Commentary - September 2024

Despite persistent core inflation and service price increases, headline inflation across various countries is trending towards central bank targets. As a result, the Federal Reserve has shifted its focus from combating inflation to fostering economic growth and cutting rates by 50 basis points—the first in four years. Similarly, the ECB and the SNB have also reduced rates in response to subdued economic data and a more benign inflation trajectory. Concurrently, China announced an economic stimulus package featuring fiscal and monetary support.

Despite escalating geopolitical tensions, global equities rose approximately 2% in USD, buoyed by significant gains in Emerging Markets, particularly the Chinese stock market, which surged over 20% as a result of the unveiled stimulus package. The S&P 500 and Nasdaq Composite reached new all-time highs. Interestingly, the financial sector is embracing digital assets with an increased pace, highlighted by BNY Mellon being the first U.S. bank to receive approval to offer crypto custody services, BlackRock’s progress with Bitcoin ETF options, the Zürcher Kantonalbank announcing the launch of crypto trading and custody services, Commerzbank offering crypto assets to corporate clients, and finally, Mastercard’s crypto card “Spend” letting users pay directly from self-custodial wallets. Additionally, PayPal completed its first corporate payment via PYUSD stablecoin to pay an invoice to EY using SAP’s Digital Currency Hub. Bitcoin miner stock performance was mixed. Mining rewards halved, and the total hash rate of the network peaked at around 700 EH/s. Subsequently, they faced their lowest earnings month of this year. On the other hand, various mining companies started to use their infrastructure and energy supply for high-performance computing for AI, which will diversify future revenue streams and reduce their risk profile.

Digital assets, after slumping through summer, performed strongly in September, as key events improved market sentiment and investor interest. Net inflows into US-listed ETFs picked up again, totalling USD 1.3 billion for BTC and 46 million for ETH ETFs. BTC was up 8%, while the overall equally weighted altcoin market was up 14%. The focus shifted from DeFi and infrastructure projects towards more speculative consumer-focused sectors like AI and memes. Additionally, monolithic blockchains like SUI or SOL, bundling consensus, execution, and data availability into a single protocol stack, outperformed. Strongly performing digital assets were SUI (+123%), MYRIA (+54%), and ARKM (+41%), while POL (-6%), ATOM (-6%), and ETH (+4%) were laggards. SUI is a high-beta competitor of Solana, offering unique consensus mechanisms with high throughput and low latency, with a market value of USD 17 billion, a fraction of Solana’s 82 billion.

ETH continued to lag the market as questions were raised over its rollup-centric narrative and its “ultra-sound” money properties. EIP-4844 - introducing a new transaction type to Ethereum for cheaply storing data for a limited amount of time - reduces Ethereum block space demand and, consequently, reduces gas prices. While lower fees are a positive development for users transacting on Ethereum, this also led to a revenue collapse and less deflationary supply pressure on ETH. However, in the long run, Ethereum should profit from millions of additional users onboarded through Layer 2 blockchains and the Layer 2 blockchains spending fees in ETH for settlement and security services of Ethereum. With this upgrade, Ethereum has developed a future-proof and scalable solution. As additional Layer 2 blockchains emerge, Ethereum could benefit from scale effects and increase its fee revenues from Layer 2 blockchains.

Stablecoins, as a measure of on-chain activity, since they are the base for digital asset trading on centralised and decentralised exchanges, reached a total market cap of USD 173 billion. Additionally, Sony, Revolut, and BlackRock announced or are planning their own stablecoins as more and more financial institutions recognise the potential of blockchain technology and the potential for efficiency gains and cost savings through tokenisation and digital payments.

Our constructive outlook for asset prices over the coming months is mainly supported by increased liquidity due to central bank policy. However, further aggressive falling yields would need a more pronounced slowdown in growth and inflation, which is again mitigated by the current more accommodative policies. The main driver of performance remains the accelerating adoption of Web3 and the political support of blockchain technologies and digital assets. Additionally, as most supply overhangs and long positioning seen during the summer are gone, prices - even in a neutral market environment – are skewed to the upside. Risks remain the sticky core inflation, higher than expected interest rates, and geopolitical tensions.