Graphing Digital Assets

Month in Review — May 2024

Crypto in the Political Spotlight?

May was undeniably a pivotal month for digital assets in the United States, marked by a more crypto-friendly climate in D.C. that facilitated significant progress in the future regulation and adoption of digital assets in the U.S. 

Key developments include:

  1. Senate Votes to Appeal SAB 121: On May 16th, the Senate voted to overturn SAB 121, an SEC accounting rule which restricts banks from providing digital asset custody services. Although ultimately vetoed by Biden, this decision saw bipartisan support, with 12 Democrats joining 48 Republicans in a significant pushback against what many perceive as the SEC’s regulatory overreach in the digital assets sector.

  2. SEC Approves Spot ETH ETFs:  On May 20th , a senior ETF analyst at Bloomberg announced they had increased the probability of ETH ETF approval from 25% to 75%, in response to “chatter that the SEC” was revising its stance on ETH ETFs. The announcement immediately triggered a rally in the prices of major cryptocurrencies (top graph) and a surge in ETH’s realized and implied volatility (bottom graph). When the SEC approved the listing of eight spot ETH ETFs three days later, ETH’s implied volatility declined, indicating a reduction in market uncertainty (bottom graph).

  3. House Passes Historic Crypto Bill - FIT21: On May 22nd, the House of Representatives passed the Financial Innovation and Technology for the 21st Century Act, a comprehensive bill for digital asset regulation that delineates regulatory authority between the SEC and CFTC. This has been considered the most significant legislative accomplishment in Congress to date for digital assets as it provides long-awaited regulatory guidelines, reflecting the growing institutional interest in the asset class. The Bill now awaits approval by the Senate.

Amid this legislative activity, digital assets are emerging as a central topic in this year’s presidential election. Donald Trump declared his support for cryptocurrency, even accepting cryptocurrency donations. Conversely, President Biden’s vetoing the repeal of SAB 121 brought much criticism: “In the excessively polarized political climate we find ourselves in today, the ability to attract an expanding community—such as the crypto ecosystem—can mean the difference between winning and losing narrow elections” (Fortune).

While digital assets may have entered the political spotlight, it remains to be seen how much Washington and the mainstream will embrace the asset class once the election is over. In the meantime, our hope is that the heightened focus will further validate these assets and will serve as a positive catalyst for digital asset regulation and adoption.

End of day pricing for BTC, ETH, SOL, and DOGE sourced from Coinbase; ETH hourly volatility data sourced from Deribit Metrics.

Fear and Greed in the Markets

While few will admit it, emotion often controls investment decisions and our perception of the market, with fear and/or greed being the strongest driving forces.

With that in mind, CNN Business developed the Fear and Greed Index (FGI), a stock market sentiment indicator that gauges investors' emotional extremes to assess their risk tolerance and how much they're willing to pay for stocks. It assumes that fear drives down stock prices, while greed increases their value, basing their findings solely on technical indicators.

Alternative.me adapted the index for Bitcoin and other large cryptocurrencies. In addition to the technical indicators used by FGI, the crypto index relies on social media, trends, and surveys, as this market is particularly sentiment-driven due to its high retail investor participation, lack of many fundamental valuation models, and overall speculative nature.

Comparing the two indices since April (top graph), we see that, in the absence of significant crypto-specific developments, the crypto index generally corresponds to equities, showing heightened sensitivity to macroeconomic factors. We see this as both indices reacted similarly to macro shocks related to geopolitical tensions and stagflation risks in April. However, the latter part of May saw significant crypto-specific influences, leading to the divergence of the two indices. For example, from May 20 to May 21, the crypto index reflects the market reacting to Bloomberg analysts’ significantly increasing their prediction of a spot ETH ETF approval. Conversely, the S&P500 and Dow Jones declined towards the end of the month due to inflation concerns and rising treasury yields. The FGI shows equities sentiment continuing to fall further towards Fear while the crypto index maintained its Greed levels, bolstered by the crypto-specific catalysts in the month.

The bottom graph is a live look at the crypto fear and greed index. More information is available here. To see how the FGI compares, click here. 

Latest Crypto Fear & Greed Index

Tokenizing Real World Assets

We joined other leading digital asset and blockchain professionals last month at the 10th annual Consensus conference in Austin, TX. A key takeaway this year was the accelerating growth of real-world assets tokenization.

Tokenization of real-world assets (RWAs) is gaining significant traction as institutions and individual investors recognize the potential for enhanced liquidity, transparency, and accessibility to various asset classes. This is especially meaningful to us at Samara Alpha as the pioneering team behind the tokenization of private equity with KKR and Hamilton Lane. 

At the end of May, the value of tokenized RWAs across private credit, U.S. treasuries, commodities, and stablecoins totaled $171.6 billion (top chart; this sum excludes real estate, estimated at ~$200 million as of February, private equity, and other asset classes whose total tokenized value was not available through May). Industry experts estimate the total value of tokenized assets to reach $10 trillion by 2030.

Increased institutional involvement has particularly propelled the growth of tokenized U.S. Treasuries, currently valued at $1.5 billion (bottom graph). The first tokenized treasury fund, BENJI, was launched by Franklin Templeton in April 2021 and currently accounts for $357 million of the total. Most recently, BlackRock launched its first tokenized treasury fund, BUIDL, on March 20th, currently accounting for $456 million of the total. Since the launch, the value of tokenized treasury assets has grown 78.2%.

Tokenized private credit is experiencing a similar trajectory, with total tokenized assets increasing 23.5% in 2024 as of the end of May.

RWA tokenization holds great promise for streamlining existing financial processes and making traditionally illiquid assets accessible for trading. International organizations, including the International Monetary Fund, the World Bank, and the Bank for International Settlements are actively collaborating on tokenization initiatives.

With an increasing number of institutions recognizing the benefits of transacting on the blockchain network, RWA tokenization is poised for significant growth, led by U.S. Treasuries, private credit, and commodities. As the technology and regulatory frameworks continue to evolve, the market for tokenized assets is expected to expand rapidly, offering new opportunities for investors and reshaping traditional financial markets.