Alpha Report March Recap

Key Takeaways

1.   The broader crypto market strengthened in March(+17.5%), with the consensus speculating on the upcoming Bitcoin halving, set to occur on April 20, 2024.

2.   The Investment Team forecasts a "soft landing" in the U.S. and is constructive on risk assets in 2024. This is constructive for digital assets, especially since the Fed's March meeting confirmed FOMC's expectations of interest rates falling in 2024.

3.   The Investment Team is monitoring the probable approval(s) of a U.S. spot Ethereum ETF, Bitcoin's halving in April 2024, spot Bitcoin ETF flows, and the effects of various macroeconomic and geopolitical events on risk assets.

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Market Performance

As of March 31, 2024, the Standard and Poor's 500("S&P 500") is up +3.1% in the past month and is up +31.19% annually. Bitcoin ("BTC") is up +21.27% in the past month and is up +154.86% annually. The recent strength is primarily attributed to the positive adoption of the recently approved Bitcoin spot ETF.

The U.S. Treasury 10-year rate fell 6.68 basis points over the past month, translating to a -0.28% decrease in 10-year prices. The declining rate environment drove a 0.38% monthly gain in the U.S. Dollar. U.S. equities, U.S. High-Yield, U.S. Investment Grade, and gold rose +2.86%, +1.03%,+0.75%, and +7.18% over the last month, respectively.

As of March 31, 2024, BTC gained +21.25%, and Ethereum("ETH") gained 8.32% on a monthly basis, respectively. These returns are reflected in our Risk-Adjusted Portfolios ("RAP"), given their dominance in the marketplace. Sentiment and performance in the digital asset market (as proxied by BTC and ETH) remained positive recently, as speculation on a spot ETH ETF application approval strengthened, BTC's halving approaches, and FOMC's expectations of interest rates lowering in 2024.

The macro backdrop is constructive for risky assets (see 'Outlook' below). While two concurrent geopolitical conflicts remain a risk to the global economy and financial markets, effects appear to be currently limited to specific locales and assets. The primary near-term catalysts appear to be BTC's halving in April 2024, continued positive inflows for BTC spot ETFs, and the approval of an Ethereum spot ETF. The Team remains constructive on BTC and the digital asset market as a whole in 2024 and ahead of the halving slated for mid-Q2 2024.

Portfolio Performance

Cumulative returns across the three RAP (Balanced, Strategic, and Opportunistic) portfolios ranged from +111.88% to +153.4% for the period starting July 18, 2023 through March 31, 2024. This compares to a+16.62% return in the Standard and Poor's 500 index (S&P500) over the same period (see image below).

The main driver of recent RAP performance is attributed to the Investment Director's discretionary views. These views include the relative outperformance of SOL and MKR, as well as the Decentralized Physical Infrastructure Network (DePIN) and Artificial Intelligence (A.I.) sectors.

Recent Solana ecosystem activity drove a +40.39% gain in the past 30 days. Similarly, MakerDAO's increasing daily savings rate for their DAI stablecoin has led to a 58% gain over the past 30 days.

Market Events

Solana/Ethereum

Recent activity and price appreciation have put Solana in the spotlight as market participants speculate on a possible Solana/Ethereum flippening, defined as a change in relative market capitalization leadership. As of this writing, Ethereum's market capitalization is roughly five times that of Solana, suggesting a flippening in the near-term, while possible, is unlikely.

Messari notes significant absolute and relative active address growth on Solana, which is driven by Solana's lower costs. This has supported substantial DeFi and NFT activity on Solana, where the volume on Solana's DEX aggregator Jupiter eclipsed that of Ethereum's Uniswap V3.Additionally, Solana-based Orca became the second-largest decentralized exchange, trailing Ethereum's Uniswap V3.

Recent activity on Solana-based platforms is driven by users' desire for lower fees relative to Ethereum. Messari acknowledges Ethereum's dominance from market capitalization and user base perspectives. The Team is cognizant that Solana's ecosystem growth is primarily driven by smaller market participants that may transact small notional amounts at a relatively higher rate. Moreover, the Ethereum blockchain enjoys a critical mass of users and developers that support its intrinsic value. On balance, the Team is constructive on overweight exposure to Solana on a medium to long-term basis and long Solana/short-Ethereum exposure on a short-term, relative basis.

Ethereum's Spot ETF

Grayscale is optimistic about the approval of spot Ether ETFs in May despite concerns over SEC engagement. Chief Legal Officer Craig Salm believes the ETFs should be approved, citing resolved issues from spot Bitcoin ETF approvals. However, incorporating staking into spot Ether ETFs presents a challenge. Analysts have lowered the odds of approval to 25%. Ether Futures ETF approval and regulation may boost spot Ether ETF chances. Various applicants await SEC decisions by May 23.

As of March 27, Fidelity, a $4.5 trillion asset management firm, has filed for a Spot Ethereum ETF with staking included. Following the success of the first Spot Bitcoin ETF, many anticipate Ethereum's turn. Despite SEC concerns, Grayscale remains optimistic about Ethereum's approval. Time will reveal the SEC's stance on Ethereum spot ETFs being introduced into the market.

SEC vs. Coinbase

The SEC sued Coinbase for allegedly operating as a non-registered broker and exchange. Judge Failla ruled on March 27, 2024, that Coinbase's Staking Program involved unregistered securities. The SEC's claim against Coinbase's Wallet app was dismissed. Coinbase is challenging the SEC and plays a key role in Wall Street's crypto adoption. SEC Chair Gensler criticized platforms like Coinbase for mixing functions.

Judge Katherine Polk Failla denied most of Coinbase's motion to dismiss the SEC lawsuit, setting an April 19 deadline for a case scheduling plan. The SEC accuses Coinbase of violating securities laws by offering trading and staking services to the public and acting as an unregistered brokerage. The judge found that while some tokens on Coinbase Wallet might be "investment contracts," dismissing the claim that Coinbase acted as a brokerage. Other aspects of the lawsuit can proceed, with the judge citing previous cases against crypto companies. The judge highlighted that customers buying tokens on Coinbase are investing in the token's digital ecosystem, which is tied to its value. This emphasizes the resale value in secondary markets and the continuing support for the token's blockchain. The judge also noted that token developers promote reinvestment of capital raised through token sales. Such cases often survive motions to dismiss, as seen in the SEC's case against Ripple. The judges must consider the allegations as facts, with arguments on the case details to follow.

Ripple's victory against the SEC leads us to believe, although Coinbase's dismissal was denied that ultimately, they will win their case against the SEC as well.

Outlook

Coupling the Federal Open Market Committee's (FOMC)anticipated rate cut decisions happening throughout the latter half of 2024, in conjunction with the successful launch of a Bitcoin spot Exchange-Traded Fund(ETF) and the probable approval of an Ethereum spot ETF in the future, the Investment Team holds a positive view on the cryptocurrency market's prospects for the remainder of 2024.

Numerous market cycle indicators, such as the Pi Cycle, Mvrv Z-score, on-chain analytics, Google trends data, and app store rankings, all point towards our Team's belief that this cycle is still evolving and has not yet reached the peak euphoria typically associated with cryptocurrency market cycle peaks.

News

Fetch.ai, SingularityNET, and Ocean Protocol tokens surge amid proposed merger plans.

New BlackRock tokenized fund garners $160 million in deposits.

Judge: SEC's claims against Coinbase to move forward

KuCoin sees nearly $800 million in net outflow following DOJ indictment.

House GOP: SEC must first decide if ETH is a security for Prometheum to custody it

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