Written by: Grayscale Research
Translated by: Golem;
Editor: Hao Fangzhou
Key points summary:
As the market pays increasing attention to the U.S. elections, Bitcoin rose in October. Polls indicate that the competition for the White House seat is very intense, but changes in financial assets and the implied odds from prediction markets suggest that investors now believe Trump has a higher chance of winning.
Bitcoin exchange-traded products (ETPs) saw significant net inflows this month, although some of the new demand may reflect hedging transactions by hedge funds (they may be long on Bitcoin ETPs and short on Bitcoin futures).
The intersection of cryptocurrency and AI technology continues to have profound impacts, including autonomous chatbots promoting their own meme coins. While it's easy to overlook their significance due to the amusing nature of these projects, they indicate that blockchain technology can serve as an effective tool for mediating economic value among humans, AI agents, and connected physical devices.
Market expectations in October predict Trump will win the election
American voters will head to the polls on Tuesday, November 5, and this election is expected to have a significant impact on the digital asset industry. Although polls indicate a competitive race for the White House, investor expectations seem to have shifted towards a victory for former President Trump last month. For instance, at the end of September, the odds from the blockchain-based prediction market Polymarket (https://polymarket.com/) showed Vice President Harris slightly ahead of Trump at that time. However, by the end of October, Polymarket's presidential election market indicated a 65% probability of Trump winning (Chart 1). Prediction markets are not infallible, and Harris could win the election, but the shift in investor expectations towards Trump's victory seems to have driven asset markets upward last month.
Chart 1: Prediction markets show higher odds of Trump winning the election
The likelihood of the financial markets anticipating a Trump victory can only be inferred indirectly, but Grayscale Research believes that the cross-asset returns in October are consistent with the 'Trump trade' (Chart 2). From a macro perspective, the appreciation of the dollar and depreciation of the yuan may reflect an increased awareness of tariff risks. Similarly, rising bond yields (falling bond prices) and increasing gold prices may reflect expectations of a growing budget deficit during Trump's presidency (https://www.grayscale.com/research/reports/potential-implications-of-u.s.-election-outcomes-on-digital-asset-markets) and heightened inflation. Bitcoin appreciated by 9.6% this month, making it one of the better-performing assets on a risk-adjusted basis. Trump's enthusiasm for Bitcoin and cryptocurrencies may mean that the rise in Bitcoin prices reflects market expectations for government support of a regulatory environment for Bitcoin. Additionally, like gold, Bitcoin may be reacting to potential macro policy changes during Trump's presidency (https://www.grayscale.com/research/market-commentary/bitcoin-and-the-macro-policy-issues-of-biden-v-trump2).
Chart 2: Bitcoin was one of the top-performing assets in October
The results of the U.S. elections could have significant implications for the digital asset industry. The next president and Congress may enact legislation targeting cryptocurrencies and could change tax and spending policies that impact broader financial markets. Grayscale Research believes that given the Senate's role in confirming presidential appointments to key regulatory agencies (such as the SEC and CFTC chairs), changes in Senate control may be particularly relevant to cryptocurrencies.
However, at the voter level, data shows that cryptocurrency is a bipartisan concern, with Democrats slightly more likely than Republicans to hold Bitcoin. Additionally, specific candidates from both parties have expressed support for cryptocurrency innovation. Regardless of which party is in power, Grayscale Research believes that comprehensive bipartisan legislation may be the best long-term solution for the U.S. digital asset industry.
Bitcoin arbitrage trading weakens the impact of net inflows into spot Bitcoin ETPs on price increases
In October, demand for spot Bitcoin exchange-traded products (ETPs) listed in the U.S. increased. As of October 31, total net inflows amounted to $5.3 billion, up from $1.3 billion in September, marking the highest level since February. Since the launch of spot Bitcoin ETPs in January, total net inflows have exceeded $24.2 billion, with U.S. ETPs currently holding about 5% of the total Bitcoin supply.
The net inflows into spot ETPs this year may exert upward pressure on Bitcoin prices. However, this relationship may not be one-to-one, partly because trading by hedge funds is becoming increasingly popular. Specifically, hedge funds (or other mature and/or institutional investors) can buy Bitcoin ETPs while shorting an equivalent amount of Bitcoin futures. This strategy aims to profit from the difference between spot and futures prices, sometimes referred to as Bitcoin 'basis trading' or 'arbitrage trading'. Because this strategy involves both buying Bitcoin (through ETPs) and selling Bitcoin (through futures), it should not have a significant impact on Bitcoin's market price.
There is currently no precise measure, but a report from the U.S. Commodity Futures Trading Commission (CFTC) indicates that since the launch of spot Bitcoin ETPs in January, some hedge funds have increased their net short positions in Bitcoin futures by nearly $5 billion. Based on this estimate, Grayscale Research believes that of the $24.2 billion net inflow into spot Bitcoin ETPs listed in the U.S. this year, approximately $5 billion may be used to pair spot/futures positions, which may not have contributed to the increase in Bitcoin prices (Chart 3).
Chart 3: Hedge funds may pair long Bitcoin ETPs with short futures
Blockchain as a value intermediary for AI agents
Despite a significant rise in Bitcoin prices in October, other segments of the crypto market returned poorly. For example, the Crypto Sector Market Index (CSMI)—a comprehensive index we developed in collaboration with FTSE/Russell—fell by about 6% (Chart 4). The worst-performing segments were utilities and services in the crypto industry (https://www.grayscale.com/crypto-products/grayscale-crypto-sectors/utilities-and-services). This diversified crypto industry includes many tokens related to decentralized AI technologies, some of which retreated this month after rising at the beginning of the year, including FET, TAO, RENDER, and AR.
Chart 4: Utilities and services sector lag behind other crypto segments
Despite some tokens' valuations retreating, the decentralized AI theme remains a focal point in the crypto market. We believe this is largely due to new applications showcasing the use of 'AI agents' on the blockchain—software capable of understanding goals and making autonomous decisions.
A key 'figure' is Truth Terminal, an AI chatbot created by researcher Andy Ayrey. The chatbot has an account on X (formerly Twitter) and autonomously interacts with other X users (i.e., without any input from Andy). The innovation is that Truth Terminal expressed interest in creating a meme coin GOAT and then deposited the new meme coin into an associated blockchain address. After acquiring ownership of the meme coin, Truth Terminal takes steps to promote the token to its social media followers.
Due to strong interest in this narrative, related meme coins have also appreciated by about 9 times, leading many to call Truth Terminal the 'first AI agent millionaire'. While this project appears humorous and lighthearted, it indicates that AI agents can understand economic incentives and can use blockchain to send and receive value. Other innovative projects are making breakthroughs in jointly owned AI agents, and many use cases are expected in the future.
These attempts are still in their early stages, but the latest wave of decentralized AI applications may realize one of the promises of blockchain technology in a tangible way: it can serve as a core financial infrastructure of the future, mediating value between humans, AI agents, and potentially various physical devices. We believe that using permissionless blockchains can be a better way for AI agents to accumulate and transfer resources compared to traditional payment infrastructures.
Summary
The U.S. elections on November 5 may dominate the cryptocurrency and traditional financial markets in the short term. The digital asset industry faces some important issues, and the outcomes of the White House and Congress may impact the development of the U.S. cryptocurrency business to some extent. Meanwhile, we are encouraged by the bipartisan ownership of digital assets, numerous macro trends driving Bitcoin adoption, and recent technological breakthroughs, particularly at the intersection of cryptocurrencies and AI. Therefore, regardless of next week's election results, we are optimistic that cryptocurrencies will continue to develop in the U.S.
