September 2020 Market Commentary

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October 9, 2020

When measuring progress, we often look to metrics and numbers—but those numbers can be deceiving at times. For digital assets, September was one of those instances. Bitcoin finished down 8.61% while the Bloomberg Galaxy Crypto Index (BGCI) saw a 14.70% drawdown for the month. Despite finishing lower, both indicators remain well above the 2020 water mark with bitcoin returning 56.80% and the BGCI showing the broader large cap market up 79.39%. When weighing yearly returns versus the past month, it is much easier to conceptualize that, despite a lower finish, the final month of the third quarter still had several positive developments continuing to drive this rapidly emerging asset class forward.

Picking up where we left off last month with the purchase of bitcoin by MicroStrategy Inc. (MSTR) and its forward-thinking CEO, Michael Saylor, the company made yet another bitcoin investment with its balance sheet. When bitcoin dipped into the $10,700 range in September, MicroStrategy announced the purchase of an additional $175 million of bitcoin to add to its roughly 20% corporate treasury position, bringing its total balance sheet holding to about $425 million. A public company that could have monetized its balance sheet with any asset in the world has now taken a nearly half billion-dollar position in bitcoin.

Additional developments in September were tied to other key themes of the year: decentralized finance (DeFi) and regulation. Growth in the DeFi sector of digital assets continued. Despite some assets collapsing 50%+ from their highs of just a few months ago, investors continued to flock to this rapidly developing area of the digital asset market. In September, the number of assets held or locked in DeFi applications crossed the $10 billion mark, finishing just north of $11 billion for the month. Lending applications, decentralized exchanges (DEXes), and other primitive forms of financial instruments continued to drive growth despite the drawdown for many assets. Ether finished down 18.81% but the Ethereum network continues to grow as the lifeblood application for DeFi.

On the regulatory front, the Office of Comptroller of the Currency (OCC) continued to release direction that appears bullish for digital assets. Earlier this year, the OCC released a letter confirming that banks with Federal Charters may custody digital assets. In September, the regulatory body released another letter, this time clarifying that these same banks may hold stablecoin reserves or the assets that back stablecoins, which are widely used to create currency pairs in the digital asset market. This development should not only help traditional banks enter the space with the ability to increase their holdings, but also provide a broader stablecoin issuer community more options for the custody of their underlying holdings.

In another regulatory development, Kraken, a large San Francisco based digital exchange, secured a banking charter issued in the crypto-friendly state of Wyoming. Under a framework developed in the state, Kraken will be allowed to submit applications for services such as an account at the Federal Reserve, which would allow for common fiduciary services such as regulated custody, deposits, and servicing institutional level clients.

On a final note, the European Central Bank (ECB) made an announcement that further signals that the
digitization of money is inevitable. The ECB indicated that a digital version of the Euro—its most widely-used currency—may become essential in the coming years. This announcement builds on prior signals that central bank digital currencies (CBDCs) will become part of the global financial system. Both China and the United States have discussed digitized forms of currency, with China being on the forefront of such innovation.

Despite markets finishing lower in September, it is important to remember that progress for the asset class and its underlying trends continue to strike a positive note and signal an upward trajectory.

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