Market Update September 2024: Navigating Volatile Markets

The market has entered a downward trend since reaching its historic peak in March. This development is not unexpected given the significant increase of 300% since early 2023. A notable shift compared to the situation in March is that long-term investors are now accumulating Bitcoins again, rather than selling them. This dynamic contributes to an increasingly positive market sentiment.

A prominent example of a long-term investor is El Salvador, a Central American country that has been consistently accumulating Bitcoin since September 2021, with a daily purchase of at least one bitcoin. This investment strategy has resulted in a current profit of 300 million dollars, a substantial return on an initial investment of 135 million dollars. The president of El Salvador believes that this Bitcoin strategy has contributed to an improvement in the country's image, investment climate, and tourist attractiveness. The concept of Bitcoin as legal tender could potentially offer an innovative solution for developing countries struggling with hyperinflation, such as Zimbabwe and Venezuela.

📈 Market Update

A brief analysis on Bitcoin, Ethereum and Blockrise Fundamentals:

Bitcoin Analysis

The crypto market experienced significant influence from the unwinding of the carry trade in Japan, leading to a 25% value decline in early August. After a brief recovery, Bitcoin closed September with a 13% loss. However, underlying indicators show no excessive realized losses, and the number of bitcoins held by long-term holders has increased significantly. Moreover, the hash rate reached a new record high, indicating confidence among miners. Finally, the expected interest rate cuts in September are likely to strengthen the positive sentiment in global markets.

Ethereum Analysis

In recent months, Ethereum has underperformed compared to Bitcoin and shown more downward volatility during market corrections. This month, Ethereum suffered a 25% loss and recovered less strongly after the carry trade than Bitcoin. This pattern of weak recovery is not new since the peak price in March. Additionally, the capital inflow from the new ETFs has been disappointing, indicating reduced confidence from professional investors in Ethereum under current market conditions. Nevertheless, it is characteristic of the beginning of a bull market that capital first focuses on Bitcoin, before flowing to altcoins.

Fundamentals

Blockrise offers comprehensive care with its asset management strategy called "Fundamentals." This strategy involves managing assets in Bitcoin and Ethereum versus a euro position, with these positions being reviewed and adjusted monthly.

Last month, the price of Bitcoin decreased significantly by 13%, while Ethereum experienced an even sharper decline of 25%. The current month began with a new, substantial correction, caused by macroeconomic factors in Japan. The current market conditions show similarities to the situation before the market rally in March. Fundamentals underwent a correction of 11.3% last month, mainly due to Ethereum's decline. In response to the yen carry trade, we carried out an interim rebalancing: we increased our Bitcoin position from 62.5% to 67.5%, lowered our Euro position to 15%, and kept our Ethereum position stable at 17.5%.

During the monthly rebalancing, we decided to increase our Bitcoin position again from 67.5% to 75%, lower our Ethereum position from 17.5% to 15%, and reduce our Euro position from 15% to 10%, in response to the volatility and current market conditions.

🗞 Crypto Highlights

An overview of the most notable events in crypto:

Growing Institutional Demand for Cryptocurrencies

Institutional demand for cryptocurrencies is on the rise, with the Bitcoin ETF serving as a prime example. Approximately 75% of this ETF is held by financial institutions such as asset managers and hedge funds. This ETF has become a significant entry point for these institutions, operating within familiar territory, stock markets. Currently, the average cryptocurrency allocation in institutional portfolios ranges from 1% to 5%, according to a report from KPMG. Bitcoin and Ethereum dominate these allocations due to their accessibility and relatively lower volatility.

Institutional investors are increasingly viewing Bitcoin as a commodity similar to gold. However, Bitcoin's fixed supply and potential as an inflation hedge makes it more a scarcity than commodity. The strategic impact of cryptocurrencies in portfolios must be evaluated, particularly in light of planned holding periods and broader market strategies.

Looking ahead, the growth of the cryptocurrency market is expected to be substantial. Projections from sources like VanEck, BCG, and ArkInvest suggest an average Compound Annual Growth Rate (CAGR) of around 35% until 2030. The widespread adoption of blockchain technology is anticipated to disrupt the financial industry, prompting institutional investors to seek opportunities in this expanding market.

