KEY TAKEAWAYS

• Prices of Bitcoin (+7%) and Ethereum (+6%) rose over Q2 2023, however the value of the total market cap of altcoins (all digital assets excluding BTC, ETH and stablecoins) decreased with nearly 19% in Q2 2023.
• This decrease was mainly caused by the SEC alleging Coinbase and Binance for trading at least12 crypto assets which should have been registered as securities.
• A large number of leading asset managers, including Blackrock, WisdomTree and Invesco, applied for a SEC license to launch a Bitcoin Exchange-Traded Fund (ETF) – demonstrating the rise of institutional interest in digital assets.
• The European Commission has unanimously approved the Markets in Crypto-Assets (MiCA) regulations, a landmark piece of legislation that will establish a comprehensive regulatory framework for cryptocurrencies within the borders of the EU.
• Hong Kong is strongly positioning itself as global crypto hub with the establishment of a Web3 taskforce led by Hong Kong’s financial secretary.
• The United Kingdom is continuing its efforts to become the global crypto hub by approving a new crypto bill.
• Inflation continues to decrease, the FED therefore announced a pause to rate hikes at the conclusion of its meeting on June 14, raising analyst expectations that the FED will soon reach its terminal interest rate and the aggressive liquidity tightening campaign is closer towards the end.
• Technical analysis indicates (potential) positive price action of Bitcoin and Ethereum in Q3.

FED INTEREST RATE POLICY Q2 2023

In May, the Federal Open Market Committee (FOMC) of the Federal Reserve (FED) raised its target federal funds rate by one quarter of a percentage point, its tenth consecutive interest rate hike. Since March of last year, the committee has raised fed funds by 5% to its current range of between 5% and 5.25%. FED Chair Jerome Powell said a U.S. banking crisis that included the collapses of Silicon Valley Bank, Signature Bank and First Republic Bank has tightened credit markets. Thanks to the crisis, Powell noted, “our policy rate may not need to rise as much as it would have otherwise to achieve our goals.”

As expected, the FED therefore announced a pause to rate hikes at the conclusion of its meeting on June 14, for the first time in 11 meetings. The FED also surprised markets, however, by projecting ­two more rate hikes to a 5.75% peak, given recent strong economic data, while markets had only priced in one more hike.

Economists expect a further CPI decrease to 3.1% over June, which will be announced in July.Though it remains above the Fed’s 2% target, that doesn’t mean investors should expect infinite rate hikes from the FED. We continue to expect that the Fed will soon reach its terminal rate, bringing it closer toward the end of its most aggressive tightening campaign in generations – which will bring a positive investor sentiment towards risk-on investments, including digital assets.

EU COUNCIL APPROVES CRYPTO REGULATORY FRAMEWORK MICA

On May 16 the European Union Council — the financial arm of the EU — unanimously approved the Markets in Crypto-Assets (MiCA) regulations, a landmark piece of legislation that will establish a comprehensive regulatory framework for cryptocurrencies within the borders of the EU, to roll out in 2024.

The MiCA frameworks were first proposed by the European Commission in 2020, with the legislation being formally adopted by the European Parliament in April 2023. After debates and negotiations between EU member states and stakeholders in the crypto industry, the final text of the regulations was agreed upon by all members of the European Council on May 16, 2023.

MiCA’s main focus is consumer protection, requiring crypto-asset service providers to register in the countries of operation and ensuring stablecoin reserves. MiCA will also establish several requirements for crypto service providers such as licensing, customer due diligence and risk management. The regulations will also create a framework for issuing and trading stablecoins, utility tokens, and other digital assets such as NFTs. Crypto-asset service providers must obtain a license from regulators in the EU countries where they operate. These will help provide suitable security measures and risk protection for customers.

MiCA’s framework has been welcomed by some in the crypto industry, including M21, who see it as a necessary step to protect investors and promote innovation.

United States SEC Commissioner Hester Peirce stated that “MiCA should serve as a model for the United States” at the Financial Times’ crypto and digital assets summit on May 11, 2023.

SURVEY

A recent survey of the major international investment bank Nomura suggests the interest of traditional financial (TradFi) institutions interest in the digital assets sector is growing. The survey reveals pension funds, fund managers, other institutional investors and wealth managers are positive on digital assets and plan to invest.

The survey covered pension funds, wealth managers, family offices, hedge funds and investment funds, insurance asset managers and sovereign wealth funds who collectively manage around $4.956 trillion in assets, and concludes:

• 96% see digital assets as an investment diversification opportunity.
• 91% see digital assets helping to produce “all-weather’ income strategies to “cope with the risk of inflation and the debasement risk of fiat currencies.
• 82% are positive about the digital asset class in general and Bitcoin and Ethereum in particular over the next 12 months.
• 3% of respondents are negative about the outlook for the sector while 15% are neutral.

