The cryptocurrency market has had a bumpy ride this quarter after a very strong first quarter. The CoinDesk Market Index, which covers over 90% of crypto market capitalizations, has appreciated by 2.2% in the last three months. Bitcoin ( BTC), and ether ( ETH), however, have outperformed this benchmark with gains of 7% and 5.2% respectively.



The CoinDesk Market Index is a broad-based, market capitalization-weighted index that measures the performance of the digital assets market. It does so by comparing the trading volume and the exchange eligibility criteria.

This underperformance of the CMI relative to BTC or ETH is largely due to the fact that the quarter saw significant regulatory actions against large cap alternatives tokens combined with positive developments in Bitcoin. The result was a split in the cryptomarket between bitcoin and ether versus other digital assets.

Sector by sector

In the coinDesk DACS sector framework,, we continue to see this separation of market capitalization in the quarter. Sectors containing bitcoin and Ethereum [Currency, (CCY) +6% and Smart Contract Platform, (SMT), -2.4%, respectively] performed better than sectors with smaller capitalization, such as Digitization, (DTZ, (-28%) and Cultural and Entertainment, (CNE, (-35%)].

DACS Performance Attribution Q2 2023 (CDI Research).

April and May were both relatively quiet months, as the market traded in a range of prices established following the Silicon Valley Bank crash that occurred in March. The market was also range-bound, exhibiting lower realized volatility than average. Q2 2023 showed the lowest volatility for CMI (XBX), Ether (ETH), and Bitcoin (XBX).

CoinDesk - Unknown Average realized volatility by quarter, annualized (CDI Research).

While AI themes played out in traditional equity markets, traders of digital assets were focused on newly minted meme tokens such as BRC-20 ordinal and PEPE tokens that drove on-chain activities to the benefit staking miners and node validators.

The U.S. 2 year yield increased by 30bps, and the U.S. Treasury yield curve eliminated any rate reduction expectations for the remainder of the year.

The market remained range bound into June. First, the Binance and Coinbase SEC filings were tested, and then the BlackRock filing for a Bitcoin ETF. This last event focused attention on bitcoin and increased demand, which led to positive effects for the Currency Sector as well as for the broad CMI cap-weighted index.

This Bitcoin positive development combined with the SEC’s action against Coinbase, for allegedly listing certain alt coins as unregistered security, led to an acceleration in the ratio between Bitcoin Market Cap and Total Crypto Market Cap (Bitcoin Dominance, see Figure 3), to levels not seen in 2021, and a dramatic performance underperformance by small cap vs. large cap crypto tokens.

CoinDesk - Unknown Bitcoin Dominance (TradingView).

What’s next?

The monthly crypto exchange trading volume and Google Search Trends data (see Figure 4) have not recovered to levels of 2020-2021, indicating that the retail interest in cryptocurrency continues to stagnate because token prices are lower than during the bull market period 2021. The lower realized volatility of bitcoin (XBX), Ethereum (ETX) as well as the CMI index supports this reduced interest. Markets that move less are more attractive to traders.

We can only hope that with the recent rush of Bitcoin Spot Exchange Traded Fund filings and the newer offerings from institutional exchanges (such as the EDX), this interest will be revitalized. This will result in more consistent trading activity and volume, as well as new attention and focus on the asset class.

CoinDesk - Unknown Monthly crypto-exchange volume (The Block).

CoinDesk - Unknown Global search keyword activity (Google Trends).

The CoinDesk Indicators, which are part of our suite, show that both Bitcoin and Ethereum Trend Indicators indicate strong upward trends. They also suggest a move to higher prices than current levels. However, the macroeconomic environment remains neutral in the short term as recent increases in nominal and real rates are offset by positive credit conditions for the United States.

This net positive indicator should be compared to a US yield curve that is substantially inverted (see Figure 6), the most inverted since early 1980s. Inversions of the yield curve have historically been associated with recessions in the United States. The current inverted state began in July 2022.

U.S. Treasury yield curve spread, 10yr to 1yr rates (FRED).

This is not an exact recession indicator but it does indicate a possible recession in the next 6-12 month period, which will likely affect investor sentiment, market risk, and demand for digital assets and cryptocurrency. We continue to recommend using the Bitcoin and Ethereum Market Trend Indicators to take advantage of positive trends and to reduce risk in choppy or downward-trending markets.

Ben Schiller is the editor.