May 2024 Market Commentary: Key Trends and Insights
Author: Hillroute
Date: May 18, 2024
Introduction:
As a long-short, digital assets quant fund, we aim to provide you with a comprehensive analysis of the latest trends and developments in the crypto market. In this update, we delve into the much-discussed Bitcoin halving, BTC ETF flows, altcoins, and the overall macroeconomic environment. Our insights aim to equip investors with the knowledge needed to navigate the evolving digital assets landscape. By integrating such rich market data into our quant models, we ensure that our strategies remain robust and adaptive to market changes.
Bitcoin Halving: A Catalyst for Market Dynamics
The fourth Bitcoin halving event on April 19th has been a significant milestone in the cryptocurrency market. This automated process, which halves the reward for mining a new block occurs once every 210,000 blocks, or roughly after every four years. The latest halving cut miner rewards from 6.25 BTC to 3.125 BTC. Historically, Bitcoin halvings have been followed by bull runs, with the short term impact being varied as can be seen from the graph below in Pic 2. As was the case earlier, BTC performance in the month after the latest halving has been mixed. It traded in a close range and volumes have dropped as well. Although in the past, one year performance after halving has been remarkable, this time, since the market capitalisation is high, it will also be affected by other factors like risk environment and interest rates.
Between 2009 and 2016 the US Federal Reserve held interest rates at around 0.25%. The central bank briefly increased rates to 2.5% in 2019 before cutting to 0.25% again by the time of Bitcoin’s third halving in 2020. This is the first time a halving has taken place in a high interest rate environment, so there is no precedent to how Bitcoin will trade in the long-run. Also, since institutional involvement in digital asset industry was minimal earlier, the price movement in response to macro events was insignificant. As institutions are increasingly participating in this asset class through instruments like ETFs, the price movement in digital assets has become more correlated to other risk assets like equity, and is more sensitive to the current high interest and inflation rates and other macroeconomic events.
But markets have matured and the immediate reaction to halving events has become more measured. The long-term outlook remains optimistic, with many anticipating that the new reduced supply will support higher BTC prices over time.
Bitcoin ETF Flows: Institutional Confidence
The advent of Bitcoin ETFs has provided institutional investors with a regulated and secure means of accessing the digital assets market. The chart below shows Bitcoin ETF Assets Under Management (AUM), excluding Grayscale Bitcoin Trust, indicating a significant influx of capital into Bitcoin.
Since the launch of Bitcoin ETFs, average net flows have remained positive as can be seen in Pic 4, reaching a peak AUM of $37 billion (in Pic 3). The introduction of additional digital asset ETFs is expected to further diversify investment opportunities and bolster confidence in cryptocurrencies as a viable asset class.
BTC Dominance and Altcoin Interest
Since the beginning of the year, Bitcoin’s dominance has increased only by 1%, while BTC prices have surged by 50%. This trend highlights growing interest in both Bitcoin and altcoins. Institutional money flows primarily into Bitcoin, while retail investors diversify into altcoins, indicating a broadening market participation.
The market capitalisation of altcoins (cryptocurrencies excluding BTC and ETH) in the month of April has declined by 21%, falling from $775B to $615B. Whereas, the market cap of digital assets (including BTC and ETH) in the month of April has declined by 16%, falling from $2.615T to $2.177T. There was bearishness in the overall crypto market, with the money flowing out of altcoins more than out of BTC and ETH.
Global Macroeconomic Environment
The global economy shows resilience, with regional variations in performance. Here’s a snapshot of key economic trends:
- United States: Economy continues to grow above trend; rate cuts anticipated as latest employment statistics are poor and CPI, though high, is lower than expected.
- Japan: Experiencing economic rejuvenation and moving towards policy normalization.
- Europe: Lagging, with central banks likely to cut rates in H2 2024.
- China: Growth remains high but has slowed in recent years.
In the US, liquidity conditions have remained favourable despite a global tightening cycle. The M2 money stock has stabilised at elevated levels, suggesting ample credit availability and a reduced likelihood of forced selling in risk assets, including digital assets. This is reflective of the global liquidity conditions, especially for the advanced economies.
In the last FOMC meet on May 1st, the Federal Reserve kept the interest rates unchanged and stated that they would be looking at both inflation and labour data to decide the next course of action. While they are focused on bringing inflation back to 2%, they would decrease interest rates to handle labour market distress, only if needed. The labour data (NFP and unemployment rate) that came out a few days after this meet, was worse than expected and increases the probability of rate cuts in the next meeting in June. The lower-than-anticipated inflation figures that came out on May 15th has provided further impetus to cut rates. The markets have risen in anticipation of this cut, as lower interest rates are generally favourable for risk assets like growth stocks and crypto.
Conclusion
April 2024 has been a pivotal month for the crypto market, marked by significant events and trends. The Bitcoin halving, sustained ETF inflows, balanced market sentiment, and supportive global liquidity conditions collectively paint a promising outlook for digital assets. As we continue to monitor these developments, our quant-focused approach ensures that we provide actionable insights to our investors. We meticulously programme our digital asset strategies with market insights gleaned over time, enhancing their robustness and adaptability.