Graphing Digital Assets

Month in Review — October 2024

“Uptober” in Full Effect

Despite a slow start, "Uptober" lived up to its name, with bitcoin closing the month up 10.89%, significantly outpacing U.S. equities, as the S&P 500 TR index recorded a 0.91% loss. On October 29, BTC came within $200 of its all-time high, crossing $73k for the first time since March. Experts are speculating what may have caused the surge, some turning to the potential promise of a friendlier crypto regulatory environment post election, while others are pointing to concern over a monetary policy that may be ill-equipped to correct inflation, regardless of which candidate wins.

Bullish sentiment ahead of the election is evident in the derivatives markets. CME BTC options saw an uptick in activity at October’s end, with institutions placing significant optimistic post-election bets. Data from Kaiko also highlights a high volume of bullish positions on Deribit’s November 8 options contract (top graph), suggesting traders are poised for potential new highs post-election. Notably, while bitcoin's price is approaching its all-time high, the perpetual swap funding rates are significantly less elevated compared to earlier in the year when they were at extreme levels (bottom graph). This suggests that while there is bullish sentiment, traders are not excessively leveraged, which could support a continued upward outlook with lower risk of a major correction.

Bitcoin’s role as a potential inflation hedge likely contributed to October’s rally. Like gold, which has historically played a similar role and also saw gains in the month, bitcoin is increasingly viewed as a safeguard against economic uncertainty. With doubts surrounding U.S. monetary policy’s effectiveness in combating inflation, bitcoin demand may persist amid fears of broader economic turbulence.

Key levels to watch include $74,000, a potential breakout point for bitcoin. With next week’s election, the FOMC meeting, October’s economic data releases, and ongoing geopolitical tensions in the Middle East, investors are positioning for heightened volatility.

Source for top graph: Kaiko Options data. BTC options contracts on Deribit expiring on November 8, 2024 – 3 days after the U.S. Presidential election. Source for bottom graph: Bitcoin Magazine as of October 31, 2024.

Growing Interest in Digital Asset Hedge Funds

In October, AIMA and PwC released their 6th Annual Global Crypto Hedge Fund Report, surveying both traditional and crypto hedge funds, revealing a positive trend in hedge fund involvement in digital assets. We highlight several key findings below.

Traditional hedge funds are increasingly investing in digital assets, with 47% of funds surveyed reporting exposure, marking a 29% increase from last year. Given that traditional hedge funds manage more than $5 trillion in assets globally, this trend is a promising indicator for future capital inflows into the ecosystem.

The uptick in traditional fund participation can be attributed in part to the launch of exchange-traded products (ETPs), such as spot bitcoin ETFs in the U.S. and Asia, as well as increasing regulatory clarity. Notably, in October, the SEC approved options listings for spot bitcoin ETFs on the NYSE and Cboe, following BlackRock’s IBIT approval on Nasdaq. These developments are likely to deepen traditional hedge fund engagement, opening new avenues for digital asset speculation and risk hedging.

The digital asset market is maturing, as evidenced by a shift in preference towards derivatives over spot trading among surveyed funds. 58% of traditional hedge funds surveyed invest in digital asset derivatives (top graph), up from 38% last year. This trend likely results from the availability of more suitable trading products and reflects the growing sophistication of digital asset trading strategies.

Traditional and digital asset hedge funds reported increased interest in digital assets from institutional clients, with demand 43% and 85% respectively within the past year (bottom graph). All funds cited regulatory uncertainty as the biggest risk for digital assets at present; however, with expected improvements in regulatory clarity, more inflows from hedge funds into digital assets can be expected.

While traditional hedge fund participation is expected to drive greater capital flows and market maturation, crypto-native funds retain a competitive edge. With broader access to diverse trading venues, DeFi opportunities, and specialized strategies, these funds are well-positioned to navigate complexities and capitalize on exclusive yield-enhancing and arbitrage opportunities.

Source: PwC & AIMA 6th Annual Global Crypto Hedge Fund Report, October 2024.

Stablecoins: A Catalyst for the Next Wave of Innovation

In October, we attended the RWA Summit in New York City. A recurring topic at the event was the importance of stablecoins in the financial ecosystem, particularly as institutions explore the digital asset space. Stablecoins are experiencing impressive growth and rapid adoption as they establish themselves as a key gateway to digital assets for both institutions and individuals.

Stablecoin Check-In — Recent Key Developments and Milestones

  • Market Cap: As of October, the total market capitalization of stablecoins has continued its ascent, exceeding $172.7 billion and increasing 32.9% in 2024.

  • New Launches: In October, Ripple and Agora launched dollar-pegged stablecoins, while Visa announced plans to launch a platform in 2025 to assist banks in issuing fiat-backed stablecoins. There are many more stablecoin launches to come.

  • Tether (USDT): Tether, issuer of the largest stablecoin by market capitalization (USDT), reported impressive growth with Q3 earnings of $2.5 billion. Demand for USDT is on the rise, evidenced by a significant increase in the number of users. Q3 alone saw the creation of 36.5 million new USDT on-chain wallets and accounts (top graph). This surge increases global access to the U.S. dollar.

  • Acquisition Activity: Payment service provider Stripe is going all in on stablecoins. In October, Stripe finalized a deal for a $1.1 billion acquisition of stablecoin platform Bridge, a startup launched just three years ago.

  • Impact on U.S. Treasuries: In October, the U.S. Treasury noted in a report that the growth in stablecoins has resulted in a modest increase in demand for short-dated Treasuries. Notably, stablecoin issuers have emerged as significant holders of U.S. Treasuries, surpassing Germany, Mexico, and South Korea (bottom graph).

Stablecoins are positioned to reshape both the institutional and retail financial landscape, enhancing the efficiency of outdated traditional banking systems and providing solutions for the unbanked. Stablecoins are a catalyst for a wave of innovation and tokenization and we are merely at the beginning of this journey.

Source for top graph: Tether Insights Vol 1, October 16, 2024.
Source for bottom graph: Bitwise, as cited in The Block.