Source: Grayscale
Compiled by: Bai Shui, Jinse Finance
Summary
- Bitcoin rose in October as the market focused on the US election. Polls show the White House race is tight, but changes in financial assets and the implied odds from prediction markets suggest investors now see a higher chance of a Trump victory.
- Bitcoin exchange-traded products (ETPs) saw large net inflows this month[1], though some of the new demand may reflect hedge fund pair trades (where they go long the Bitcoin ETP and short Bitcoin futures).
- The intersection of crypto and AI technology continues to yield thought-provoking developments, including an autonomous chatbot that promotes its own MEME coin. While it's easy to dismiss these projects as novelties, they suggest blockchain can be an effective tool for intermediating economic value between humans, AI agents, and networked physical devices.
American voters will go to the polls on Tuesday, November 5th, in an election expected to have major implications for the digital asset industry. While polls show the White House race is tight, investor expectations seem to have shifted toward a former President Trump victory over the past month. For example, at the end of September, the blockchain-based prediction market Polymarket showed Vice President Harris slightly ahead of Trump (for background, see Polymarket: A Crypto Election Year Breakthrough App). However, by late October, Polymarket's presidential election market showed Trump with a 65% chance of winning (Chart 1). Prediction markets are not infallible, and Harris could still win, but the shift in investor expectations toward a Trump victory appears to have driven asset market developments over the past month.
Chart 1: Prediction markets see a higher chance of a Trump victory
Whether financial markets are pricing in a higher likelihood of a Trump victory can only be inferred indirectly, but Grayscale Research believes the cross-asset returns in October were consistent with a "Trump trade" (Chart 2). From a macro perspective, the US dollar strengthened, the Chinese yuan weakened, perhaps reflecting a heightened perception of tariff risks. Similarly, bond yields rose (bond prices fell), and gold prices increased, potentially reflecting expectations of wider budget deficits and higher inflation under a Trump presidency. Bitcoin gained 9.6% on the month, making it one of the better performing risk-adjusted assets. The former president has expressed great enthusiasm for Bitcoin and cryptocurrencies, so its appreciation may reflect expectations of a more favorable regulatory environment. Additionally, like gold, Bitcoin may be responding to potential macroeconomic policy shifts under a Trump presidency.
Chart 2: Bitcoin was one of the better performing assets in October
The US election outcome could have significant implications for the digital asset industry. The next president and Congress may enact legislation targeting cryptocurrencies and could modify tax and spending policies that impact broader financial markets. Grayscale Research believes changes in Senate control could be particularly important for cryptocurrencies, as the Senate plays a key role in confirming presidential appointments to key regulatory bodies like the SEC and CFTC. However, at the voter level, data suggests cryptocurrencies are a bipartisan concern, with a slightly higher proportion of Democrats holding Bitcoin than Republicans.[2] Additionally, the specific candidates from both parties have expressed support for crypto innovation. Regardless of which party is in power, Grayscale Research believes comprehensive bipartisan legislation may be the best long-term solution for the US digital asset industry.
In October, demand increased for US-listed spot Bitcoin exchange-traded products (ETPs). As of October 31st, net inflows totaled +$5.3 billion, up from +$1.3 billion in September, marking the highest level since February. Since the launch of the first US spot Bitcoin ETP in January, total net inflows have reached +$24.2 billion, with US ETPs now holding around 5% of the total Bitcoin supply.
The year-to-date net inflows into spot ETPs could exert upward pressure on Bitcoin prices. However, this relationship may not be one-to-one, partly because hedge fund trading is becoming more prevalent. Specifically, hedge funds (or other sophisticated/institutional investors) may be buying Bitcoin ETPs while shorting an equivalent amount of Bitcoin futures. This strategy aims to profit from the spread between spot and futures prices, sometimes referred to as the Bitcoin "basis trade" or "arbitrage".[3] Since this strategy involves buying Bitcoin (via the ETP) and selling Bitcoin (via futures), it should not have a significant impact on Bitcoin's market price.
There is no precise measure of this activity yet, but a CFTC report noted that since the launch of the US spot Bitcoin ETP in January, some hedge funds[4] have increased their Bitcoin futures net short positions by nearly $5 billion.[5] Based on this estimate, Grayscale Research believes that around $5 billion of the $24.2 billion in net inflows to US-listed spot Bitcoin ETPs this year may be paired spot/futures positions, and thus may not have driven Bitcoin price appreciation (Chart 3).
Chart 3: Hedge funds may be pairing long Bitcoin ETP positions with short futures positions
While Bitcoin prices rose sharply in October, returns across other crypto market segments were lackluster. For example, the Crypto Industry Market Index (CSMI) (a comprehensive index we co-developed with FTSE/Russell) fell by around 6% (Chart 4). The worst-performing market segments were Utilities and Services crypto. This diversified crypto industry includes many tokens related to decentralized AI technologies, some of which pulled back this month after earlier rallies, including FET, TAO, RENDER, and AR.[6]
Chart 4: Utilities and Services lagged other crypto sectors
While some token valuations have pulled back, the decentralized AI theme remains a dominant focus in the crypto market.[7] We believe this is largely due to new applications demonstrating the use of "AI agents" on blockchains - software that can understand goals and make autonomous decisions.
One key emerging figure is Truth Terminal, an AI chatbot created by researcher Andy Ayrey. The chatbot has an account on X (formerly Twitter) and autonomously interacts with other X users (i.e., without any input from Andy). In this case, the innovation is that Truth Terminal expresses interest in creating a MEME coin $GOAT, and then takes steps to promote the new MEME coin to its social media followers once it owns the associated blockchain address.[8] Due to widespread interest in this story, the related MEME coin appreciated by around 9x[9], leading many to dub Truth Terminal the "first AI agent millionaire".
Although this project is deliberately humorous and lighthearted, it shows that AI agents can understand economic incentives and use blockchain to send and receive value. Other innovative projects are making breakthroughs in the area of collectively owned AI agents, with many use cases to come in the future. [10] While these are still in the early stages, the latest wave of decentralized AI applications may deliver on one of the promises of blockchain technology: to serve as the core financial infrastructure of the future, requiring mediation of value between humans, AI agents, and potentially various physical devices. We believe that using permissionless blockchains can be a superior way for AI agents to accumulate and transfer resources compared to traditional payment infrastructure. The U.S. election on November 5th may dominate crypto and traditional financial markets in the short term. The digital asset industry faces important questions, and the results of the White House and Congress could impact the development of crypto business in the U.S. to some degree. At the same time, we are encouraged by the bipartisan ownership of digital assets, the many macro trends driving Bitcoin adoption, and the recent technological breakthroughs, especially at the intersection of cryptocurrencies and AI. Therefore, regardless of next week's election results, we are optimistic that cryptocurrencies will continue to thrive in the U.S. [1] Source: Bloomberg. [2] https://www.grayscale.com/globalassets/harris-poll/grayscale-crypto-election-research-report.pdf [3] For example, the November CME Bitcoin futures contract is currently trading around 10% (annualized) above the spot Bitcoin price. The two prices need to converge at contract expiration, so this structure can generate returns as the prices trend together. [4] Referred to as "leveraged funds" in the report. [5] Source: CFTC Commitments of Traders (COT) report. [6] Artemis. For illustrative purposes, the example chosen is large-cap AI-related assets by market value and a significant negative contribution to utilities and services in October 2024. [7] Kaito [8] Chain of Thought [9] Source: Artemis. Returns for the period October 13, 2024 to October 31, 2024. [10] Cointelegraph and OLAS
