Will Crypto Soar In Q4?
Risk assets appear to be hitting their stride this week, following the 50 bp rate cut from the Fed last week and the news that China is attempting to stimulate their ailing economy and markets. Key risk assets are approaching, or outright breaking through, pivotal levels as investors look toward the final months of 2024. Are we seeing circumstances similar to Q4 of 2023, in which risk assets underwent an impressive rally into year-end, and how will the upcoming US presidential election impact the crypto markets?
Looking at last year’s Q4, several factors lined up nicely to set up a strong rally for risk assets going into the year-end. One of the key factors was the weakness in the US dollar index, which had been wreaking havoc on risk assets in 2022. The dollar index fell approximately 5% in the final quarter of last year and tested 100 before it rose again in the New Year.
This bout of dollar weakness coincided with a 16% rally for the Nasdaq 100 index and an impressive 64% rally for Bitcoin. Of course, several factors contributed to this rally in risk, but one of the key turning points was when the Federal Reserve Chairman began hinting that the rate hiking cycle may be ending and that cuts are now on the table. The fact that we just received the first rate cut in years from the Federal Reserve could serve as a similar catalyst for the bulls.
Another factor to consider is that, since 2024 is both an election year and a halving year, the bulls may feel like the wind is at their back. For example, consider the strong Q4 returns we have seen in Bitcoin and Nasdaq over the last 12 presidential election years. Nasdaq has had a positive Q4 in all but two, with the exceptions being 2000 and 2008, of the last dozen presidential election years. Bitcoin thus far has a perfect record in this same timeframe, as it has been up sharply over the last three presidential years.
With a 50 bps cut and the election mere weeks away, we ask whether today’s setup, heading into Q4, can kick-start a crypto rally similar to 2023. Here are some of the bullish and bearish arguments:
Bull case
Accommodative policies coming from nearly every central bank.
Powell was fairly dovish after the last FOMC meeting, stating that their 50bps cut is ‘a sign of our commitment not to get behind [the curve].’
China announced new policies aimed at stimulating markets and the economy.
No obvious signs of an imminent recession, with relatively strong economic growth over recent months.
2024 is an Election year, which has statistically signalled a higher probability of a positive Q4 for both Bitcoin and the Nasdaq 100 index.
2024 is also a Bitcoin halving year (it occurred in April), and it has typically taken 6-8 months post-halving for past crypto bull markets to begin in earnest.
Bear case
If Kamala Harris wins, crypto prices and technology shares could pull back.
Worsening economic data indicating a rapidly slowing economy could set up for a faster rate-cutting cycle from the fed, which is historically a bearish outcome for risk.
A further unwinding of the yen carry trade if the Bank of Japan continues to hike rates while the Fed cuts.
The US dollar index is currently testing 100. It would not be ideal for risk assets if the US dollar can muster a counter-intuitive (given recent rate cuts) rally into year end, perhaps tied to geopolitical risks.
A sudden jump in CPI could signal a possible stagflation scenario.
The upcoming US presidential election presents the most uncertain factor for crypto markets. Polls have put Trump and Harris at close to even odds, with Nate Silver calling it a toss-up. However, Harris has inched forward since their debate.
It has become the consensus view that a Trump presidency would be a major win for crypto, while a Harris victory would be comparatively bearish for crypto prices. Under the Biden administration, the US crypto industry has seen unprecedented enforcement actions from the SEC, Treasury Department, and banking regulators like the FDIC, creating a chilling effect on the industry. It's been assumed that a Harris victory would mean a continuation of the same enforcement-heavy policies.
In contrast, Trump has become a strong proponent of crypto and has publicly committed to specific pro-crypto policies. He is the first US presidential candidate to have an explicitly pro-crypto platform. Meanwhile, the Harris campaign has been silent on the issue, until this week.
Speaking at The Economic Club of Pittsburgh, Vice President Kamala Harris announced that, under her leadership, the U.S. will focus on maintaining global leadership in emerging technologies, including blockchain, AI, and quantum computing.
Many in the industry immediately responded with skepticism. Some have labelled Harris's speech as political pandering to pull votes away from Trump rather than a meaningful shift in the Democratic party.
Harris's crypto mention may be more than just electoral rhetoric, as a lot of work has gone on in DC over the last few years to push back against the anti-crypto policies. There has been a rapid rise in crypto lobbying efforts over the last few years, and we now have pro-crypto super PACs like Fairshake, which raised over $200 million ahead of the 2024 elections. Several members of Congress have taken up the pro-crypto stance, although this has largely been on the Republican side, with a few Democrats joining the ranks. This week, for example, during a congressional hearing, Democratic Representative Ritchie Torres grilled SEC Chairman Gary Gensler on how his broad interpretation of securities laws risks not just stifling innovation in crypto, but elsewhere.
