Grayscale Research Report: Bitcoin and the cryptocurrency market faced pressure in June, but the fundamentals of the assets remain unchanged

Source: Grayscale Research Team

Compiled by: Web3 Scent Observation, Coin World

According to Coin World, the Grayscale Research team stated that the Bitcoin and cryptocurrency markets were under pressure in June due to selling pressure from multiple parties, but the fundamentals of the assets remained largely unchanged. Grayscale Research expects that spot Ethereum exchange-traded products (ETPs) will begin trading in the third quarter of 2024. They believe that, barring any significant changes in the macroeconomic outlook, cryptocurrency valuations may recover in the coming months.

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In June 2024, the cryptocurrency market retreated, partly due to selling pressure on Bitcoin triggering a broader decline in investor risk appetite, but Grayscale Research maintains a constructive outlook on the asset class.

Returns on traditional assets varied in June as the market digested various new risks. Some market segments performed poorly due to these risks, including U.S. homebuilders (due to signs of a cooling housing market), the Chinese stock market and certain industrial metals (due to renewed weakness in the Chinese economy), and French stocks (due to potential government changes).

In contrast, global bonds, emerging market stocks excluding China, and the S&P 500 index performed relatively well, while the Swiss franc—often a barometer for rising international risks—also fared well. Bitcoin and Ethereum fell approximately 10%, making them among the poorer-performing market segments on a risk-adjusted basis.

Chart 1: Cryptocurrency valuations fell in June, with mixed performance among traditional assets

According to Grayscale Research, various sources of actual and anticipated selling pressure contributed to Bitcoin's decline this month. The weakness in Bitcoin also seemed to spill over into other cryptocurrencies. The main sources of new selling pressure include:

· Mt Gox Legacy: The trustee of the Mt Gox bankruptcy estate announced on June 24 that it would begin repaying Bitcoin and Bitcoin Cash starting in early July 2024. As of the time of writing, the estate holds Bitcoin valued at $8.9 billion. It remains uncertain whether creditors will convert their proceeds into fiat currency and the timeframe for such conversions.

· German Government: A German government agency has begun liquidating Bitcoin seized in 2013. According to data provider Arkham Intelligence, wallets associated with the German government sent nearly 4,000 Bitcoin (worth about $220 million) to exchanges during June.

· U.S. Government: On June 26, the U.S. government sent 3,940 Bitcoin (worth $240 million) to a Coinbase Prime deposit account, which were seized from a wallet linked to a convicted drug dealer. The last confirmed sale by the U.S. government was in March 2023, when it sold 9,861 Bitcoin, valued at $216 million at the time.

· U.S. Spot Bitcoin ETP: In the latter half of June, these products experienced a net outflow of $581 million, following net inflows in May and early June.

In addition to these new sources of selling pressure, Bitcoin miners continued to reduce their holdings: according to Glassnode, miners sold approximately 1,560 Bitcoin (about $100 million) over the past 30 days. On the other hand, publicly traded company Microstrategy reportedly purchased nearly 12,000 Bitcoin (worth $786 million) in mid-June, potentially supporting Bitcoin's price.

While these short-term fund flows may have temporarily impacted Bitcoin's price, we believe the fundamentals of the asset remain unchanged. For example, despite a modest strengthening of the dollar, the market has priced in expectations for further rate cuts by the Federal Reserve this year and next to address further easing of consumer price inflation. Additionally, adoption metrics for certain smart contract platforms show continued growth. For instance, as shown in Chart 2, the daily active users of the top ten constituents of our smart contract platform cryptocurrency sector (by market capitalization) have continued to increase in recent months.

Chart 2: Daily Active User Growth of Major Smart Contract Platforms

Moreover, there seems to be further progress in the listing of spot Ethereum ETPs in the U.S. In late May, the Securities and Exchange Commission (SEC) approved the 19b-4 form applications of several issuers to list these products on U.S. exchanges. On June 13, SEC Chairman Gensler stated that the regulator might approve the remaining applications "sometime this summer." While the timing remains uncertain, for the purposes of market analysis, Grayscale Research assumes these products will begin trading in the third quarter of 2024.

Similar to the spot Bitcoin ETP launched in January 2024, the Grayscale Research team expects the new Ethereum products to generate significant net inflows (albeit lower than Bitcoin ETPs), potentially supporting the valuations of Ethereum and tokens within its ecosystem.

Although both Bitcoin and Ethereum fell last month, they outperformed the broader cryptocurrency market, which is measured by the FTSE Grayscale Cryptocurrency Sector Index Series (see Chart 3). Our Cryptocurrency Sector Market Index (CSMI)—which measures the performance of the entire digital asset market—fell 19% in June. The worst-performing market segment this month was the consumer and cultural cryptocurrency sector, primarily due to the weakness of memecoins (tokens mainly used for entertainment value and associated with internet culture). The currency cryptocurrency sector, including Bitcoin, and the financial cryptocurrency sector performed relatively well.

Chart 3: Widespread Decline in the Cryptocurrency Industry

Despite most token prices falling in June, a notable exception was Toncoin (TON), which is the third-largest asset in our smart contract platform cryptocurrency sector (by market capitalization) and a component for the next quarter. The TON blockchain is integrated into Telegram's secure messaging application, with the potential to leverage Telegram's 900 million monthly active users, making it an attractive platform for application developers. Partly driven by its Open League token incentive program and the increasingly popular Telegram games, the network's daily active users grew from an average of 27,000 in January to over 400,000 in June.

Additionally, Tether's USDT stablecoin launched on the TON network in April 2024 and was quickly adopted. In March, the Financial Times reported that Telegram was considering an initial public offering (IPO), which we believe could impact the value of public blockchain tokens integrated with applications.

Despite the setbacks in the cryptocurrency market in June, Grayscale Research remains optimistic about the valuation outlook for the remainder of the year. In our view, the macro backdrop is generally favorable for the cryptocurrency asset class, with economic growth, potential Federal Reserve rate cuts, and a strong stock market all being supportive factors. While a U.S. economic recession could put pressure on the cryptocurrency market, a slow but positive growth period remains the central scenario for the economy.

Furthermore, the approval of Ethereum ETPs has the potential to familiarize more investors with the concepts of smart contracts and decentralized applications, thereby recognizing the potential of public blockchains in transforming digital commerce.