Galaxy: Will "Uptober" continue?

Source: Galaxy; Compiled by Golden Finance. A cryptocurrency flash crash severely dampened the October Uptober rally. The October 11th cryptocurrency flash crash resulted in the liquidation of over $19 billion in leveraged positions, with some altcoin prices plummeting by 50% to 75% in a matter of minutes, casting a shadow over the month's bullish start, which had seen some major assets reach new all-time highs. After hitting an all-time high of $126,300 on October 6th, Bitcoin traded around $121,000 on the morning of October 10th (US time), briefly hitting a low of $107,000 that afternoon. Although Ethereum (ETH) last reached a new all-time high a few weeks prior ($4,955 on August 24th), it had been trading near $4,800 before the recent crash, falling as low as $3,500. At the peak of the crash, Bitcoin fell 13% intraday, Ether 20%, and Solver (SOL) 25%. Some long-tail altcoins saw losses of as much as 50% to 75% during the sell-off. As Thad Pinakiewicz of Galaxy Research wrote, "High leverage, thin order book depth, and a single macroeconomic news item triggered the crash." This move was exacerbated by automatic deleveraging (ADL) on exchanges, which in some cases limited market makers' short positions and forced them to withdraw liquidity significantly. Ultimately, the market stabilized on Friday evening and rallied significantly last week. However, risk appetite weakened somewhat due to slight weakness in microchip stocks, hawkish rhetoric from Federal Reserve Governor Christopher Waller (despite his previous dovish stance), weak performance from regional banks, and comments from President Trump regarding his meeting with Russian President Vladimir Putin. Bitcoin is currently trading at its lowest level since June. Meanwhile, gold and silver prices both hit all-time highs, exceeding $4,300 and $54 per ounce, respectively.

Galaxy's Take:

Markets entered October on high note, but after mid-month, the fundamentals of both the cryptocurrency and stock markets appeared significantly more fragile. Bitcoin prices fell 16% from its all-time high of $126,200 on October 6th, while the S&P 500 fell 1.85% from its all-time high of 6,735 on October 8th. Other cryptocurrencies largely underperformed Bitcoin. October's risk aversion was further reflected in record highs for gold and silver prices, as well as the 10-year U.S. Treasury yield falling below 4% for the second time in over a year.

Perhaps the most significant factor behind the risk aversion is concern about whether the AI-driven capital spending boom is a bubble. Respected investor Paul Tudor Jones told CNBC last week that the current investment landscape "feels like 1999" and that "all the ingredients are in place for something to happen." Others have criticized the cyclical nature of some announced AI deals, with chipmakers acquiring stakes in hyperscalers alongside GPU acquisitions, and vice versa, raising concerns that isolated transactions are driving stock prices higher. However, this wave of AI activity is being driven by large, well-funded investment-grade firms, not just speculative mania or a cycle. Examples include the $40 billion sale of Aligned Data Centers to a consortium led by BlackRock and Nvidia, Google's massive deals with OpenAI and Coreweave, Meta's recent $1.5 billion deal for a new data center in Texas, and Microsoft's deal with Nscale. These are all real investments in the future by well-funded incumbents, not speculators chasing a pipe dream. While the US government strongly supported the development of the internet in the 1990s, its support for AI will be even more significant by 2025. According to our analysis, the US government invested only a few hundred million dollars annually in internet-related R&D in the 1990s through programs like the High Performance Computing and Communications program and the Next Generation Internet initiative. Even if we include the E-Rate program, which connected schools and libraries and cost approximately $2.25 billion but was funded by telecommunications fees rather than the federal budget, federal investment still accounted for approximately 0.1-0.2% of annual federal spending (or 0.03% of GDP). By comparison, by 2025, the federal government itself will invest $3.3 billion annually in AI R&D, plus $45 billion in semiconductor and infrastructure incentives under the CHIPS Act, representing approximately 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 US government in the 1990s primarily viewed internet development as an economic and educational opportunity, by 2025 it had explicitly stated the race to build AI as a geopolitical priority, launching a national "AI Action Plan" and framing it in almost existential geopolitical terms. We believe that this inter-state competition makes the development of AI look more like a new space race than another dot-com bubble. It could very well escalate into a new Manhattan Project. At its peak in 1944, spending on the Manhattan Project accounted for 4-5% of annual federal spending (approximately 0.85% of GDP). It's no exaggeration to say that AI at this level could become an arms race—artificial general intelligence (AGI) is at stake, and which country achieves it first will determine the global balance of power for decades to come, if not longer. In short, government support for AI is significantly more aggressive today than it was before the dot-com bubble of the 1990s, and it's likely to intensify. Given the enormous potential of AI, as with the rise of the internet, it's difficult to quantify its impact on the market as it continues to develop and permeate the global economy. While the dot-com bubble did burst in 2000, that was only a local peak. Even those who bought at the S&P 500's peak would have been handsomely rewarded if they had held on to it today. The key point is that major structural innovations lead to booms, and booms lead to bubbles. But if the boom is justified, even if the road is bumpy, it generally leads to a good outcome. We believe that AI's impact on the economy is still in its very early stages, and its ultimate game-changing future will require further capital expenditures, energy utilization, and infrastructure development. Cryptocurrencies are, to some extent, caught up in this anxiety and are experiencing their own market pressures. Most recently, the flash crash on October 11th dealt a significant blow to asset prices, creating a short-term price regime characterized by fragility and quiescence. However, enthusiasm for digital treasury companies (DATs) has waned over the past few months, leading to a general decline in share prices across the nascent sector. We don't know if the "bubble has burst," as BitMine Chairman Tom Lee stated last Thursday, but investor fatigue may have contributed to the decline. With falling share prices, these companies' ability to raise capital has also declined, reducing the purchasing power of structural and price-insensitive cryptocurrencies that can be deployed. Despite this, we believe the market landscape for digital assets remains quite positive. As digital gold, Bitcoin remains well-positioned to capitalize on fundamental market skepticism regarding government fiscal and monetary prudence. The rise of tokenization and stablecoins, coupled with an extremely favorable regulatory outlook in the United States, should boost the prospects for other key digital assets, such as ETH and SOL. As the old saying goes, "The market is climbing a wall of worry." While we are indeed on a sustained upward trajectory, the worry remains. Does this mean we are on the right track? Maybe so—but if Uptober is just like this, the team responsible for "November promotion" will probably have their hands full.