Graphing Digital Assets

Month in Review — April 2024

BTC Rally Haults

Following seven consecutive months of positive bitcoin performance from September 2023 to March 2024, bitcoin experienced a decline of -14.96% in April, dropping  from $71,288.90 to finish the month at $60,662.10.

Against the backdrop of new macroeconomic data as well as heightened geopolitical tensions, investors seek to de-risk their portfolios, resulting in dampened demand for bitcoin. This trend underscores the significant involvement of institutional investors in the asset class, highlighting their impact on the market.

Contrary to previous months, in April, inflows into spot bitcoin ETFs slowed, perpetual funding rates dropped, remaining negative for most of the month, and open interest decreased significantly. Until another substantial catalyst emerges to drive digital asset price action, crypto’s performance is likely to remain highly sensitive to macroeconomic and geopolitical factors (top graph). 

  1. April 2: Following the release of March U.S. manufacturing sector data, which rose much more than expected, bitcoin fell more than 6%, as U.S. Treasury yields climbed.

  2. April 12-13: U.S. authorities warned that they expected Iran to carry out an attack on Israel, heightening fears of increased and broadening conflict in the Middle East, impacting equities and crypto alike. The next day, Iran launched an attack on Israel.

  3. April 19: Choppy markets… blink and you missed it! Early on April 19th, Israel launched a counterattack against Iran, and bitcoin briefly dropped below $60,000, falling more than 6% from approximately $63,500, to $59,570, before rebounding to above $64,500 within a few hours (graph callout).

  4. April 30: Bitcoin fell below $60,000, with many investors pulling money out of cryptocurrencies in anticipation of a hawkish stance from the FOMC on future rate cuts in their April 30 – May 1 meeting. Additionally, spot crypto ETFs in Hong Kong were launched, albeit with unimpressive inflows at their debut. 

We anticipate the impending wave of crypto regulation, both domestically and internationally, to become the next potentially disruptive catalyst in the cryptocurrency market.

Source: BTC price from Coinbase.

Challenging the SEC

The SEC’s recent attempts to tighten regulations around trade activity and the crypto sector were met with retaliation from industry leaders who highlighted Gensler’s overall lack of clarity.

In February, the SEC adopted a new rule to expand the definition of a ”dealer”. On April 23rd, the Crypto Freedom Alliance of Texas and the Blockchain Association jointly filed a lawsuit against the SEC, arguing that the new rule violates the Administrative Procedures Act by unlawfully broadening the dealer definition. Blockchain Association CEO criticized the SEC for its alleged attempts to regulate beyond its authority and for ignoring cryptocurrency-related concerns raised during the compressed comment period. Crypto advocates argue that the rule’s broad language could subject a wide range of activities to regulatory oversight, counterintuitive to the decentralized nature of crypto.

This came on the heels of a separate lawsuit filed against the SEC by the National Association of Private Fund Managers, the Managed Funds Association, and the Alternative Investment Management Association alleging that the SEC vastly overstepped its authority, placing unnecessary regulatory burdens on private funds and would irrationally decrease liquidity, in violation of the Administrative Procedures Act.

Also in April, the SEC issued Wells Notices to U.S. crypto technology firms Consensys and  Uniswap Labs, outlining alleged violations of operating as unregistered broker-dealers and offering or selling unregistered securities. These companies are behind two pivotal projects in the Ethereum ecosystem: the majority of the swap volume on Consensys’ MetaMask is on the Ethereum blockchain (top graph), while Uniswap is one of Ethereum’s most dominant decentralized applications, with its all-time trading volume surpassing $2 trillion in April (bottom graph).

In response, while Uniswap’s CEO publicly expressed frustration that the SEC is going after existing reputable players rather than working to create clear and informed rules for all to follow, on April 25th, Consensys filed a lawsuit against Gary Gensler and the SEC, alleging that the SEC seeks to regulate ETH as a security, contradicting their previous declaration that ETH is not a security, in an attempt to “seize control over the future of cryptocurrency.”

As Gensler seeks to expand the reach of SEC regulatory oversight claiming it aims to enhance investor protection within the securities market, many in the industry highlight the SEC’s lack of clarity and the burdensome requirements imposed upon a broadly defined group. With both traditional and crypto players taking action against the SEC, the goal is to deter this potential stifling of innovation and market participation, particularly as it opposes the decentralized nature of the crypto ecosystem.

The Rise of Hedge Funds

At the close of 2023, estimated global hedge funds AUM surpassed $5 trillion, a new historical high (top graph). Hedge funds continue to be poised for increased allocations in 2024, positioned as a particularly attractive investment opportunity for investors.

According to Morgan Stanley’s 2024 Outlook: Hedge Funds, there is increased demand for hedge funds as alternative diversifiers in the current environment where stocks and bonds have shown a positive correlation, inflation levels remain above central bank targets, and heightened economic and market uncertainty persists. This landscape creates greater price dispersion alpha generation opportunities for hedge funds.

A Barclays’ Capital Solutions survey of 300+ institutional investors, family offices, and intermediaries confirms this sentiment, with 85% of those surveyed planning to make at least one allocation to a hedge fund in 2024, and 25% planning to increase their allocations to the asset class compared to last year (middle graph).

In its April report, J.P. Morgan Research credited multi-strategy hedge funds as driving outperformance of the asset class. Nikolaos Panigirtzoglou, managing director at J.P. Morgan observed, "Multi-strategy funds are still on the rise, producing a positive alpha for a third consecutive year in 2023.” He added, “Currently, risk markets are vulnerable due to investor positioning, expensive valuation, and underappreciated inflation risk. As such, we favor less directional hedge fund categories such as relative value, discretionary macro, and in particular multi-strategy and multi-manager funds.”

Digital asset hedge funds present an especially lucrative opportunity, trading in volatile markets and capturing various market inefficiencies, with decreased competition compared to traditional markets. Digital asset hedge funds outperformed equities hedge funds in 2023 and in Q1 of 2024 (see bottom table). While it can be noted that gains seen from fundamental and quantitative directional crypto hedge funds during this period coincided with the rally in bitcoin’s price, market-neutral digital asset funds, with uncorrelated returns to bitcoin’s price, also significantly outperformed equities during this period, which seek to make positive returns in all market conditions.

Sources: Samara Alpha Management; Statista; Barclays; Galaxy VisionTrack; Hedge Fund Research.