Picking up the thread following typically subdued peak summer months in the northern hemisphere provides an immediate reminder that crypto has only ever worn traditional seasonal market patterns very loosely.
There’s been little that’s ‘typical’ about recent months—particularly for volumes. The severe diminishment of substantial counterparties since 2022, combined with exacerbating behavioural impact, helps account for crypto’s total market capitalization hovering at around $1 trillion for most of the year, halved from as much as $2.2 trillion in 2022.
The latter figure lays bare the enormous value destruction from the market peak of almost $3 trillion in November 2021. Against that backdrop, even the green shoots of a turnaround in participation will likely take longer than a few months to take hold.
In recent months we’ve continued to see the fallout from those counterparty implosions: like realised volatility on CME Bitcoin futures (powered by our BRR) falling to its tamest since the contracts began trading in 2017. That’s despite crypto open interest on the institutionally dominated venue reaching record highs in Q2. By August, monthly spot volumes across 32 exchanges tracked by The Block had drained to the lowest mark since October 2020.
Dry run
Could such deterioration soon expose asset-level liquidity issues at the margins? Participants are unlikely to experience liquidity impairments for the largest cryptocurrencies by market capitalization, i.e. those covered by our CF Ultra Cap 5 index. But blockchain data and research firm Glassnode concluded recently that “Volatility, liquidity, trade volumes and on-chain settlement volumes are at historical lows”, reinforcing “the probability that the market has entered a period of extreme apathy, exhaustion and arguably boredom”.
Own goals
Meanwhile, self-inflicted impacts at the bleeding edge of the digital asset space continue, with predictably exacerbating outcomes on the metrics measuring participants’ inclination to gain or maintain exposure.
As CF Benchmarks’ Lead Research Analyst, Gabe Selby, CFA notes in our recently released June-September Quarterly Attribution Report, a Z-Score analysis on the decline of Total Value Locked (TVL) in the wake of the late-July hack of the Curve Finance protocol, suggests:
“The recent impact has been in line with the prior shocks in the space that included the collapse of Terra-Luna, FTX, and April’s Beanstalk (flash loan exploit) and Venus (compromised private key) hacks.”
In other words, investors are showing few signs of habituation to these ‘own goals’, regardless of their seemingly interminable frequency. The suggestion is that risks to existing allocations from future big DeFi malfeasances could be comparable to what we've seen over the last couple of years. Unfortunately, that would underscore any tendency some participants might have to stay out of the market.
That said, Gabe does point out that DeFi TVL has stabilized in more recent weeks.
(Scroll down for our spotlight on the latest Quarterly Attribution Reports, or click here to read the compiled report).
Paradox
All the above said, as we saw throughout the summer, ‘liquidity drought’ or not, large institutions have embarked on a wave of plans to install the infrastructure for the mass adoption they’re clearly convinced is just downwind.
Together with the convergence towards a more constructive legislative and judicial sentiment, these factors continue to stand in stark contrast to uncertain market conditions.
The disparity may be down to several factors – some of which are less intentional than accidental. Still with so-called ‘Crypto Winter’ coming up to two years old, enterprises and institutions have had plenty of time to react to ‘cold feet’. Yet signs of institutional adoption and entrenchment keep coming.
We outline recent key institutional adoption developments below.
“Bitcoin maximalists might not be the sole beneficiaries of a spot fund, as many foresee that Ether's substantial market size and decentralized network could potentially follow suit."
Against the backdrop of other favourable legal outcomes and promising legislative progress, the Grayscale ruling looks more indicative of changing attitudes in the official sector than on its own.
“It defies logic that a drafter of computer code underlying a particular software platform could be liable under Section 29(b) [of the Securities Exchange Act] for a third-party’s misuse of that platform.” - Judge Katherine Polk Failla
The recent evolution of two key CF Benchmarks pricing sources is also driven by adoptive convergence trends among institutional participants.
Click the links to read more about the once-a-day CF Ultra Cap 5 EUR - Settlement Price, and the CF Ultra Cap 5 EUR - Spot Rate, which is published once a second.
The availability of a BRR price synchronized with the traditional Hong Kong market close enables institutions to more easily utilize the most verifiably reliable and secure bitcoin pricing methodology closer to regional market hours, for settling derivative contracts, striking fund NAV, and other functions.
Visit the BRRAP Index Page.
Read more about BRRAP and ETHUSD_AP on the CME Group website.
By Gabe Selby
Plenty of potentially market-moving events and economic data remain ahead this week. Although a U.S. government shutdown was avoided almost at the last minute, market participants will continue to view forthcoming data points through the lens of the Fed's still uncertain rate-setting intentions, despite the recent pause in its historical hiking cycle. Meanwhile, with the recent increase in gasoline prices, the U.S. consumer's resilience may soon truly be put to the test.
To cap off the week, the latest employment report is expected to highlight the continued softening of the U.S. labor market. Economists surveyed anticipate job growth will decrease slightly to approximately 160k in September (down from 187k in August). Last month's upside surprise highlighted slowing wage growth along with an increase in labor-force participation, and while the trend of smaller monthly increases is expected to remain intact, current payroll levels are at risk, amid the Fed's goal of managing inflation at the expense of a robust labor market.
Featured utility: CF Digital Asset Classification Structure:
With the launch of regulated institutional cryptocurrency-related financial products now so frequent that such instruments are becoming increasingly mainstream, it’s all the more important for institutions to be apprised of accurate, detailed analyses of crypto market performance.
And because a quarterly cadence is in step with common rebalancing schedules of traditional investment vehicles, adopting the same frequency for digital asset market reviews is cogent: enabling efficiency, facilitating cross asset insights, and fostering an integrated approach to research overall.
CF Benchmarks’ Quarterly Attribution Reports (QARs), overseen by our Lead Research Analyst Gable Selby, CFA, are expressly designed to fill the shortfall of publicly available institutional-standard digital asset research.
Underpinned by the CF Digital Asset Classification Structure, QARs are still the only regular in-depth market analyses based on a transparent, comprehensive taxonomy of the blockchain economy, and designed and published by a regulated Benchmark Administrator.
Meanwhile, with QARs now having been published quarterly for a year, their utility for bringing the same analytical discipline to blockchain economic performance as is required by institutions participating in traditional markets, is demonstrably ever more unique.
Highlights from the latest QAR:
To get updated further about market trends in the final month of the quarter, be sure to read Gabe Selby’s September Monthly Report.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell any of the underlying instruments cited including but not limited to cryptoassets, financial instruments or any instruments that reference any index provided by CF Benchmarks Ltd. This communication is not intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. Please contact your financial adviser or professional before making an investment decision.
Note: Some of the underlying instruments cited within this material may be restricted to certain customer categories in certain jurisdictions.
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