- Crypto became a more prominent topic in the U.S. presidential election debate in July as the Republican candidate spoke to a major Bitcoin conference, and it was reported that Democrats are considering a “reset” with the industry. The Harris Poll conducted on behalf of Grayscale earlier this year highlighted the importance of the crypto voting bloc, and Grayscale Research is encouraged to see a bipartisan focus on crypto policy issues.
- The election campaigns also brought attention to former President Trump’s views on the U.S. Dollar (he may favor weakness to support manufacturing).
- Separately, spot Ethereum ETPs launched in the US market; the products collectively saw about $6bn in volume over the first seven trading days.[1]
- Although crypto returns were mixed in July, we see current macro trends as increasingly favorable for the crypto asset class.
Although price performance was mixed in July 2024, the crypto industry seemed to take major steps forward with the launch of spot Ethereum exchange-traded products (ETPs) and the strong endorsement of Bitcoin from the Republican candidate for president, former President Trump. Together, these developments could help expand public blockchain adoption over time.
Volatility increased across broader financial markets as shifts in the macro outlook upended several popular investment themes. For example, large cap tech stocks and AI-related equities[2] underperformed significantly after leading the market in the first half of 2024. In contrast, homebuilders, regional banks, and small cap stocks outperformed following disappointing returns earlier in the year (Exhibit 1). The rotations appeared to be triggered by rising expectations for Federal Reserve rate cuts, as well as improved polling for former President Trump after the assassination attempt on July 13. Crypto performance was mixed during the month: Bitcoin gained about 7% and Ethereum fell about 5%; both were in the middle of the pack on a risk-adjusted basis.
Exhibit 1: Mixed crypto returns alongside equity rotation
Bitcoin’s comparatively strong performance during the month meant that Bitcoin dominance — its market capitalization relative to total crypto market capitalization — continued to trend higher (Exhibit 2). In part this may reflect solid fund flows into the asset: the U.S.-listed spot Bitcoin ETPs saw net inflows of about $3 billion in July, and cumulative inflows since launch now total more than $18 billion. Notably, press reporting indicated that a portion of the inflows reflected buying from public sector pension funds, an encouraging sign of institutional adoption.[3] In addition, Bitcoin selling by the German government concluded on July 13, which may have helped contribute to the recovery in prices after that point.[4] Meanwhile, distributions from the Mt Gox estate (a failed crypto exchange) appeared to have a limited impact on Bitcoin’s price. Mt Gox distributions started on July 4 and began appearing in user accounts on centralized exchanges on July 23, but there is no evidence that this triggered large-scale selling.
Exhibit 2: Bitcoin dominance still trending higher
For the longer-term outlook, the more important development in July, in our view, was the embrace of Bitcoin and crypto by former President Trump, as well as the potential evolution in views on crypto from some Democratic party leaders. For example, at the Bitcoin 2024 conference in Nashville, Trump said that he intends to be “the pro-innovation and pro-Bitcoin president that America needs and our citizens deserve.” He also defended a right to self-custody and said that, if he were elected, the U.S. government would “keep 100% of all the Bitcoin the U.S. government currently holds or acquires into the future.”[5] Trump’s efforts to win over crypto voters may also have prompted a change in strategy around crypto from the Democrats. For instance, the Financial Times reported last week that advisors to Vice President Harris have reached out to major crypto companies to “reset” relations.[6] Whether this results in a change in policy remains to be seen, but bipartisan support for the industry in Washington could support adoption and development of public blockchain technology.
In addition to the courting of crypto voters, aspects of the Trump Campaign’s policy platform could have implications for Bitcoin’s valuation over time. Both Trump and his running mate, Senator JD Vance, have previously expressed a desire for a weaker Dollar as a way to support domestic manufacturing (a weaker Dollar can make US exports more competitive in international markets).[7] The U.S. Dollar today is highly valued on standard metrics: the real (inflation-adjusted) trade-weighted value of the Dollar is at the 98th percentile of its historical range (Exhibit 3). Bitcoin is an alternative store-of-value asset that competes in this role with the U.S. Dollar. As a result, sustained depreciation in the value of the Dollar may support Bitcoin, as well as other store-of-value assets like physical gold.
