Gox Risk Overblown

In a piece in late April, we noted a high likelihood that Mt. Gox repayments would begin toward the end of May or in early June. On Tuesday, the transfer of nearly 142k BTC, valued at approximately $9 billion, from Mt. Gox wallets to an unknown address generated a bearish market reaction. This transfer, likely part of a plan to repay creditors by October 31st, began in the early Asian morning hours. The immediate market response featured Bitcoin dropping to a low of $67,680 after reaching a high of over $70,000 on Monday. Concerns about potential selling pressure from such a large amount of BTC caused traders to pull back risk.

In any other market, we would say that this supply is “priced in,” but this is crypto, and the market is not always as efficient as others, as information disseminates to different participants at differing rates. Thus, it is worth assessing the near-term risks, as 142k BTC equates to roughly 20% of daily volume across all exchanges.

Given that we are still mid-cycle and those receiving their BTC in-kind have been in the market for a very long time (high-conviction, long-term investors), and the funds that purchased BTC claims are likely hedged, we think the near-term selling pressure from these coins will be less than many anticipate.

It is likely that as the market catches wind of the distributions, traders will pull back some risk, and prices will squeeze higher, repeating this process until the market overcomes its fears. Further, market participants with such large holdings do not typically log onto platforms like Coinbase and market sell large orders all at once – they do so in a more orderly and professional manner that will get them the best price. Thus, there are many reasons to discount the magnitude of this risk.

It’s also worth noting that since the ETFs went live, GBTC has seen nearly $18 billion in redemptions, which, due to the current cash create and redeem mechanism, always results in the sale of BTC.

However, there have been impressive inflows into other ETFs that have offset this selling pressure. If we eventually break higher out of the $60-$70k range that we are currently in, we are likely to see flows mitigate any implicit selling pressure from the Gox coins.

On the other hand, in our view BCH is likely a coin to avoid for the time being. It lacks the same fundamental investment thesis as BTC and does not have the same cohort of long-term, high-conviction investors as BTC. It is likely that most recipients will dispose of their BCH before their BTC.

Completion of Locked SOL Auctions Good for Supply Dynamics

Late last week, it was reported that Pantera Capital and Figure Markets acquired the last of the deeply discounted Solana tokens from the bankrupt FTX estate, which had been auctioning $2.6 billion of locked SOL over several weeks. Figure Markets purchased 800,000 tokens at roughly $102 each, totaling about $80 million, while the price Pantera paid remains undisclosed.

The cessation of the Solana (SOL) token auctions by the FTX estate is likely to be bullish for SOL in the near term. The auctions, which in total amounted to around $7 billion at current market prices, had been introducing a significant supply overhang in the market. This overhang likely pressured SOL prices downward as funds reduced their spot exposure to participate in the auctions.

With the end of these auctions, the immediate excess supply entering the market has ceased, which should alleviate some of the downward pressure on SOL prices. This could provide a more favorable environment for SOL, allowing the market to stabilize and potentially move higher as the acute supply overhang is removed.

It is important to consider that 20% of the locked SOL tokens from these sales will be unlocked in March 2025, with the remainder unlocking monthly until 2028. This future unlocking of tokens represents a longer-term supply increase that the market will need to absorb.

In summary, the immediate outlook for SOL appears positive with the completion of the FTX estate auctions, removing a significant source of supply pressure. This situation illustrates that adding supply to a market can adversely affect prices, but this can easily be negated if there is sufficient demand to support added supply. This dynamic is also important to remember as Mt. Gox distributions begin.

Correlations With Equities Increasing

Since the launch of BTC ETFs, we have seen investors who had previously abandoned the space return in droves. CME open interest has surged, and volumes have returned to substantial levels not seen throughout 2023. Additionally, there have been several regulatory gains, and evidence shows broader interest in crypto as an investable asset class is miles above the trough observed during the bear market.

Given these developments, it is no surprise that the charts below show a resurgence in correlations between BTC and US equities.

What is the takeaway here? We believe that crypto will continue to ebb and flow with liquidity conditions – this is unlikely to change. However, non-macro factors are likely to affect crypto prices to a greater extent than they normally would.

