Dog Days Of Summer Bring Crypto Assets Lower As Tech Stock Soar - What Is Causing This Decoupling?
Despite the rise in US stocks and other risk assets, crypto markets have been experiencing rather slow, boring and bearish price action over the past several weeks. This is an unwelcome decoupling of the wrong sort that is being lamented by crypto traders as they watch the likes of Nvidia reach dizzying highs. Since the beginning of June, Bitcoin has fallen approximately -5%, while the NASDAQ composite index has risen a remarkable +7.5%. This dislocation may signal the beginning of a new trend or may simply be due to esoteric reasons that we will get into momentarily.
Figure 1. This is not the decoupling crypto investors have been hoping for as the NASDAQ soared while BTC declines.
Before we get to some theories that seek to answer the underperformance of crypto assets, we should draw attention to the fact that the JPY/USD is once again testing all-time highs, meaning that the Japanese Yen is depreciating against the US dollar. This is a key macro indicator to keep an eye on as it has a number of important implications. Since Japan has the lowest interest rates in the world, its system is often used to finance carry trades, a type of foreign exchange trade in which you borrow money in one currency at low interest and use it to make high-interest investments in other currencies. The other major implication is that if the Japanese Yen continues to depreciate, it could trigger some form of financial dislocation. In the worst-case scenario, a depreciating Yen could trigger a 1998-style Asian Financial crisis, where a soaring dollar burst a regional bubble that had been brewing for years. Today’s financial landscape and the fundamental economic strength of the Asian region, are nothing like 1998, but investors would be wise to watch for continued (and rapid) depreciation in the Japanese Yen.
Figure 2. USD/JPY has been at it again as the pair appeared poised to make new 30+ year all-time highs.
Looking back to crypto markets, there are a number of theories floating around concerning the unpleasant decoupling that crypto assets have experienced vis-a-vis other risk assets such as technology stocks. The first and most straightforward is that the rapid appreciation of crypto assets in recent months/years has brought about a flurry of profit-taking as everyone from the German Government, The Ethereum Foundation, and Bitcoin miners have taken advantage of near-all-time highs for Bitcoin and multi-year highs on Ether and other altcoins. The fact that it is currently June and the summer vacation season is kicking off may also contribute to this underperformance in the face of significant sell pressure.
Figure 3. Bitcoin’s price continues to consolidate in a +3-month long range.
Perhaps the strength in names such as Nvidia is, in fact, the culprit. There may be a cohort of investors who believe that the rise in AI shares is growing a bit long in the tooth and a reckoning is coming soon, which means higher-beta risk assets, such as crypto, are in for some outsized losses in the near future. Regardless of the reason, if you consider the bigger picture, this recent dip/dislocation is rather minor in the grand scheme of things.
Figure 4. The price jump on Ether following the ETF news has largely faded, with the price drifting back down to a low of $3,360
Another area of disappointment for crypto investors has been the lacklustre follow-through in the bullish impulses that followed the surprise spot Ether ETF announcements in late May. Following the 11th-hour pivot by the SEC regarding the approval of spot Ether ETFs, Ether jumped from around $3K to just under $4K. Since then, however, we have witnessed a slow and grinding drift lower, bringing the price of Ether to a low of around $3,360. This “rally for ants” has been quite disappointing despite the fact that Ether has managed to regain $3,500. Perhaps investors had taken on too much leverage following the announcement, the Ether ETF news has been priced in, or the market anticipates a lukewarm reception for the spot Ether ETFs. The market has seen a return of the a spot premium relative to the derivatives market and a draw down in open-interest, suggesting that the market has become less levered and that the spot market has become a greater driver of price, a welcome development for Ether bulls.
Figure 5. Ether’s derivatives market has cooled off since the announcement that the SEC will approve the Ether ETF.
Regardless of the cause, this sell-off could be an opportunity for those who still believe in the Ether thesis to take advantage of this pessimism before the launch of the spot Ether ETFs, which are expected to come out later this summer. There is sure to be some level of inflows from investors looking to diversify their crypto exposure away from Bitcoin and those attracted to Ethereum’s smart contracting capabilities. Ethereum has already attracted the attention of institutions such as Blackrock, which launched a money market fund on Ethereum earlier this year. The debut of the first bit of Ether marketing from one of the ETF issues, Bitwise, in which a young upstart Ethereum converses with a tired old Tradfi character (in the style of the classic Apple ads), could be an indication of the concerted effort to market this asset over the coming months.
Image 1. Bitwise has debuted a new Ether-focused advertisement that is aimed at promoting their upcoming spot ETher ETF.
On the bullish side of the ledger for Ether is the recent news that the SEC had dropped its investigation into ConsenSys, the Ethereum development studio. The SEC had been looking into whether Ethereum's transition to a proof-of-stake model constituted a securities transaction. ConsenSys received formal notice that no enforcement action would be recommended, which was a relief for the Ethereum community. However, the SEC's letter clarified that this decision should not be interpreted as a complete exoneration.
Rumours began to circulate in March that the SEC was investigating Ethereum. In response to these rumours, Consensys sued the SEC, demanding clarity as to whether the SEC believes Ether is a security. Although the SEC’s response doesn't explicitly state that they have determined Ether not to be a security, it does confirm that there was an investigation that has now been closed.
The SEC’s response is in line with their policy towards the crypto industry, where there is a continued effort to offer little to no guidance to the industry as to the rules of the road or how a crypto asset is deemed a security. The SEC is currently embroiled in two court cases against Coinbase and Kraken over accusations that they have broken securities laws and facilitated securities trading without proper registration. These cases may force greater clarity over the SEC’s framework in how it determines which crypto assets are commodities or securities. A framework that the agency has refused to make public under Chairmen Gary Genslers.
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.
Paul Ryan Advocates for Stablecoins to Counter China
In an opinion piece in the Wall Street Journal, former House Speaker Paul Ryan has called on the United States to use stablecoins as a strategic tool to counter China's influence. Ryan emphasizes the importance of adopting stablecoins to enhance the U.S. financial system's competitiveness and resilience.
Surge in CME Bitcoin Futures Open Interest Driven by Spot ETF Basis Trades
An analyst reports that basis trades related to spot Bitcoin ETFs have driven an 80% surge in open interest for CME Bitcoin futures. This trend could suggest some of the positioning in the bitcoin ETFs are delta-neutral and non-directional.
MicroStrategy Acquires Additional 11,931 BTC
MicroStrategy has purchased an additional 11,931 Bitcoin, reinforcing its position as one of the largest corporate holders of Bitcoin. This latest purchase brings MicroStrategy’s total holdings to 226,331 bitcoins, approximately worth $14.7B.
Bitcoin Miners' Reserves at Record Low Levels
Bitcoin miners have the lowest reserves of bitcoin since early 2021 as over-the-counter (OTC) selling of miner inventory has increased over the last few months. Miner reserves have been trending lower since October 2023, when bitcoin’s price entered a strong uptrend.
Market Returns
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