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Source: Grayscale; Compilation: Baishui, bitchain vision
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After regulators approved the initial application for spot Ethereum ETFs in the U.S. market, the cryptocurrency market appreciated, and Ethereum performed better than the broader cryptocurrency market.
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Also this month, cryptocurrency-related legislation has made progress in Congress.The latest survey conducted by Harris poll representative Grayscale found that cryptocurrency remains a bipartisan concern ahead of the November election.
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The financial cryptocurrency industry leads Grayscale’s cryptocurrency industry, while Bitcoin lags slightly behind the market, despite an increase in net inflows of spot bitcoin ETFs in the U.S.
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Grayscale Research believes that digital assets have a good outlook, although the macro market has been priced smoothly and may be affected by adverse surprises.
In May 2024, the cryptocurrency market rebounded as U.S. regulators appeared to pave the way for trading spot Ethereum Exchange-traded funds (ETFs).Like the spot Bitcoin ETFs that went public in January 2024, these new products may open crypto asset classes to a wider range of investors and may help accelerate public blockchain adoption.
Except for commodities, most traditional asset classes achieved positive returns in the month due to general decline in market volatility.After risk adjustment (i.e., taking into account the volatility of each asset), potential assets and emerging markets (EM) currencies lead the gains (Figure 1).ETH performed well both at absolute and risk-adjusted, while Bitcoin’s risk-adjusted return is at the middle level of traditional assets.The FTSE Grayscale Cryptocurrency Industry Total Market Index (an indicator of the largest and most liquid return on digital assets) rose 15% in May 2024, with a market cap of $2.3 trillion.
Figure 1: Ethereum outperforms traditional asset and cryptocurrency markets
On May 23, 2024, the U.S. Securities and Exchange Commission (SEC) approved Form 19b-4 filed by several issuers for spot Ethereum ETFs, indicating significant progress has been made in listing of these products on U.S. exchanges.Just a few days ago, the SEC approval seemed unlikely; a week ago, estimates from decentralized forecasting platform Polymarket showed that the likelihood of approval was only about 10%.As approval was not expected, ETH price rose by about 17% over the next five hours when Bloomberg analysts broke the news of a possible approval on May 20 (Chart 2).
Figure 2: The U.S. may approve spot ETFs, ETH prices soar
According to international precedents, Grayscale Research believes that the demand for spot Ethereum ETFs will reach 25%-30% of spot Bitcoin ETFs (For more details, see our report “The Current Situation of Ethereum”).In the long run, Ethereum’s market cap is likely to depend on the network’s expense revenue and other fundamentals, but in the short run, the increase in demand for new ETFs may have an impact on the price of tokens.While these products are not allowed to pledge at least initially, we do not expect this to have a significant impact on investor demand.Ethereum’s staking yield is only 3.6%, and all basic transaction fees on the network are destroyed, rewarding all token holders with reduced supply.[1]
In addition to unexpected approval of applications related to spot Ethereum ETFs, Congress has also made progress in various legislation related to regulation of the crypto industry.On May 8, the House voted to repeal the Securities and Exchange Commission Accounting Notice (SAB) 121, which required banks to hold capital in custody digital assets, thereby limiting their participation in custody services; despite the White House threatening to veto,But 71 Democrats still voted for the rule.[2] The Senate then passed the legislation—also passed by both parties.On Friday, May 31, President Biden vetoed the bill on the grounds that consumers need to be protected.[3] Later this month, on May 22, the House passed another cryptocurrency-focused bill, the 21st Century Financial Innovation and Technology Act (FIT21).The legislation will provide a comprehensive regulatory framework for cryptocurrencies [4] and has been submitted to the Senate for consideration.Against the backdrop of these recent legislative moves, the latest survey conducted by Harris poll representative Grayscale found that cryptocurrencies are a bipartisan issue, with similar holdings among Republicans (18%) and Democrats (19%) (For more details, please refer to the 2024 election: The role of cryptocurrencies).
