- Over the last month, the crypto rally has broadened beyond Bitcoin to include other market sectors, notably smart contract platforms—the best performing FTSE Grayscale Crypto Sector since mid-October.
- The market is now discounting a more optimistic outlook, and active crypto traders appear to be positioned long, as futures open interest has picked up and the cost of leverage has increased. If the favorable news does not continue, there is a greater risk of disappointment.
- Encouragingly, lower-than-expected inflation for October should allow the Fed to remain on hold. If real interest rates have peaked and we continue to see progress toward spot ETF approvals in the US market, we believe the recovery in crypto valuations can continue.
The crypto rally that started with Bitcoin has since broadened and is now reflected in most other market segments. In addition to optimism about spot Bitcoin ETF approval and demand for Bitcoin’s properties as a digital alternative to gold, recent market performance highlights a variety of other themes, including competition among smart contract platforms, progress on blockchain-native video game development, and tokenization efforts by TradFi firms.
Based on the FTSE Grayscale Crypto Sectors Index Series, aggregate crypto valuations rose 40% between October 15 and November 13 (Exhibit 1). Although the Currencies Crypto Sector had led the market in 2023 prior to October, it has since lagged as the market rebound extends beyond Bitcoin. Instead, over the last month the Smart Contract Crypto Sector has outperformed, supported by a surge in the price of the Solana (SOL) token and several other smart contract platform assets. In total, the aggregate market capitalization of the FTSE Grayscale Crypto Sector Index Series increased to $1.2 trillion from $890 billion as of October 15, 2023.
Exhibit 1: Smart Contract Platforms Sector Recent Outperformance
Competition among smart contract platforms was a major theme in crypto markets in 2021, and has recently reemerged. In particular, SOL appreciated more than 150% since mid-October (Exhibit 2), likely driven by the announcement of Firedancer at the annual Solana Breakpoint conference, a new validator client developed by Jump Crypto intended to improve the network’s reliability. Among Layer 1 smart contract platforms, Solana has the third most daily active users and the second most full-time developers, and many investors seem to consider the chain the strongest competitor to the market leader, Ethereum.
Exhibit 2: Solana Outpacing Rivals
Other notable outperformers included Illuvium (ILV) and ImmutableX (IMX), components of the Consumer & Culture Crypto Sector. Illuvium has developed a suite of interoperable sci-fi games built on the ImmutableX blockchain; the project announced that its games will be released on the Epic Game Store on November 28.
Separately, asset tokenization by TradFi institutions remained in focus among market participants. While much of this activity will take place on private/permissioned blockchains, it could have certain implications for crypto markets, as well. In particular, Chainlink developers expects that its Cross-Chain Interoperability Protocol (CCIP) may help connect these two ecosystems. Chainlink’s LINK token has gained 94% since October 15.
After the runup in prices, active crypto traders now appear to be positioned fairly long. Bitcoin futures open interest has reached its highest level since the spring of 2022, and the cost of borrowing on both centralized and decentralized platforms surged on November 13 (Exhibit 3). There have also been substantial inflows into global crypto Exchange Traded Products (ETPs) in recent weeks, including spot-based products outside the US market and futures-based products in the US. Since October 15, Grayscale Research estimates that crypto ETP net inflows have totalled about $990mn, dominated by inflows into Bitcoin products.
Exhibit 3: Leverage more expensive on centralized and decentralized platforms
Crypto valuations now discount a more optimistic outlook, which means if the incoming news becomes less favorable, there is a greater risk of disappointment . Fortunately, the latest data continue to cut in a positive direction. For instance, consumer price inflation was lower than expected in October, which we would expect to raise the odds that the Federal Reserve is done tightening (bond yields declined sharply after the report). Fed rate hikes have weighed on crypto valuations, in our view, and the end to that process may help support a market recovery (Exhibit 4). We believe the recovery in crypto valuations can continue if real interest rates peak and we continue to see progress toward spot ETF approvals in the US market.
Exhibit 4: Lower real interest rates should support a crypto recovery
 Source: Token Terminal.
 Source: Electric Capital Developer Report. Not including Layer 0 chains.
 Source: Coin Metrics.
 Source: Glassnode.
 Live data suggest that borrowing costs fell back on Tuesday, November 14.
 Source: Grayscale Research based on Bloomberg data as of November 13, 2023.
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