Market View
On June 13, Coinbase hosted the second annual State of Crypto Summit in collaboration with the Financial Times. Panel discussions covered a wide range of topics including institutional adoption, global regulatory frameworks, future payment systems, and crypto’s role in a portfolio. Industry leaders ranging from Cathie Wood, the CEO of Ark Invest, to Samara Cohen, BlackRock’s CIO of ETF and Index Investments, provided insights on key industry trends. Many took the opportunity to reflect on the significance of crypto exchange traded products to the industry, particularly as spot bitcoin ETFs have attracted $15.4B of net inflows in just six months with $60B in total AUM. According to Cohen, while the 13F filings have confirmed that there are a breadth of investors buying shares in BlackRock's spot bitcoin ETF, around 80% of interest comes from self-directed investors.
At its core, the conference reinforced that crypto is a firmly established alternative asset class with staying power. In fact, a general theme echoed was that if an institution is not in the space, they are implicitly short the space – an increasingly contrarian position given the better understanding and adoption of crypto. The conversation around crypto has shifted from “why should we do this” to “why aren’t we doing this”.
America's largest public companies are increasingly active with cryptocurrency, blockchain and web3 initiatives, and the announcements from Fortune 100 firms engaging in the space have hit record highs. Although we are still in the early days of crypto adoption, some major asset managers now view crypto as an established asset class worthy of portfolio allocation. Pension funds, sovereign wealth funds and other large institutional players are mobilizing to explore opportunities in this emerging market, as highlighted in the session on “CIO Perspectives - Role of Crypto in Portfolios.”
Separately, the progress shown in improved user experience with Coinbase’s Smart Wallet as well as the unprecedented collaboration between traditional finance and the crypto ecosystem are set to drive real innovation and benefit investors and consumers alike. Interoperability between old and new systems promises to make global capital markets more efficient while reducing costs. Indeed, each member of the CIO Perspectives panel affirmed their belief that all financial systems will eventually run on tokenized rails (though predicted adoption timelines varied).
Altogether, the regulatory and institutional tailwinds behind crypto that were exemplified during the 2024 State of Crypto Summit reaffirm our constructive view in the coming months. In the first half of the year, positive catalysts like the spot bitcoin ETF launches in the US and Blackrock’s tokenized BUIDL fund unlocked access to new capital and also signaled increasing onchain adoption. By all accounts, this trend only appears to be accelerating as more institutions venture into the space and onchain technology and tooling matures.
Macro view
On the macro front, the FOMC made the decision to hold rates unchanged, in line with the market consensus. That said, the updated Fed dot plot signals only one rate cut this year (down from three cuts previously), which alongside a moderating CPI (3.3% vs a median forecast of 3.4% YoY) suggest that stubborn real rates could put pressure on a slowing economy. Nevertheless, the pricing of Fed Funds Futures implies the market is expecting two cuts this year – in November and December, while US equities strengthened after the meeting. Note that the Fed’s longer term outlook for interest rates has also moved higher, with a median projection of “4.1 percent at the end of 2025”, compared to market pricing of a 3.625 percent terminal rate for 2025.
Indeed, we think the Fed could deliver a cut as early as September this year and again in November because of our view that (1) the disinflationary trend remains intact (despite our concerns over the cost of shelter) while (2) issues surrounding financial stability could become more relevant. On the former, we believe that the disinflationary impacts of AI and technology driven efficiency gains will continue to push this trend of moderating inflation throughout this year. On the latter, there are approximately $929 billion of commercial real estate (CRE) mortgages that will need to be rolled over this year, which we think may demand a more proactive stance from the Fed to ease the burden of refinancing.
We believe the market is generally reflecting these sentiments by pricing in additional cuts relative to the Fed’s signals. Separately, there has also been mounting political pressure to cut rates, although the influence on the Fed is debatable given their politically neutral position. Regardless, the combination of these factors provides multiple potential avenues to support earlier and more aggressive rate cuts than signaled. When rate cuts begin, we think that will be a constructive catalyst for both equities and crypto as it could lead to capital outflows from money market funds (currently holding $6.4T) into other asset classes.
