Kvants Insights Newsletter: 18th October 2024

This week, digital assets saw increased momentum with growing institutional interest and positive technical indicators pointing towards Bitcoin approaching $70K. Morgan Stanley’s $272 million investment in Bitcoin ETFs underscores this institutional shift, while Italy’s decision to raise its crypto capital gains tax may dampen local market activity. DeFi remained stable with total value locked at $81.3 billion, and the rise in crypto adoption among Asian private wealth managers signals a growing demand, with some predicting Bitcoin could hit $100K by year-end. Meanwhile, outflows from digital asset funds reflect cautious investor sentiment amid macroeconomic pressures and market uncertainty. Also in the news, Trump's new crypto project launches with a struggle.

Market Highlights

Bitcoin Demand Surges in Bullish Catalyst That May Drive BTC Price to $70K

Technical indicators point to a price surge, and Polymarket bettors have their money on BTC passing $70K this month. Link

Importance

Bitcoin demand has increased recently, and technical indicators suggest a positive catalyst for the digital assets market. Bitcoin's approach to $70K may increase institutional and retail interest, attracting new capital into the cryptocurrency space. As investors diversify their portfolios to profit, digital asset valuations and liquidity may rise. The momentum may also accelerate crypto-related financial product adoption, such as ETFs, increasing market depth and stability.

Italy to Raise Capital Gains Tax on Crypto to 42% From 26%: Reports

Italy's Deputy Finance Minister, Maurizio Leo, said the government will raise taxes on capital gains on cryptocurrencies such as bitcoin to 42% from 26%, according to Reuters and Bloomberg. The Italian cabinet made the decision because the “phenomenon is spreading," The move comes as Italy decided to strengthen its digital services tax as part of plans to raise more revenues in the 2025 budget. Link

Importance

Italy's plan to raise cryptocurrency capital gains tax from 26% to 42% could hurt investor sentiment and reduce crypto market participation. This tax hike may cause investors to seek tax-efficient jurisdictions, change their trading strategies, or reduce digital asset exposure, reducing local market liquidity and trading volume. Such regulatory measures indicate growing government interest in crypto, which may prompt similar actions in other European markets, shaping the global digital asset regulatory landscape.

According to industry monitoring site DeFi Llama, total value locked in DeFi remained almost unchanged at $81.3bn. Link?

Importance

With no significant outflows or inflows, DeFi's total value locked (TVL) at $81.3 billion indicates consolidation in the decentralised finance sector. This plateau may indicate that market participants are holding positions amid uncertainty, with growth dependent on clearer regulatory frameworks, new innovations, or macroeconomic developments. Despite recent crypto market volatility, DeFi protocols' stable TVL suggests investor confidence in the sector's long-term value proposition.

Morgan Stanley Holds $272 Million in Spot Bitcoin ETF Amid Mainstream Crypto Push

Morgan Stanley invested $272.1 million in Bitcoin ETFs, demonstrating its growing cryptocurrency involvement. This reflects a larger trend among major financial institutions to diversify with digital assets. Link

Importance

Morgan Stanley’s $272.1 million position in Bitcoin ETFs marks a significant step in institutional adoption of digital assets, signaling that major financial institutions are increasingly recognizing cryptocurrencies as a viable asset class. Despite representing just 0.02% of the firm’s $1.2 trillion AUM, this allocation demonstrates a strategic diversification move, aimed at gaining exposure to the long-term growth potential of Bitcoin while managing risk within a broader portfolio. This investment also highlights a broader shift in the hedge fund and institutional landscape, where digital assets are becoming integral to asset allocation models, driven by both investor demand and the evolving maturity of crypto markets.

