Galaxy: Will "Uptober" continue?

Source: Galaxy; Compiled by Golden Finance

Cryptocurrency flash crash, sharply reversing the “Uptober” gains. The flash crash on October 11 led to over $19 billion in leveraged positions being liquidated, with some altcoin prices plummeting by 50% to 75% within minutes, casting a shadow over the strong bullish sentiment in the market at the start of this month, where some major assets reached all-time highs.

After Bitcoin reached a historic high of $126,300 on October 6, it traded around $121,000 on the morning of October 10 (U.S. time), before briefly dipping to a low of $107,000 in the afternoon. While ETH last reached a historic high a few weeks ago (at $4,955 on August 24), its trading price was close to $4,800 before this crash, hitting a low of $3,500. At the lowest point of the crash, Bitcoin dropped 13% intraday, Ether fell 20%, and SOL decreased by 25%. Some long-tail altcoins saw declines of up to 50% to 75% during this crash.

As Thad Pinakiewicz from Galaxy Research wrote, “High leverage, weak order book depth, and a macroeconomic news event triggered this collapse.” The exchange's automatic deleveraging (ADL) exacerbated this trend, in some cases limiting the short positions of market makers and forcing them to withdraw liquidity significantly. Ultimately, the market stabilized on Friday evening and rebounded significantly last week.

However, due to a slight weakness in chip stocks, Federal Reserve Governor Christopher Waller's hawkish remarks (despite his previously dovish stance), the weak performance of regional banks, and comments made by President Trump regarding his talks with Russian President Vladimir Putin, risk appetite has weakened. The current trading price of Bitcoin remains at its lowest level since June. Meanwhile, the prices of gold and silver have reached historical highs, exceeding $4,300 and $54 per ounce, respectively.

Galaxy's Perspective:

The market was in high spirits as it entered October, but after mid-month, the foundations of the cryptocurrency and stock markets clearly appeared more fragile. The price of Bitcoin has dropped 16% from its all-time high of $126,200 set on October 6, and the S&P 500 index has fallen 1.85% from its all-time high of 6,735 set on October 8. The performance of other cryptocurrencies has mostly lagged behind Bitcoin. The risk aversion in October was further reflected in the prices of gold and silver reaching historical highs, as well as the 10-year U.S. Treasury yield falling below 4% for the second time in over a year.

The most significant factor behind the risk-averse sentiment may be concerns about whether the AI-driven capital expenditure boom has entered a bubble. The respected investor Paul Tudor Jones told CNBC last week that the current investment landscape “feels like 1999,” and that “all the elements are in place for some sort of explosion.” Others have criticized the cyclical nature of some announced AI trades, where chip manufacturers are acquiring stakes in massive companies while simultaneously buying GPUs, raising concerns about isolated trades driving stock prices up. However, this wave of AI enthusiasm is driven by well-capitalized large investment-grade firms, rather than mere speculative frenzy or cycles. Some examples include the $40 billion sale of Aligned Data Centers to a consortium led by BlackRock and Nvidia, Google's substantial deals with OpenAI and Coreweave, Meta's recent $1.5 billion deal to build a new data center in Texas, and Microsoft's deal with Nscale, among others. These are all significant investments made by well-capitalized existing players for the future, rather than speculative pursuits by dreamers.

Although the U.S. government strongly supported the development of the internet in the 1990s, its support for artificial intelligence will be even more significant by 2025. According to our analysis, in the 1990s, the U.S. government invested only hundreds of millions of dollars annually in internet-related R&D through programs such as “High-Performance Computing and Communications” and “Next Generation Internet.” Even when including the E-Rate program, which connects schools and libraries and costs about $2.25 billion, the funding comes from telecom fees rather than the federal budget, with federal investments still accounting for about 0.1-0.2% of federal annual spending (or 0.03% of GDP). In contrast, by 2025, the federal government itself will invest $3.3 billion annually in AI R&D, plus an additional $45 billion in semiconductor and infrastructure incentives under the CHIPS Act, accounting for about 0.7% of the federal budget (or 0.15-0.2% of GDP), roughly seven times the annual spending on internet growth in the 1990s. While the U.S. government primarily viewed internet infrastructure in the 1990s as an economic and educational opportunity, by 2025, it has explicitly stated that the race for artificial intelligence is a geopolitical priority, launching a national “AI Action Plan” and framing it from a critically significant geopolitical perspective. We believe that the competition between nations makes the development of AI appear more like a new space race rather than the formation of another internet bubble. It is likely to escalate into a new “Manhattan Project.” In 1944, spending on the “Manhattan Project” peaked at 4-5% of federal annual spending (about 0.85% of GDP). It is not an exaggeration to say that AI could evolve into an arms race to this extent—general artificial intelligence (AGI) may be at stake, and which country achieves this goal first will determine the global balance of power for decades to come, if not longer. In summary, compared to the support for the internet before the burst of the 1990s bubble, the government today has a noticeably more proactive attitude toward supporting artificial intelligence, and it may become even more proactive.

Given the immense potential of artificial intelligence, akin to the rise of the internet, as it continues to develop and permeate the global economy, we cannot quantify its impact on the market. Although the year 2000 did experience the burst of the “internet bubble,” that was merely a localized peak; even those who bought at the height of the S&P 500 would have reaped substantial returns if they held onto their investments until today. The key is that significant structural innovations bring about prosperity, and prosperity can lead to bubbles. However, if this prosperity is justified, even if the road is bumpy, it usually results in positive outcomes. We believe that the impact of artificial intelligence on the economy is still in a very early stage, and realizing its ultimate game-changing future will require more capital expenditures, the utilization of more energy, and the construction of more infrastructure.

Cryptocurrencies have also fallen into this anxiety to some extent, bearing the pressure of the market themselves. Recently, the flash crash on October 11 caused significant damage to asset prices, forming a short-term pricing mechanism characterized by fragility and silence. However, over the past few months, enthusiasm for Digital Asset Trust (DAT) has also waned, with the overall stock prices in this emerging industry generally declining. We do not know whether the “bubble has burst” (as BitMine Chairman Tom Lee said last Thursday), but potential investor fatigue has led to falling stock prices. As stock prices decline, these companies' ability to raise funds has also decreased, thereby weakening the purchasing power of cryptocurrencies that can be deployed structurally and are insensitive to price.

Nevertheless, we still believe that the market landscape for digital assets remains quite optimistic. Bitcoin, as digital gold, still occupies a favorable position to capitalize on the fundamental questioning of government fiscal and monetary prudential policies. The rise of tokenization and stablecoins, along with the extremely favorable regulatory outlook in the United States, should boost the prospects of other important digital assets like ETH and SOL.

There is an old saying: “The market climbs the wall of worry.” Currently, we are indeed moving upwards, and the worries have never disappeared. Does this mean we are on the right path? Perhaps so — but if Uptober is just this kind of scenery, then the team responsible for “November promotions” will probably be busy.