- Bitcoin gained in October as markets looked ahead to the U.S. elections. Polls point to a tight race for the White House, but shifts in financial assets and the implied odds from prediction markets suggest investors now see higher odds of a Trump win.
- Bitcoin exchange-traded products (ETPs) saw substantial net inflows during the month[1], although a portion of the new demand could reflect paired trades by hedge funds (who may take long positions Bitcoin ETPs and short positions Bitcoin futures).
- The intersection of crypto and AI technologies continued to bring thought-provoking developments, including autonomous chatbots promoting their own memecoins. While it can be easy to dismiss these projects due to their playful nature, they are demonstrating that blockchain technology could be an effective tool for intermediating economic value among humans, AI agents, and networked physical devices.
U.S. voters will go to the polls on Tuesday, November 5, in an election that is expected to have significant implications for the digital assets industry. Although polling suggests a tight race for the White House, investor expectations seemed to have shifted over the last month toward a victory for former President Trump. For example, at the end of September, odds from blockchain-based prediction market Polymarket said that Vice President Harris held a slight edge over Trump at the time (for background, see Polymarket: Crypto’s Election-Year Breakout App). However, by the end of October, Polymarket’s presidential election market suggested that Trump had a 65% probability of victory (Exhibit 1). Prediction markets are not infallible, and Harris may win the election, but the shift in investor expectations toward a Trump victory seemed to drive asset markets over the last month.
Exhibit 1: Prediction markets assigned higher odds to a Trump win
Whether financial markets are pricing in higher odds of a Trump victory can only be inferred indirectly, but Grayscale Research sees cross-asset returns during October as consistent with a “Trump trade” (Exhibit 2). From a macro perspective, the U.S. Dollar appreciated and the Chinese Yuan depreciated, perhaps reflecting higher perceived risks of tariffs. Similarly, bond yields increased (bond prices declined) and the price of gold increased, which could reflect expectations for larger budget deficits and more inflation under a Trump presidency. Bitcoin appreciated 9.6% during the month and was among the better-performing assets on a risk-adjusted basis. The former president has enthusiastically embraced Bitcoin and crypto, so its appreciation could reflect expectations of a pro-Bitcoin regulatory environment. Moreover, Bitcoin, like gold, may be responding to potential macro policy changes under a Trump presidency.
Exhibit 2: Bitcoin among the outperforming assets in October
The outcome of the U.S. elections could potentially have a major impact on the digital assets industry. The next president and Congress may take up crypto-specific legislation and could make changes to tax and spending policies that affect broader financial markets. Grayscale Research believes a change in control of the Senate could be particularly relevant for crypto, given the Senate’s role in confirming presidential appointments of key regulators, like the chairs of the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC). At the constituent level, however, data show that crypto is a bipartisan issue, with slightly higher levels of Bitcoin ownership among Democrats than Republicans.[2] Moreover, specific candidates from both parties have expressed support for crypto innovation. Regardless of which party is in control, Grayscale Research believes that comprehensive bipartisan legislation could be the best long-term solution for the digital assets industry in the United States (for more detail, see Potential Implications of U.S. Election Outcomes on Digital Asset Markets).
Demand for the U.S.-listed spot Bitcoin exchange-traded products (ETPs) increased during October. Through October 31, net inflows totaled +$5.3bn, up from +$1.3bn in September and the highest since February. Since the launch of spot Bitcoin ETPs in January, net inflows have totaled +$24.2bn, and the U.S. ETPs now hold about 5% of the total Bitcoin supply.
Net inflows into the spot ETPs this year have likely put upward pressure on Bitcoin’s price. However, the relationship may not be one-for-one, in part due to an increasingly popular hedge fund trade. Specifically, a hedge fund (or other sophisticated and/or institutional investors) may buy a Bitcoin ETP and simultaneously sell short an equivalent Dollar amount of Bitcoin futures. This strategy is designed to benefit from the difference between spot and futures prices and is sometimes referred to as the Bitcoin “basis trade” or “carry trade.”[3] Because the strategy involves both buying Bitcoin (through the ETP) and selling Bitcoin (through futures), it should not have a meaningful impact on Bitcoin’s market price.
