Source: Coinbase; Compiled by: Wuzhu, Golden Finance
summary
We expect Q4 2024 to be constructive due to rate cuts in the US and massive fiscal and monetary stimulus in China, which will enhance market liquidity and support BTC’s performance.
The SEC’s approval of iShares Bitcoin Trust options is a positive sign. These options could enhance institutional adoption and liquidity.
On-chain activity is growing, DEX volumes are increasing, and Ethereum gas prices are rising.
Market View
Investor sentiment is positive
Our impression from the Token2049 conference was that sentiment among crypto investors seemed fairly positive, though this could be related to the event coinciding with the Fed’s 50bp rate cut on September 18. However, while many market participants were bullish on BTC, we encountered some skepticism about ETH, as the token did not appear to benefit from the launch of a spot ETH ETF in the U.S. more than two months ago. (Note that many attribute this to the recent surge in Ethereum Layer 2 activity, but we’ve previously explained why we believe this is an incomplete explanation for ETH’s underperformance relative to its peers.) Additionally, some believe that there are more higher beta instruments (such as L2 tokens) benchmarked to ETH today than in the previous cycle, which is leading to a crowding-out effect.
At the same time, we have not seen a major shift in themes in the crypto community that is consistent with our outlook for late 2023. That said, there appears to be a greater focus on emerging alternative layer 1 networks than Ethereum layer 2 networks, and the potential for Bitcoin L2 to provide enhanced programmability to the network and new revenue streams for miners. There is also a more pressing need for general consumer applications than crypto infrastructure protocols, corresponding to a broader review of crypto fundamentals.
Finally, a number of announcements were made at both events, including:
Sui announced a partnership with MoviePass and is bringing USDC to the network. Sui is also taking pre-orders for its SuiPlay0X1 handheld gaming console, which it previously teased in April.
A few days before the event, The Open Network (TON) continued to attract attention at the conference by announcing a partnership with Tada, a popular ride-hailing app in Southeast Asia. This highlighted the potential utility of Telegram Mini Apps and the expansion of TON’s L1 in the crypto ecosystem.
Solana Mobile has launched its second-generation phone, the Seeker, as a successor to the Saga phone, which is scheduled to be released in 2025 and is now available for pre-order.
Contrary to previous expectations from Breakpoint, Jump Crypto has not announced when the new Solana client Firedancer will be live on mainnet (it’s currently on testnet), but they did confirm that an early version called Frankendancer is already live.
WisdomTree has announced the creation of WisdomTree Connect, a platform for tokenized real-world assets (RWAs) that “enables customers to interact with any WisdomTree-issued token on any supported blockchain in any wallet over time.”
Solana also appears to be attracting more RWA projects to its platform, with Franklin Templeton announcing plans to launch a money market mutual fund on the network, similar to its offerings on Stellar, Arbitrum, and Polygon.
Tokenization-as-a-service provider Securitize also announced native support for Solana through the integration of Wormhole, aiming to provide cross-chain capabilities for assets tokenized on its platform.
Coinbase announced that cbBTC (wrapped Bitcoin) will soon be available on Solana, following its launch on Ethereum and Base earlier this month. Note that the Sky community officially voted to drop wBTC as collateral on its platform starting October 3rd.
Macro Outlook
Looking ahead, we are constructive on our outlook through Q4 2024, based largely on our bullish view of the current macro environment, as well as the idiosyncratic factors discussed above. For example, just last week, we thought a more important impact of the Fed’s decision to cut rates by 50 basis points was that it provided cover for other monetary authorities to take more stimulus measures. Subsequently, China unveiled a massive dual fiscal and monetary stimulus package, which included record rate cuts, liquidity support for equities, and a reduction in bank reserve requirements—all in an effort to “boost lending and reduce the burden of existing lending.” The reduction in bank reserve requirements, in particular, should benefit market liquidity, which we previously found to be positively correlated with BTC’s performance. That said, we expect there may be a lag in the positive impact of these measures on cryptocurrency performance.
In the US, the economy has remained resilient despite concerns about the labor market raised at the last FOMC meeting. The Q2 2024 GDP figure came in higher than expected at 3.0% (Bloomberg survey median of 2.9%), reaffirming our view that recession risks remain low in the near term. That being said, we are watching a possible US East Coast (and Gulf of Mexico) port strike that could start next week (October 1st), which could weigh on the economy in Q4 2024. JPMorgan estimates that supply disruptions from the strike could cost the economy around $5 billion per day. However, we believe concerns about the strike’s potential impact on inflation are overstated, as shipping still accounts for only a small portion of the cost of goods. For now, this does not change our view on the macro picture for the crypto market.
Spot BTC ETF options?
The U.S. Securities and Exchange Commission (SEC) has officially approved options on spot Bitcoin ETFs, specifically BlackRock’s iShares Bitcoin Trust (IBIT), although the contracts cannot be traded until the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC) also approve them. That timeline remains uncertain. But we believe this means greater liquidity and volume for the asset class, as the product could expand Bitcoin adoption primarily among institutional investors (and potentially retail investors to a lesser extent). While CME does have options on Bitcoin futures, these options are cumbersome for U.S. institutional investors from a regulatory perspective.
However, IBIT options will allow this group to trade options on the underlying Bitcoin directly and help minimize credit risk, as investors will face a clearing house as a counterparty. This provides a new entry point for institutions to enter the space, potentially leading to new derivatives-based/yield enhancement strategies that were not possible before. In short, we could see more market participants enter the space, attracting more liquidity. On the other hand, we believe the impact on BTC spot price is likely to be minimal (at least initially), while the impact on volatility is likely to be low. (Note that the impact on implied volatility ultimately depends on whether most end users are option sellers or option buyers.)
On-chain activities
Ethereum transaction fees have risen slightly over the past week as on-chain activity has generally recovered. While the absolute number of transactions and active addresses have remained flat, the average gas price over the past 10 days (September 16-26) has risen 498% from the average price over the previous 30 days. The average transaction fee on Ethereum is now $1.69, compared to $0.09 at the beginning of the month. (For reference, the average fees were $6.45 and $0.59, respectively. They are skewed higher by a group of high-priority and complex transactions.)
There was no single driver for the increase in activity. Ethereum decentralized exchange (DEX) volumes rose slightly, up 9% week-over-week. USDC deposit rates on lending platform Aave also rose modestly from 3.5% to 4.5%, indicating a slight increase in leverage. Meanwhile, total ETH transfer volume increased 17% week-over-week as fees increased.
That being said, the increase in mainnet Ethereum activity was proportionally lower than the WoW changes in L2 and Solana activity — even though the latter did not see similar fee increases. DEX volume on Base and Solana grew by +28% and +35% WoW, respectively, while average transaction costs did not change. (In fact, average Base gas fees fell by 10% WoW.) We believe this is due to the sensitivity of blockspace limits on mainnet Ethereum, demonstrating the success of scaling blockspace via the integrated network and L2.
Coinbase Trading Insights
Recently, the correlation between cryptocurrencies and stock markets has been high, approaching 50%, aided by global easing policies in the United States and China. ETH has staged a notable rally, gaining 8% over the past seven days, outperforming BTC. Altcoins also continue to receive new attention from buyers. Gaming, Extended Solutions and Layer-0 were some of the best performing sectors, gaining 17%, 11% and 9% respectively over the past week. Overall, key indicators point to a strong market. Financing rates are stable and open interest is close to the six-month average. Taken together, this suggests the market is ready for what is typically a good month for cryptocurrencies, with BTC rising in eight of the last 10 Octobers.
