Market Q3 2023 Recap
During the last quarter, the CoinDesk Market Index (CMI), which covers more than 90% of the crypto market capitalization, experienced a decline of 11%. In this period, Bitcoin (BTC) performed better than the broader benchmark, with a decline of 10.9%. On the other hand, Ether (ETH) underperformed, recording a loss of 12.5% over the past three months.
To better understand these figures, it is helpful to consider their year-to-date performance. Bitcoin has shown impressive growth of 64%, while Ether has risen by 41%. This highlights the resilience of these cryptocurrencies as some of the top-performing assets in 2023. The quarterly outperformance of BTC compared to ETH and the broader CMI is consistent with the trend observed throughout the year. Institutional demand for Bitcoin ETFs continues to support BTC, while regulatory pressure on alternative tokens contributes to the divergence in the crypto market between established majors like Bitcoin and Ether, and other digital asset protocols and projects.
When examining quarterly sector performance using the CoinDesk DACS framework, trends and preferences towards larger capitalization tokens are not as clear. In Q3 of 2023, the Computing (CPU) and DeFi sectors (DCF) were relative outperformers, with gains of 3% and a decline of 8%, respectively. Conversely, the Smart Contract Platform (SMT) sector, which includes Ether, and the Culture and Entertainment (CNE) sector were relative underperformers, experiencing declines of 13% and 22% respectively. Please refer to the chart below for a detailed breakdown of sector performance in Q3 of 2023.
Regulatory news in the United States played a significant role in driving price movements during this quarter, with actions by the SEC featuring prominently. This followed regulatory enforcement actions against Coinbase and Binance earlier in June. Additionally, the filing of regulatory documents for spot ETFs by some of the world’s largest asset managers generated significant price action ahead of potential approval dates.
While July and August exhibited relatively subdued market conditions, September saw the outperformance of the DeFi, Digitization, and Computing sectors, driven by the partial Ripple court case victory earlier in the month and investor enthusiasm for AI. This propelled Chainlink (LINK), the largest token in the Computing sector and an on-chain data provider, to a 24% increase in value for the month.
September also marked the one-year anniversary of Ethereum’s successful transition to a “Proof-of-Stake” consensus mechanism. This transition has effectively reduced the computational work required to verify blocks and transactions, eliminating its carbon footprint. Thus far, the network has operated as intended, with staking assets becoming a popular means for crypto investors to enhance returns. The CoinDesk Indices Composite Ether Staking Rate (CESR), a metric used to estimate the expected income from Ethereum staking activities, averaged 4% (annualized) over the quarterly period, declining to 3.6% by the end of September.
One notable shift in the cryptocurrency landscape during this quarter is the decreased level of risk, as indicated by standard risk measures. Volatility levels have decreased, correlation with traditional equities has reduced, and there is a slightly reduced correlation among the top 30 tokens, as in the below chart.
This shift could indicate a maturation of the market, as investors become more discerning across token sectors. Alternatively, it could be a result of market illiquidity, as trading volumes continue to decline across major cryptocurrency exchanges.
Bond yields are experiencing a significant rise following a relatively hawkish September Federal Open Market Committee (FOMC) meeting. During this meeting, the summary of economic projections, also known as “the dot plot,” removed the expectation for near-term interest rate cuts. This guidance provided by the dot plot allowed the Federal Reserve to be clearer and more concise in communicating to the market that interest rates would need to be maintained at higher levels for a longer period. Although the increase in interest rates has not immediately impacted the price of digital assets, it is anticipated that the tightening of financial conditions and the strengthening of the U.S. dollar will pose additional challenges to the price appreciation of cryptocurrencies. Interestingly, the CoinDesk Bitcoin and Ether Trend Indicators have recently shown neutral to slightly negative trend signals in the early days of the fourth quarter.
The approval of a Bitcoin spot ETF could serve as a catalyst to overcome the macroeconomic headwinds caused by tightening financial conditions. Why is this the case? Firstly, it would significantly enhance accessibility, allowing a wider range of investors to easily gain exposure to Bitcoin without the complexities associated with direct purchase and storage. Similar to how gold ETFs simplified the process of gaining exposure to physical gold starting in the early 2000s, this development could shift and diversify the investor base in cryptocurrencies. The shift from tech-savvy enthusiasts to more mainstream, longer-term investors seeking diversification could potentially lead to a reduction in volatility across the digital asset market.
Moreover, the structure of an ETF would facilitate easier adoption by institutional investors, as it would delegate asset acquisition and storage to qualified custodians. This would make it more familiar and regulated for institutional investors such as hedge and pension funds.
Lastly, a Bitcoin ETF would enable investors to allocate some of their assets to Bitcoin as a store of value or an uncorrelated asset class. This could result in a significant influx of capital into the cryptocurrency market, signaling the maturation of Bitcoin from a niche asset class to a regulated and accepted component of the traditional financial system.