July 2023 Monthly Recap: Crypto and the Soft Landing Dream
Research Team
Last Updated: 8/1/2023 | 11 min. read
While Bitcoin took a breather in July, the rally in other risky assets extended further, fueled by hopes of a “soft landing” for the US economy: the goal of bringing inflation sustainably back to target without a recession (Exhibit 1). In our view, crypto market capitalization would likely benefit in this scenario due to the correlation of major token valuations to risky assets, as well as a variety of current tailwinds for the industry. However, a soft landing is not assured, and is now increasingly a consensus view–and therefore already discounted to some degree by markets.
Aside from further regulatory developments, crypto’s near-term outlook may largely depend on how this debate unfolds. If incoming economic data continue to support the soft landing thesis, the year-to-date rebound in major token valuations can continue. But if the economy stumbles or the Federal Reserve raises real rates further, the crypto recovery may pause over the near-term. Until resolved, crypto markets may see more price volatility in alt-coins (those beyond Bitcoin and Ethereum), as has occurred over the past month.
Exhibit 1: Summer optimism about a “soft landing”
Data and Fed policy signals over the last month support the idea that the economy can potentially rebalance without a recession. Inflation has decelerated further, and was especially low for the “core” measure, which excludes volatile food and energy prices. This deceleration occurred despite a low unemployment rate, strong employment growth, and declines in claims for unemployment benefits. At a press conference following the July 25-26 FOMC meeting, Chair Powell said that the Federal Reserve Board staff no longer predict a recession in their forecasts, while redirecting when he was asked about guidance the Fed previously shared in June noting that at least one more rate increase was planned for later in 2023. The bond market discounted a lower path for policy rates after his remarks.
In financial markets, the prospect of a soft landing resulted in a new mix of outperformers. Bitcoin, the Nasdaq Composite index, and AI-related assets outperformed in the year to June[1], reflecting a rebound from 2022’s drawdowns and benefiting from the launch of AI tools, including ChatGPT (public blockchain technology may provide solutions for some of AI’s challenges). During July, however, the leadership shifted to previous laggards, including US regional bank equities and crude oil (Exhibit 2). Tellingly, the top performers among US equities included heavily-shorted names–suggesting many active investors were not well-positioned for a soft landing scenario.[2]
Exhibit 2: Year-to-date laggards outperformed in July 2023
Bitcoin (BTC) and Ethereum (ETH) were broadly range bound, falling slightly month-over-month, as market leadership pivoted away from tech-related themes. Compared to earlier this year, there were also fewer Bitcoin-specific drivers, like concerns around regional banks (in March 2023) and optimism about spot ETF approval (in June 2023). Both cryptocurrencies’ realized and implied volatilities declined to historically low levels (Exhibit 3). Meanwhile, their daily correlations with the S&P 500 Index rebounded after falling through the first half of the year.[3] Bitcoin fees declined again in July and have fallen steadily after spiking in May around interest in ordinals. In contrast, Ethereum fees increased in July, and both gas prices and maximal extractable value (MEV) rewards spiked on July 30 following an attempted exploit of the Curve protocol (an event that continued to roil DeFi at the time of writing).[4]
Exhibit 3: BTC and ETH volatility declined
Price volatility was higher beyond the two largest tokens, and “alt-coin dominance” (the share of market capitalization not accounted for by Bitcoin and Ethereum) increased through July. We believe the primary catalyst was a U.S. District Court ruling on July 13th in the case, SEC v. Ripple Labs. In this case, the judge ruled that certain sales to institutional investors qualified as securities transactions and should have been registered with the SEC, while certain sales to the general public did not. Notably, the court stated that Ripple’s native token, XRP, “as a digital token, is not in and of itself . . . an investment contract.” Following the Court’s ruling, XRP roughly doubled in price[5], although it lost some ground later in the month, ending +48% from June.[6] The clarification of XRP’s legal status appears to have lifted prices for a few other tokens, including XLM, SOL, OP and MATIC – although in some cases these tokens have been supported recently by idiosyncratic positives, as well. Aside from the XRP ruling, a bipartisan group of legislators has also continued to make progress on bills related to crypto market structure and stablecoins.[7]
