcoin bulls to defend $57K and/or $50K if we are to see an end to this multi-week-long downtrend that has been in place since the beginning of June. Ether too has been experiencing the summertime blues as it has retraced the euphoric price jump that followed the surprise SEC approval of the yet-to-be launched spot Ether ETFs. If Ether cannot muster a rally around the $3,000-$3,100 support, a fall to $2,800 or even lower may be in the cards.
Figure 2. Ether has completely retraced the post-ETF news rally and is poised to test $3K support.
All of this bearish price action is occurring at a time when a number of relatively positive developments are occurring in the crypto industry. On the political front, last week’s debate between President Joe Biden and former President Trump was an absolute disaster for the Democratic party. At crucial moments, Biden came across as incoherent and generally unable to project the sense that the 81-year-old is up to the task of running for President in November, much less the task of enduring another four years at the helm of the US government. While Democrats were quick to point out that Trump’s rhetoric was peppered with falsehoods, the post-debate chaos stemming from the Democratic party and the sharp uptick in Trump’s polling numbers indicate that the Democrats have an up-hill battle heading into November’s election.
Regardless of one’s political leaning, the jump in polling numbers for Trump is fundamentally a positive development for the crypto industry in the US. This is because the Democratic establishment has waged a multi-year anti-crypto campaign. Meanwhile, Trump has opportunistically taken up the pro-crypto banner in recent months and has pledged to make the United States a leading force in crypto trading, Bitcoin mining, and other pro-crypto initiatives.
Another major development, that occurred over the past week, which should be positive for the crypto industry in the US, is the Supreme Court’s decision to end the Chevron Deference Doctrine. The Chevron Doctrine is a legal principle that has been in place for over 40 years. It granted regulatory agencies the power to make broader interpretations of existing legal statutes. This allowed agencies, such as the Securities and Exchange Commission and the Environmental Protection Agency, to create rules based on vague legal statutes, and lower courts would generally defer to such regulatory rule-making. This change is part of a broader push by a more conservative Supreme Court to reduce the power of the regulatory state, which many conservatives feel has been promoting left-leaning policies that go beyond the mandate of regulatory agencies (such as the SEC’s ESG disclosure requirements). It is notable that crypto regulations and the actions of SEC chair Gary Gensler were specifically cited in oral arguments before the Supreme Court on this matter. Here is a sample of the arguments from the transcript:
“What I'm saying is Chevron is a big factor in contributing to [Congressional] gridlock. And let me give you a concrete example. I would think that the uniquely 21st century phenomenon of cryptocurrency would have been addressed by Congress, and I certainly would have thought that would have been true in the wake of the FTX debacle. But it hasn't happened.
Why hasn't it happened?
Because there's an agency head out there that thinks that he already has the authority to address this uniquely 21st Century problem with a couple of statutes passed in the 1930s. And he's going to wave his wand and he's going to say the words "investment contract" are ambiguous, and that's going to suck all of this into my regulatory ambit, even though that same person, when he was a professor, said this is probably a job for the CFTC.”
Now that Chevron has been overturned, individuals and corporations can take regulatory agencies to court to challenge regulations, and the courts will rule on such matters and no longer defer to the judgement of the experts at these agencies. This has massive implications for the crypto industry, Wall Street, energy companies, and many other industries. It also places a larger burden on courts to interpret regulatory disputes. At the same time, it places the onus on Congress to pass more laws instead of relying on regulatory agencies to interpret vague or out-of-date laws in novel settings. Legal analysts have been quick to point out that this development may not eliminate the ability of the SEC to continue its “regulation by enforcement” strategy that involves the SEC engaging in enforcement actions against crypto firms. Crypto firms claim that there are, in fact, no clear rules for the crypto industry and Coinbase is currently suing the SEC to publish specific rules on how the agency deems certain crypto assets as securities. For a good crypto-specific breakdown of this development, check out this bankless podcast.
Image 1. An updated S-1 form caught the attention of analysts that project a mid-July spot Ether ETF release. .
The final piece of good news is that there has been more progress with the Ether ETF as Bitwise submitted an amended S-1 form, which analysts indicate that the Ether ETFs could begin trading as early as July 15th.
