The spot bitcoin ETF filings by BlackRock and other financial services giants ensured bitcoin would finish Q2 in positive territory.
June 28, 2023
Insights and analysis for the professional investor
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Welcome to Crypto Long & Short!
This week, CoinDesk analyst Glenn Williams analyzes the first two quarters in crypto markets and considers their path forward as investors await an SEC decision about multiple spot bitcoin ETFs.
William Ogden Moore, research analyst at Grayscale Investments writes about potential ways that blockchain technology could help with AI development.
Looking Back on Crypto Activity For 2nd Quarter 2023
The end of the second quarter is a good time to consider crypto markets’ recent past and path forward for the remaining half of the year. Enough time has gone by to observe certain trends and extrapolate from them.
Will bitcoin and other assets rise, fall or stay roughly in place? BTC is currently trading at about $30,500, after spurting last week. Ether is holding strong a little below $1,900. First, let’s consider the past.
A healthy 6 months for most cryptos
Here are the first and second quarter performances for a half-dozen of the largest digital assets by market capitalization, the leading U.S. equity indexes and prominent crypto-based stocks:
Layer 1’s
TradFi Indices
Crypto Based Stocks
Note that Bitcoin and Ether – the cryptos with the largest values – Solana and crypto-based stocks have outperformed the indexes – no small achievement given stocks’ rise from 2022’s bear market – and that much of the digital asset market’s gains have occurred in the first quarter. A recent price spike following spot bitcoin filings by BlackRock and two other financial services powerhouses ensured bitcoin and other assets finished in positive territory for Q2.
Smart contracts surge
Within CoinDesk Indices CMI sectors, Small Contract Platforms led the way in the second quarter, followed by the currency sector up 55.82% and 35.06%, respectively. The digitization and computing sectors lagged, falling 84.7% and 92.03% respectively.
CoinDesk’s Bitcoin and Ether Trend Indicators show that both assets are in a phase of significant uptrend, a result of recent price upswings stemming from the spot BTC ETF applications.
Correlations between BTC and Tradfi indices decoupled from fairly strong levels, to virtually no correlation. A notable decline occurred between bitcoin and the Nasdaq Composite, falling from a correlation coefficient of 0.85 on March 31, to 0.02 currently.
Correlations range between 1 and -1, with 1 indicating a direct pricing relationship, and the latter indicating an inverse one.
Quiet first, then a surge
The first 74 days of the second quarter were quiet. Between April 1 and June 5, BTC sank from $28,134 to 27,173, a 5% fall-off..
The more than two-month slump occurred amid fresh macroeconomic economic uncertainties, even as inflationary pressures continued to subside, and the FOMC increased interest rates by 25 basis points (bps). The most recent top line, 4% inflation rate is 50% lower than it was in June 2022. M2 money supply declined 2.5% since January, and the Federal Reserve’s balance sheet is 2.1% lower in 2023, both positive developments specific to inflation control.
But the action and resulting price activity accelerated, starting with the U.S. Securities and Exchange Commission’s (SEC) suit against the world’s largest crypto exchange, Binance, on June 5.
The SEC suits against Binance and Coinbase on June 6 sent prices down 7% over the ensuing 10 days as investors grew fretful that an increasingly prohibitive U.S. regulatory environment would weigh on crypto markets.
But then prices about-faced 20% following the spot BTC applications by BlackRock, the world’s largest asset manager, Invesco and WisdomTree (the latter two were re-filings). The sudden appearance of BlackRock with its $9.1 trillion in assets under management sets up a cage match between an organization that has a 575-1 record for its ETF applications against an SEC that has seemed increasingly anti-crypto.
BlackRock’s inclusion of a “surveillance-sharing agreement,” is likely key to ultimate approval, and investors seem similarly upbeat about the application’s prospects.
Yet BlackRock’s ETF success rate is no guarantee its bitcoin product will win approval. The SEC has rejected multiple applications from high-profile firms and seems fiercely committed to deem crypto a security and to rein in what the agency considers a lack of consumer protection..
For the record, the denied ETF application was in October 2014 when BlackRock filed an application for an ETF that would not require the daily disclosure of holdings. The firm seems determined to avoid such lack of transparency issues in its spot BTC filing.
But what should investors expect for the third quarter?
August decision on BlackRock’s application
Markets are tentatively expecting that the first opportunity for the SEC to approve, deny or extend its deliberations about BlackRock’s offering will occur in August. Anything other than an approval would likely be bearish. A rejection would likely depress BTC prices.
A so-called extension of review would raise questions about a BlackRock approval. An extension would also follow the SEC’s pattern of delaying its decision only to ultimately reject an application when delaying was no longer an option. A rejection at any point would likely drag on prices.
Will altcoins return to Q1 form or retreat further?
The disparity in performance between BTC, ETH, and other layer 1 protocols has been striking. And while BTC and ETH have thus far avoided being labeled “securities” by the SEC, the same is not true for a number of altcoins.
In many ways, regulatory clarity from the SEC may ultimately be more pertinent to altcoins, than to BTC and ETH. A lack of it may lead to continued decoupling, as investors looking for crypto exposure stick with BTC and ETH.