While the summary did note there were challenges to implementation and, not surprisingly, highlighted regulation as one of the main ones, this is a strikingly upbeat response from an industry that doesn’t like to put its views on crypto out there very publicly.

UK CRYPTO LAW APPROVED – IN LINE WITH THE GOAL TO BECOME THE GLOBAL DIGITAL ASSETS HUB

A U.K. bill giving regulators the power to supervise crypto and stablecoins was approved by King Charles on June 29, marking the last formal stage that makes the bill law and bringing digital assets under the same rules and supervision as traditional assets.

The bill, which was introduced in July 2022, gives regulators more power over the financial system, including crypto. While the bill was debated in Parliament, amendments were added to treat all crypto as a regulated activity and to supervise crypto promotions. The bill will also bring stablecoins into the scope of payments rules.

This approval shows that the UK is delivering on this commitment to become world’s leading crypto hub and recognise that digital assets and crypto will be a central pillar to future-proofing the competitiveness of the UK’s financial centres.

Ethereum

Ethereum shows strength on the weekly timeframe moving above the 100 EMA and well above the 200 EMA ribbon with a Q2 close price of $1,933, indicating positive future price movement if these levels hold.

RSI and StochRSI both move upward indicating bullish momentum. A break above the previous April high of $2,125 would give an upward price action with a target of $2,500. The MacD indicator also recently crossed to the upside, indicating bullish momentum.

Both Bitcoin and Ethereum are currently experiencing remarkably low levels of volatility. Market trading volume is also notably reduced. These factors suggest that small investors are currently influencing price movements, while large investors are maintaining their current positions. A longer period of low volatility and trading volume is often an indicator that a bigger move is upcoming. 

It is noteworthy that Bitcoin is increasingly forging its own path over the last weeks, diverging from traditional stock markets. Over the past two years, its 90-day average correlation to stock markets has reached its lowest point.

Bitcoin dominance

Bitcoin dominance (market cap of BTC compared to market cap of all other digital assets) is on a consistent upward trajectory over the last months, surpassing a significant milestone of 48% early June. The Bitcoin dominance may further increase once it breaks through the weekly 200 EMA (around 51%), which would give a target to 57% or higher.

Correlation with other markets

Bitcoin’s 30-day correlation to the S&P 500 has gone from a record high 0.8 readout midway 2022 to around 0.3, bringing it closer to the “uncorrelated to traditional financial markets” norms of the past.

MARKET PERFORMANCE: SIGNIFICANT DECLINE IN TOTAL MARKET CAP ALTCOINS

The total market cap of digital assets remained nearly flat over Q2, with a 0,09% increase. However, the total market cap of altcoins (all coins excluding Bitcoin, Ethereum and Stablecoins) suffered a significant loss of 18,66% in Q2, which was mainly caused by the sell-of of altcoins due to the SEC alleging Binance and Coinbase of offering unregistered securities.

Q3 PERFORMANCE EXPECTATION

Looking at historic patterns, Q3 performance can be characterized as accumulation period with medium positive price action (+5 to +10%). Combining our technical analysis with historic patterns, we expect this pattern will repeat itself and the probability of a positive Q3 performance in the digital assets market is likely.

• Google Cloud is teaming up with Polygon Labs to make it easier for developers to set up and manage their own Polygon nodes in a join-effort to increase the usage of Polygon’s networks.
• Shapella Hard Fork goes live on Ethereum Mainnet
• Nearly a million addresses hold more than 1 Bitcoin
• Polygon announced its plans to unveil ‘Polygon 2.0,’a blueprint to revamp its entire ecosystem
• The Graph migrates from the layer 1 Ethereum blockchain to the layer 2 Arbitrum rollupin an effort lower fees, speed up transactions, and improve accessibility
• Warner Music and Polygon Labs unleash the power of blockchain for music innovation

SUMMARY

SECTOR NEWS

• • G7 Aims to aid developing nations in introducing Central Bank Digital Currencies
  • Bank of England explores Digital Pound for wholesale markets
  • S. House Committee publishes draft Stablecoin bill
  • House Republicans propose new bill for Stablecoin Regulation in the US
  • Coinbase sues the SEC for answer on rule specific to digital assets
  • SEC Asks Court to Deny Coinbase Demand for Crypto Rules
  • SEC changes its mind on officially labelling Digital Assets
  • Tokenization is likely to transform Infrastructure and Financial Markets: Bank of America