Greythorn Monthly Market Update — June 2024

OPENING REMARKS

Welcome to Greythorn Asset Management’s June 2024 Monthly Market Update. We’re excited to share insights and analyses on the market trends we’re observing. Our mission is to invest in groundbreaking technologies and asset classes, aiming to generate significant value and positively impact the industry.

At Greythorn, we provide monthly updates on the cryptocurrency market, including detailed analyses of market dynamics, regulatory developments, and macroeconomic factors affecting digital currencies.

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MARKET ANALYSIS

BTC Patterns and Market Liquidity

BTC is still currently trading within a relatively tight range, with the selling pressure likely coming from some miners selling BTC to cover operating costs post-halving. This pattern might suggest a gentle upward trend until September, similar to the post-halving pattern seen in 2020. However, the macro environment is different now, with US interest rates at 5.25% compared to 0% in 2020, and the potential for less liquidity injection to avoid market destabilisation.

The Chicago Fed’s financial conditions index indicates that liquidity now is much looser than at the last halving, suggesting that BTC’s sensitivity to market inflows will continue to play a significant role. ETFs and smoother onramps in markets outside the US are expected to drive new money into the market, supporting BTC and other crypto assets.

ETH ETFs and ETH Supply

Arca’s CIO Jeff Dorman recently highlighted the potential supply impact of ETH ETFs. Unlike Bitcoin, which has a predictable supply of new BTC entering the market, ETH’s supply can be negative during times of high demand as transaction fees are burned. Thus, less new demand is required to maintain or increase ETH’s price.

Despite underperforming earlier this year, ETH has caught up with BTC in terms of year to date price moves, but still has some underperformance from 2023 to recover. This will likely happen at some point since the US government doesn’t hold a substantial amount of ETH to liquidate, there’s no miner sell-off post-halving to concern us, and the launch of spot ETFs in the US is drawing nearer.

Also, the SEC has dropped its investigation into Ethereum 2.0, confirming that it does not plan to classify ETH as a security. This is positive news for entrepreneurs and developers building on Ethereum, although risks related to ETH staking or swaps remain. Despite this, ETH continues to follow BTC’s lower trend, reflecting the current market lull.

Stablecoins for Cross-Border Trade

Two major Russian metals producers, neither on the US sanctions list, have started using stablecoins and other cryptocurrencies to settle cross-border trade with Chinese clients and suppliers. Switching to stablecoins offers faster and cheaper settlement, even for businesses with access to traditional cross-border payment methods. Additionally, businesses in Russia and China are likely creating backup plans in case they are cut off from traditional financial systems.

This move is likely to attract more attention from US regulators to the stablecoin market, possibly leading to a more positive regulatory approach. The stablecoin market is significant, settling a growing share of global trade, yet the US has been hesitant to legitimise their issuance.

The total issuance of dollar-backed stablecoins has risen by nearly 25% this year, reaching $167 billion, exceeding the GDP of Ukraine and doubling that of Luxembourg.

The successful adaptation of payment processes to stablecoins could influence discussions around a common BRICS currency, which has seen mixed support due to the complexity of achieving consensus. Stablecoins, backed by fiat currencies, could serve as a simpler alternative.

South Korean Crypto ETFs

While many countries have launched BTC spot ETFs with muted success, South Korea may be an exception. The Korea Institute of Finance recently published a report warning that crypto ETFs could divert funds from more “productive” enterprises and destabilise the economy by wiping out retail savings in a downturn. The Democratic Party has promised to review the current ban on crypto spot ETFs, but there is no promise of listing them. This highlights the political consequences of market decisions.

A Telecoms Giant Will Mine Bitcoin

Germany’s Deutsche Telekom, the largest telecommunications provider in Europe, will soon start mining Bitcoin, marking a significant move given that the German government holds over 30% of the company. This highlights the growing interest of traditional network providers in participating in new types of networks.

Coinbase’s Smart Wallets: Redefining Digital Identity

Coinbase’s new “smart wallet” could signal a solution to the complexities of self-custody in crypto, potentially evolving into a broader concept of online identity. The smart wallet is a smart contract that can reflect balances and interact with apps without needing a unique recovery phrase, using “passkey” authentication technology. This technology could eventually hold key identification data, automatically granting access to certain apps and smart contract privileges.

Coinbase and other validators can cover user transaction fees, making some applications free for users. This can make on-chain experiences more practical, especially for gaming apps and blockchain-based social platforms, where users would otherwise need to pay fees for every action.

Tokenization Roundup

JPMorgan JPMorgan’s tokenization platform, Onyx Digital Assets, will now open up to third-party developers, allowing external innovation to boost the platform’s utility and value. Additionally, JPM Coin will be used to settle transactions on Broadridge’s distributed ledger repo platform, marking its first use on a third-party system. Fidelity International used Onyx to tokenize shares in a money market fund, indicating JPMorgan’s commitment to expanding use cases for Onyx.