Will macroeconomic narratives subside?
A year ago, inflation was above 9%. Today it sits at 4%. While still above the Fed’s 2% target, the speed of decline has changed the inflation narrative from “can it be managed” to “is it time to stop monetary hawkishness.”
Looking forward, economic data points which may take a larger portion of center stage, are employment, and the growth of consumer revolving credit, which would impact the amount of discretionary capital available for crypto assets.
Cboe Digital is a U.S. regulated exchange and clearinghouse bringing trust and transparency to the crypto spot and derivatives markets. Cboe Digital honors a separation of duties and includes intermediaries as a key tenet in managing risk and avoiding conflicts of interest. Our unified spot and derivatives markets are underpinned by responsible innovation and enable collateral efficiency. www.cboedigital.com.
Institutional Outlook
Blockchain Solutions for AI Challenges
ChatGPT is the fastest growing consumer application of all time, according to research by banking giant UBS. This growth underscores the profound impact that artificial intelligence (“AI”) and related technologies (i.e. large language models, machine learning, and natural language processing) have already had on society. But like any promising new technology, AI also has the potential to harm. Could blockchain help meet some of these challenges? Here are three key areas where blockchain and artificial intelligence intersect:
Verification and identity: Generative AI significantly lowers the barrier to content creation but also instigates a flood of misinformation and deepfakes. Establishing consensus on the authenticity of information is at the core of blockchain technology. For instance, a unique digital signature could be created for each piece of digital content and recorded on a blockchain, allowing anyone to verify the content’s authenticity.
Data privacy and ownership: Companies like Google, Facebook, and 23andme derive significant income from monetizing various forms of user data. It’s feasible that powerful AI systems could follow suit as consumer applications increase in popularity. Projects like the Brave browser demonstrate how blockchain could combat this trend by enabling individuals to maintain sovereign ownership over their personal data in a privacy-preserving manner as well as decide how and when it is shared and monetized.
Centralization risk: AI’s capital-intensive nature and tendency toward network effects could centralize power among an oligopoly, limiting alternative options for users. Crypto can democratize AI development by offering decentralized data and computation marketplaces. By incentivizing user participation through tokens, crypto could counterbalance AI-induced centralization.
Progress: The Intersection of Crypto and AI Today
While the convergence of crypto and AI is in its infancy, it has already garnered significant investor interest. So far in 2023, venture capitalists have invested $422 million specifically in crypto applications related to AI, privacy and identity. Notable raises include Worldcoin, a verification and identity-based protocol that raised $115 million in a Series C round, and Auradine, an AI and privacy-focused web3 infrastructure solution that secured $81 million in Series A funding.
Co-founded by OpenAI CEO Sam Altman, Worldcoin’s blockchain-based “proof of humanity” system uses retinal scans to authenticate human users. The company’s long-term vision is to combat the increasing presence of bots online and mitigate potential AI-related wealth inequality. So far, it has attracted 1.8 million sign-ups from dozens of countries.
Conclusion
Driven by technologies like ChatGPT, AI is influencing society at a mass scale. Since ChatGPT reached the landmark of 100 million sign-ups in January 2023, $5.4 billion has been invested in AI startups worldwide which may lead to additional advancements in the technology.
As AI systems develop, the accompanying challenges and solutions will also evolve, increasing the intersection and synergies between crypto and AI. Can blockchain technology harness AI’s potential to empower society, while also mitigating AI’s potential risks?
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Takeaways
From CoinDesk Markets Co-Managing Editor James Rubin, here’s some news worth reading:
STRONG START: In its opening hours Tuesday, Volatility Shares 2x Bitcoin Strategy exchange-traded-fund (BITX), the first leveraged crypto ETF in the U.S., reached more than $4.2 million of in trading volume. About $500k worth of shares traded in the first 15 minutes, according to Bloomberg data.
COURT REJECTS SBF: The federal judge overseeing FTX founder Sam Bankman-Fried’s criminal trial denied his pretrial motions to dismiss criminal charges against him, writing that the exchange’s founder did not have standing to dismiss many of these charges and didn’t meet the “extraordinary” circumstances for a dismissal.
DORSEY QUESTIONS APPLE: Former Twitter CEO Jack Dorsey, who now heads the Bitcoin-focused financial services firm Block, asked Apple CEO Tim Cook via a Tweet why Apple Pay doesn’t support bitcoin after the technology devices giant indicated to Bitcoin-friendly social media app Damus that it would likely be kicked out of the App Store for violating the platform’s terms of service.
FIDELITY SPOT BTC ETF: Bitcoin surged above $31,000 on Tuesday, regaining its brief perch from the previous week after The Block crypto publication reported that the financial services giant would apply for a spot bitcoin ETF. “We are not able to confirm or share an update, a Fidelity Investments spokesperson said in a statement to CoinDesk.
CRYPTO HUBS: What’s the best place to be working in crypto? What city has the most jobs and friendliest regulation? CoinDesk’s Crypto Hubs project roams the world to find the leading blockchain hubs.
