Crypto quarterly review and outlook for Bitcoin, Ether & Co. - 2nd quarter 2024

Focus was placed on risk management during the second quarter. Following a strong start to the year, Bitcoin entered a consolidation phase. Unlike in previous phases, altcoins did not impress, meaning we remained loyal to our Bitcoin and Ethereum positions. 

The second quarter was clearly marked by a period of risk management. After a wonderful first quarter and Bitcoin hitting a new all-time high, the market took a breather. Since mid-March, Bitcoin has consolidated within a trading range of between USD 73,000 and USD 60,000.

Unlike in other post-halving phases in the past, during which altcoins outperformed Bitcoin as it consolidated, most alternative cryptos failed to shine during this phase.  As the investment team, we therefore took the decision at the start of the second quarter to refrain from shifting into other altcoins for the time being. Our Bitcoin and Ethereum positions remain unchanged.

ARCHIP Investment Management: what happened?

With ARCHIP, we are endeavouring to expand the investment universe with new crypto assets. The following six new digital assets were added on 1 July:

• Maker (MKR)
• Aave (AAVE)
• Cosmos (ATOM)
• Synthetix (SNX)
• Render (RNDR)
• Shiba Inu (SHIB)

We will continue to expand this range over the coming quarters. In addition to the expansion of our crypto investment universe, we have also entered into a partnership with Bitcoin Suisse AG. This cooperation with Switzerland’s leading provider of crypto financial services will allow us to regularly exchange knowledge via the “Joint Crypto Advisory Board”, which is integrated within our investment process.

We have also introduced the “Digital Asset Blue Chip Index” as a benchmark for the investment solutions actively managed by us, namely the “Crypto” focus module and the “ARCHIP Crypto Certificate”. This index has been launched by Bitcoin Suisse and the index provider STOXX, a subsidiary of Deutsche Börse.

A look at the market

In our previous quarterly report, we wrote that after the first three months the outperformance posted by Ether over Bitcoin had come to an end. Following the approval of Bitcoin spot ETFs, Ether took the lead and remained ahead of Bitcoin up to 11 March with an annual performance of 72.82% measured in US dollars compared to an annual performance of 63.20% posted by its competitor. 

While the entire crypto market began to falter towards the end of March and Bitcoin subsequently consolidated, Ether lost further ground. The main reason for the underperformance of Ether was that the market increasingly priced out the prospect of the approval of an Ethereum spot ETF. By 14 May, Ether’s annual performance was still 22.49%, while as at this date Bitcoin had registered an annual return of 39.33%.

Despite the somewhat gloomy outlook, we held on to our Ethereum position and decided against reducing it. For us, it was obvious that Ethereum, as the second largest crypto asset in terms of market capitalisation and with an advanced level of market penetration, would be granted an ETF sooner or later. We considered it too risky to reduce our Ether holding within the portfolio and thus potentially being faced with the prospect of not being invested or, in our view, being underinvested in the event of ETF approval being given.

_{Source: Messari}

On 19 May, the market received the surprising news that the Ethereum spot ETFs were set to be approved. This unexpected development was immediately priced in, meaning that Ether once again surpassed Bitcoin in terms of performance. At the end of the quarter, Ether had generated a return of 46.01%, just ahead of the figure of 41.94% posted by Bitcoin.

Altcoin seasons has not arrived (yet)

We have refrained from shifting from Bitcoin or Ethereum to other digital assets or reducing our remaining cash position. Despite positive tailwinds for Ethereum (see outlook below), there have to date been no clear indications of an altcoin rally. This is also signalled by the well-known “Altcoin Season Index”. According to this index, just 22% of all top-50 crypto assets have currently succeeded in outstripping Bitcoin in terms of price performance over the past 90 days.

_{An altcoin season is considered to be upon us if 75% of the top 50 crypto assets have put in a better performance than Bitcoin over the past 90 days (as at 8 July). Source: Blockchaincenter}

The problem faced by the current altcoin market is a supply overhang. A considerable share of many altcoins is not yet circulating on the open market and will only be released as blocking periods continue to expire. The higher this proportion, the greater the supply inflation, and it is precisely this that many altcoins are suffering from.

In addition to the inflation being experienced by individual altcoin projects, the total number of new projects is also steadily increasing. Many of these projects have not even launched their own coin or token yet. This rising inflation being experienced by “alts” means that a disproportionately fast-growing token segment is having to compete for comparatively slower-growing capital flows.

Generally speaking, the entire crypto market is now structurally different to how it was in the past. For example, the traditional transmission mechanism, as known from earlier bull markets, today plays a less important role. A significant proportion of the capital that flows into the crypto market arrives there via ETFs and other financial products. The capital is “trapped” in these financial instruments to a certain extent and does not first flow into Ether and then into other altcoins following a price increase in Bitcoin as is usually the case.

