Note that Bitcoin and Ether – the cryptos with the largest values – Solana and crypto-based stocks have outperformed the indexes – no small achievement given stocks' rise from 2022's bear market – and that much of the digital asset market's gains have occurred in the first quarter. A recent price spike following spot bitcoin filings by BlackRock and two other financial services powerhouses ensured bitcoin and other assets finished in positive territory for Q2.
Smart contracts surge
Within CoinDesk Indices CMI sectors, Small Contract Platforms led the way in the second quarter, followed by the currency sector up 55.82% and 35.06%, respectively. The digitization and computing sectors lagged, falling 84.7% and 92.03% respectively.
CoinDesk's Bitcoin and Ether Trend Indicators show that both assets are in a phase of significant uptrend, a result of recent price upswings stemming from the spot BTC ETF applications.
Correlations between BTC and Tradfi indices decoupled from fairly strong levels, to virtually no correlation. A notable decline occurred between bitcoin and the Nasdaq Composite, falling from a correlation coefficient of 0.85 on March 31, to 0.02 currently.
Correlations range between 1 and -1, with 1 indicating a direct pricing relationship, and the latter indicating an inverse one.
Quiet first, then a surge
The first 74 days of the second quarter were quiet. Between April 1 and June 5, BTC sank from $28,134 to 27,173, a 5% fall-off..
The more than two-month slump occurred amid fresh macroeconomic economic uncertainties, even as inflationary pressures continued to subside, and the FOMC increased interest rates by 25 basis points (bps). The most recent top line, 4% inflation rate is 50% lower than it was in June 2022. M2 money supply declined 2.5% since January, and the Federal Reserve's balance sheet is 2.1% lower in 2023, both positive developments specific to inflation control.
But the action and resulting price activity accelerated, starting with the U.S. Securities and Exchange Commission's (SEC) suit against the world's largest crypto exchange, Binance, on June 5.
The SEC suits against Binance and Coinbase on June 6 sent prices down 7% over the ensuing 10 days as investors grew fretful that an increasingly prohibitive U.S. regulatory environment would weigh on crypto markets.
But then prices about-faced 20% following the spot BTC applications by BlackRock, the world's largest asset manager, Invesco and WisdomTree (the latter two were re-filings). The sudden appearance of BlackRock with its $9.1 trillion in assets under management sets up a cage match between an organization that has a 575-1 record for its ETF applications against an SEC that has seemed increasingly anti-crypto.
BlackRock's inclusion of a "surveillance-sharing agreement," is likely key to ultimate approval, and investors seem similarly upbeat about the application's prospects.
Yet BlackRock's ETF success rate is no guarantee its bitcoin product will win approval. The SEC has rejected multiple applications from high-profile firms and seems fiercely committed to deem crypto a security and to rein in what the agency considers a lack of consumer protection..
For the record, the denied ETF application was in October 2014 when BlackRock filed an application for an ETF that would not require the daily disclosure of holdings. The firm seems determined to avoid such lack of transparency issues in its spot BTC filing.
But what should investors expect for the third quarter?
August decision on BlackRock's application
Markets are tentatively expecting that the first opportunity for the SEC to approve, deny or extend its deliberations about BlackRock's offering will occur in August. Anything other than an approval would likely be bearish. A rejection would likely depress BTC prices.
A so-called extension of review would raise questions about a BlackRock approval. An extension would also follow the SEC's pattern of delaying its decision only to ultimately reject an application when delaying was no longer an option. A rejection at any point would likely drag on prices.
Will altcoins return to Q1 form or retreat further?
The disparity in performance between BTC, ETH, and other layer 1 protocols has been striking. And while BTC and ETH have thus far avoided being labeled "securities" by the SEC, the same is not true for a number of altcoins.
In many ways, regulatory clarity from the SEC may ultimately be more pertinent to altcoins, than to BTC and ETH. A lack of it may lead to continued decoupling, as investors looking for crypto exposure stick with BTC and ETH.
Will macroeconomic narratives subside?
A year ago, inflation was above 9%. Today it sits at 4%. While still above the Fed's 2% target, the speed of decline has changed the inflation narrative from "can it be managed" to "is it time to stop monetary hawkishness."
Looking forward, economic data points which may take a larger portion of center stage, are employment, and the growth of consumer revolving credit, which would impact the amount of discretionary capital available for crypto assets.
– Glenn C. Williams Jr CMT
