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Are we entering a bull market?
There’s been a lot to digest in the crypto markets this month. Rate cuts from the world’s largest central banks; PayPal allowing businesses to buy, hold, and sell crypto; BNY Mellon approved for crypto custody; SEC approval of BTC ETF options; and even a former US president buying burgers with bitcoin.
These factors and others, including the ongoing institutional acceptance of crypto, contributed to bitcoin (BTC) having its best September since 2012. And the short-term outlook is strong, especially considering October has historically proven to be a very good month for prices, with BTC averaging over a 28% return for that month since 2010.
Source: Hashdex Research, Messari (from July 31, 2010 to September 29, 2024)
But does the strong September performance, and a potentially strong start to the fourth quarter, mean that we’ve now entered crypto’s next bull market?
If we look at past BTC cycles, then the short answer is yes. Since the first Bitcoin halving in 2012, BTC has tracked three phases: a bull cycle of about a year, then a bear phase of 13 months, followed by a longer recovery phase of 22 or 23 months before once again entering a year-long bull market. September is the 22nd month of the current recovery phase, which began after the November 2022 bottom, suggesting we are indeed entering—or at least very close to—the next bull market phase.
Source: Hashdex Research, TradingView (accessed September 30, 2024)
The two “E’s” on everyone’s mind
There are, of course, factors that could impact how quickly this bull market charges forward. Arguably the two most important are 1) the pace of easing and 2) the election outcomes.
Easing: In addition to the Fed’s rate cuts this month, China also cut its reserve requirement by 50 basis points, on top of its announcement of a massive stimulus package to support its struggling economy. These developments have contributed to increased liquidity conditions which historically have been very positive for risk assets, including BTC.
As noted in a recent research report from Lyn Alden, bitcoin has been a very strong barometer for liquidity conditions, moving in the direction of global liquidity more than 80% of the time—higher than the S&P 500 and every other major asset class. So, if the market perceives that global liquidity will continue to increase (i.e., more central bank easing), BTC should benefit, especially if labor conditions and other economic data continue to diminish fears of recession.
Source: Bitcoin: A Global Liquidity Barometer, Sam Callahan and Lyn Alden, September 2024
Elections: The outcome of the US elections, most notably the presidential election, will without a doubt impact the immediate future of the crypto asset class. Markets don’t like uncertainty, and for an emerging industry like crypto, the uncertainty of the November elections will be an overhang. However, there have been important developments recently supporting the case that regardless of who wins, crypto will be entering a more favorable policy environment.
Former president Trump has been very explicit in his support for Bitcoin and the crypto industry, including suggesting the US hold BTC as a long-term investment, so it’s likely he would be proactively positive for the industry and its development. While Vice President Harris has not shared any details or overtly positive statements on crypto, she has seemingly taken a more open mind to the industry, mentioning “digital assets” in a speech for the first time last week. This will also be the first US election where there is such a thing as the “crypto voter.” Coinbase released a 25-page report on these voters today, which included that more crypto owners are Democrats than Republicans and two-thirds of crypto owners in the key swing states in the election are enthusiastic to vote for candidates that support crypto. This growing political influence is something I wrote about earlier this year, and I continue to believe this technology, like the internet, is not political by nature and will over time become less partisan. In fact, we are seeing this already, as some influential leaders in the Democrat party are seemingly pivoting toward a more open approach. Regardless of how fast this happens, in the short term the most likely result of the election is a new administration that is not proactively against this industry. So, we believe the shift from the current administration to the next, regardless of which party wins, will be a net positive for investors in this space.
An eventful fourth quarter
The first three quarters of this year have been some of the most important in the history of this industry, as institutional developments—most notably the launch of crypto ETFs in the US—have increasingly strengthened the investment case for this asset class. In the next three months, monetary policy decisions, election outcomes, geopolitical events, and many other factors will impact the near-term outlook for crypto. But for long-term investors, we firmly believe that the case for this asset class is as strong as ever.
The outcome of the US election last month continues to reverberate through the crypto markets. The Nasdaq Crypto IndexTM (NCITM) has risen over 57% since November 5, fueled by widespread optimism over the direction of digital asset policy in the US.
