Market update: May


Cryptocurrency market experiences correction

During the first two weeks of May, the cryptocurrency market corrected as Bitcoin dropped to $25,800. Participants in financial markets closely watched the latest Federal Open Markets Committee (FOMC) meeting with the publication of the interest rates which is still a major catalyst in the market. The interest then shifted to the latest Consumer Price Index figures as this data will confirm if the plan of the FOMC and Federal Reserve (FED) was successful or that we may enter unknown territory.

Furthermore, the biggest networks in the market, Bitcoin and Ethereum, experienced congestion as the so-called “Meme coins” had an upsurge in popularity. The large amount of transactions led to congestion which resulted in a sharp increase in transaction fees, pushing fees on Ethereum to over $100 per transaction. The market also saw the adoption of traditional institutions continue as BNP Paribas, Goldman Sachs and Deloitte and other major institutions announced that they are working on a new blockchain called “Canto Network”.

The price of Bitcoin and important events during the month of May

Central banks continue with interest hikes

On the third of May, the Federal Open Markets Committee (FOMC) conducted their fourth meeting of the year and announced the new interest rates. As the meeting closed in, Bitcoin experienced volatility since its price increased from $28,300 to over $30,000. As of the latest economic figures, the FOMC members voted for a 0.25% increase. The Federal Funds rate officially reached the forecasted end rate of 5.25% which will act as an important milestone. The markets are currently pricing in a 0.75% decrease in interest rates throughout the rest of the year. Furthermore, the European Central Bank (ECB) also hiked interest rates by 0.25%, bringing the end rate to 3,75%. However, in the Eurozone, participants expect further hikes as inflation remains high.

However, if economic figures, such as the Consumer Price Index, don’t meet expectations in the upcoming months, we may see more hikes in interest rates. If this is the cause, we may see more corrections across financial markets. Additionally, this scenario will require the FED and FOMC to execute a new plan of attack which financial market participants don’t know the full scope yet.

Latest CPI figures cause mixed signals

On the tenth of May, the latest Consumer Price Index (CPI) figures were published and the data displayed mixed signals. The month-over-month CPI fell in line with expectations and the year-over-year figures were better than forecasted by 0,1%. However, the Core CPI m/m, the change in price of goods and services excluding food and energy, came in at 0,4%, which is 0,1% higher than forecasted. The publication of the figures led to high levels of volatility as Bitcoin’s price increased by over $1000, reaching $28,300. This short upward movement was followed by a strong correction pushing Bitcoins’ price to $26,800. In the days after, Bitcoin continued its trend down to $25,800.

US Core CPI during 2023

Currently, the overall CPI continues to show signs of cooling down but the Core CPI has remained high throughout the year. Food and energy prices account for a quarter of the CPI but these prices are quite volatile and distort the trend of the figures. So, the Core CPI is a good indicator of the overall trend of inflation and it seems that inflation isn’t displaying the desired trend, yet. The biggest contributor to the increase in the Core CPI is shelter, the cost of living in terms of housing, which rose by 0.5%, other contributing factors were used cars and trucks, increasing by 4%.

Bitcoin and Ethereum experience congestion

During the first two weeks of May, the Ethereum and Bitcoin network experienced congestion as meme coins on these networks had a surge in popularity. After several meme coins experienced extreme rallies, more and more people tried to participate in the speculative assets. This resulted in a substantial increase in transactions and eventually in a congested blockchain due to the limited throughput. A side-effect is a severe increase in transaction fees, with fees on Ethereum passing 100 dollars per transaction. The Ethereum network has had its fair share of meme coins, however, these speculative tokens have now also found their way to Bitcoin.

Earlier this year, Non-Fungible Tokens (NFTs) found their way to the Bitcoin blockchain as users were able to inscribe videos, images and other content on satoshis, the smallest divisible unit of a single Bitcoin. This evolution caused other programmers to think of implementing fungible tokens on Bitcoin. These fungibles are now possible on Bitcoin as programmers introduced the BRC-20 token standard. This standard enables the mining and transferring of fungible tokens on the Bitcoin network. Due to the introduction of this new standard, users created a wide variety of these speculative meme coins, resulting in congestion on the Bitcoin network.

The introduction of the BRC-20 has caused some controversy as Bitcoin users have divided opinions on the matter. Some see the new token standard as spam as these tokens take up block space which results in slower transactions and higher fees. On the other hand, others are happy to see that the Bitcoin network is finally experiencing some technological improvements.

While Bitcoin experiences the downsides of congestion, Ethereum also benefits from some aspects of this congestion. In 2022, Ethereum shifted from Proof-of-Work to Proof-of-to-Stake, which caused the issuance of new Ether to drop drastically. In addition to new lower issuance, another upgrade of Ethereum implemented a burn mechanism that burns Ether when it reaches a certain threshold. Due to the spike in activity of Ethereum, over 147,000 Ether has been burned during the last 30 days, creating a deflationary Ethereum network. However, it doesn’t solve the issue of high transaction costs and transaction time.

During the past 30 days, 147.000 ETH was burned as activity increased

The sudden congestion of the biggest networks in the market displays the importance of scaling both networks.. The most well-known and used scaling solution on Bitcoin is the Lightning Network, a payment channel in which users experience low costs and fast transactions. However, the pace of adoption of the Lightning Network hasn’t been optimal as only 5,300 Bitcoins are located on the network.

The Ethereum network has seen the introduction of various scaling solutions such Optimism and Arbitrum. However, the main network still needs to increase its transaction throughput as scaling solutions on Ethereum are affected when the main networks are being congested.

Traditional Finance and Tech Firms participate in shared blockchain

On the ninth of May, an article was published on Businesswire which stated a group of traditional institutions that included Deloitte, Goldman Sachs and Microsoft are committed to joining a new blockchain network, called “Canton Network”. The new blockchain is being developed by an organization called Digital Asset which is led by Blythe Masters, ex-executive of JP Morgan. The organization aims to develop a privacy-enabled interoperable blockchain for institutional assets, which will aid in the synchronization of financial markets.

Traditional institutions enter the market by joining Canton Network

The network will be able to connect (currently) siloed ecosystems in financial markets which will create an interconnected network of assets, data and other vital information. The firms will start testing the new blockchain at the beginning of July. In the released article, the various firms state they have experimented in the past with blockchain technology, such as tokenizing financial instruments. However, usually these experiments are kept in-house and this provides a unique opportunity to interconnect the various institutions.

Introduction to the Hodl Team

Over the past three years, Hodl has grown from a small company into a brand with an international presence. During this period, Hodl’s team has grown to a team of 25+ colleagues. All team members have a valuable contribution to Hodl, however, there are some who have made Hodl as we know it today. In the series "Introducing the Hodl Team '', we delve deeper into key team members of Hodl and the first of this series is our Head of Trading, Jess Muntenaar. To read this blog, click the button below.

Read the interview with Jess Muntenaar

Interview with our Head of Trading, Jess Muntenaar

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