Source: Coinbase; Compiled by Wuzhu, Golden Finance
Summary
We expect constructive growth in the fourth quarter of 2024 due to US rate cuts and China's massive fiscal and monetary stimulus, which will enhance market liquidity and support BTC's performance.
The SEC's approval of iShares Bitcoin Trust options is a positive signal. These options can enhance institutional adoption and liquidity.
On-chain activity is growing, with increasing DEX volumes and rising Ethereum gas prices.
Market View
Investor Sentiment is Positive
Our impression of the Token2049 conference is that sentiment among cryptocurrency investors seems to be quite positive, although this may be related to the event coinciding with the Federal Reserve's 50 basis point rate cut on September 18. However, while many market participants are bullish on BTC, we have encountered some skeptics on ETH, as the token does not appear to have benefited 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 have previously explained why we believe this is an incomplete explanation for ETH’s underperformance relative to its peers.) In addition, some believe that there are more higher beta instruments (such as L2 tokens) benchmarked to ETH today than in the previous cycle, which has led to a crowding-out effect.
Meanwhile, we have not seen a major shift in themes in the crypto community that is consistent with our late 2023 outlook. That is, there seems to be more focus on emerging alternative Layer 1 networks rather than Ethereum Layer 2 networks, and the potential for Bitcoin L2 to provide enhanced programmability to the network and new revenue streams for miners.
At the same time, were not yet seeing a major shift in themes in the crypto community that would be consistent with our late 2023 outlook. That is, there seems to be more 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 was 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 the inclusion of USDC on the network. Sui is also accepting pre-orders for its SuiPlay0X1 handheld gaming console, which was previously previewed 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 highlights the potential utility of Telegram Mini Apps and the expansion of TON’s L1 in the crypto ecosystem.
Solana Mobile unveiled its second-generation phone, the Seeker, as a successor to the Saga phone, which is scheduled to be released in 2025 and is now open for pre-order.
Contrary to previous expectations from Breakpoint, Jump Crypto has not announced when the new Solana client Firedancer will go live on mainnet (it’s currently on testnet), but they did confirm that an early version called Frankendancer is already live.
WisdomTree announced the creation of WisdomTree Connect, a platform for tokenized real-world assets (RWAs) that “enables clients 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 formally voted to drop wBTC as collateral on its platform starting October 3.
Macro Outlook
Looking ahead, we are constructive on our outlook for Q4 2024, based largely on our bullish view of the current macro environment, as well as the idiosyncratic factors mentioned above. For example, just last week, we believed that 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 interest rate cuts, liquidity support for stocks, and a reduction in the reserve requirement ratio for banks - all in an effort to “boost lending and reduce the burden of existing lending.” The reduction in bank reserve requirements should be especially beneficial for market liquidity, which we previously found to be positively correlated with BTC performance. That being said, we expect the positive impact of these measures on crypto performance could be somewhat lagged.
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 above expectations at 3.0% (Bloomberg survey median of 2.9%), reaffirming our view that recession risk remains low in the near term. That being said, we are watching a possible US East (and Gulf) Coast port strike that could begin 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 think concerns about the impact the strike could have 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 spot Bitcoin ETF options, 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 think it could mean 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 the CME does have options on Bitcoin futures, those 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 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 options sellers or options buyers.)
On-chain activity
Ethereum transaction fees have risen slightly over the past week as on-chain activity generally recovered. While the absolute number of transactions and active addresses remained flat, the average gas price over the past 10 days (September 16-26) was up 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 were skewed higher by a group of high-priority and complex transactions.)
There is no single driver for the increase in activity. Ethereum decentralized exchange (DEX) volume 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 said, the increase in mainnet Ethereum activity was proportionally lower than the WoW changes in L2 and Solana activity — despite the latter not seeing similar fee increases. DEX volumes on Base and Solana increased by +28% and +35% WoW, respectively, while average transaction costs did not change. (In fact, average Base gas fees fell 10% WoW.) We believe this is due to the sensitivity of blockspace limits on mainnet Ethereum, demonstrating the success of scaling blockspace via integrated networks and L2.
Coinbase Trading Insights
The correlation between crypto and stock markets has been high recently, approaching 50%, driven by global easing policies in the US and China. ETH has seen a notable rebound, up 8% over the past 7 days, outperforming BTC. Altcoins also continued to see renewed attention from buyers. Gaming, Scaling 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. Funding rates were stable, and open interest was close to its six-month average. Taken together, this suggests the market is ready for what is typically a strong month for cryptocurrencies, with BTC rising in 8 of the past 10 Octobers.
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