ALTERNATIVE MARKETS UPDATE – MID SEPTEMBER 2023

​The cryptocurrency markets have been relatively quiet this year. Aside from the surge at the beginning of the year, cryptocurrencies have remained relatively flat since then. The total market capitalization of the industry started slightly below $1tn at the beginning of 2023 and has remained at around $1.2tn since March 2023. The relatively low volatility of the industry also signals a certain level of cautiousness of investors, as the market environment is not great for the industry. In particular recession concerns are holding the industry back, as cryptocurrencies are notorious for sharp declines. Options data on cryptocurrencies also supports a more defensive notion of investors, as implied volatility is close to a record low. The lower degree of risk appetite is also visible in the Bitcoin (BTC) and Ethereum (ETH) dominance. This measure quantifies the total market capital of BTC and ETH respective to the total cryptocurrency market capitalization. Their dominance has been on the rise since Q3 2022 and shows fewer investments in riskier and emerging projects. Similarly, during these times stablecoin gained more importance in the space due to their stability compared to other coins. Figure 1 shows the total market capitalization of cryptocurrencies and the dominance of BTC, ETH, and USDT. Historically, these times are the most important ones for the space, as it drives innovation. With no frenzy, emerging companies are not in a rush to cash out which allows them more time to develop their projects.

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RESEARCH PERSPECTIVE VOL. 211 August 2023 Alternative Markets September 2023 The cryptocurrency markets have been relatively quiet this year. Aside from the surge at the beginning of the year, cryptocurrencies have remained relatively flat since then. The total market capitalization of the industry started slightly below $1tn at the beginning of 2023 and has remained at around $1.2tn since March 2023. The relatively low volatility of the industry also signals a certain level of cautiousness of investors, as the market environment is not great for the industry. In particular recession concerns are holding the industry back, as cryptocurrencies are notorious for sharp declines. Options data on cryptocurrencies also supports a more defensive notion of investors, as implied volatility is close to a record low. The lower degree of risk appetite is also visible in the Bitcoin (BTC) and Ethereum (ETH) dominance. This measure quantifies the total market capital of BTC and ETH respective to the total cryptocurrency market capitalization. Their dominance has been on the rise since Q3 2022 and shows fewer investments in riskier and emerging projects. Similarly, during these times stablecoin gained more importance in the space due to their stability compared to other coins. Figure 1 shows the total market capitalization of cryptocurrencies and the dominance of BTC, ETH, and USDT. Historically, these times are the most important ones for the space, as it drives innovation. With no frenzy, emerging companies are not in a rush to cash out which allows them more time to develop their projects. Figure 1: Total Cryptocurrency Market Cap and Dominance of Bitcoin, Ethereum and Tether, Sources: Stone Mountain Capital Research & CoinMarketCap, September 2023 Despite the rather negative sentiment towards the industry currently, cryptocurrencies are in a good state. An important driver for its future is regulatory clarity, which seems promising, as the industry has seen a lot of coverage in the past months and weeks. Most notably, Grayscale’s spot Bitcoin ETF won the lawsuit against the SEC. In a similar fashion, Ripple (XRP) is also in a promising position to win its lawsuit against the SEC, although the SEC appealed the current verdict that several transactions of XRP are not considered securities. These developments highlight the importance of regulatory clarity and emphasize clear and concise regulation sooner rather than later. The industry is also seeing continued support from large corporations, such as BlackRock and Visa. Another historically beneficial is the Halving of BTC which happens every four years. The Halving cuts the reward in BTC per mined block in half. The next Halving is taking place in April 2024 and reduces the amount of BTC per block from 6.25 to 3.125. Previous Halvings led to strong bull runs. According to the Stock-to-Flow model and past Halvings, BTC should reach a value of around $35k by April 2024 when mining rewards are cut to half. After this event, most strong bull runs were observed. After 480 days (the historical average of days to reach a new peak before contracting), BTC could reach as much as $147k if it follows previous rallies. Figure 2 provides further insights into the pre- and post-Halving rallies of BTC. Figure 2: Pre- and Post-Halving Rally of Bitcoin from 2011 to 2025E, Source: Pantera Capital, September 2023 House prices have been soaring since 2020, when Covid triggered a shift towards more working from home and many people decided to invest more into their homes. This development continued almost until 2023 with substantial price increases throughout this period. In the UK for example, house prices rose as much as 25% despite their economic problems. During this time demand strongly exceeded the available supply even though mortgage rates were very low for the most part. With the strongly increased interest rates, mortgages rates have risen dramatically and have surpassed the 7% in the US and the 8% mark in the UK, as shown in Figure 3. In the UK, house prices are falling significantly, with the monthly decline from July to August 2023 marking the largest decline since 2009. Demand has decreased with substantially elevated costs of living due to the still high inflation in the country. In addition, housing has become much more expensive. Not only have house prices risen significantly, the cost of the mortgages for these homes also skyrocketed. The latter argument is also correct for the US, but US citizens are no longer that strongly affected by inflation. Thus, on an aggregated level, in the US house prices are still rising, although many regions also see falling house prices. It seems that the decline in overall demand is still smaller than the impact of elevated mortgage rates. Figure 3: Growth of House Price Indices & Mortgage Rates in the US and UK over the Past Year, Sources: Halifax House Price Index, FHFA House Price Index, BBA Mortgage Rate & Federal Reserve, September 2023 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. 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