July 15th Weekly Market Commentary
Inches From Death, Trump's Epic Response Propels Bitcoin Higher
It is difficult to describe the emotions of the American people to the attempted assassination of former President Trump & his defiant response, but the Bitcoin market certainly acted in a clear manner. Combined with the news that Trump is going to speak at Bitcoin 2024 & the inclusion in his platform of support for self custody and Bitcoin mining, the price rallied hard, back towards the middle of the long trading range it has been in.
Apart from the Trump news, the past week saw the completion of the German state of Saxony selling roughly 50,000 Bitcoin, the SEC dropping enforcement actions against Paxos and Hiro systems and watering down SAB121 for their friends, and, in macroeconomic news, rate cut expectations have increased in the U.S.
All of these stories are quite constructive for the future of crypto markets, if demonstrative of the failings of the current administration, which, under the political circumstances, explains the positive price action over weekend.
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Trump's support of Bitcoin takes on increased importance as a catalyst for positive price action in wake of shooting.
Much has been written about the assassination attempt from a variety of perspectives, but, as this is a market commentary, I will focus on that. Last week, Trump had pushed into the official Republican platform a ringing defense of the crypto industry, including preserving the right to self custody and mine Bitcoin. Thus, the immediate surge in polling is very bullish for Bitcoin. Polymarket pushed his odds of winning the election up to 71% for a number of reasons, including the powerful image of Trump, under an American Flag, raising his fist in defiance. While it is too soon to know definitively, it also looks like the Democrats desire to replace Biden is faltering which will make the contrast more stark.
This week is the Republican National Convention and President Trump has already re-confirmed that he will be speaking at the Bitcoin 24 conference the following week. It is unsurprising, therefore, that these events triggered a Bitcoin & broad crypto rally. In fact, as of the writing of this note, it has completely erased the early July correction that saw Bitcoin fall from $63,000 to below $54,000 a couple of times over the past week.
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Saxony's poorly handled sales of Bitcoin demonstrates an important lesson
We have discussed the sale of the roughly 50,000 Bitcoin seized by the state of Saxony before, but this is the week it was completed. At this point, it is fair to say that the sales were handled poorly, creating much more market impact than it could have, if handled professionally. In this case, they signalled to the market, by transferring the coins to exchanges and then selling aggressively each time they sold a tranche. The result was likely a significant portion of the 20% drawdown in Bitcoin over the period. Had they instead followed a different strategy, more like how MSTR has bought Bitcoin, the results could have been quite different.
We would have recommended they transferred their coins to the exchanges they planned to use months ago and waited a bit before selling. Then, they could have used algorithmic trading methods, such as CoinRoutes provides, to slowly liquidate their position. To put this in perspective, CoinRoutes clients trading orders with an average size of $2 million, executed over $6 Billion in spot Bitcoin orders within 0.085% of the midpoint price. While constant selling would certainly have increased the impact over the entirety of the process, they could have avoided the bulk of the impact by spacing out the sales as well.
Instead, their sloppy selling action created a tradeable bottom for Bitcoin buyers below $55k, which will, in retrospect, become a famous story in the future history of the Bitcoin market.
SEC drops enforcement actions while SAB 121 gets weakened (poorly)
The SEC dropped two enforcement actions this week, with most of the attention being given to Paxos. The case against Hiro systems is noteworthy, however, because it was a "smoking gun" against the claim that crypto companies could "come in and register". In this case, Hiro, formally known as Blockstack, has done just that, by selling their initial tokens as securities under Reg A+. Only after they implemented a new consensus mechanism they felt to be "sufficiently decentralized" did they sell tokens as non-securities. Millions of dollars of legal fees later, and the SEC dismissed the case, but this and other cases has had an undeniable chilling effect upon the industry in the U.S.
The Paxos case is arguably worse, as the token accused of being a security was a stablecoin and Paxos, despite disagreeing with the accusations, stopped minting the coin in reaction to the suit. In both of these cases, however, there is no mechanism for the SEC to provide restitution to the impacted businesses for the damages or costs, which has angered many on Capitol Hill. Perhaps, with a new administration, we might see fundamental reform of the agency, to create accountability and negative consequences for initiating such cases.
The worst SEC story of the week, however, was the ongoing SAB 121 story. Last week, Congress failed to override the presidential veto of their bipartisan bill to end SAB 121, which was guidance provided by the SEC that effectively banned regulated entities from crypto custody. As noted in previous weeks, this guidance did not go through the APA process, meaning it faced no public commentary.
This week, the SEC started to allow exceptions to the SAB 121 from some firms. The problem with this approach, of course, is it can be provided to firms that have more lobbyists or political clout, without any way to know that is how the firms obtained the exception. Whether or not real cronyism is taking place, such regimes are open to abuse and cause the public to lose confidence in the system.
Rate Cut expectations surge to 89%
After the recent CPI report and Fed statements, the betting markets are pegging the odds of 2 or more rate cuts this cycle at 89%. This has buoyed many markets, including the rate sensitive Russell 2000 small cap index. Many market watchers think this bodes well for crypto as well, particularly as we get closer to the September meeting where the oddsmakers think the first cut will take place. I included this story, as it provides another reason to believe the correction in crypto may have ended for the time being, but we shall see.