MicroStrategy’s Bitcoin Strategy Amid Inflation

In recent years, MicroStrategy (MSTR) has accumulated significant attention for its bold Bitcoin acquisition strategy, which has transformed the company into one of the largest corporate holders of Bitcoin. The story began in early 2020 when MicroStrategy sought a solution to preserve the purchasing power of its cash reserves amid rising inflationary pressures. After considering traditional investments such as art, real estate, and treasury bills, the company found these options either too illiquid or unattractive due to near-zero interest rates at the time. This led CEO Michael Saylor to explore Bitcoin, which presented a compelling alternative without the drawbacks of the other assets.

MicroStrategy’s strategy revolves around issuing low-interest convertible notes to fund its Bitcoin purchases. These convertible notes are particularly attractive because they can be converted into company shares, allowing bondholders to benefit from any increase in the value of those shares. This mechanism enables MicroStrategy to acquire Bitcoin at a lower cost of capital compared to traditional financing methods.

Interestingly, MicroStrategy’s core business, enterprise business analytics, has seen stagnant growth, with annual revenue increases hovering between 0-1%. This has raised questions about the company’s ability to service its growing debt, especially as the first significant repayment obligation looms in 2025. There is widespread speculation about whether MicroStrategy will need to sell its Bitcoin holdings for the first time in five years to meet these obligations.

Despite these concerns, the strategy has been widely praised for its execution. By leveraging cheap debt and placing Bitcoin on its balance sheet, MicroStrategy effectively hedged against the inflationary pressures aggravated by the Covid-19 pandemic. This move has not only preserved the company’s purchasing power but has also generated substantial demand for MSTR stock, making it a key player in the intersection of traditional finance and crypto assets.

🏦 Macro Economy

An overview of relevant global economic events:

A Late Response of the Fed to Economic Tension

Since the onset of the pandemic in 2020, the United States has experienced a substantial 20% increase in inflation. This surge in inflation eroded the purchasing power of uninvested capital over four years, primarily driven by excessive monetary expansion aimed at mitigating the pandemic's economic impact. To combat this high inflation, central banks responded by raising interest rates, a move designed to reduce investments and reduce consumer spending. Currently, inflation has decreased to 2.5% and is expected to drop further to 2%, according to Federal Reserve Chairman Jerome Powell.

Despite these improvements, many professional investors argue that the rate cuts have come too late. The unemployment rate has been steadily rising for several months, and the stock market recently experienced its worst day since 2022. This has led to concerns that the delayed response might have aggravated economic challenges.

During the Jackson Hole symposium, Jerome Powell signalled that the Federal Reserve is likely to begin a rate cut cycle in September. The Fed attributes the rise in unemployment to factors such as hiring freezes and an increased labour force, rather than widespread layoffs. While a rate cut in September seems highly probable, the extent of the reduction remains uncertain. Investors and analysts are now closely watching the Fed’s next moves, as they could significantly impact the economic landscape.

Japan’s rate hikes shake Markets

The yen carry trade has long been a favoured strategy among professional investors, capitalising on Japan's historically low or even zero interest rates. This mechanism involves borrowing in yen at minimal cost and investing the proceeds in assets with higher expected returns elsewhere. Japan’s unique monetary environment, characterised by decades of deflation and economic stagnation, has made this strategy particularly attractive.

However, the landscape shifted dramatically in March when the Bank of Japan (BOJ) announced its first interest rate increase in 17 years. This move signalled a potential end to the deflationary pressures that had gripped the Japanese economy for so long.

By July, the yen surged by 14% against the dollar within a month as investors anticipated further interest rate hikes from the BOJ. Higher interest rates generally boost demand for the yen, making it more attractive to hold. Consequently, borrowing in yen became more expensive, undermining the profitability of carry trades. As the yen appreciated and interest rates climbed, investors were forced to quickly unwind their carry trades to mitigate losses, leading to significant selling pressure across global markets. This resulted in double-digit losses at the start of August.

The future of the yen carry trade now hinges on the BOJ's upcoming decisions. If the BOJ proceeds with additional interest rate hikes, it could further pressure investors to unwind remaining carry trades, potentially causing more volatility in global markets.