July 2020 Market Commentary

Paul Cappelli, Portfolio Manager

August 11, 2020

When history looks back on the progression of the digital asset class—its graduation from cypher-punks in the far corners of the internet to Main Street investors—July 2020 may prove to be a pivotal moment. Digital assets are seeing their highest demand since late 2017. While that spectacular bubble put the asset class on investors’ radar, it left much to be desired in terms of infrastructure, regulation, and education. Fast forward nearly three years and we’re entering the second half of 2020 with vast improvements in all three areas. These developments came just in time for two other tailwinds: investors are focused on transformative technologies in the COVID-19 era, and rampant money printing is fueling their inflationary concerns and mistrust in the monetary system. Digital assets may be ready to sustain their next lift-off moment.

July’s rally was once again led by a combination of efforts that saw a gradual push higher throughout the month in bitcoin, Ethereum, and the Bloomberg Galaxy Crypto Index (BGCI), a measurement of large cap liquid digital assets.

Bitcoin rose to its highest levels in nearly twelve months, up 24.43% to close at $11,354.56. It started the month hovering around $9,100, then began an orderly climb as inflation fears continued to take root in investors’ minds. The CARES Act stimulus benefits moving toward month-end expiry further supported bitcoin’s increase, as did uncertainty around keeping the economy afloat amidst a choppy re-opening. Gold had its own climb to all-time highs; the two assets seemed to move in lockstep, further supporting bitcoin’s validity as a digital gold. Spot volumes on major exchanges soared north of $1.5bn going into month-end as buyers seemed to flood the market following a July 22 announcement by the Office of the Comptroller of the Currency (OCC). This announcement outlined yet another infrastructure milestone: federally chartered banks and federal savings associations now have the authority to provide cryptocurrency custody services for customers. Open interest on CME futures hit an all-time high of nearly $750mm on July 24 and continued to see elevated futures volumes as the month drew to a close.

As mentioned in last month’s commentary, it was expected the decentralized finance (DeFi) applications would continue to push Ethereum higher amidst increased use of those applications on the underlying blockchain. Ethereum continued its stellar year as BGCI’s best performing asset, with a July increase of 53.02% and a closing price of $344.73. DeFi has seen growth of nearly $3.5bn in 2020 with assets like Compound, Dharma, DAI, and decentralized exchanges (DEX) driving smart contract growth in primitive financial functions—lending, debt issuance, liquidity, and exchanges. Look for this to continue to be a driving theme for the asset class.

The BGCI finished over the 500 mark for the first time since February at 502.50 with all six constituents finishing in positive territory. ETH, XRP, EOS, and BCH all posted gains north of 30%. The 39.48% increase for the index was its highest monthly gain since January; broader large cap digital assets certainly seemed to benefit from the consolidation of liquidity at the top of the asset class.

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