Exhibit 3: Dollar’s value at high end of historical range
The U.S. presidential election also brought focus to Polymarket, a decentralized prediction market on the Polygon blockchain that allows users to buy and sell shares on the outcomes of future events using stablecoins (Polygon is a component of the Smart Contract Platforms Crypto Sector). Polymarket leverages blockchain technology to ensure transparent, secure, and tamper-proof transactions on a wide range of topics, including current events, politics, and public health issues. The platform has recently seen significant growth, with volume of $387 million in July alone.[8] The platform has also served as an effective barometer for public sentiment on the probability of various events, including the debate within the Democratic party about whether to replace President Biden as its nominee (Exhibit 4). Polymarket raised $45 million in a Series B funding round earlier this year with backing from Vitalik Buterin and Peter Theil’s Founders Fund.[9] Former CFTC Chairman J. Christopher Giancarlo chairs its advisory board, and journalist and statistician Nate Silver recently joined as an advisor.[10]
Exhibit 4: Polymarket showcasing decentralized applications
In addition to the array of political developments, the month of July also marked the launch of trading for spot Ethereum ETPs in the U.S. market (for more background on Ethereum, see Your Ethereum Questions Answered). Over the first seven trading days, the nine products saw a trading volume of about $6 billion. Compared to the first seven trading days for the Bitcoin ETPs (launched in January), the new Ethereum products saw 30% of the volume, or an amount roughly comparable to the difference in market capitalization for the two assets (Ethereum currently has 30% of Bitcoin’ s market cap).[11] Collectively the nine products saw net outflows immediately after launch. Ethereum’s price declined after the products launched, perhaps in part reflecting these outflows. However, Ethereum’s price decline was also correlated with the drawdown in tech stocks, so a broader pullback in investor risk appetite may also have contributed (Exhibit 5).
Exhibit 5: Ethereum drawdown was correlated with tech stocks
The Grayscale Crypto Sectors framework highlights that digital asset returns continue to be narrowly concentrated (for more details, see Grayscale Research Insights: Crypto Sectors in Q3 2024). For example, Exhibit 6 compares Bitcoin returns year to date with our Crypto Sectors Market Index (CSMI). The CSMI weights tokens by the square root of their market capitalization to reduce the weight of Bitcoin and to better represent the marketplace as a whole. Since the start of the year, while Bitcoin has gained nearly 50%, the CSMI has actually declined slightly. For investors who believe that the recovery in crypto markets may extend beyond Bitcoin, relatively depressed valuations for the broader market may imply an attractive entry point.
Exhibit 6: Bitcoin significantly outperforming broader crypto market
Besides Bitcoin, the other notable outperformer in July was Solana, which gained 18% in July. Solana's daily active addresses increased from 1.4 million to 2.3 million, showing a rise in user engagement. Its total value locked (TVL) grew from $3.6 billion to $5.5 billion, and DEX trading volume rose from $1.1 billion to $1.9 billion. These metrics highlight Solana's growing adoption and market presence, pushing its market cap to nearly $85 billion, close to its all-time high.[12]
Although former President Trump has now brought more attention to the issue, Bitcoin and crypto were always likely to feature in this year’s U.S. election. Earlier this year, The Harris Poll conducted a survey of likely voters on behalf of Grayscale (for details, see 2024 Election: The Role of Crypto). The results highlighted the macroeconomic trends driving digital asset adoption and the increasing maturity of the asset class. For instance, in the second phase of our survey, voters said they were paying more attention to Bitcoin because of geopolitical tensions, inflation, and risks to the U.S. dollar. Moreover, nearly half of voters (47%) now expect some of their investment portfolio to include crypto. In our view, neither political party can ignore this increasingly important voting bloc, and Grayscale Research is hopeful that crypto legislation will receive bipartisan focus in the next Congress.
Despite range-bound valuations over the last month, we see current macro trends as increasingly favorable for the crypto asset class. Bitcoin has become an important topic in the U.S. presidential election, a future White House may actively support a weaker U.S. Dollar, and the Federal Reserve appears ready to cut interest rates. Taken together, Grayscale Research sees a strong case for Bitcoin retesting its all-time highs later this year.
[1] First seven trading days were business days in range from July 23, 2024 to July 31, 2024
[2] AI-related equities refers to the AI theme as seen in Exhibit 1 (Indxx AI & Big Data)
[3] Source: Reuters, CoinDesk.
[4] Source: Arkham Intelligence data.
[5] Source: Bitcoin Magazine video.
[6] Source: Financial Times.
[7] Source: New York Times.
[8] Source: Dune Analytics. Data as of July 31, 2024.
[10] Source: The Block, Axios.
[11] Source: Bloomberg, Artemis, Grayscale Investments. Data as of July 31, 2024. For illustrative purposes only.
[12] Source: Artemis. Data as of July 31, 2024.
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