There is no exact measure of this activity, but a report from the CFTC notes that some hedge funds[4] have increased their net Bitcoin futures short position by nearly $5bn since the spot Bitcoin ETPs launched in January.[5] Based on this estimate, Grayscale Research believes that roughly $5bn of the $24.2bn of net inflows into the U.S.-listed spot Bitcoin ETPs this year could have been for paired spot/futures positions, and therefore likely has not contributed to Bitcoin price appreciation (Exhibit 3).
Exhibit 3: Hedge funds may pair Bitcoin ETPs longs with shorts in futures
Despite the notable increase in Bitcoin’s price in October, returns for other crypto market segments were lackluster. For example, the Crypto Sectors Market Index (CSMI) — our composite index developed in partnership with FTSE/Russell — declined about 6% (Exhibit 4). The worst-performing market segment was the Utilities & Services Crypto Sector. This diverse Crypto Sector includes many of the tokens related to decentralized AI technology, several of which pulled back during the month after gains earlier in the year, including FET, TAO, RENDER, and AR.[6]
Exhibit 4: Utilities & Services lagged other crypto sectors
Despite the retreat in certain token valuations, the decentralized AI theme remained a dominant crypto market focus.[7] We believe in large part this was due to new applications showcasing blockchain use by “AI agents” — software capable of understanding goals and making autonomous decisions.
A key emerging figure has been Truth Terminal, an AI chatbot created by researcher Andy Ayrey. The chatbot has an account on X (formerly Twitter) and engages with other X users autonomously (i.e., without any input from Andy). The innovation in this case is that Truth Terminal expressed an interest in creating a memecoin $GOAT, then received a deposit of the new memecoin to an associated blockchain address.[8] Once it had an ownership stake in the memecoin, Truth Terminal took steps to promote the token to its social media followers. As a result of widespread interest in this story, the associated memecoin appreciated ~9x[9], leading to many call Truth Terminal the “first AI agent millionaire.” Although this project was deliberately humorous and lighthearted, it demonstrates that AI agents can understand economic incentives, and that they can use blockchains to send and receive value. Other innovative projects are making breakthroughs in co-owned AI agents, with many future use cases.[10]
Although these are still early-stage projects, the latest wave of decentralized AI applications may deliver on one of the promises of blockchain technology in a tangible way: that it can serve as the core financial infrastructure for the future, which will need to intermediate value between humans, AI agents, and likely a wide array of physical devices. We believe that using permissionless blockchains can be a superior way for AI agents to accumulate and transfer resources compared to traditional payments infrastructure.
The U.S. election on November 5 will likely dominate crypto and traditional financial markets over the short term. There are important issues on the line for the digital assets industry, and outcomes for the White House and both chambers of Congress could affect crypto business development in the U.S. on the margin. At the same time, we are encouraged by the bipartisan ownership of digital assets, by the many macro trends driving Bitcoin adoption, and by recent technological breakthroughs, particularly at the intersection of crypto and AI. As a result, we are optimistic that crypto will continue to develop in the United States, regardless of the election outcomes next week.
[2] https://www.grayscale.com/globalassets/harris-poll/grayscale-crypto-election-research-report.pdf
[3] For example, the November CME Bitcoin futures contract is currently about 10% (annualized) above the Bitcoin spot price. At the time of expiry of the futures contract, the two prices need to be the same. Therefore, this structure can generate returns as the two prices converge.
[4] Referred to as “leveraged funds” in the report.
[5] Source: CFTC Commitments of Traders (COT) reports.
[6] Artemis. Examples are chosen for illustrative purposes as large AI-related assets by market cap and large negative contributions to the Utilities and Services Sector in October 2024.
[7] Kaito
[9] Source: Artemis. Return from Oct 13 through Oct 31, 2024.
[10] Cointelegraph and OLAS
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