Source: Coinbase; Translated by Wuzhu, Jinse Finance
Summary
- We expect constructive growth in Q4 2024 due to US rate cuts and China's large-scale fiscal and monetary stimulus measures, which will enhance market liquidity and support BTC's performance.
- The SEC's approval of the iShares Bitcoin Trust options is a positive signal. These options can enhance institutional adoption and liquidity.
- On-chain activity is growing, DEX trading volume is increasing, and Ethereum gas prices are rising.
Market Outlook
Positive Investor Sentiment
Our impression from the Token2049 conference is that the sentiment of Cryptocurrency investors seems quite positive, although this may be related to the event coinciding with the Fed's 50 basis point rate cut on September 18. However, while many market participants are bullish on BTC, we encountered some who are skeptical about ETH, as the token does not appear to have benefited from the launch of the US spot ETH ETF a couple of months ago. (Note that many attribute this to the recent surge in Ethereum Layer 2 activity, but we've previously explained why we think this is an incomplete reason for ETH's underperformance relative to its peers.) Additionally, some believe that higher beta tools benchmarked to ETH (such as L2 tokens) are more prevalent than the previous cycle, leading to a crowding-out effect.
Meanwhile, we have not yet seen a major shift in the themes of the crypto community, which is consistent with the outlook we proposed at the end of 2023. That is, people seem 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. Demand for general consumer applications also appears more urgent compared to a broader scrutiny of crypto fundamentals.
Finally, some announcements were made at the two events, including:
- Sui announced a partnership with MoviePass and will integrate USDC into the network. Sui is also taking pre-orders for its SuiPlay0X1 handheld gaming device, which was previewed in April.
- In the days leading up to the event, The Open Network (TON) announced a partnership with the popular Southeast Asian ride-hailing app Tada, continuing to generate 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 planned for release in 2025 and is now open for pre-orders.
- Contrary to expectations at Breakpoint, Jump Crypto did not announce when the new Solana client Firedancer will go live on the mainnet (currently in testnet), but they did confirm an early version called Frankendancer is live.
- WisdomTree announced the creation of WisdomTree Connect, a platform for tokenizing real-world assets (RWAs) that "enables clients to interact with any WisdomTree-issued token on any supported blockchain in their 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 products on Stellar, Arbitrum, and Polygon.
- Tokenization-as-a-service provider Securitize also announced native support for Solana through integration with Wormhole, aiming to provide cross-chain functionality for the tokenized assets on its platform.
- Coinbase announced that cbBTC (wrapped Bitcoin) will soon launch on Solana, after previously launching on Ethereum and Base earlier this month. Note that the Sky community has officially voted to abandon 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 macroeconomic environment and the specific factors mentioned above. For example, just last week, we believe a more important impact of the Fed'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, including record-breaking rate cuts, liquidity support for stocks, and a reduction in bank reserve requirement ratios - all aimed at "boosting lending and easing existing loan burdens." The reduction in bank reserve requirement ratios, in particular, should be beneficial for 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 to be somewhat delayed.
In the US, although the last FOMC meeting raised concerns about the labor market, the economy remains resilient. Q2 2024 GDP data came in higher than expected at 3.0% (Bloomberg survey median was 2.9%), further confirming our view that the risk of a near-term recession remains low. That said, we are monitoring a potential port strike on the US East Coast (and Gulf of Mexico) that could begin as soon as October 1, which could weigh on Q4 2024 economic performance. JPMorgan estimates that supply disruptions from a strike could cost the economy around $50 billion per day. However, we believe concerns about the strike's potential impact on inflation are exaggerated, as shipping still accounts for only a small portion of commodity costs. Currently, this does not change our macroeconomic outlook for the cryptocurrency market.
Spot BTC ETF Options?
The SEC has formally approved spot Bitcoin ETF options, specifically the iShares Bitcoin Trust (IBIT) from BlackRock, although these contracts cannot trade until they are also approved by the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC), with an uncertain timeline. But we believe this represents greater liquidity and trading volume for the asset class, as the product may significantly expand Bitcoin adoption, primarily among institutional investors (and potentially to a lesser extent, retail investors). While the CME does have Bitcoin futures options, these options have been cumbersome for US institutional investors from a management perspective.
However, the IBIT options will allow this group to trade options on the underlying Bitcoin directly and help minimize counterparty credit risk, as investors will face the clearing house as the counterparty. This provides a new entry point for institutions to enter the space, potentially leading to new derivative/yield-enhancement strategies that were previously impossible. In short, we can see more market participants entering the space, attracting greater liquidity. On the other hand, we believe the impact on the spot BTC price may be negligible (at least initially), and the impact on volatility may be relatively low. (Note that the impact on implied volatility ultimately depends on whether most end-users are option sellers or option buyers.)
On-Chain Activity
Over the past week, Ethereum transaction fees have risen modestly as on-chain activity has generally recovered. While the absolute number of transactions and active addresses have remained stable, the average gas price over the past 10 days (September 16-26) has increased by 498% compared to the previous 30-day average. The average Ethereum transaction fee is now $1.69, up from $0.09 earlier this month. (For reference, the averages were $6.45 and $0.59, respectively. They were skewed higher by a set of high-priority and complex transactions.)
There is no single driver behind the increase in activity. DEX trading volume on Ethereum has risen slightly, up 9% week-over-week. The USDC deposit rate on the lending platform Aave has also moderately increased from 3.5% to 4.5%, indicating a slight rise in leverage. Meanwhile, with the increase in fees, the total ETH transfer volume has grown 17% week-over-week.
That said, the increase in mainnet Ethereum activity is lower than the WoW change in L2 and Solana activity - although the latter did not see a similar increase in fees. DEX trading volume on Base and Solana grew by +28% and +35% WoW, respectively, with no change in average transaction costs. (In fact, the average Base gas fee decreased by 10% WoW.) We believe this is due to the sensitivity of mainnet Ethereum's block space constraints, demonstrating the success of integrating networks and L2 scaling block space.
Coinbase Transaction Insights
Recently, the correlation between the cryptocurrency and stock markets has been high, close to 50%, thanks to the global easing policies in the US and China. ETH has seen a significant rebound, rising 8% in the past 7 days, outperforming BTC. Altcoins have also continued to attract new buyer interest. Gaming, scaling solutions, and Layer-0 have been some of the best-performing sectors, rising 17%, 11%, and 9% respectively over the past week. Overall, key indicators point to a strong market. Funding rates are stable, and open interest is near the six-month average. Taken together, this suggests the market is primed for the typically strong crypto performance months, with BTC rising in 8 out of the last 10 Octobers.
