Original article from Grayscale Research
Compiled by | Odaily Planet Daily Golem (@web3_golem)
Summarize:
In August 2024, cryptocurrency valuations fell back, coinciding with a brief spike in financial market volatility. Bitcoin outperformed the overall crypto market, while Ethereum underperformed the overall crypto market.
Federal Reserve Chairman Powell hinted that rate cuts are coming, which could support Bitcoin and other assets that compete with the dollar (such as physical gold).
Ethereum’s scaling strategy may leave some investors uncertain about its long-term prospects, despite a significant increase in activity on its L2.
August saw an increase in stablecoin market capitalization, upgrades to some key protocols, and intensified discussions around digital privacy.
The market fluctuated significantly in August, and the weak dollar and falling interest rates will be beneficial to Bitcoin
In August 2024, global stock markets were largely unchanged overall, but there were significant intra-month fluctuations. After the weaker-than-expected employment report released on August 2, many risk asset prices fell, stock volatility soared, and the Chicago Board Options Exchange Volatility (VIX) Index exceeded 65%. However, subsequent economic data did not show further signs of danger, many market sectors rebounded, and the VIX Index quickly fell back below 20%.
Meanwhile, news of softening labor market conditions may have influenced the views of Fed policymakers. In his speech at the Jackson Hole annual conference on August 23, Fed Chairman Jerome Powell said that "the time has come to cut interest rates," which in part reflects the fact that "downside risks to employment have increased." Interest rate futures currently indicate that the central bank will reduce the policy rate by 100 basis points in the three remaining Federal Open Market Committee (FOMC) meetings this year.
Figure 1: The FOMC is expected to cut interest rates by about 100 basis points over the next three meetings
In summary, the brief volatility and signals of an impending rate cut left some changes in the market (see Figure 2). Returns on some strategies at the center of the storm fell sharply (including short volatility strategies and FX carry trades), the US dollar weakened against major currencies, while gold prices rose, and defensive assets such as high-quality bonds and consumer staples stocks outperformed. Bitcoin fell slightly (-8.5%), while Ethereum fell more (-21.8%) and was one of the assets that underperformed on a risk-adjusted basis (discussed further below).
Figure 2: Ethereum underperformed during the August pullback
We believe that if a weaker dollar and lower interest rates persist, this should be bullish for Bitcoin. Like physical gold, Bitcoin is an alternative monetary system that competes with the dollar in international markets. Lower U.S. interest rates weaken the dollar's competitive advantage and could benefit assets that compete with the dollar, including other fiat currencies, physical gold, and Bitcoin. Over the past few years, as digital assets have become more integrated with mainstream financial markets, Bitcoin has been negatively correlated with both the level of real interest rates and the value of the U.S. dollar (Figure 3). Therefore, those who are concerned about the impact of a weaker dollar on their portfolios may consider allocating funds to Bitcoin for diversification.
Figure 3: Bitcoin is negatively correlated with the value of the U.S. dollar
Pessimism about Ethereum is unlikely to change in the short term
As mentioned above, Ethereum suffered a significant decline in early August and failed to stage a significant rebound by the end of the month. We believe this partly reflects long positions in CME-listed futures and perpetual futures. In May 2024, traders significantly increased their gross perpetual futures positions and net CME futures positions around the time the SEC approved issuers’ U.S. spot Ethereum exchange-traded product (ETP) 19b-4 applications. , perhaps judging that Ethereum’s price will rise further after receiving full regulatory approval; this approval was obtained in July 2024, and the US spot Ethereum ETP began trading shortly thereafter. We believe that an excess of speculative positioning contributed to the significant price pullback in Ethereum and limited the price recovery thereafter.
More fundamentally, the Ethereum network is undergoing a major transition that may leave some investors uncertain about its future. As we explored in previous articles, Ethereum plans to achieve greater scaling by moving more transactions to L2 networks, which will periodically settle to the Layer 1 mainnet.
