Crypto Clean Up
After a stellar October, crypto prices continued to trade higher last month with the Trakx Top10 Crypto CTI adding another 15% to its value, bringing the year-to-date return to 75%. This is almost 4X the performance of US equities, which is the best performing tradfi asset class in 20231.
Several factors helped to sustain the bullish crypto trend last month. One was a favourable macro tailwind, something that has been decidedly lacking over the past 18 plus months. Following dovish US inflation reports - PPI and CPI came in lower than expected both on a headline and core basis – there has been a significant downgrading of US interest rate expectations.
According to the CME’s FedWatch tool, the consensus view amongst market participants is that the Fed hiking cycle has now run its course, meaning the next move will be a cut. At present, investors are pricing in only a 25% chance of a 25bp cut at the March 20 meeting, but by June the overwhelming consensus is that the Fed will be in easing mode (almost 75% chance). Indeed for 2024 as a whole, the Fed is priced to trim roughly 100bp off the target Funds rate – see chart below - which is the most aggressive pace of easing amongst all the major central banks.
Target Rate Probabilities For December 18, 2024 Fed Meeting
Source: CME Fed Watch Tool
Alt-Coin Season Returns
Just like a rising tide lifts all boats, the more favourable US interest rate backdrop provided a boost to most cryptocurrencies (it also helped equities rebound from the October slump), but there was a notable divergence relative to prior months. For much of the rally since last November’s cycle low, it has been the market leaders – Bitcoin and Ethereum – that have led the charge higher. However, while they experienced high single- digit/ low double-digit percentage gains last month, their performance was outshone by the larger cap Alt coins, indicative of a broadening in the bullish crypto trend.
One of the most notable standouts was Solana. Its price rallied over 70% last month. Part of the reason why Solana has experienced such strong upward price momentum is that it was badly beaten up during the crypto winter, suffering a peak-to-tough decline of 94%. What caused such severe damage to Solana’s price was its strong association with Sam Bankman-Fried (SBF), the disgraced founder of FTX and Alameda Research, who earlier this month was convicted on seven counts including wire fraud and conspiracy to commit money laundering.
As the native token of a blockchain with high transactional bandwidth (an important crypto characteristic as I will outline in the soon-to-be-published Trakx 2024 crypto outlook), low and stable transaction fees and a thriving ecosystem, a decline of this magnitude effectively turned Solana into the crypto equivalent of a lottery ticket. This made it the ideal candidate to benefit from the turn in investor sentiment2.
Heads Are Rolling
Obviously SBF was not the only major crypto player to end up in court this month. The Higher Court of Podgorica, Montenegro last week approved the extradition of Do Kwon, founder of Terra Labs. Kwon, who faces charges by both the US and South Korean authorities for his role in the collapse of the $40bn algorithmic stablecoin Terra last year, was caught trying to leave the country on a forged passport and will now be handed over either to the South Korean or US3 to face criminal charges.
Finally, and most eye-popping of all, the US charged Binance, the world’s largest crypto exchange, with violating money-transmitting laws, sanctions evasion and failing to maintain a proper AML programme. In order to settle the claims against it, Binance agreed to pay fines totalling more than $4.3bn, to withdraw its crypto services from the US4 and provide the US Treasury with access to the books, records, and systems of Binance for a period of five years. In addition, its founder Changpeng Zhao (CZ), after pleading guilty to violating the Bank Secrecy Act, was personally fined $50mn and forced to step down as CEO5.
For the naysayers, the latest media headlines will only serve to reinforce the longstanding narrative that crypto is nothing but a vehicle for illegal activity. However, rather than being an excuse to offload crypto, weighing on prices, these media headlines caused barely a ripple (no pun intended) to crypto prices, testament to substantial improvement in investor sentiment. Indeed, for many – myself included – this crypto clean up represents a positive.
As I stated last year6,
“the tough times we are seeing in crypto today is not down to technology, it is entirely due to the dubious practices and behaviour of individuals within the industry…..
The crypto industry is not going away. Too many people – including central banks and tradfi institutions in addition to millions of users – can understand and appreciate the benefits of distributed ledger technology. Nevertheless, it will have to be subject to greater regulation. After such egregious behaviour, if regulators were not to respond with tougher laws then they would be open to accusations of dereliction of duty…..
Regulation will be beefed up and implemented sooner in response to the FTX crisis. This is likely a necessary condition for broader public adoption of cryptocurrencies because regulation brings with it the perception of legitimacy. It also removes one of the key impediments for institutional adoption of crypto because they are used to operating in a regulated environment.”
And this is how many in the crypto world have responded to the recent news – see image below.
To-date the SEC has denied all spot Bitcoin ETF applications primarily due to concerns over the potential for market manipulation and a lack of customer protections. Hence, anything that reduces the potential for such manipulation boosts the odds that the SEC will green light a spot crypto ETF. (In addition to numerous spot BTC ETF applications the SEC also has a number of ETH spot ETF applications under consideration). The conviction of SBF and the action taken against Binance represents a crypto clean up and the removal of another hurdle to such products being approved by the SEC, potentially opening up crypto to a much wider and larger investor base (the US ETF market is worth around $7tr). When viewed from this perspective, is it any wonder that November turned out to be another positive month for crypto.
2In order capture such opportunities Trakx earlier this month released a new “Recovery Index” CTI composed of 10 tokens that have undergone notable price drops but which have robust on-chain financials. For more details please check out https://app.trakx.io/tradingSimple/l1recoverusdc or drop us an email.
3At the time of writing it is unclear where Do Kwon will be extradited.
4Given CZ’s predilection for tweeting images of himself holding up four fingers perhaps the authorities were having some fun at his expense when setting the size of the fine.
5CZ will be sentenced next February and faces up to 10 years imprisonment.