Despite continued positive newsflow from the political and regulatory front and continued indications of institutional adoption, the crypto market has been consolidating over the past two months. While the fundamental backdrop remains positive, the market requires a fresh catalyst to reignite the bull cycle.
The crypto market rallied strongly following the US elections, which was further fuelled by a string of nominations and announcements that showed the new administration was intent on delivering on its crypto-related campaign promises. The resignation of Gary Gensler and an additional Democrat SEC commissioner provided further impetus to the rally. After a +60 percent performance over six weeks, a healthy correction ensued, and the market has been consolidating since.
Performance of Bitcoin and the S&P 500 Broad Crypto Market Index
Source: CoinMarketCap, S&P Global
The inauguration briefly inspired a new intraday high but did not result in a new closing high. Meanwhile, the S&P 500 has already made two new closing highs this year.
The fundamental outlook remains positive, with even BlackRock CEO Larry Fink suggesting that the current adoption trends, coupled with the backdrop of escalating government indebtedness, could send Bitcoin to USD 500,000–700,000. However, the crypto market is awaiting a fresh catalyst.
The SEC’s changing approach
The announcement that the SEC agreed to drop its lawsuit against Coinbase, with the final decision awaiting the formal approval of the Commissioners, has far-reaching implications.
It confirms the path that the SEC’s newly created crypto task force set: to clarify the status of crypto assets, define the limits of the SEC’s jurisdiction, provide practical rules for compliance and focus litigation on instances of fraud.
The head of the task force, Commissioner Hester Peirce, asked for patience, suggesting that disentangling the SEC’s legacy approach and the various lawsuits “will take time” to do in an “orderly and legally defensible way.”
The delay in the confirmation hearing of the newly nominated SEC Chair, Paul Atkins, also suggests that some issues may not be quickly finalised. For now, the confirmation hearing has not been scheduled yet – although this is not unusual. Gary Gensler was confirmed in April and Jay Clayton in May in the years of their nominations.
However, the SEC appears to be taking action in several areas already. This includes reducing the headcount of its crypto enforcement unit, redirecting the unit to focus on fraud and scams across cyber technologies and acknowledging a host of crypto ETF filings, which are now being considered for approval with a 240-day final deadline.
While the market is awaiting confirmation from the SEC on the Coinbase resolution, and the initial positive market reaction on the day was quickly overwhelmed by the news of the USD 1.5bn Bybit hack, the implications of the SEC’s changing stance are tremendously positive for the crypto market.
This is further supported by the CFTC’s stance on disclosure requirements that ensure investor protection but are feasible to comply with for decentralised protocols. The proposals involve technology-based solutions instead of the reporting requirements placed on private corporations, which require substantial headcount and overhead to satisfy.
The implications of regulatory clarity on the status of crypto assets and tailored disclosure requirements are tremendously positive, especially for the alt sector. This could unleash not just a surge in innovation and the long-awaited altseason but also help investors identify tokens that have genuine economic value and improve crypto’s appeal to traditional institutions.
Bitcoin reserves
A further catalyst could come from a national government or a US state passing a bill on Bitcoin reserves into law.
The outlook on this has dampened recently despite an ever-growing number of states advancing proposals after the bills were rejected in several states, including Wyoming. The latter, being a strongly pro-crypto state, as well as the home state of Senator Lummis, the sponsor of the Bitcoin Act, has cast doubt on the chances of the Bitcoin Act being passed by the legislature.
The crypto Executive Order’s vague language on Bitcoin strategic reserves was a further disappointment – it merely mandates the administration to “evaluate the potential” and gives a fairly extended timeline of 180 days. Additionally, it introduced confusion by implying that other crypto assets may also be included, as this would extend to assets that lack strong store-of-value characteristics. This would mean that the reserve is no longer a safe-haven proposition, placing Bitcoin alongside gold, but rather a strategic investment by the government.
The size of the US government’s current Bitcoin holdings – which may constitute the strategic reserves until and unless the Bitcoin Act passes – may potentially halve if the Bitcoin seized from the Bitfinex hack is returned to the company, something that the courts are currently deliberating.
Meanwhile, the ECB has pushed back strongly on the idea of Bitcoin reserves in the EU, which may hinder progress also in non-Euro-based EU countries such as Czechia.
As expectations are currently relatively muted on the chances of Bitcoin reserves, an actual approval by a US state or a national government would be a very strong catalyst for the crypto market.
Institutional demand
Meanwhile, institutional demand for crypto is steadily growing. We have seen the first sovereign wealth fund make a sizeable investment in BlackRock’s Bitcoin ETF, making it the fund’s second-largest holding by a wide margin. There is continued steady newsflow on large traditional institutions making or considering allocations to crypto assets, with 1–2 percent allocations now considered a “conservative” approach. This growing interest can easily build up to a demand shock, providing the next catalyst.
Global liquidity
Despite concerning news on the macro front about inflationary pressures or slowing growth, global liquidity is loose, and it is likely to get looser.
This has been the key driver of risk assets, and this is why the S&P 500 has continued to make all-time highs in the face of serious concerns around tariffs, the debt ceiling or rising inflation.
This translates into a benign backdrop for financial markets, and news of further increases in liquidity (e.g. from China) could provide an additional catalyst to the crypto market as well.
Summary
The crypto market has been uninspired over the past two months after a period of exuberance, strong performance and high expectations in the run-up to and following the US elections.
Nonetheless, as the US progresses in putting a suitable regulatory framework in place to encourage innovation in the crypto space and some of the world’s largest institutional investors are beginning to make crypto allocations, the current bull cycle is set to resume and numerous potential catalysts may provide the impetus for the next leg of the rally.
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