Market Commentary

April 2023 was an exciting month for the crypto market as the Ethereum network was upgraded to enable staking withdrawals on April 12. Meanwhile, BTC and ETH reached yearly highs, gaining 2.7% and 2.6% on the month, respectively. The FOMC did not meet in April, and will reconvene on May 3 to determine whether to implement a 25 bps rate hike—an outcome the market currently perceives as 80% likely. While rate hikes have historically been unfavorable to risk asset prices, crypto prices may benefit if the FOMC decision aligns with market expectations. 

Post-Shanghai Stats

With withdrawals now enabled, the Shanghai upgrade has rendered ETH staking considerably less risky, attracting an influx of institutional investors. The amount of ETH staked with institutionally-focused staking providers has risen by 28% (~462k ETH), while the amount with liquid staking protocols has increased by 5% (~356k ETH). Liquid staking is a popular choice for both individuals and institutional traders as it allows them to gain exposure to ETH and earn staking yield without sacrificing DeFi functionality. 

Figure 1: Change in Staked ETH by Category Since Shanghai

Following the Shanghai upgrade, exchanges have been responsible for over 44% of the total ETH withdrawals, with Kraken being the primary contributor. These withdrawals were somewhat anticipated, primarily due to regulatory action against Kraken’s staking service, which resulted in its closure. While these withdrawals account for a significant portion, it does not necessarily suggest that the withdrawn ETH will be sold. Instead, it is possible that some of this ETH may be re-staked through liquid staking protocols or alternative service providers, maintaining its utility in the market.

Figure 2: Staked ETH Withdrawn by Centralized Exchanges

The effect of withdrawn ETH on the market has been minimal, with the second-largest crypto asset ending the month with a net gain. The total amount of ETH staked keeps rising, growing by over 1.5 million ETH in April¹—possibly fueled by institutional and retail interest. Ethereum staking offers one of the most stable sources of yield in the crypto sphere, with about 25% of the yield generated by transaction fees paid to the network. By traditional investing standards, many would regard achieving a 5% annualized yield on an asset that has appreciated 58% YTD as impressive.

Figure 3: Ethereum Staking Reward Rate

Recent Bitcoin Volatility

Bitcoin experienced a period of intense volatility in the latter half of April, marked by a steep drop in price and a rapid rebound. The low point followed a price drop of about 6%, descending from roughly $29,700 to $27,696. This abrupt decline caused the second-largest liquidation event of the year, with $125M in both long and short positions liquidated on a combined basis. The resulting price fluctuations and subsequent developments provide valuable insights into the cryptocurrency’s potential trajectory.

Figure 4: Bitcoin Price Volatility in the Last Week 

Around the time of the price drop, a Twitter alert suggested that dormant Bitcoin addresses associated with Mt. Gox and the US Government had suddenly begun moving coins. This led to noticeable concern on Twitter until Arkham, a blockchain intelligence company that tracks the movement of coins, quickly announced that the alert had been misleading and not in fact associated with Mt. Gox or the US Government.²

While the alert and tweet may have contributed to some panic selling, it is unlikely that they directly caused the majority of the price drop, as the alert was sent out at 4:07 PM EST on the 26th, while the largest price drop occurred in the previous hour. As seen in the data, Bitcoin prices quickly rebounded to above $29K within hours of the news that the alert was false and largely remained above that threshold for the rest of the week.

Despite the restoration of Bitcoin’s price, there are a couple of noteworthy takeaways worth considering going forward. For one—despite its market dominance and its massive ~$570 market cap—Bitcoin may still be susceptible to a number of sentiment-driven factors that can be influenced by incorrect or incomplete information (particularly in the short term). Moreover, the perception of actions by large holders can also have a consequential impact on Bitcoin’s value. For example, the US government currently owns around 205K BTC (worth $6B and ~1% of the total circulating supply) seized from the Bitfinex hack and Silk Road hack confiscations.³ If you’re unfamiliar with the significance of these events, read Grayscale’s Brief History of Crypto Markets.

Fear around sell-pressure was corroborated by court documents earlier this year, which revealed that the US government plans to sell over 41K BTC (~$1.1B) in 2023.⁴ Despite the magnitude of these pending sales, it should be noted that a few important factors weigh heavily in the opposite direction. For one, the US government sold off $215M⁵ worth of BTC in mid-March ‘23 when its price was hovering around $24K. Evidently, the market shrugged this off. While the exact impact of future developments on Bitcoin’s price remains uncertain, factors such as an additional rate hike and a declining inflation rate (reduced to 5% in March from 6% in February) align well with a bullish case for Bitcoin in the future. As Bitcoin and the broader asset class navigate these competing headwinds and tailwinds, the upcoming year will be revealing in terms of their resilience and adaptability.

What Lies Ahead?

As the significance of the crypto asset class increases, regulators worldwide are taking note and striving to develop policies that effectively incorporate cryptocurrencies into the global financial market. Regulatory stances vary, with some exhibiting a supportive attitude, while others display a more cautious approach towards regulating the crypto market. Regardless, the importance of crypto in global regulatory discussions should not be underestimated.

Bitcoin has demonstrated its resilience against harsh regulatory action. China, which houses one of the largest crypto markets, has imposed four bans on crypto: a 2013 banning financial institutions from transacting crypto, a 2017 ban on ICOs, a 2020 ban on Bitcoin mining, and another ban on crypto transactions in 2021. Certain US regulators and policymakers have also taken a stringent approach to crypto regulation. Some proposed bills have sought to force network participants such as nodes, miners, and wallets to adhere to Know-Your-Customer laws (KYC). However, these initiatives have not garnered sufficient support to advance further.

In addition to navigating regulatory challenges, the crypto industry must confront potential macroeconomic risks, including a possible US recession. Such an event could result in heightened market volatility, diminished investor risk appetite, and a potential impact on the growth and adoption of cryptocurrencies. However, the failures of First Republic (FRC), Silicon Valley Bank (SVB), Silvergate Bank (SI), and Signature Bank (SBNY) have demonstrated that investors continue to display an appetite for crypto during times of economic uncertainty, as it offers both a hedge against weakness in the incumbent financial system as well as further emphasizing the value proposition of self-sovereign digital assets. The crypto market spans the globe, and its future won’t be dictated solely by one country’s regulations. We believe the industry will continue to evolve and expand, appealing to users for a multitude of use cases around the world.

Read more: https://grayscale.com/monthly-report-2023-april-newsletter/