This strategy is working: Ethereum L2 has flourished this year (Figure 4), and major companies such as Sony have announced projects to build in Ethereum. However, this has also led to lower fee income for the mainnet, which has a potential impact on the value of ETH. In addition, this uncertainty may have led to relatively low net inflows for the spot Ethereum ETP launched in July. Grayscale Research believes that Ethereum's expansion strategy is working effectively, and the current market pessimism about Ethereum is unfounded, but the shift in market consensus may take some time.
Figure 4: Ethereum’s scaling strategy is working
The currency encryption sector and the financial encryption sector still have bright spots
The FTSE/Grayscale Cryptocurrency Industry Index Series also fell in August, but less than Ethereum (Figure 5). Despite the overall market setback, there are still some noteworthy bright spots, especially in the currency crypto sector and financial crypto sector.
Figure 5: Bitcoin outperforms most of the cryptocurrency space
Cryptocurrency privacy asset ZCash (ZEC) rose 29.5% in mid-August before retreating later that month. In early August, ZCash’s founders joined Shielded Labs to develop a “Crosslink” hybrid consensus mechanism. Historically a proof-of-work protocol, this upgrade will add proof-of-stake as a finality layer designed to enhance network security and allow ZEC holders to stake. The move has received a lot of support, including donations from Ethereum founder Vitalik Buterin and others. In addition, the second ZEC halving event is scheduled for later this November, further fueling investor interest.
Aave Protocol is another bright spot in the financial crypto sector. The protocol’s weekly active borrower count hit a record high, and its governance token AAVE rose 21%. Meanwhile, a new proposal from the Aave community would deploy a “buy and distribute” model that uses Aave’s excess revenue to buy AAVE tokens from the market and distribute them to stakers—similar to the smart destruction engine used by the Maker Protocol. The proposal is expected to go live by the end of 2024, but still requires community approval.
Stablecoin market capitalization rose again in August and is now approaching its previous all-time high (Figure 6). Importantly, Apple's software update may bring more stablecoin payment adoption to the market. Circle CEO Jeremy Allaire said that Circle's USDC stablecoin will soon be able to "tap to pay" on the iPhone due to Apple's decision to open near-field communication payment functions to third-party developers. This feature is independent of Apple Pay and does not involve a direct relationship between Circle and Apple, but it can enable USDC transactions through FaceID confirmation and blockchain settlement. In addition, Latin American e-commerce platform Mercado Libre announced the creation of its own dollar-pegged stablecoin, while stablecoin issuer Tether said it would create a token pegged to the UAE dirham.
Figure 6: Stablecoin market capitalization rises
Finally, there has been growing attention on the potential connection between blockchain technology and digital privacy following the arrest of Telegram founder Pavel Durov in France. French authorities said the charges were related to “failure to mitigate” the misuse of the encrypted messaging app for illicit activities. TON fell more than 20% following the news, before recovering slightly in the following days.
Outlook: Selling pressure ends, fundamentals improve, Bitcoin is expected to reach new highs
Since the first quarter, the price of Bitcoin has remained in a fairly narrow range, as the cryptocurrency market has benefited from positive fundamental news on the one hand, but has also been affected by some selling pressure on the other. Grayscale Research believes that the selling pressure from the German government, Mt Gox legacy, etc. has basically passed, and the impact of improved fundamentals should gradually emerge. If the US labor market remains stable, the Fed's interest rate cuts and US policy changes around the crypto industry may allow Bitcoin prices to re-attempt to break through previous highs later this year.
We believe the main downside risk to crypto valuations is further increases in unemployment and a possible recession. Investors should therefore pay close attention to upcoming labor market data, including the next monthly jobs report, scheduled for September 6. However, even with recession risk, Grayscale Research believes that the market has a low tolerance for a deep recession, and we believe policymakers have an incentive to respond to economic problems in the early stages by printing money and spending. This unfettered approach to monetary and fiscal policy is one reason some investors choose to invest in Bitcoin; therefore, periods of economic weakness may further strengthen the long-term value investment case for Bitcoin.