From the perspective of the cryptocurrency industry,The best performing market segments in May 2024 are finance, consumer and culture, and smart contract platforms, including Ethereum(Figure 3).As discussed further below,The financial cryptocurrency industry may benefit from the progress of spot Ethereum ETF approval, as the Ethereum network is home to most DeFi activities and many tokenization projects.The cryptocurrency sector in consumption and culture has been boosted by the strength of some memecoins – these tokens are mainly used for entertainment value and are related to internet culture.[5]Some video game-related assets have also boosted returns in the consumer and cultural cryptocurrency industry.[6]
Figure 3: Financial-related cryptocurrency performance
Bitcoin, the largest crypto asset component in the cryptocurrency sector, gained slightly lower than the market, up 13% in May.[7] Inflows of spot Bitcoin ETFs listed in the United States rebounded in the month, reaching a total of US$2.1 billion.[8] Since its launch on January 11, the cumulative inflow of spot Bitcoin ETFs has reached nearly $14 billion (Figure 4).Meanwhile, Bitcoin’s price may be suppressed by the concern that the Mt Gox-related tokens may be sold.The bankrupt cryptocurrency exchange processed more than 70% of Bitcoin transactions at one point, but it has been working hard to get rid of it for the past decade.Last September, the bankruptcy trustee announced that creditor repayment would begin in October 2024.Late last month, wallets associated with bankrupt exchanges began to transfer bitcoin to the chain, refocusing on sales in cryptocurrency markets.[9]Mt Gox holds nearly $10 billion worth of Bitcoin [10], so if it is converted into fiat currency, sales can have a significant impact.
Figure 4: Spot Bitcoin ETF cumulative inflows close to US$14 billion
The financial cryptocurrency sector is mainly supported by the rise in Uniswap (UNI) and Celsius (CEL) tokens.[11] Uniswap is an automatic market maker based on Ethereum that allows for decentralized token trading without intermediaries.The market appears to interpret partial approval of spot ETH ETFs as a benefit to decentralized finance (DeFi) tokens including UNI.While UNI performed strongly throughout the month, on May 31, a governance vote aimed at distributing part of the agreement’s fee income directly to token holders was postponed, causing a 6% drop in the day’s price.In addition, during the bankruptcy crypto lender’s bankruptcy process, more than 90% of the token supply was destroyed, and CEL tokens rose by about 750%.[12]
at last,In the utility and services cryptocurrency sector, returns are driven primarily by growth in Chainlink (LINK), Ethereum Name Services (ENS) and Livepeer (LPT).LINK’s rise seems to reflect the news that the co-founder of the Oracle Network will attend the consensus meeting with representatives of payment service SWIFT, and the end of the pilot program between Chainlink and the U.S. Depository Trust and Clearing Corporation (DTCC) – thisBoth signs may be signs of traditional financial institutions adopting public blockchains.[13] ENS Labs, the organization that develops ENS software, announced various upgrades to the project, including a planned transition to Ethereum Layer 2.[14] Finally, Livepeer announced a subnet designed to support GPU sharing and other activities related to the Artificial Intelligence (AI) industry (See our report “The Advention of Artificial Intelligence and Encryption Synergy”).[15]
The crypto market benefits from various downwind factors, including steady flow of spot Bitcoin ETFs listed in the U.S., efforts made by Congress to bring regulatory clarity to the industry and growth in activity within the Ethereum ecosystem.As long as the macro market background remains good,Grayscale Research believes valuations can continue to climb throughout the (Northern Hemisphere) summer and beyond.However, it must be emphasized thatFinancial markets are ready for smooth sailing: the implied volatility of many traditional assets has declined(Figure 5).therefore,While favorable backgrounds may continue, the market may be affected by adverse news from the economic outlook, Federal Reserve monetary policy and/or the upcoming U.S. presidential election.
Figure 5: Implicit volatility drops to the low end of the range
References
[1] Source: StakingRewards.com.Data as of May 31, 2024.
[2] Source: Axios, American Banker.
[3] Source: Axios, The Block.
[4] Source: House Financial Services Committee.
[5] In mid-May, a similar situation occurred in the open stock market as trader Keith Gill (aka Roaring Kitty)’s X account reactivated.Source: New York Times.
[6] For example, IMX (+13%), PRIME (+18%), and YGG (+24%).Source: Artemis.Data as of May 31, 2024.
[7] Source: Artemis.Data as of May 31, 2024.
[8] Source: Bloomberg, Grayscale Investments.Data as of May 31, 2024.
[9] Source: The Block.
[10] Source: Arkham.Data as of May 31, 2024.The asset also holds approximately 141k of Bitcoin Cash.
[11] “PEOPLE” also made a significant contribution to the returns of the financial crypto industry in May 2024.
[12] Source: Artemis, Etherscan.Data as of May 31, 2024.
[13] Source: Decrypt, CoinDesk.
[14] Source: The Block.
[15] Source: Livepeer.
