Grayscale Research Report: What makes the crypto market break the September curse?

Source: Grayscale; Compiled by Wuzhu, Golden Finance

Summary

• The cryptocurrency market performed well in September 2024 as the Federal Reserve cut interest rates for the first time.

• While Bitcoin has outperformed the broader cryptocurrency market so far this year, the gains in September were led by other segments, especially AI-related tokens in the utility and service cryptocurrency sectors.

• The regulatory and political backdrop appears to be improving: the SEC approved an application to list spot Bitcoin ETP options, and other institutions are expected to follow suit, while a New York bank appears set to offer cryptocurrency custody services. Meanwhile, former President Trump announced a new DeFi protocol, and Vice President Harris made supportive comments on digital assets and blockchain technology.

The start of the Federal Reserve’s rate cuts and various fundamental developments helped extend the cryptocurrency rally in September 2024, with the FTSE/Grayscale Cryptocurrency Sector Market Index (CSMI) posting its best monthly return since March(Figure 1).

Figure 1: Digital assets have higher returns in September 2024

On September 18, the US Federal Open Market Committee (FOMC) announced a larger-than-expected 50 basis point (bp) interest rate cut as inflation improved and downside risks in the US labor market increased. [1] The move triggered a further decline in bond yields (higher price returns on short-term Treasury bonds), a weaker US dollar, and a rise in gold prices (Figure 2). At the same time, financial sector stocks that could benefit from higher interest rates underperformed the broader market. Later that month, macro stimulus measures by Chinese policymakers supported global stock markets. Bitcoin’s 8% return is middling on a risk-adjusted basis (i.e. taking into account the volatility of each asset), while CSMI’s 18% gain is among the best on a risk-adjusted basis.

Figure 2: The Fed’s first rate cut was the main driver of the broader market’s gains

Our crypto sector framework highlights the breadth of digital asset market gains in September. Bitcoin and Ethereum have underperformed the FTSE/Grayscale Crypto Sector Index this month (Figure 3). The best performing market sector was the Utilities and Services crypto sector, which gained 25%. The sector includes many tokens related to artificial intelligence (AI) technology and benefited from sharp gains in AI-related tokens Fetch.ai and Bittensor. Several assets in the Utilities and Services crypto sector appear in the latest Grayscale Research Top 20 list, including Chainlink, Bittensor, Helium, Lido DAO, Akash Network, and UMA Protocol.

Figure 3: Utilities and Services Crypto Industry Leads Other Segments

Ethereum (ETH) is once again lagging behind Bitcoin (BTC), with the ETH/BTC price ratio hitting a new cycle low in mid-September. However, Ethereum remains the leader in the smart contract platform cryptocurrency space on most key metrics[2], and Grayscale Research believes that Ethereum may be able to beat its competitors for some time for a number of reasons (for more details, see Grayscale Research Insights: The Crypto Space, Q4 2024). Notably, Ethereum has maintained at least 60% of the total market capitalization of the smart contract platform cryptocurrency space since 2020, despite competition from new entrants (Exhibit 4).

Figure 4: Ethereum Still Dominates the Smart Contract Platform Crypto Sector

Net inflows into US-listed spot Bitcoin exchange-traded products (ETPs) picked up again, totaling +1.3 billion for the month. Cumulative inflows also hit a new high of +18.9 billion since the launch of these products on January 11, 2024, according to our estimates.

In related news, the ability to trade listed options on the spot Bitcoin ETP has recently made progress. In late September, the U.S. Securities and Exchange Commission (SEC) approved an application submitted by Nasdaq—the first step in a multi-stage regulatory approval process. Other applications are expected to be approved subsequently. [3] While the OCC and CFTC still need to provide their own approvals due to the OCC’s jurisdiction over options and the CFTC’s jurisdiction over Bitcoin, the SEC’s preliminary approval represents a positive step forward for the U.S. crypto ETP ecosystem. Similar to the approach taken with the spot Bitcoin ETP itself, Grayscale Research expects the regulator to consider applications from other issuers and take into account competitive factors to level the playing field before final approval. In stark contrast to the positive news for spot Bitcoin ETPs, spot Ethereum ETPs continued to see modest net outflows as the SEC delayed its decision on related options products. [4]

Last month, institutional adoption of cryptocurrency custody services also made progress.Specifically, it was reported that The Bank of New York (BNY) — the oldest bank in the United States, founded by Alexander Hamilton — would begin providing custody services for spot Bitcoin and Ethereum ETPs after receiving a “no objection” opinion from the SEC on the plan. [5] Traditional financial services firms were previously prohibited from providing custody of digital assets due to SEC Staff Accounting Bulletin (SAB) 121. [6] In a subsequent interview with Bloomberg, SEC Chairman Gensler seemed to suggest that New York banks would be allowed to custody crypto assets other than Bitcoin and Ethereum, saying: "While the actual negotiations involved two crypto assets, the structure itself does not depend on what the cryptocurrency is." [7]

The crypto industry also continued to play a major role in the US election. First, former President Trump announced the establishment of World Liberty Financial, a new decentralized finance (DeFi) lending platform based on Aave technology. [8] Second, Vice President Harris said in a speech to donors that her administration would "encourage innovative technologies such as artificial intelligence and digital assets while protecting our consumers and investors." [9] At a subsequent event, she expressed her "recommitment to the country's global leadership in areas that will define the next century," including "blockchain." [10] While no specific policy recommendations were made, we believe Harris' latest remarks are a step in the right direction.

Perhaps due to growing bipartisan support for the industry, the correlation between Bitcoin price and Trump’s odds of winning on Polymarket recently broke down (Figure 5; for background, see our report Polymarket: Cryptocurrency’s Election-Year Breakout Application).

Figure 5: Correlation between Trump’s win probability and Bitcoin price is disappearing

We continue to view the election as an important risk event for the cryptocurrency market. From a macro perspective, a key consideration is whether the government is unified or divided: both parties have run large budget deficits when they control the White House and Congress (for more details, see our report Bitcoin and Macro Policy Issues with Biden vs. Trump). The election could also bring possible changes to cryptocurrency regulation in the United States, as well as uncertainty about the potential impact of large-scale tariff increases (Trump wins).

However, even acknowledging near-term election uncertainty, Grayscale Research expects that a favorable macro backdrop (e.g., Fed rate cuts and a “soft landing” for the economy) and various adoption trends (e.g., stablecoins and prediction markets) should support crypto assets over time.

References

[1] Source: Federal Reserve.

[2] Ethereum has the most applications, the most developers, the highest 30-day fee revenue, and the most value locked in smart contracts. It is second only to Solana in terms of daily active users when including the largest Ethereum layer 2 networks. For users, the Ethereum ecosystem is equivalent to Ethereum Mainnet, Arbitrum, Optimism, Polygon, zkSync, Metis, Base, Blast, Mantle, Scroll, and Linea combined. Source: Dapp Radar, Electric Capital, Artemis, DeFi Llama. Data as of September 25, 2024.

[3] Source: Reuters.

[4] Source: Decrypt.

[5] Source: Bloomberg.

[6] SAB 121 requires regulated financial services firms to record digital assets on their balance sheets, making it economically unviable to provide custody services.

[7] Source: Bloomberg.

[8] Source: The New York Times, CryptoSlate.

[9] Source: Bloomberg.

[10] Source: The White House.