Grayscale August report: ETH underperforms the market, Bitcoin is expected to retest its historical high this year

Summarize:

– In August 2024, cryptocurrency valuations retreated, coinciding with a brief spike in financial market volatility. Bitcoin outperformed the overall crypto market, while Ethereum underperformed the overall crypto market.

● Federal Reserve Chairman Powell hinted that rate cuts are coming, which could support Bitcoin and other assets that compete with the dollar (such as physical gold).

● Ether's scaling strategy may leave some investors uncertain about its long-term prospects, despite a significant increase in activity on its L2.

● August saw a rise in stablecoin market capitalization, upgrades to key protocols, and growing discussion around digital privacy.

Meanwhile, news of softening labor market conditions may have influenced the views of Fed policymakers. In his speech at the Jackson Hole annual conference on August 23, Fed Chairman Jerome Powell said that "the time has come to cut interest rates," which in part reflects the fact that "downside risks to employment have increased." Interest rate futures currently indicate that the central bank will reduce the policy rate by 100 basis points in the three remaining Federal Open Market Committee (FOMC) meetings this year.

In summary, the brief volatility and signals of an impending rate cut left some changes in the market (see Figure 2). Returns of some strategies at the center of the storm fell sharply (including short volatility strategies and FX carry trades), the US dollar weakened against major currencies, while gold prices rose, and defensive assets such as high-quality bonds and consumer staples stocks outperformed. Bitcoin fell slightly (-8.5%), while Ethereum fell more (-21.8%) and was one of the assets that underperformed on a risk-adjusted basis (discussed further below).

We believe that if a weaker dollar and lower interest rates persist, this should be bullish for Bitcoin. Like physical gold, Bitcoin is an alternative monetary system that competes with the dollar in international markets. Lower U.S. interest rates would weaken the dollar’s ​​competitive advantage and could benefit assets that compete with the dollar, including other fiat currencies, physical gold, and Bitcoin. Over the past few years, as digital assets have become more integrated with mainstream financial markets, Bitcoin has been negatively correlated with both the level of real interest rates and the value of the U.S. dollar (Figure 3) . Therefore, those who are concerned about the impact of a weaker dollar on their portfolios may consider allocating funds to Bitcoin for diversification.

As noted above, Ether declined significantly in early August and failed to rebound significantly towards the end of the month. We believe this reflects, in part, long positions in CME-listed futures and perpetual futures. In May 2024, around the time the SEC approved the issuer's filing for a U.S. spot Ether exchange-traded product (ETP) 19 b-4 application, traders significantly increased their gross positions in perpetual futures and their net positions in CME futures, perhaps judging that the price of Ether would rise further after receiving full regulatory approval; that approval was granted in July 2024, and U.S. Spot Ether ETP began trading shortly thereafter. We believe that the excess of speculative positions led to a sharp fall in the price of Ether and has limited the price recovery since then.

Figure 6: Stablecoin market capitalization rises

We believe the main downside risk to crypto valuations is a further rise in unemployment and a possible recession . Therefore, investors should pay close attention to upcoming labor market data, including the next monthly employment report, scheduled for September 6. However, even with recession risk, Grayscale Research believes that the market's tolerance for a deep recession is low, and we believe policymakers have an incentive to respond to economic problems in the early stages by printing money and spending. This unfettered approach to monetary and fiscal policy is one of the reasons why some investors choose to invest in Bitcoin; therefore, periods of economic weakness may further strengthen the long-term value investment logic of Bitcoin.

Bitcoin is expected to retest its former all-time highs this year, and the market's drive to push Bitcoin to its climax is unquestionably good news for us, so try trading together for free!