So, despite these bullish developments, why have crypto markets continued to perform poorly? It could be that the lack of momentum and volatility that has often marked this asset class through the summer months has led to a lack of fresh capital inflows. Crypto has now become large enough in size that it may have to start competing for flows against other markets like US equities or money market funds. With both the Nasdaq and S&P500 making new highs and rates on US treasuries at elevated levels, crypto markets might not be all that attractive. The lack of inflows can be seen in the data from the bitcoin ETFs, which have seen disappointing numbers over the summer.
We’ve also seen sell pressure in bitcoin from a number of sources. Mt Gox, for example, has begun its repayment to creditors ten years after filing bankruptcy. However, how much this will add to sell pressure is up for debate. The US and German governments, who had seized a sizeable amount of bitcoin from illegal dark markets, have begun selling off portions of their holdings. The US still holds around $9.6B, and Germany holds $2.3B in bitcoin. Another source of selling has been bitcoin miners. With the halvening behind us, miner revenues are down while hash rates have remained high. This has forced miners to sell off inventory to fund their operations. Some on-chain analysts have pointed out that miner capitulation could be near, a historical indication of local bottoms for bitcoin.
Figure 3. The Hash Ribbon is an indicator of miner capitulation, i.e. when Bitcoin becomes too expensive to mine relative to the cost of mining.
So, as crypto’s cruel summer drags on, investors look towards a mid-July Ether ETF launch and hope it can catalyze some bullish momentum. Until then, it may be best for traders to go outside, “touch grass” and wait for the summer doldrum to come to an end. After all, the past several weeks have been fundamentally positive for the crypto industry, with regulatory, political and legal victories coming in one after another. These victories have helped pull crypto out of the tailspin that the industry has been in since the collapse of FTX and the regulatory and banking onslaught that threatened the survival of the asset class in the United States. In the long-term, these recent victories sincerely matter and may pave the way for the second leg of what is still looking like a mid-cycle correction in a larger bull market. Tomorrow, non-farm payroll data will be released, and if the data comes in cooler than expected, the market could begin to reprice how many rate cuts we can expect from the Fed this year. If the market can absorb this sell pressure and global liquidity improves as rates come down, crypto markets could begin to look attractive yet again for sidelined capital.
Latest Crypto Developments
In this section, we highlight the latest developments that may be significant in either the price action or the trajectory of the crypto space overall.
Circle Warns Non-Compliant Stablecoins Will Disappear in EU
Circle has suggested that non-compliant stablecoins will vanish from the European Union (EU) as new regulations come into effect. This prediction comes as the EU continues to tighten its regulatory framework around crypto assets and stablecoins. Circle was recently granted a license to operate in the EU becoming one of the first major stablecoin issuers to achieve MiCA compliance, the EU’s recent crypto regulation framework.
Societe Generale’s Stablecoin Becomes MiCA Compliant
Societe Generale's crypto-division, FORGE (SG-Forge), has updated its EUR CoinVertible (EURCV) stablecoin to comply with the European MiCA regulation, ensuring free transferability and no whitelisting restrictions. The stablecoin, launched on the Ethereum blockchain, aims to facilitate broader adoption and integration into the decentralized finance space. The firm has also partnered with Wintermute to enhance liquidity for EURCV.
Judge Upholds Most of SEC's Case Against Binance
A judge has upheld the majority of the SEC's case against Binance, though charges related to secondary sales were dismissed. This partial dismisal is seen as a major blow to the SEC’s long-standing argument that crypto assets can be themselves securities.
IRS's Tax Reporting Rule for Brokers Affects DeFi
The IRS has implemented a controversial tax reporting rule for brokers that also affects decentralized finance (DeFi). This rule requires brokers to report transactions, which has sparked debate within the crypto community about its implications for privacy and compliance.
Market Returns
That's Some Good Content!
Recommended articles, podcasts, and other content from this week:
Coin Center blog - What the heck happened last week? SEC Broker Enforcement, Treasury Broker Rule, and SCOTUS Broke Chevron.
On the Brink podcast - Weekly Roundup 07/04/24 (Chevron overturned, prediction markets, revisiting Silvergate)
Unchained podcast - Why the Mt. Gox Repayments May Not Hurt the Bitcoin Price Much
On the Margin podcast - Rate Cuts Are Coming | Weekly Roundup
The Breakdown podcast - The SEC's Horrible, No Good, Very Bad Week
Meme Of The Week