Source: Grayscale; Compiled by: Wuzhu, Golden Finance
summary
In September 2024, the cryptocurrency market performed well as the Federal Reserve cut interest rates for the first time.
While Bitcoin has outperformed the broader cryptocurrency market so far this year, gains in September were led by other segments, particularly artificial intelligence-related tokens in the utility and services crypto space.
The regulatory and political backdrop appears to be improving: the SEC approved an application to list spot Bitcoin ETP options, with others 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 about 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 Crypto 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) 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 for short-term Treasury bonds), a weaker US dollar, and a rise in gold prices (Chart 2). At the same time, financial sector stocks, which benefit from higher interest rates, underperformed the broader market. Later that month, macro stimulus measures from Chinese policymakers supported global equities. Bitcoin’s 8% return was middling on a risk-adjusted basis (i.e., taking into account the volatility of each asset), while CSMI’s 18% gain was among the best on a risk-adjusted basis.
Figure 2: The Fed’s first rate cut was the main factor driving the market’s gains
Our crypto sector framework highlights the breadth of digital asset market gains in September. Bitcoin and Ethereum 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%. This 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 Industries Lead Other Segments
Ethereum (ETH) has once again fallen behind Bitcoin (BTC), with the ETH/BTC price ratio hitting a new cyclical 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 in Q4 2024). Notably, since 2020, Ethereum has maintained at least 60% of the total market capitalization of the smart contract platform cryptocurrency space despite competition from new entrants (Exhibit 4).
Figure 4: Ethereum still dominates the smart contract platform crypto space
Net inflows into U.S.-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 spot Bitcoin ETPs 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. It is expected that other applications will 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 the related options product. [4]
Last month, there was also progress in the institutional adoption of cryptocurrency custody services. Specifically, it was reported that the Bank of New York (BNY) — the oldest bank in the United States, founded by Alexander Hamilton — would begin offering 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 offering 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 BNY would be allowed to custody crypto assets other than Bitcoin and Ethereum, stating that “while the actual negotiations involved two crypto assets, the structure itself is not dependent on what the cryptocurrency is.” [7]
The crypto industry also continued to play a major role in the U.S. election. First, former President Trump announced the formation 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 like artificial intelligence and digital assets while protecting our consumers and investors.” [9] At a subsequent event, she expressed her “recommitment to our nation’s global leadership in the 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’s price and Trump’s odds of winning on Polymarket recently broke down (Figure 5; for background, see our report (Polymarket: Crypto’s Election-Year Breakout App)).
Figure 5: The correlation between Trump’s chances of winning and Bitcoin’s price is disappearing
We continue to view the election as a significant risk event for the cryptocurrency markets, and from a macro perspective, a key consideration is whether the government is unified or divided: both parties have run large budget deficits when in control of the White House and Congress (see our report (Bitcoin and Macro Policy Issues with Biden vs. Trump) for more details). The election could also bring possible changes to cryptocurrency regulation in the U.S., as well as uncertainty about the potential impact of a massive tariff hike (if Trump wins).
However, even acknowledging the uncertainty surrounding the election in the short term, Grayscale Research expects that a favorable macro backdrop (such as Fed rate cuts and a “soft landing” for the economy) and various adoption trends (such as 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 unfeasible to provide custody services.
[7] Source: Bloomberg.
[8] Source: The New York Times, CryptoSlate.
[9] Source: Bloomberg.
[10] Source: The White House.