Gains in other digital assets appear to have mostly reflected protocol-specific fundamentals, highlighting how gradual technological advancements generally drive the crypto industry forward. For example: the MakerDao governance token, MKR, appreciated 50%[8] during the month following a proposal in late June, which would accelerate MKR’s buyback rate. Additionally, an increase in interest rates enhanced the protocol’s profitability by approximately 4x since last quarter, a trend likely to continue due to Blocktower’s Andromeda vaults–a real world asset loan facility. Similarly, the pricing of UNI and LINK tokens also increased on the back of tech rollouts–the UniswapX auction-based protocol, and Chainlink’s new cross-chain interoperability protocol, respectively. Dogecoin also appreciated in late July, likely in response to Elon Musk’s decision to change Twitter’s name to “X”, and speculation that any restructuring of the social media app could have favorable implications for the asset, given Musk’s previous statements. Lastly, Worldcoin (WLD) was listed on select crypto exchanges late in the month, and it is already trading at a fully-diluted market capitalization of more than $20bn.[9]
Exhibit 4: XRP court decision and fundamentals lifted select token valuations
The crypto recovery has come a long way since late 2022, and there are reasons to be optimistic about recent technological advancements as well as the legal and legislative backdrop. As a result, in our view, the macro outlook is now the biggest risk to crypto valuations. A soft landing for the economy would likely be positive for risky assets, including cryptocurrencies, as it should allow the Federal Reserve to reduce real interest rates. Bitcoin specifically could also appreciate if the Fed decides to tolerate a long period of above-target inflation, given Bitcoin’s role as an alternative non-sovereign money system and alternative to gold as an inflation hedge (a topic we will explore further in future work).[10] However, if the central bank decides to raise real interest rates further, or if its monetary tightening to date tips the economy into recession, the crypto recovery may pause over the near-term.
[1] For example, Bitcoin had one of the highest vol-adjusted returns among a set of global assets, while the Nasdaq and various AI-related equities or baskets had the highest vol-adjusted returns in the US equity market.
[2] For example, the Goldman Sachs Liquid Most Short basket gained 18% in July, as of July 31 2023. This basket includes stocks in the Russell 3000 Index with the highest percentage of short interest.
[3] For example, Bitcoin’s daily correlation with the S&P 500 was 30% in July, up from near zero in May.
[4] Dune analytics.
[5] According to TradeView, prices rose from a price of $0.47 just prior to the announcement to an intraday high of $0.9479.
[6] Coin Metrics as of July 31, 2023.
[7] Coindesk, “House Financial Services Committee Votes in Favor of Crypto, Blockchain Bills” (July 26, 2023), https://www.coindesk.com/policy/2023/07/27/house-financial-services-committee-votes-in-favor-of-crypto-blockchain-bills/
[8] Coin Metrics as of July 31, 2023.
[9] CoinMarketCap, as of July 31, 2023.
[10] Allowing inflation to remain high would also cause inflation expectations to rise, reducing real interest rates, which we see as a key driver of Bitcoin’s medium-term valuation.
ARTICLE DISCLOSURES
Investments in digital assets are speculative investments that involve high degrees of risk, including a partial or total loss of invested funds. Investments in digital assets are not suitable for any investor that cannot afford loss of the entire investment.
All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale.
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any investment in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. This content does not constitute an offer to sell or the solicitation of an offer to sell or buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this content to make an investment decision and any information contained herein should not be used as a basis for this purpose.
The Federal Reserve (“Fed”) is the central bank of the United States. Its Federal Open Markets Committee (FOMC), consisting of members of the Federal Reserve Board and voting members of the presidents of the regional banks in the Fed system, decides the nation’s monetary policy. Volatility refers to the annualized standard deviation of an asset’s returns. Implied volatility refers to the level of prospective volatility that would equate current option prices with those of an option-pricing model. Crypto token “burn” refers to removing circulating supply through a smart contract mechanism. Basis point refers to one tenth of one percent, or 0.1%. Correlation is a statistical measure that quantifies the relationship between two or more assets.. Real interest rates refer to the rate of return on an investment after accounting for inflation in the price of goods over the same period.
The S&P 500 Index (SPX) is a market-capitalization-weighted index that measures the performance of 500 of the largest publicly traded companies in the United States. The Russell 3000 Index (RUA) is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. The KBW Regional Banking Index (KRX) is a modified market capitalization weighted index designed to track the performance of leading banks and thrifts that are publicly traded in the U.S. The Nasdaq Composite Index (NDX) is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. The Generative AI Enablers Basket Index (CGRBGAIE) represents a weighted group of several financial instruments. Generative AI, or generative artificial intelligence, is a form of machine learning that is able to produce text, video, images, and other types of content. You cannot directly invest in an index.
This content does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors.
Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability, or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.
There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.