New in Digital Assets: October 2023

The month of October was defined by continued optimism about the prospect of a spot bitcoin (BTC) ETF being approved by the SEC. Coupled with the U.S. Federal Reserve’s (Fed) decision to keep the federal funds rate unchanged at a range between 525 and 550 bps, crypto markets in general, and bitcoin in particular, closed the month on a strong foot. BTC recorded a monthly gain of 28.5%, its largest increase since January 2023, and decoupled from the broader stock market as its correlations to the S&P 500 dropped to historically low levels.1

October also saw the introduction of ether (ETH) futures ETFs to the U.S. market.2 Despite this, ETH’s performance was relatively more subdued compared to bitcoin, registering an 8.6% monthly gain over the previous month. Meanwhile, Solana (SOL) and Chainlink (LINK) reached highs not seen since May 2022. SOL closed the month at US$38.40, marking a 79.8% monthly gain, while LINK closed at US$11.40, a 38.7% increase.3

The performance of SOL and LINK can be attributed to broader market sentiment and technological acknowledgments within these ecosystems. Both feature vibrant developer communities and have made notable progress in partnerships and collaborations. Solana stands out as an exceptionally efficient computing platform, minimising transaction costs even in times of network congestion, enabling near-instant settlement, and providing a single-layered ledger with no scalability constraints. Additionally, Solana developers have expanded their software implementation clients to prevent faults in network liveliness. These advancements and efficiency gains have garnered attention from major players like Visa, who are now testing stablecoin payments on the Solana network, and Shopify, who now offers Solana-based payment infrastructure to their customers. Meanwhile, Chainlink has continued to solidify its position as a leader in providing offchain services and computation. Established pillars of global financial infrastructure, such as the SWIFT banking system, are actively exploring partnerships with Chainlink to facilitate cross-chain value transfers across various public and private blockchains.

The surge in BTC’s price can be linked to several key factors: anticipation of a spot BTC exchange-traded fund (ETF) in the U.S., recognition of BTC as a global safe haven in a time of geopolitical uncertainty, and Bitcoin’s fourth halving event which will reduce the issuance of new BTC by 50% and which is expected to occur in April 2024.4

The slew of pending applications for spot BTC ETF products has triggered an overwhelmingly positive market response as investors anticipate these products to give rise to net new demand for BTC, especially from pools of capital that have thus far been unable to access bitcoin in a compliant manner. Investors were given a glimpse of what the reaction to an official confirmation of a spot ETF might look like when a publication in mid-October falsely claimed that the SEC had approved one of the pending ETF applications. Though this headline was retracted within minutes, it catalysed a 10% surge in BTC’s value.

BlackRock CEO Larry Fink also provided a catalyst for bitcoin as he commented that bitcoin’s rally could be viewed as a flight to quality amidst mounting geopolitical tensions in the Middle East.5 This perspective reflects a growing appreciation of BTC’s role as a robust and apolitical asset, particularly valuable due to its stateless nature and provably scarce supply.

Given the anticipation of new bitcoin demand flooding the market in addition to institutions embracing BTC’s value proposition, the bitcoin dominance—a measure of bitcoin’s market capitalisation in relation to the total crypto market cap—reached 52%, its highest level since April 2021.6 The rise in BTC dominance follows a well-established pattern in previous market cycles, where bitcoin typically gains market share in the lead-up to the halving.

News & Headlines

The SEC Does Not Contest the Court’s Ruling Over Grayscales GBTC Product

In August 2023, the D.C. Circuit Court of Appeals ordered the SEC to review Grayscale Investment’s application to convert its flagship Grayscale Bitcoin Trust (GBTC) into an ETF, calling the grounds on which the SEC had previously rejected the application “arbitrary and capricious.7 The SEC had until midnight on Friday, October 13th to decide whether to challenge the court’s ruling, but the SEC allowed that deadline to pass without filing an appeal.

Experts in the industry contend that the absence of an appeal could potentially clear the path for the long-awaited approval of a spot BTC product. Many are keeping a close eye on any possible communication between the two entities in the days and weeks to come. The optimism surrounding Grayscale’s case combined with news that the SEC is working with numerous other applicants to make amendments to S-1 filings for spot BTC ETF applications points to a growing likelihood of approval of spot BTC ETF products between late Q4 2023 and early Q1 2024.

ETH Futures Go Live and Are Now Accessible for U.S. Consumers

Several U.S. asset management firms launched ETFs that offer exposure to ETH futures contracts in the U.S. Most of these funds invest exclusively in near-dated ETH futures contracts which trade on the Chicago Mercantile Exchange (CME). The launches of these products represent a significant milestone as Ether becomes only the second cryptoasset to be made accessible to investors through traditional brokerage accounts in the U.S. Though trading volumes across these products have been relatively muted in their first month of trading, they are viewed by many as a necessary precursor for a spot ETH ETF to be considered for listing on U.S exchanges.

Coinbase Launches an International Perpetual Futures Exchange

Amidst its ongoing case with the SEC, Coinbase has begun to explore business opportunities outside of the U.S. Coinbase has identified the United Kingdom, the European Union, Canada, and Brazil as potential target markets. While the move to expand internationally will allow Coinbase to access larger groups of potential consumers, it will also enable Coinbase to launch products that are competitive with those of its international rivals.

Recently, Coinbase International Exchange received regulatory approval from the Bermuda Monetary Authority (BMA) to launch perpetual futures trading on its Coinbase Advanced platform. The offering, which was formally launched in October, is specifically designed for qualified retail customers outside the U.S. and features contracts for BTC, Litecoin (LTC), ETH, and XRP, all settled in the USDC stablecoin.

Perpetual futures contracts offer Coinbase a chance to enter a market that has witnessed noteworthy adoption and by some measures accounts for approximately 75% of global crypto trading volume.8

BlackRock Continues to Experiment With Tokenised Assets

BlackRock recently utilised JPMorgan’s Tokenised Collateral Network (TCN), a private blockchain application, to tokenise shares of one of its money market funds. These tokenised shares were then provided as collateral for an over-the-counter (OTC) derivatives trade with Barclays Bank, marking the first live client OTC derivative transaction facilitated by TCN.

Such advancement simplifies the use of money market fund shares as collateral, removing the need for prior cash conversion. It also enhances operational efficiency and bolsters market stability by enabling swifter mobilisation of funds, resulting in improved capital efficiency and the creation of new sources of liquidity for margining. Notably, the collateral transfer between BlackRock and Barclays took one second to post on the blockchain, a significant advancement over the potentially protracted processes that may take one or more days to settle.

Related Funds

EBTC: The Global X 21Shares Bitcoin ETF (EBTC) invests in physical Bitcoin to provide exposure to the price of Bitcoin in Australian dollars.

EETH: The Global X 21Shares Ethereum ETF (EETH) invests in physical Ethereum to provide exposure to the price of Ethereum in Australian dollars.