Source: Grayscale; Compilation: Jinse Finance

Key Points Overview

• The clarity of U.S. regulation on digital assets has been brewing for a long time—although the future path is still unfolding, policymakers have made significant progress this year.
• The market's focus on favorable regulation may have contributed to ETH's strong performance. Ethereum is the leader in the blockchain financial market, so if regulatory clarity can promote the adoption of stablecoins, tokenized assets, and/or decentralized finance applications, Ethereum may benefit from it.
• The Digital Asset Treasury (DAT)—public companies holding cryptocurrencies on their balance sheets—has surged in recent months, but investor demand may have reached saturation. The valuation premium for large projects is compressing.
• Bitcoin's price once hit an all-time high of about $125,000 but closed lower in August. Although Bitcoin's price movement in August was not as strong as other tokens, the pressure on the Federal Reserve's independence clearly reminds us why investor demand for Bitcoin is so robust.

By August 2025, the total market capitalization of cryptocurrencies stabilized around $4 trillion, but there were significant fluctuations behind the scenes. The cryptocurrency asset class encompasses various software technologies, each with different fundamental drivers, so token valuations do not always fluctuate in sync.

Despite Bitcoin's price decline in August, Ether rose by 16%. This second-largest public chain seems to benefit from investors' attention to regulatory changes, which may support the adoption of stablecoins, tokenized assets, and decentralized finance (DeFi) applications—Ethereum currently leads the industry in these areas.

Figure 1 uses Grayscale's "Crypto Track" framework (a rigorous digital asset classification system and index product suite developed in collaboration with FTSE Russell) to show the changes in various sub-tracks in August. The indices for currency, consumption and culture, and artificial intelligence (AI) crypto tracks all saw slight declines month-over-month. The weakness in the AI track reflects the poor performance of AI-related stocks in the public equity market. Meanwhile, the indices for finance, smart contract platforms, and utilities and services crypto tracks all rose during the month. Despite Bitcoin's price decline month-over-month, it reached an all-time high of about $125,000 in mid-August; ETH also hit an all-time high of just under $5,000.

Chart 1: Cryptocurrency Track Returns in August

GENIUS Act and the Future

We believe that Ethereum's recent strong performance is closely related to its fundamentals: most importantly, the increased transparency in U.S. regulation of digital assets and blockchain technology. We consider the passage of the GENIUS Act in July to be the most significant policy change this year. This act provides a comprehensive regulatory framework for payment stablecoins in the U.S. market (see "The Future of Stablecoins and Payments"). Ethereum is currently the leading stablecoin blockchain (measured by trading volume and balances), and the passage of the GENIUS Act drove ETH up nearly 50% in July. Similar factors seem to have propelled Ether higher in August.

However, U.S. policy changes this year extend far beyond stablecoins, covering a range of issues from crypto asset custody to banking regulatory guidance. Chart 2 summarizes what we believe to be the most important specific policy actions taken by the Trump administration and federal agencies regarding digital assets this year. These policy changes—and more to come—have stimulated a wave of institutional investment across the entire crypto industry (for more details, see "Institutional Chain Reaction").

Chart 2: Policy Changes Bring Greater Regulatory Clarity to the Crypto Industry

In August, Federal Reserve Governor Waller and Bowman both attended a blockchain conference in Jackson Hole, Wyoming, which would have been unimaginable a few years ago. This conference followed closely after the Federal Reserve's annual Jackson Hole Economic Policy Symposium. In their speeches, they emphasized that blockchain should be viewed as an innovation in financial technology, and regulators should strike a balance between maintaining financial stability and creating space for the development of new technologies.

In September, the Senate Banking Committee plans to review legislation on the structure of the cryptocurrency market—this legislation will cover areas of the cryptocurrency market beyond stablecoins. This Senate effort is based on the CLARITY Act, which passed with bipartisan support in the House in July. Senate Banking Committee Chairman Scott stated that he expects the market structure legislation to also gain bipartisan support in the Senate. However, there are still some significant issues that need to be addressed. Industry groups are particularly focused on ensuring that the market structure legislation includes protections for open-source software developers and non-custodial service providers. In the coming months, lawmakers may engage in ongoing debates on this issue (notably, Grayscale is a signatory to a recent industry comment letter to members of the Senate Banking and Agriculture Committees).

Is DAT Oversaturated?

In August, BTC performed poorly while ETH excelled, which was clearly reflected in the flow of funds across a range of venues and products.

Part of this drama unfolded on Hyperliquid, a decentralized exchange (DEX) that offers spot trading and perpetual contracts (see "The Rise of DEX" https://www.jinse.cn/blockchain/3716302.html). Starting on August 20, a Bitcoin "whale" (large holder) sold approximately $3.5 billion worth of BTC and immediately bought about $3.4 billion worth of ETH. While we cannot determine the investor's motivation, it is encouraging to see such a large-scale risk transfer occurring on a DEX rather than a centralized exchange (CEX). In fact, on the day with the highest trading volume this month, Hyperliquid's spot trading volume briefly surpassed that of Coinbase (Chart 3).

