- Crypto markets performed well in September 2024 as the Federal Reserve delivered the first of several likely rate cuts.
- While Bitcoin outperformed broader crypto markets year to date, gains in September were led by other market segments, especially AI-related tokens in the Utilities & Services Crypto Sector.
- The regulatory and political backdrop appears to be improving: The SEC approved an application for the listing of options on spot Bitcoin ETPs and others are expected to follow, while Bank of New York looks set to offer crypto custody services. Meanwhile, former President Trump announced a new DeFi protocol and Vice President Harris made supportive comments about digital assets and blockchain technology.
The start of Fed rate cuts and a variety of fundamental developments contributed to a broadening crypto rally in September 2024, and the best monthly return for the FTSE/Grayscale Crypto Sectors Market Index (CSMI) since March (Exhibit 1).
Exhibit 1: Stronger returns for digital assets in September 2024
On September 18, the Federal Open Market Committee (FOMC) delivered a larger-than-expected 50 basis point (bp) rate cut due to progress on inflation and greater downside risks to the U.S. labor market.[1] The move triggered further declines in bond yields (and high price returns for short-maturity Treasuries), weakness in the U.S. Dollar, and appreciation in the price of gold (Exhibit 2). Meanwhile, equities in the Financials sector, which can benefit from higher interest rates, underperformed the broader market. Later in the month, macro stimulus by Chinese policymakers supported global equities. Bitcoin’s 8% return was in the middle of the pack on a risk-adjusted basis (i.e., accounting for each asset’s volatility), while the 18% gain in the CSMI ranked among the outperformers on a risk-adjusted basis.
Exhibit 2: First Fed rate cut was a major driver of broader markets
Our Crypto Sectors framework highlights the breadth of gains across digital asset markets in September. Bitcoin and Ethereum underperformed FTSE/Grayscale Crypto Sectors indexes during the month (Exhibit 3). The best-performing market segment was the Utilities & Services Crypto Sector, which gained 25%. This Crypto Sector includes many of the tokens related to artificial intelligence (AI) technologies and benefited from significant gains in AI-related tokens Fetch.ai and Bittensor. Several assets within the Utilities & Services Crypto Sector were featured in the latest Grayscale Research Top 20 list, including Chainlink, Bittensor, Helium, Lido DAO, Akash Network, and the UMA protocol.
Exhibit 3: Utilities & Services Crypto Sector led other market segments
Ethereum (ETH) again lagged Bitcoin (BTC), and the ETH/BTC price ratio reached a new low for the cycle in mid-September. However, Ethereum remains the category leader in the Smart Contract Platforms Crypto Sector on most key metrics[2], and Grayscale Research sees a variety of fundamental reasons why it may be able to stave off competitors for a time (for more details, see Grayscale Research Insights: Crypto Sectors in Q4 2024). Notably, since 2020, Ethereum has maintained at least a 60% share of the total market capitalization of the Smart Contracts Platforms Crypto Sector, despite competition from new entrants (Exhibit 4).
Exhibit 4: Ethereum still dominates Smart Contract Platforms Crypto Sector
Net inflows into the U.S.-listed spot Bitcoin exchange-traded products (ETPs) picked up again, totaling +$1.3 billion for the month. Cumulative inflows since the launch of these products on January 11, 2024, also reached a new high-water mark of +$18.9 billion, based on our estimates.