Franklin Templeton’s on-chain money market fund, FOBXX, has enabled peer-to-peer transfer to other onboarded investors and now allows purchases and redemptions with USDC. While this adds convenience, it is primarily available to institutional investors and does not pose a significant threat to BlackRock’s leadership in tokenized assets.

Reflections and Looking Ahead

Recently, crypto markets saw significant drops, with BTC falling below $60,000. News of the Mt. Gox bankruptcy estate distributing recovered BTC in July contributed to the decline, although the actual market impact is expected to be less severe. Technical factors, macroeconomic concerns, and potential ETH outperformance also influenced the market movements.

Despite these challenges, developments in stablecoins, ETH ETFs, and tokenization highlight the crypto ecosystem’s growing complexity and potential. As new money enters the market and awareness and infrastructure improve, the long-term outlook for crypto assets remains positive.

MACRO INSIGHTS

Economic Overview and Inflation Surprise

June brought mixed signs about inflation, showing a slow but steady easing. The core U.S. Personal Consumption Expenditure (PCE) index, which leaves out food and energy prices, grew by just 0.2% over the month — less than what was expected. This marks the smallest monthly increase in a year. Both the core and overall indices are growing at rates close to what we saw last March, at 2.9% and 2.8% respectively, which is pretty much what everyone was expecting.

May’s inflation numbers were unexpectedly flat, with no month-on-month increase, down from April’s 0.3%. This brought the annual inflation rate to 3.3%, lower than anticipated. This drop is mainly due to falling energy prices, which helped ease overall inflation. This unexpected result could positively affect consumer confidence and play a significant role in shaping future monetary policy.

On the other hand, June’s employment figures presented a complex scenario: Non-farm payrolls surged by 272,000, surpassing forecasts, yet the unemployment rate also ticked up to 4.0%, its highest level in over a year. This discrepancy stems from the use of two different data sources — the establishment survey reported strong job gains, while the household survey showed a reduction in employment. This mixed data poses a challenge for the Federal Reserve as it navigates between controlling inflation and supporting a stable job market.

Large investment firms are now expecting the first rate cut to happen in the fall, with the likelihood of a September cut being seen as a 50/50 chance.

Global Economic Context

Internationally, we’re seeing some interesting moves too. Inflation in the Eurozone turned out higher than expected (2.9% vs 2.7% previous and forecast), which might lead to the European Central Bank cutting rates soon — a move that could suggest similar actions might follow in the U.S.

On the commodities front, oil prices initially fell when OPEC+ announced earlier production cuts. However, this dip was short-lived and Brent crude has been claiming back up, driven by doubts over OPEC+’s commitment to these cuts and concerns that a hot summer will increase demand for air conditioning and travel.

Digital Economy Developments

The rollout of retail Central Bank Digital Currencies (CBDCs) continues to face complex challenges, mostly around legal and design issues, which slow down their adoption. Meanwhile, Paxos has announced a new yield-bearing stablecoin — Lift Dollar (USDL), choosing the UAE as its base due to more favourable regulatory conditions, highlighting ongoing adaptations in the digital currency market.

Reflections and Looking Ahead

This month’s economic indicators give us a mixed picture. On one hand, the easing inflation and strong job numbers suggest the economy is holding up well. On the other hand, cautious consumer spending and the drop in goods spending might be early signs of slower economic times ahead. These factors will play a big role in what the Federal Reserve decides to do next, especially with more data on employment and consumer prices coming soon.

DISCLAIMER

This presentation has been prepared by Greythorn Asset Management Pty Ltd (ABN 96 621 995 659) (Greythorn). The information in this presentation should be regarded as general information only rather than investment advice and financial advice. It is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments or to participate in any particular trading strategy. In preparing this document Greythorn did not take into account the investment objectives, financial circumstance or particular needs of any recipient who receives or reads it. Before making any investment decisions, recipients of this presentation should consider their own personal circumstances and seek professional advice from their accountant, lawyer or other professional adviser. This presentation contains statements, opinions, projections, forecasts and other material (forward looking statements), based on various assumptions. Greythorn is not obliged to update the information. Those assumptions may or may not prove to be correct. None of Greythorn, its officers, employees, agents, advisers or any other person named in this presentation makes any representation as to the accuracy or likelihood of fulfilment of any forward looking statements or any of the assumptions upon which they are based. Greythorn and its officers, employees, agents and advisers give no warranty, representation or guarantee as to the accuracy, completeness or reliability of the information contained in this presentation. None of Greythorn and its officers, employees, agents and advisers accept, to the extent permitted by law, responsibility for any loss, claim, damages, costs or expenses arising out of, or in connection with, the information contained in this presentation. This presentation is the property of Greythorn. By receiving this presentation, the recipient agrees to keep its content confidential and agrees not to copy, supply, disseminate or disclose any information in relation to its content without written consent.