Due to the U.S. interest rate cuts and China's large-scale stimulus measures, this will enhance market liquidity in Q4 and support BTC's performance.

Source: Coinbase

Compiled by: Wuzhu, Golden Finance

Summary

• We expect constructive growth in Q4 2024 due to U.S. interest rate cuts and China's large-scale fiscal and monetary stimulus measures, which will enhance market liquidity and support BTC's performance.
• The U.S. Securities and Exchange Commission's approval of iShares Bitcoin Trust options is a positive signal. These options can enhance institutional adoption and liquidity.
• On-chain activity is increasing, with DEX trading volume rising and Ethereum gas prices continuously climbing.

Market View

Investor Sentiment is Positive

Our impression from the Token2049 conference is that the sentiment among cryptocurrency investors seems quite positive, although this may be related to the event coinciding with the Federal Reserve's 50 basis point interest rate cut on September 18. However, while many market participants are optimistic about BTC, we encountered some skepticism regarding ETH, as the token does not seem to have benefited from the U.S. launch of the spot ETH ETF over 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 reason for ETH's underperformance relative to peers.) Additionally, some believe that higher beta tools based on ETH (such as L2 tokens) are more prevalent than in the previous cycle, leading to a crowding-out effect.

Meanwhile, we have not seen a significant shift in themes within the crypto community, which aligns with the outlook we presented at the end of 2023. That is to say, people seem to be more focused on emerging alternative Layer 1 networks rather than Ethereum Layer 2 networks, as well as the potential for Bitcoin L2 to provide enhanced programmability for the network and new revenue sources for miners. The demand for general consumer applications is also more pressing compared to crypto infrastructure protocols, corresponding with a broader review of crypto fundamentals.

Finally, several announcements were made during both events, including:

• Sui announced a partnership with MoviePass and will integrate USDC into its network. Sui is also accepting pre-orders for its SuiPlay0X1 handheld gaming console, which was previously teased in April.
• Days before the event, The Open Network (TON) announced a partnership with the popular Southeast Asian ride-hailing app Tada, continuing to draw attention at the conference. This highlights the potential utility of Telegram Mini Apps and TON's expansion as an L1 in the crypto ecosystem.
• Solana Mobile launched its second-generation phone, Seeker, as a successor to the Saga phone, which is set to be released in 2025 and is now open for pre-orders.
• Contrary to previous expectations before Breakpoint, Jump Crypto did not announce when the new Solana client Firedancer will go live on the mainnet (currently on the testnet), but they did confirm that an early version called Frankendancer is already live.
• WisdomTree announced the creation of WisdomTree Connect, a platform for tokenizing real-world assets (RWA) that "enables customers to interact over time with any WisdomTree-issued token on any supported blockchain in their wallet."
• 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 products on Stellar, Arbitrum, and Polygon.
• Tokenization-as-a-service provider Securitize also announced native support for Solana through the integration of Wormhole, aimed at providing cross-chain functionality for tokenized assets on its platform.
• Coinbase announced that cbBTC (wrapped Bitcoin) will soon launch on Solana, following its earlier launch on Ethereum and Base earlier this month. Note that the Sky community officially voted to discontinue wBTC as collateral on its platform starting October 3.

Macroeconomic Outlook

Looking ahead, we maintain a constructive outlook for Q4 2024, primarily based on our optimistic view of the current macro environment and the specific factors mentioned above. For instance, just last week, we noted that a more significant impact of the Federal Reserve's decision to cut rates by 50 basis points is that it provides cover for other monetary authorities to take more stimulative measures. Subsequently, China announced a large-scale dual fiscal and monetary stimulus plan, which includes record interest rate cuts, liquidity support for stocks, and a reduction in bank reserve requirements—all aimed at "promoting lending and alleviating the burden of existing loans." The reduction in bank reserve requirements should particularly benefit market liquidity, which we have previously found to be positively correlated with BTC's performance. That said, we expect the positive impact of these measures on cryptocurrency performance may be somewhat lagged.

In the U.S., despite concerns about the labor market raised during the last FOMC meeting, the economy remains resilient. The GDP data for Q2 2024 came in above expectations at 3.0% (with a Bloomberg survey median of 2.9%), reaffirming our view that the risk of an economic recession remains low in the short term. That said, we are monitoring a potential strike at East Coast (and Gulf Coast) ports in the U.S. that may begin next week (October 1), which could weigh on the economy in Q4 2024. JPMorgan estimates that supply disruptions from the strike could cost the economy about $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 goods costs. This does not change our view of the macro conditions for the cryptocurrency 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 these contracts cannot be traded until they are also approved by the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC). The timeline remains uncertain. However, we believe this means greater liquidity and trading volume for the asset class, as this product may primarily expand Bitcoin adoption among institutional investors (and possibly to a lesser extent retail investors). While CME does have Bitcoin futures options, these options are cumbersome for U.S. institutional investors from a management 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 the clearinghouse as the counterparty. This provides a new entry point for institutions into this space, potentially leading to new derivative/yield-enhancing strategies that were previously not possible. In short, we could see more market participants entering this space, attracting more liquidity. On the other hand, we believe the impact on the spot price of BTC may be minimal (at least initially), while the impact on volatility may be lower. (Note that the impact on implied volatility ultimately depends on whether most end users are option sellers or buyers.)

On-Chain Activity

In the past week, as on-chain activity generally rebounded, Ethereum transaction fees saw a slight increase. Although absolute transaction numbers and active addresses remained stable, the average gas price over the past 10 days (September 16 to 26) rose by 498% compared to the average price over the previous 30 days. The average transaction fee on Ethereum is now $1.69, up from $0.09 earlier this month. (For reference, the average fees were $6.45 and $0.59, respectively, skewed higher due to a set of high-priority and complex transactions.)

There is no single driver behind the increase in activity. Ethereum decentralized exchange (DEX) trading volume rose slightly, with a week-over-week increase of 9%. The USDC deposit rate on the lending platform Aave also moderately increased from 3.5% to 4.5%, indicating a slight rise in leverage. Meanwhile, as fees increased, the total ETH transfer volume rose by 17% week-over-week.

That said, the increase in mainnet Ethereum activity is lower than the week-over-week changes in L2 and Solana activity—although the latter did not experience a similar fee increase. DEX trading volume on Base and Solana grew by +28% and +35% week-over-week, respectively, while average transaction costs remained unchanged. (In fact, average Base gas fees decreased by 10% week-over-week.) We believe this is due to the sensitivity of block space limitations on mainnet Ethereum, demonstrating the success of integrating networks and L2 to expand block space.

Coinbase Trading Insights

Recently, the correlation between the cryptocurrency and stock markets has been high, nearing 50%, thanks to global easing policies from the U.S. and China. ETH has seen a significant rebound, rising 8% over the past 7 days, outperforming BTC. Altcoins continue to attract new attention from buyers. Gaming, scaling solutions, and Layer-0 are among the best-performing sectors, rising 17%, 11%, and 9% respectively over the past week.

Overall, key indicators suggest a strong market. Funding rates are stable, and open interest is close to a six-month average. Taken together, this indicates that the market is ready to enter the months when cryptocurrencies typically perform well, with BTC rising in 8 out of the last 10 Octobers.

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