Chart 3: Surge in High Liquidity Spot Trading Volume

In August, the net inflow of exchange-traded products (ETPs) in the cryptocurrency market also reflected a similar preference for ETH. The U.S.-listed spot BTC ETP saw a net outflow of $755 million, marking the first net outflow since March. In contrast, the U.S.-listed spot ETH ETP saw a net inflow of $3.9 billion this month, following a net inflow of $5.4 billion in July (Chart 4). After a surge in net inflows for ETH over the past two months, both BTC and ETH ETPs hold more than 5% of their respective token circulation.

Chart 4: ETP Net Inflows Shift to ETH

Bitcoin, Ether, and many other crypto assets have also been supported by purchases from Digital Asset Treasuries (DAT). DAT refers to public companies that hold cryptocurrencies on their balance sheets and serve as access tools for equity investors. Strategy (formerly MicroStrategy) is the largest Bitcoin DAT, having purchased an additional 3,666 BTC (approximately $400 million) in August. Meanwhile, the two largest Ethereum DATs collectively purchased 1.7 million ETH (approximately $7.2 billion).

According to media reports, at least three new Solana DATs are in preparation, including investment tools sponsored by consortia such as Pantera Capital and Galaxy Digital, Jump Crypto, and Multicoin Capital, valued at over $1 billion. Additionally, Trump Media & Technology Group announced plans to launch a DAT based on the CRO token, which is associated with Crypto.com and its Cronos blockchain. Recent announcements from other DATs have mainly focused on Ethena's ENA token, Story Protocol's IP token, and Binance Smart Chain's BNB token.

Despite the ongoing provision of these investment tools by sponsors, price performance suggests that investor demand may have reached saturation. To measure the imbalance of supply and demand for DATs, analysts typically monitor their "mNAV," which is the ratio of the company's market capitalization to the value of the cryptocurrencies on its balance sheet. If there is excess demand for cryptocurrencies existing in the form of public equity tools (i.e., insufficient DATs), the trading price of mNAV may exceed 1.0; if there is excess supply of cryptocurrencies existing in the form of public equity tools (i.e., oversaturation of DATs), the trading price of mNAV may fall below 1.0. Currently, the mNAV of some large DATs seems to be converging towards 1.0, indicating that the supply and demand for DATs are tending towards balance (Chart 5).

Chart 5: Valuation Premium of DATs is Declining

Returning to Basics: Reasons to be Bullish on Bitcoin

Like all asset classes, public discussions about the cryptocurrency market often focus on short-term issues such as regulatory changes, ETF fund flows, and DATs. However, taking a step back to consider the core investment thesis may be helpful. While the cryptocurrency space contains many different assets, the rationale for Bitcoin's existence lies in providing a monetary asset and peer-to-peer payment system based on clear and transparent rules, independent of any specific individual or institution. Recently, the independence of the Federal Reserve has been threatened, which again reminds us why many investors are so interested in these assets.

For context, most modern economies adopt a "fiat" currency system. This means that currency has no explicit backing (i.e., it is not tied to any commodity or other currency), and its value is entirely based on trust. Throughout history, governments have repeatedly exploited this characteristic to achieve their short-term goals (e.g., re-election). This can lead to inflation and reduce people's trust in the fiat currency system.

Therefore, to make fiat currency effective, there needs to be a way to ensure that the government fulfills its commitment not to exploit the system. The method adopted by the U.S. and most developed market economies is to give central banks explicit targets (often in the form of inflation targets) and operational independence. Elected officials typically exercise some oversight over central banks to ensure democratic accountability. Aside from the temporary spike in inflation following the COVID-19 pandemic, this clear targeting, operational independence, and democratic accountability have achieved low and stable inflation in major economies since the mid-1990s (Chart 6).

Chart 6: Independent Central Banks Achieve Low and Stable Inflation

In the United States, this system is now under pressure. The fundamental drivers are not primarily inflation, but rather deficits and interest expenditures. The total debt of the U.S. federal government currently stands at about $30 trillion, equivalent to 100% of GDP. Despite the U.S. economy being in a peacetime with low unemployment, it has still reached the highest level since World War II. As the Treasury refinances debt at an interest rate of about 4%, interest expenditures continue to rise, consuming resources that could otherwise be used for other purposes (Chart 7).

Chart 7: Interest Expenditures Consume More of the Federal Budget

The "Inflation Reduction Act" (OBBBA) passed in July will lock in high deficits for the next 10 years. Unless interest rates decline, this will mean higher interest expenditures, further crowding out other uses of government revenue. As a result, the White House has repeatedly pressured the Federal Reserve to lower interest rates and has called for the resignation of Fed Chairman Powell. In August, with the dismissal of Lisa Cook, one of the six current members of the Federal Reserve's seven-member board, these threats to the Fed's independence escalated. While this may provide short-term benefits to elected officials, a weakened independence of the Federal Reserve increases the risk of long-term high inflation and currency weakness.

Bitcoin is a monetary system based on transparent rules and predictable supply growth. When investors lose confidence in the institutions that support the fiat currency system, they turn to trusted alternative currencies. Unless policymakers take steps to strengthen the institutions that support fiat currency—so that investors can believe in their commitment to maintain low and stable inflation in the long term—demand for BTC may continue to rise.

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