Grayscale interprets the July cryptocurrency market the market share of altcoins increases, and the future trend of the overall market depends on the US economy.

Author: Zach LianGuaindl Translation: Luffy, Foresight News

Since the end of 2022, there have been clear signs of recovery in the digital asset market, and the cryptocurrency industry is benefiting from technological and legislative progress.

Macroeconomic factors may be the biggest risk to the current cryptocurrency market. Recent economic data has shown low inflation and stable growth, which greatly reduces the possibility of an economic recession. The market’s expectation of a “soft landing” has boosted the previously lagging risk assets such as crude oil and regional banking stocks.

If the US economy can achieve a soft landing, the rebound in the cryptocurrency market can continue. However, if the economy falters or the Federal Reserve further raises interest rates, the cryptocurrency recovery may pause in the short term.

Although Bitcoin experienced a brief consolidation in July, the momentum of other risk assets further expanded under the push of the expectation of a “soft landing” in the US economy: that is, gradually bringing inflation back to the target level without a recession (Chart 1). We believe that the cryptocurrency market may benefit due to the correlation between mainstream tokens and risk assets, as well as various favorable factors in the industry. However, a soft landing is not a certainty, and it has increasingly become a consensus, so the market has already partially priced in the benefits of a soft landing.

In addition to regulatory progress, the near-term prospects of cryptocurrencies may largely depend on whether the expectation of a soft landing can be sustained. If the upcoming economic data continues to support the argument for a soft landing, the rebound in mainstream tokens may continue. However, if the economy falters or the Federal Reserve further raises interest rates, the cryptocurrency recovery may pause in the short term. Until the outcome is determined, the cryptocurrency market may experience significant fluctuations in altcoins, as seen in the past month.

Chart 1: Recent optimism about a soft landing

Last month’s data and signals from the Federal Reserve supported the view that the economy could rebalance without entering a recession. Inflation has further slowed, especially for “core” indicators (excluding volatile food and energy prices). Despite low unemployment, strong job growth, and a decrease in the number of people claiming unemployment benefits, there are signs of a slowdown in economic recovery. In a press conference after the July 25-26 FOMC meeting (Federal Reserve monetary policy meeting), Powell stated that Fed staff projected that the economy would not enter another recession.

In the financial markets, the prospect of a soft landing has given rise to new performing stock portfolios. In the year leading up to June 1 of this year, the performance of Bitcoin, the Nasdaq Composite Index, and AI-related assets outperformed the broader market, benefiting from the launch of AI tools including ChatGPT (public blockchain technology may provide solutions to some challenges in AI). However, during July, the leadership position shifted to previously lagging assets, including US regional bank stocks and crude oil (Chart 2). It is worth noting that many of the top-performing stocks in the US stock market are heavily shorted, indicating that many active investors are not buying into the idea of a soft landing.

Chart 2: Assets that lagged at the beginning of the year performed better in July

Bitcoin and Ethereum fluctuated within a small range and fell slightly compared to the previous month, as the dominant force in the market has shifted from technology-related themes to other areas. Compared to earlier this year, there are fewer driving factors for Bitcoin, such as concerns about regional banks (March 2023) and optimism about the approval of spot ETFs (June 2023). The actual volatility and implied volatility of cryptocurrencies have both reached historical lows (Chart 3). At the same time, their correlation with the S&P 500 index has rebounded after experiencing a decline in the first half of the year. Bitcoin’s on-chain transaction fees decreased again in July and steadily declined after a surge of interest in ordinals in May. In contrast, Ethereum transaction fees increased in July, and Gas prices and Maximum Extractable Value (MEV) rewards skyrocketed on July 30th after the attack on the Curve protocol.

Chart 3: Decrease in BTC and ETH volatility

Throughout July, “altcoins dominance” increased, and their volatility was higher than that of Bitcoin and Ethereum. We believe that the main catalyst was the court ruling on July 13th by the US District Court in the SEC v. Ripple Labs case. In the case, the judge ruled that certain sales to institutional investors met securities trading standards and should be registered with the SEC, while certain sales to the public did not. It is worth noting that the court stated that Ripple’s native token XRP “is not itself an investment contract as a digital token.” The price of XRP rose in response, roughly doubling, although it declined at the end of the month, it still increased by 48% compared to June. The clarification of XRP’s legal status has driven the prices of other tokens, including XLM, SOL, OP, and MATIC. In addition to the XRP ruling, the bipartisan group of lawmakers continues to make progress on bills related to cryptocurrency market structure and stablecoins.

The performance of other digital assets is closely related to changes in the fundamentals of protocols, highlighting how incremental technological progress is driving the development of the cryptocurrency industry. For example, MakerDAO governance token MKR rose by 50% within a month after a proposal was made at the end of June. In addition, rising interest rates since last quarter have increased the profitability of the protocol by about four times, and this trend may continue due to Blocktower’s Andromeda treasury (a real-world asset lending tool). Similarly, the prices of UNI and LINK tokens have also risen with the advancement of technology – UniswapX protocol and Chainlink’s new cross-chain interoperability protocol, respectively. Dogecoin also rose in late July, possibly due to Elon Musk changing his Twitter name to “X”. Finally, Worldcoin (WLD) was listed on cryptocurrency exchanges at the end of this month, and its fully diluted market capitalization has exceeded $20 billion.

Figure 4: XRP court rulings and fundamental improvements have driven some token price increases

Since the end of 2022, the recovery of cryptocurrencies has achieved noticeable results, and we have reason to be optimistic about recent technological advancements as well as legal and legislative progress. Therefore, we believe that the macro outlook is now the biggest risk facing the cryptocurrency market. An economic soft landing could be beneficial to risk assets, including cryptocurrencies, as it may prompt the Federal Reserve to lower real interest rates. Considering Bitcoin’s role as an alternative non-sovereign currency system and a substitute for gold in combating inflation, if the Federal Reserve decides to tolerate long-term inflation above its target, Bitcoin may also appreciate. However, if central banks decide to further raise real interest rates, or if the economy enters a recession, the recovery of cryptocurrencies may temporarily pause in the short term.

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