For instance, earnings should not necessarily affect a monetary hedge like BTC, but if momentum and high-beta funds turn to BTC to outperform the QQQ or SPX, this could increase the importance of equity-specific factors to crypto and potentially introduce added volatility.

But, like the previous cycle, this increases the ceiling for crypto prices. We view stronger correlations as a sign that the setup is conducive for the frothier parts of a bull market, typically seen toward the latter half of any cycle.

STIR Market Holding Prices Back

Our “Buy in May” thesis was centered around the expectation of improved liquidity conditions for risk assets starting May 1st, due to calming effects of a dovish QRA and FOMC meeting. This thesis has largely materialized, with the DXY rolling over and net liquidity bottoming out since that date.

However, as shown in the chart below, a lack of sustained constructive inflation data outside of April’s CPI has brought short-term interest rate projections back to their levels at the start of the month.

Interestingly, the Coinbase premium, which indicates relative institutional demand for crypto in the US, started to move lower shortly after short-term interest rate (STIR) projections began to rise.

Thus, while conditions remain favorable for risk assets, positive inflation data would help reinvigorate the crypto market. Fortunately, we have a potential catalyst in PCE data due on Friday and a wealth of labor data next week, which, if recent trends continue, should be constructive for short-term interest rate projections.

Even if STIR forecasts do not recede significantly, the near-term net liquidity setup remains constructive. QT tapering is set to start next month, and the TGA is still near its target capacity of $750 billion, meaning that the liquidity draw observed in April should not be present in the immediate term, which is beneficial for banking reserves and overall liquidity conditions.

Our base case is that we will see favorable inflation (cooler) and jobs data (softer) over the next couple of weeks, combined with a resurgence in net liquidity. A combination of favorable interest rates and net liquidity should lead to the next leg higher for crypto prices.

Core Strategy

Our view remains that early May’s QT taper and dovish commentary from the Fed marked a local top in the DXY and suggests better liquidity conditions going forward, which is favorable for crypto. SOL remains a preferred avenue for large cap beta, but ETH ETF approval brings ETH back into the equation.

A brief summary of the theses behind each component of the Core Strategy:

• Bitcoin (BTC -1.40% ): Censorship-resistant money that serves as a liquidity sink in developed markets and base layer money in the global south. It is provably decentralized and can be used to build out a more robust, green energy grid throughout the globe.
• Ethereum (ETH -1.30% ): Distributed internet architecture whose proven use cases include the distribution of fiat currencies on global rails and a venue through which one can exchange digital assets globally in a permissionless fashion. Potential to supplant rent-seeking intermediaries via immutable smart contracts and digital ownership rights.
• Solana (SOL -3.53% ): The monolithic competitor to Ethereum’s layered strategy. High throughput L1 relying on the eventual reduction in hardware costs to scale. Goal is to be a global shared state operating at the speed of light.
• Optimism (OP 1.54% ): As ETH looks to scale in layers, more applications and users will migrate to layer 2 networks. OP Stack is the most popular development platform for other L2s. Outside of ARB, which is excluded due to the recent inflation of token supply, Optimism has garnered the most traction compared to other L2s with a liquid token. Offers beta exposure to ETH.
• Stacks (STX 4.12% ): A bet on the development of a bitcoin economy. Key catalysts include the bitcoin halving and the Nakamoto upgrade in Q2 2024.
• Helium (HNT 2.07% ): DePIN is an emerging theme in crypto that we think is bound to make waves in traditional markets. Helium is a leader in this category and has shown signs of early traction in its 5G product. Helium also adds Solana beta to the portfolio.
• Immutable X (IMX) & Ronin (RON N/A% ): Both networks have displayed impressive traction and are poised to be the category leaders among crypto gaming platforms.
• MakerDAO (MKR -1.64% ): MakerDAO stands as an integral piece of the DeFi landscape, offering a decentralized alternative to traditional banking with its stablecoin, DAI. With the anticipated Endgame upgrade, expanding product offerings, and increasing integration with traditional financial markets, MakerDAO is well-positioned to achieve outsized adoption and growth, making MKR a compelling ETH beta opportunity in the intermediate term.

Active Trades

• Dogecoin (DOGE 6.14% ): We think that broadly animal spirits are still working their way back into the market. DOGE is only slightly above its 200-day SMA relative to BTC.