In related news, there has been recent progress for the ability to trade listed options on spot Bitcoin ETPs. In late September, the SEC approved an application submitted by Nasdaq—the first step in a multi-stage regulatory approval process. Other application approvals are expected to follow.[3] While the OCC and CFTC still need to provide their own approval due to the OCC’s jurisdiction over options and the CFTC’s jurisdiction over Bitcoin, the SEC’s initial approval represents a positive step forward for the U.S. crypto ETP ecosystem. Similar to the approach taken for the spot Bitcoin ETPs themselves, Grayscale Research expects regulators to consider applications from other issuers and to take competitive considerations into account to create a level playing field before final approval. In contrast to the positive news for spot Bitcoin ETPs, spot Ether ETPs continue to see modest net outflows, and the SEC postponed its decision on related options products.[4]
Institutional adoption also progressed for crypto custody services last month. Specifically, Bank of New York (BNY) — the nation’s oldest bank, founded by Alexander Hamilton — will reportedly begin offering custody services for the spot Bitcoin and Ethereum ETPs after receiving a “non-objection” to the plan from the SEC.[5] Traditional financial services firms had previously been barred from offering digital asset custody due to SEC Staff Accounting Bulletin (SAB) 121.[6] In a subsequent interview with Bloomberg, SEC Chair Gensler seemed to indicate that BNY would be allowed to custody crypto assets beyond Bitcoin and Ethereum, saying: “Though the actual consultation related to two crypto assets, the structure itself was not dependent on what the crypto was.”[7]
The crypto industry also continued to feature in the U.S. election race. First, former President Trump announced World Liberty Financial, a new decentralized finance (DeFi) lending platform based on Aave technology.[8] Second, Vice President Harris said in remarks to donors that her administration would “encourage innovative technologies like AI and digital assets, while protecting our consumers and investors.”[9] At a subsequent event, she said she would “recommit the nation to global leadership in the sectors that will define the next century” including “blockchain.”[10] While not offering concrete policy proposals, the latest comments from Harris were a step in the right direction, in our view.
Perhaps reflecting the more bipartisan support for the industry, the correlation between the price of Bitcoin and Trump’s odds of winning on Polymarket has recently broken down (Exhibit 5; for background, see our report Polymarket: Crypto’s Election-Year Breakout App).
Exhibit 5: Correlation between Trump win probability and Bitcoin price is breaking down
We continue to see the election as an important risk event for crypto markets, with a key consideration from a macro standpoint being whether there is unified or divided government: both parties have run large budget deficits when controlling both the White House and Congress (for details, see our report Bitcoin and the Macro Policy Issues of Biden v Trump). The election may also introduce possible changes to crypto regulation in the United States, as well as uncertainty about the potential impact of large-scale tariff increases (in a Trump win).
However, even acknowledging election uncertainty over the short-term, Grayscale Research expects that the favorable macro backdrop (e.g., Fed rate cuts and an economic “soft landing”) and a variety of adoption trends (e.g., stablecoins and prediction markets) should support crypto assets over time.
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[1] Source: Federal Reserve.
[2] Ethereum has the most applications, the most developers, the highest 30d fee revenue, and the most value locked in smart contracts. It has the second-highest second-highest number of daily active users after Solana when including the largest Ethereum Layer 2 networks. For users, Ethereum ecosystem equates to Sum of Ethereum mainnet, Arbitrum, Optimism, Polygon, zkSync, Metis, Base, Blast, Mantle, Scroll, and Linea. Source: Source: Dapp Radar, Electric Capital, Artemis, DeFi Llama. Data as of September 25, 2024.
[6] SAB 121 requires regulated financial services firm to record digital assets on their balance sheet, making it economically infeasible to offer custody services.
[8] Source: NY Times, CryptoSlate.
[10] Source: White House.
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The Barclays Global Aggregate Index is a market-weighted index of global government, government-related agencies, corporate and securitized fixed-income investments. The Bloomberg Barclays US 1-3 Year Treasury Bond Total Return Index is composed of eligible US treasuries with a time to maturity of at least 1 year but no more than 3. Bonds are priced on the bid side.
The Bloomberg US Curve 2-10 Steepener Index measures the performance of holding duration-neutral long and short positions across 2yr and 10yr Treasury futures with monthly rebalancing.
The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,946 constituents, the index covers approximately 85% of the global investable equity opportunity set. The S&P 500 Financials comprises those companies included in the S&P 500 that are classified as members of the GICS financials sector. The U.S. Dollar Index (DXY) tracks the strength of the dollar against a basket of major currencies.
The FTSE/Grayscale Crypto Sectors family of indexes measure the price return of digital assets listed on major global exchanges.
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