As I wrote in a previous note, crypto assets tend to follow a four-year cycle that includes a bull phase of roughly 12 months, followed by a year-long bear market, and then a two-year recovery period. In the previous two bull markets, altcoins (i.e., everything outside of BTC) have significantly outperformed the largest crypto asset.
I believe we’ve entered a bull market, reinforced by the macro environment and US election outcomes. But there’s another data point signaling a bull market—the outperformance of the NCITM relative to BTC.¹ In the last three months, the NCITM has had a higher return than BTC (78.0% vs. 76.5%) and since the election, the NCITM has outperformed BTC by 6.8%.
Crypto Asset Performance
So, which specific aspects of crypto are poised for outperformance this time around?
One key area to watch is smart contract projects, platforms that will allow users to transact not only information but value and property as well. We believe these platforms and applications will outperform BTC in the next 12-18 months as they compete for users and lay the groundwork for decentralized applications. On the back of the infrastructure developments we have seen in this area in the last few years, new applications are emerging across AI, gaming, and many other areas as tokenization continues to expand.
We also believe that new regulatory progress in 2025 will be more beneficial to these applications than to Bitcoin specifically, because Bitcoin already has regulatory clarity and a well-developed capital markets structure, with the growth of ETFs, options, and futures. In the US and Europe, this legislative and regulatory clarity that will benefit altcoins may include:
• Market structure legislation: Proposals like FIT21 will remove ambiguities regarding the commodity vs. security status of crypto assets, as well as create paths to registration that could boost adoption in the US.
• Stablecoin legislation / MiCA implementation: Both will drive the adoption of stablecoins in the US and Europe, expanding the stablecoin phenomenon beyond just emerging markets.
• Repeal of SAB121: When this obstacle is removed and US banks can hold crypto for their clients, banks and brokerages will increase their crypto trading and custody offerings, which will benefit altcoins the most.
• New ETF launches: With the new SEC chair, there are renewed hopes for additional ETF approvals, including indices and single assets like Solana and XRP. There’s still much uncertainty here, but new assets having ETFs as on-ramps is highly positive.
In addition to Bitcoin developing as an emerging digital store of wealth and smart contract platforms becoming a new way to exchange information, value, and property, there are three other altcoin use cases we believe will benefit in the coming year:
- DeFi: Projects aimed at creating an internet-based financial system, running on smart contract platforms, will create a new global capital markets infrastructure for payments, with stablecoins and tokenized money market funds being the first important use cases.
- Web3: A new iteration of the internet that will let us own our data and make the internet decentralized and more usable for things like AI agents and other innovations.
- Digital Culture: An emerging digital-native generation will have more demand to own digital assets and collectibles, with gaming being a natural first application.
If we compare crypto to the internet, this industry is like the internet in the 1990s and Bitcoin could be compared to email—the only application most people hear about. But fast forward 20 years and while email is still very useful, it has not been the internet’s application that created the most societal value. We believe this could be true for how Bitcoin is currently viewed relative to crypto.
Benefits of diversification
Our team at Hashdex are firm believers that getting broad exposure to this market is necessary to capture the growth we believe we will experience in these other areas. Indices like the Nasdaq Crypto IndexTM (NCITM) can provide broader market exposure and, as crypto matures as an asset class, better risk-adjusted returns. Additionally, indices provide more significant optionality as investors don’t need to rely on an active manager to do this for them. The complexity and fast-evolving nature of crypto make it hard to pick individual winners and an index simplifies investing by offering a balanced, data-driven selection of assets that can align with modern portfolio theory principles.
This is why index ETFs have been at the core of our mission. Accessing crypto through these familiar structures allows investors to benefit from the growth of this asset class with minimal friction. For most investors, we most often recommend a very small allocation to crypto, from 1% to 5%. We strongly believe that a benchmark like the NCITM is an excellent way to “buy the market” and benefit from a strategic allocation into this promising asset class.
[1] The Nasdaq Crypto Index includes Bitcoin, Ethereum, Solana, Ripple, Cardano, Chainlink, Avalanche, Litecoin, Polygon, and Uniswap as of 9/30/24
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