We’ve also seen some bipartisan progress in DC in terms of crypto legislation. To date, only a single crypto-specific bill has been passed by both houses, a bill with the sole purpose of revoking the SEC’s SAB 121, which prohibited traditional custodians from handling crypto. Biden vetoed this bill, however, despite it passing with bipartisan support.
Currently, there are a few other crypto bills in Congress that would provide clarity to the industry, including a bill on stablecoins. Top Democrat Rep. Maxine Waters said today in an interview that “Crypto is inevitable,” and that “There are countries that are way ahead of us”. She has called for a 'grand bargain on stablecoins' before the end of 2024, suggesting that a compromise with Republicans could see the stablecoin bill move forward. This represents a major change from an influential Democrat.
It will likely take meaningful action to convince the markets that a shift is underway. Talk is cheap, and the industry has gotten its hopes up before, with the Democratic party claiming to be pro-crypto only to be sorely disappointed. It could be that strategists are finally realizing that an anti-crypto policy is a losing bet, as crypto has remained resilient after the FTX fallout and has only grown in political influence. Other competing financial hubs, like the UK, the EU, Hong Kong, and Singapore, have all passed pro-crypto legislation, while the SEC has been dealt some critical losses in court on key crypto cases.
For this softening in rhetoric to help alleviate uncertainty for crypto prices leading into the election, we need more evidence that the Democrats have, in fact, pivoted on the crypto issue. If that is the case, a Kamala win in November won’t be such a bearish catalyst that the market is currently pricing it in as. If a decisive political shift is to occur, markets might be caught off guard.
This Week’s Crypto Developments
Ethena to Launch UStb Stablecoin Backed by BlackRock's BUIDL Fund
Ethena is launching UStb, a new stablecoin backed by BlackRock’s tokenized U.S. Treasuries fund, BUIDL, and facilitated by Securitize. This stablecoin will operate alongside Ethena’s existing synthetic stablecoin USDe, which has grown to a $2.6 billion circulating supply. UStb offers an alternative with a different risk profile, investing in real-world assets like U.S. Treasury bills.
PayPal to Enable Crypto Transactions for U.S. Business Accounts
PayPal announced plans to allow U.S. business customers to buy, sell, hold, and transfer cryptocurrencies, further expanding its presence in the crypto asset space. This move follows PayPal's earlier initiatives, including the launch of a U.S. dollar-pegged stablecoin, PYUSD. While the service will not be available to businesses in New York State at launch, PayPal’s new offering will enable U.S. merchants to send and receive crypto, including transferring to third-party wallets.
BNY Mellon Nears Offering Crypto ETF Custody Services
BNY Mellon is moving closer to providing custodial services for bitcoin and ether held by exchange-traded fund (ETF) clients, potentially challenging Coinbase’s dominance in the U.S. crypto ETF market. The SEC granted BNY Mellon an exemption from SAB 121, a controversial guidance that prevented traditional custodians from handling crypto.
DTCC Tokenization Pilot Shows Major Gains in Liquidity and Collateral Optimization
The Depository Trust & Clearing Corporation (DTCC) revealed successful results from its U.S. Treasury Collateral Network tokenization pilot, which demonstrated strong potential for optimizing liquidity and collateral using blockchain technology. Conducted with the participation of banks, investors, and custodians, the pilot tested various complex use cases, such as settling a "digital twin" for U.S. Treasuries and real-time margin calls. The experiment, utilizing the Canton Network, highlighted improvements in liquidity and legal certainty during transactions, further validating the benefits of tokenized assets in the financial system.
That's Some Good Content!
Recommended articles, podcasts, and other content from this week:
Pirate Wires article - Inside the Biden Admin’s Plot to Destroy Silvergate and Debank Crypto for Good
Forward Guidance podcast - What The Latest Fed Decision Means For Markets | Weekly Roundup
Good Game podcast - Chokepoint 2.0 & Stablecoin Adoption with Nic Carter
On the Margin podcast - The Last Bitcoin Cycle That Matters | Charles Edwards
The Breakdown podcast - Defeated-Seeming Gensler Takes Congressional Shellacking
Meme Of The Week
Credit: @AndreasSteno