Asian Private Wealth Managers Embrace Crypto, Some Foresee Bitcoin at $100K By Year-End

Digital assets have emerged as an alternative investment class for private wealth in Asia, with 76% of family offices and high-net-worth individuals investing in cryptocurrencies versus 58% in 2022. Link

Importance

76% of Asian family offices and high-net-worth individuals now own cryptocurrencies, up from 58% in 2022, demonstrating the growing acceptance of digital assets as an investment class. Increasing institutional demand could bring significant capital into the crypto market, increasing liquidity and valuations. Bitcoin's projected price of $100K by year-end supports this bullish outlook. Private wealth management changes could affect global asset allocation and boost crypto's position in traditional portfolios.

Digital Asset Fund Flows Weekly Report?

Digital asset investment products saw minor outflows totalling US$147m last week. Higher than expected economic data last week being the likely culprit. Investors focussed on Bitcoin, with outflows of US$159m, while short-bitcoin saw inflows of US$2.8m. Multi-asset investment products (multi-coin) saw inflows of US$29 million, marking their 16th consecutive week of inflows. Link

Importance

Higher-than-expected economic data has caused market uncertainty, as shown by $147 million in digital asset fund outflows. Bitcoin saw $159 million outflows, while short-Bitcoin products saw inflows, indicating hedging strategies as investors become cautious. However, $29 million in multi-asset product inflows for the 16th week in a row suggest that diversified exposure remains attractive despite market volatility. Some investors seek downside protection, while others seek market resilience.

Political News

Trump’s DeFi Platform, World Liberty Financial, Launches Token Sale

Former President Donald Trump’s cryptocurrency venture, World Liberty Financial, faced significant setbacks during its first day, with the platform’s website suffering multiple extended outages that interrupted its initial token sale. The project, which aimed to raise $300 million and reach a valuation of $1.5 billion, faced technical issues that may undermine its credibility. With the election just three weeks away, the glitches could damage Trump’s efforts to position himself as a pro-crypto candidate, a strategy intended to appeal to voters favoring digital assets. Promoted by Trump and his sons, the project was designed to solidify his stance on cryptocurrency and capture the attention of the growing crypto community. Link

Importance

The significance of this situation lies in the potential damage to Trump's credibility within the crypto community just weeks before the election. The technical issues with World Liberty Financial could undermine his efforts to appeal to pro-crypto voters and position himself as a champion of digital assets. Additionally, the success or failure of this project could influence broader perceptions of cryptocurrency adoption in the political sphere, especially as more politicians seek to engage with this emerging sector.

Election Watch

Polymarket indicates that the gap between prediction markets and polls may be attributed to Harris' declining popularity among key demographics. Trump currently holds a 60.3% to 39.8% lead over Harris in election betting markets, with swing states playing a decisive role. This 20.5% edge in 2024 betting markets highlights the importance of key battleground states in shaping the race. Link

Importance

The current prediction market leaning toward a Trump victory suggests a potentially bullish environment, primarily driven by expectations of a less regulated landscape. Market participants may anticipate deregulation and business-friendly policies, which could enhance liquidity and institutional interest in digital assets. Conversely, a Harris-led administration could imply a more stringent regulatory framework, possibly constraining the growth of decentralized finance (DeFi) and crypto innovation due to increased scrutiny on compliance and consumer protection. This shift would likely influence capital flows, risk appetite, and sectoral allocations in the broader digital assets market.

Looking Ahead: Economic Events for the Week

Industrial Production Data Release

U.S. Industrial Production Falls by 0.2% in September, Down from 0.8% Growth in August. The decline signals a potential slowdown in manufacturing and broader economic activity as the sector faces ongoing challenges.? Link

Importance

The -0.2% contraction in September's industrial production, down from 0.8% in the previous month, signals a deceleration in manufacturing and broader economic activity. For digital assets, this decline may have nuanced implications: Weaker production data could also lead central banks to adopt more dovish policies, which could prolong loose monetary conditions. In this environment, digital assets could thrive, as low interest rates are known to support riskier investments, like crypto markets. On the other hand, sustained declines in industrial output could indicate broader macroeconomic risks, potentially increasing volatility.

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