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Oct 2024 Market Commentary: The State of Crypto

Author: Hillroute       Date: October 25, 2024

Executive Summary:

The global crypto landscape is undergoing transformative shifts as institutional interest in Bitcoin increases, regulatory frameworks evolve, and new technologies drive ecosystem advancements.

  • Institutional Interest: Bitcoin’s low correlation with equities and decreasing volatility are attracting institutional investors, with upcoming options on Bitcoin ETFs expected to drive further growth.
  • Regulatory Shifts: U.S. policy, Italy’s tax increase, Europe’s MiCA, and UAE’s VAT exemption illustrate diverse global approaches, each with implications for crypto market dynamics.
  • Technological Innovations: Visa’s Tokenized Asset Platform and Ethereum’s Pectra upgrade are paving new paths in asset tokenization and user experience respectively, pointing to an increasingly functional digital asset ecosystem.
  • Global Trends: As China dominates mining and Bhutan expands investments, countries like South Africa and Brazil are also fast-tracking digital asset adoption, underscoring crypto’s international relevance.

Explore how these developments impact institutional strategies and the crypto market at large.

Institutional and Investor Interest in Bitcoin

A BlackRock Report Highlights Bitcoin’s Unique Properties: Bitcoin’s low average correlation with U.S. equities (0.2) from Jan 2015 to Jul 2024, underscores its distinct behavior compared to traditional assets. In recent months, Bitcoin has outperformed gold and the S&P 500, rising 26% since the Yen carry trade unwind on August 5. This is consistent with its reputation to outperform other risk-on assets 60 days after major geopolitical events. Additionally, 99% of Bitcoin holders are in profit if held for three years, while all are profitable after five years. Bitcoin’s decreasing volatility, with realized volatility now at 50%, is attracting institutional investors looking for more stability. Despite short-term risks, long-term data positions Bitcoin as a compelling safe-haven asset.

Bitcoin ETF Momentum Builds: Bitcoin ETFs are gaining traction, with options for Bitcoin exchange-traded funds expected to launch in the U.S. by Q1 2025. While the SEC has approved Bitcoin ETF options for major exchanges like NYSE and CBOE, pending approvals from other regulators (CFTC, OCC) will shape the timeline. The introduction of these options marks a significant milestone, enhancing market liquidity and potentially reducing volatility. Nearly 50% of U.S. investors plan to invest in these crypto ETFs, further driving institutional participation. Among millennials, 62% favor crypto ETFs over traditional assets like bonds or equities.

However, spot Ether ETFs have struggled, facing close to $500 million in net outflows, largely due to issues like the lack of staking yield and underperformance compared to Bitcoin.

Regulatory Shifts and Global Policy Updates

As crypto adoption accelerates, regulatory changes are rapidly evolving across the globe. Here’s a look at the most significant developments impacting the market.

 1. U.S. Elections- Crypto Voters and Policy Stances: A 26-million-strong crypto voting bloc could play a major role in the 2024 U.S. elections. Vice President Harris is seen as more favorable toward crypto than Biden but less so than Trump, whose pro-Bitcoin mining stance seeks to position the U.S. as a global crypto leader.

2. Italy’s Capital Gains Tax Hike: Italy is set to raise its crypto capital gains tax from 26% to 42%.The sharp increase reflects the government’s intent to regulate the sector while boosting fiscal revenues. This could affect Italy’s attractiveness to crypto investors.

3. MiCA’s Global Influence on Stablecoins: The EU’s MiCA regulation, effective this December, is poised to shape global stablecoin frameworks. MiCA will enhance regulatory clarity but could restrict smaller firms. It prohibits algorithmic stablecoins to avoid a situation similar to the Terra USD collapse.

4. U.S. Crypto Settlements Reach $19B: Crypto companies have paid $19 billion in settlements to U.S. regulators this year, largely driven by collapses like FTX and Terraform Labs. This represents a 78% rise from 2023, signaling continued regulatory pressure.

5. UAE’s VAT Exemption for Crypto Transfers: The UAE has exempted crypto transfers and conversions from VAT, applied retroactively from 2018. This reinforces the country’s crypto-friendly stance and strengthens its appeal as a global crypto hub.

Technological and Ecosystem Advancements

Institutional involvement is transforming Bitcoin and Ethereum, with new products and regulatory approvals enhancing accessibility and credibility.

  • BlackRock’s Ethereum ETF: In August 2024, BlackRock launched an Ethereum ETF on the Brazilian stock exchange, marking a significant advancement in institutional crypto adoption. This development facilitates investor access to Ethereum through established financial instruments.
  • Nasdaq’s Bitcoin Index Options: The SEC’s approval of Bitcoin index options by Nasdaq offers institutional investors tools to hedge or gain exposure to Bitcoin, further cementing BTC as an institutional-grade asset.
  • Coinbase’s Wrapped Bitcoin Product: Coinbase’s Wrapped Bitcoin (WBTC) product bridges Bitcoin with Ethereum, allowing institutions to utilize Bitcoin’s liquidity while leveraging Ethereum’s DeFi infrastructure.

Crypto Dominance and Global Trends

Despite regulatory challenges, various countries and regions are advancing in crypto, CBDCs, and digital asset adoption.

  1. China’s 55% Bitcoin Hashrate Dominance: Chinese mining pools maintain over 55% control of the global Bitcoin network, despite the 2021 mining ban. The U.S. mining share has grown to 40%, with China planning AML regulation updates by 2025 amid rising money laundering risks and expanding user access through tech advancements.
  2. Tether’s USDT Captures 75% of Stablecoin Market: USDT’s market share had surged to over 75%, with Tether generating $401 million in revenue in recent months. As USDT balances on exchanges hit record highs, Tether is set to double its workforce by 2025, focusing on compliance.
  3. Tokenized Real-World Assets Exceed $13B: The tokenized real-world asset (RWA) market, excluding stablecoins, has surpassed $13 billion. Tokenized U.S. Treasuries lead this growth, with BlackRock’s BUILD and Paxos together holding over $1 billion. This sector offers fractional ownership, allowing more liquid trading of traditionally illiquid assets like real estate.
  4. Bhutan’s $910M Bitcoin Accumulation: Bhutan has quietly amassed $910 million in Bitcoin, nearly a third of its GDP, primarily through mining. State-owned Druk Holdings collaborates with Bitdeer, a Singapore-based company, to expand mining, aiming to reach 600 MW by 2025, as part of a broader tech-driven investment strategy.
  5. South Africa’s Digital Asset Hub Expansion: South Africa is emerging as a major crypto hub, with the FSCA licensing 59 crypto platforms, the first such regulation in Africa. The nation’s crypto market is projected to grow at nearly 8% CAGR till 2028, with projects like Solana’s AgriDex showcasing blockchain’s trade potential.
  6. Rising Crypto Adoption in Eastern Asia: Eastern Asia accounts for 9% of global crypto value, driven by stablecoin and crypto adoption amid currency devaluation and high inflation. Hong Kong leads the region with 40% stablecoin dominance and a recent licensing proposal for stablecoin issuers.
  7. Brazil’s Phase Two CBDC Pilot: Brazil has launched the second phase of its Drex CBDC pilot, focusing on privacy and interoperability across 13 use cases like collateralization and international trade. Drex aims to enhance Brazil’s financial infrastructure, signaling a significant step in CBDC development.
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