A look at the focus module

A look at our focus module illustrates the observations outlined above. If Bitcoin loses, then altcoins (including Ethereum) will lose just as much – if not more. In an uptrend, however, the altcoins (except Ethereum) are barely able to keep pace with Bitcoin. During the second quarter, it would have been wisest to primarily focus on Ethereum if you wanted to invest in altcoins, with the exception of some exotic altcoins including a few memecoins.

In terms of quarterly performance, Bitcoin posted a performance of -0.55%, while that of the “Crypto” focus module stood at -0.72%. While both Bitcoin and our focus module remained almost unchanged during this period, the benchmark suffered a loss of -15.56%.

_{Overview of the “Crypto” focus module since the start of the year. Source: Maerki Baumann}

Outlook for the third quarter

In our view, Bitcoin still finds itself in a consolidation phase spanning several months. The rapid price increase from USD 42,000 to USD 70,000 still has to be digested. The primary reasons why we also want to remain invested for the third quarter include the following: 

• Ethereum spot ETFs will soon be tradeable
• Global financial liquidity is likely to rise again
• Expectations regarding interest rate cuts in the US remain realistic
• The US elections are just around the corner (the return of Trump to the White House, in particular, could prove positive for crypto assets)

Ethereum spot ETFs:

It is expected that it will be possible to trade the Ethereum spot ETFs by the end of July. It is currently anticipated that they could account for around 15% to 20% of Bitcoin ETF inflows. The consensus is also that the Grayscale product ETHE could initially represent a significant overhang, similar to Bitcoin.

It cannot be ruled out, however, that Ethereum spot ETFs could deliver a surprise in terms of net inflows. For instance, the Ethereum story may catch on more strongly with traditional investors than that of Bitcoin, which is often described as digital gold. Yet, as we know, few institutional investors hold gold.

The market capitalisation of gold stands at USD 15.9 trillion versus USD 56.4 trillion alone in the US equity market.

Ethereum has a more convincing narrative. The public blockchain acts as a technology platform and performs the role of a global settlement infrastructure for new crypto-based applications for tokenisation, stablecoins and decentralised finance. In the area of stablecoins, it can be observed that fiat currencies on the blockchain are increasingly entering the mainstream. Ethereum remains the leading blockchain for stablecoin transactions.

_{Source (as at 8 July): DefiLlama}

The more widespread that applications such as stablecoins become, the greater the demand for Ethereum will be. This is due to the fact that transaction fees are charged for using the platform. As an innovative, high-growth “tech play”, Ether could therefore represent a good fit with equities such as Nvidia, Microsoft or Apple in the eyes of traditional investors. Net inflows of USD 15 billion into Ethereum spot ETFs within the first 18 months are therefore not unrealistic.

Bitcoin versus Ethereum:

Over the past few weeks, Bitcoin has increasingly had to contend with a supply overhang. In the case of the former largest crypto exchange Mt. Gox, the liquidator has announced that repayments of Bitcoin (and Bitcoin Cash) will start at the beginning of July. At the time of the announcement, almost USD 9 billion was included in the bankruptcy estate and the first movements on the blockchain have already been executed. It remains unclear whether the creditors will sell the repaid Bitcoin, and if they do, over what time frame.

The German state, and more precisely the federal state of Saxony, has likewise created sales pressure. By mid-July, the latter had sold a total of 50,000 confiscated Bitcoin units with a value of approximately USD 3 billion. 

At present, Ethereum does not have the same obvious sources of selling pressure. Ethereum is generally also not subject to the same structural selling pressure, as Ethereum validators do not have the same operating costs as Bitcoin miners, which tends to mean less forced selling. Nevertheless, it should be mentioned that Ethereum’s current annualised issue rate over the past 30 days is inflationary at 0.51%. In comparison, Bitcoin’s annualised inflation rate currently stands at 0.85%.

Important legal information

_{This publication is intended for information and marketing purposes only, and does not constitute investment advice or a specific individual investment recommendation. It is not a sales prospectus and does not constitute a request, an offer, or a recommendation to buy or sell investment instruments or investment services, or to engage in any other transaction. Maerki Baumann & Co. AG does not provide legal or tax advice. Investors are therefore advised to obtain independent legal or tax advice concerning the suitability of such investments, since their tax treatment depends on the personal circumstances of the investor in question and is subject to change at any time. ­Maerki Baumann & Co. AG holds a Swiss banking licence issued by the Financial Market Supervisory Authority (FINMA). This publication is expressly not intended for persons domiciled in Germany or so-called U.S. persons.}
 

Editorial deadline: 19 July 2024

Maerki Baumann & Co. AG
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T +41 44 286 25 25, info@maerki-baumann.ch
www.maerki-baumann.ch