Sophia’s Thoughts on an Unusual Crypto Summer
Labor Day in the US brings to an end a highly unusual crypto summer. There were lots of positive developments. But the market stumbled. And liquidity is low. Where to from here?
These are Sophia's Thoughts:
Several events shook the crypto market this summer, pushing investor sentiment to new extremes.
But the summer was unique because the crypto market showcased abnormally low volatility amidst average losses.
Trading volumes have dried up, posing challenges for how investors can prepare for the next bull run.
Going forward, sentiment will continue to prove pivotal for crypto until new developments push the market out of its funk.
CNBC has put their trust in us and featured Indicia’s sentiment data in their August crypto market preview. Are you ready to do the same? Join us for free now.
🚀 Last week’s market performance
The crypto market and Bitcoin (BTC) had initially boomed when Grayscale won its appeal against the SEC. But all the profits were lost by the end of the week. Bitcoin lost 1% while the crypto market lost 2%. The biggest winner of the week was IOTA (MIOTA). With the second highest bullish score of 57% from Sophia, it recorded a 15% gain even after it was delisted from Binance. The biggest loser of the week was Gala (GALA). It lost close to 19% after a theft dispute among its leadership team.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
☀️ An action-packed summer
The months of June, July, and August were rich in crypto action. It started early in June when the SEC sued Binance and Coinbase for running unregistered brokerages in the US. And selling unregistered securities. Binance was also accused of mishandling customer funds. It was a very ugly look for the crypto industry. And it offered a grim outlook for the future of crypto in the US.
But soon after, another event rocked the market: BlackRock filed an application with the SEC to run a spot Bitcoin ETF. BlackRock is not the first asset manager to apply but it is the biggest with $9 trillion in assets under management. This development hyped up the market. Crypto sentiment turned very positive. And the crypto market ended up recording a 5.6% gain in June.
July was another exciting month that included the Ripple lawsuit win against the SEC. The SEC had claimed that Ripple sold unregistered securities when it sold its token through an ICO. Ripple fought back and a judge agreed. The judge ruled that Ripple (and, by association, also other tokens) are not securities when traded on public exchanges. This ruling was monumental because it offered the first legal case outlining when tokens are securities. And when not. It ignited another crypto hype, with sentiment bouncing back up. It remained positive throughout August.
An Arrest, a Ruling, a Rally: Crypto’s Wild Day in the Courts (Bloomberg)
Ripple Sparks Hope for New Crypto Rules From Congress (Bloomberg)
The crypto market was getting hot. Very hot. Bitcoin briefly crossed 30,000 USD but retracted and fluctuated around 29,000 USD for a while. With little new developments boosting fundamentals, some investors began to take their profits. That drove the market down. The crypto market ended up losing 4.1% in July in spite of the Ripple hype.
Then, when the market seemed too quiet in August, investors reacted to several unrelated news in a frantic sell-off. The crypto market lost more than 10% in the three days between August 15 & 18. It seemed like the hype was coming to an end. Sentiment began to cool off again, providing little support for prices. Then, at the end of August, another event shook the market and reignited sentiment: the Grayscale win.
Last year, Grayscale had applied with the SEC to convert its Bitcoin Trust into the first spot Bitcoin ETF in the US. The SEC denied the request with concerns of possible market manipulation. Grayscale fought back. It argued that market manipulations exist in the futures market yet the SEC approved Bitcoin futures ETF. An appeals court in the US agreed. The ruling offered a harsh criticism of the SEC’s actions. It almost surely implies that we will see a spot Bitcoin ETF in the near future. The crypto fans were stoked. Sentiment bounced back up, turning very positive again. While the market boomed briefly and gained 5% after the Grayscale win. The gains were quickly undone in the days after the ruling. The crypto market ended August down 12.7%.
🧘🏻♂️ Low volatility in spite of shocks
The crypto market experienced a lot of shocks this summer, both positive and negative. But this summer was a peculiar one because it was unusually calm. This summer ranked pretty average in terms of returns. Not the highest returns, but also not the lowest returns we’ve seen in a summer going back to 2018. Even though the crypto market lost around 12% over the summer.
However, this summer was unique when it comes to volatility. The crypto market was pretty calm the last three months. It showcased the lowest volatility of any summer going back to 2018. The low crypto volatility this summer was a unique phenomenon. And we don’t necessarily expect it to change anytime soon. Investors are waiting on decisions from the SEC on spot Bitcoin ETFs. And there are new crypto regulation bills going through Congress that may change how crypto can operate in the US. While the US is not the only country that matters for crypto, its financial size really makes it very dominant. We continue to expect a calm market with sudden shocks at least until there is a decision on spot Bitcoin ETFs in the US.
💧 Liquidity is not what it used to be
The calm in the crypto market brought with it another phenomenon: abnormally low trading volumes. Aggregate volume across the largest 100 coins in the market dipped below 1 trillion USD in April. Volumes never bounced back.
More important is the fraction that trading volume represents of the total market cap. This measure is often referred to as the turnover. It tells us how easy it was to trade a crypto in the market given all liquidity considerations. Our analysis shows that crypto turnover has also decreased since April. In the first quarter of 2023, crypto markets traded more volume than the available market value. Since April, volume has shrunk to only around 70% of the available market value. This kind of liquidity dry-up spells potential trouble for crypto markets. It will make it more difficult for the market to be able to adapt in an efficient way when new developments occur. Like, for example, if the SEC does approve a spot Bitcoin ETF in the coming months.
❤️ People still love crypto
While reduced volumes sound scary, one metric remains euphorically positive: investor sentiment. Investors are still giving crypto lots of love on social media and in online news. And that has driven sentiment up from neutral earlier in the year to positive now.
Sophia viewed the positive sentiment as one of the key supporters for crypto this summer. While she remained mostly neutral on coins, her view was that strong sentiment lifted crypto prices up. In contrast, weak fundamentals at times held crypto back.
As we move forward with the never-boring evolution of crypto, sentiment will continue to be pivotal. If sentiment weakens, it will be hard for crypto prices to maintain their current levels. Unless a significant change in fundamentals arrives. For example, if the SEC approves a spot Bitcoin ETF. Or we get more clarity on crypto legislation in the US and across the world. Or there are new implementations of crypto that enable a bigger user base to enter the crypto world.
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