Original article | Grayscale
Compiled by | Odaily Planet Daily
Recently, Grayscale released its September market report. The key points are as follows:
Bitcoin rallied in September while many traditional assets suffered significant losses, highlighting the diversifying nature of cryptocurrencies. Pressure on global markets appears to have stemmed from rising government bond yields and higher oil prices.
Strong fundamentals played a key role as Bitcoin on-chain metrics improved this month. Stablecoin market capitalization stabilized after declining last year, and the digital asset market remains focused on the development of Layer 2 blockchains and the potential for spot Bitcoin ETFs after they are approved in the U.S. market.
Despite encouraging signs within the cryptocurrency industry itself, the broader financial market backdrop is likely to remain challenging. However, Bitcoin’s recent stability suggests that its valuation could begin to recover once the macro backdrop improves.
BTC is up 4% in September, in stark contrast to the significant losses seen in many traditional assets this month (Table 1). Cryptocurrencies are now more correlated with other markets, but they continue to offer investors a degree of diversification in this challenging market environment.
Bitcoin (BTC) gained 4% in September, a gain that stands in stark contrast to the significant losses seen in many traditional assets during the month (Chart 1). Cryptocurrencies are now more correlated with other markets, but they continue to offer investors a degree of diversification (yield) in this challenging market environment.
Chart 1: Bitcoin offers diversification benefits amid shrinking global markets
The latest pressure on global assets appears to be coming from the US bond market (Figure 2), which may be related to the Fed's relevant actions. At its mid-September meeting, the Fed hinted that it may raise interest rates again later this year and that the pace of rate cuts next year may be slower than previously expected. The Fed's new guidance has helped push up short-term bond yields and boost the value of the US dollar.
Chart 2: Rising bond yields weigh on global markets
However, the bigger challenge facing fixed income markets may be the glut of long-term government bonds. The yield on 30-year Treasury bonds rose nearly 50 basis points (bp) in September to its highest level since 2011. Long-term bonds, such as those with a remaining maturity of more than 10 years, are generally less sensitive to small changes in the Fed's interest rate guidance.
Instead, bond markets appear to be having trouble absorbing the massive borrowing from the U.S. Treasury—a result of the government’s large budget deficit. While the budget deficit has been large for some time, past Fed purchases (“quantitative easing”) have absorbed some of the bond supply. Now that the Fed is shrinking its balance sheet (“quantitative tightening”), more government borrowing is hitting open markets, putting upward pressure on interest rates (Chart 3).
Figure 3: Without the Fed’s quantitative easing (QE), the bond market would have difficulty absorbing US government debt
Rising bond yields and higher oil prices appear to be weighing on stocks and most other risk assets. The S&P 500 is down nearly 5% in September, led by sectors tied to the health of the U.S. economy — home builders, industrials and companies tied to retail performance.
Bitcoin has been largely unaffected by the drawdown in traditional assets and has outperformed most other large cryptocurrencies.
While transaction volume continued to decline this month, various on-chain Bitcoin metrics improved: funding addresses, active addresses, and transaction counts all increased (Chart 4). Given the progress of a spot Bitcoin ETF in late August, the pick-up in on-chain activity may represent new investors entering the market to build positions ahead of potential regulatory approval.
Bitcoin's price recovery may also be related to the news that the trustee of cryptocurrency exchange Mt Gox will postpone repayments to creditors until October 2024 - it currently holds about 138,000 bitcoins, currently worth $3.7 billion, a decision that may reduce market expectations of selling pressure.
Chart 4: Bitcoin on-chain activity increased in September
At the same time, the price of ETH tokens fell slightly from September, and the ETH/BTC ratio fell to a one-year low. ETH price volatility is also extremely low: as of September 30, ETH's 30-day annualized price volatility was only 25%, lower than BTC's volatility during the same period, and the average volatility since January 2022 was about 60%.
Unlike Bitcoin, ETH’s on-chain fundamentals have not changed much. In late September, the ETH/BTC ratio recovered slightly as market attention focused on potential ETH futures ETF approvals.
In addition to BTC and ETH, a fundamental change to note in September is that the market value of stablecoins has stabilized after a long period of decline. According to DeFiLlama, the total market value has stabilized at around $124 billion, and has fallen almost continuously over the past year; since mid-August, the circulation of DAI and True USD (TUSD) has increased significantly, while Tether Tether Tether (USDT) is a cryptocurrency whose value is intended to reflect the value of the US dollar and can be used like a digital dollar. Coins used to be stable dollar substitutes are called "stablecoins." Tether is one of the most popular stablecoins and acts as a dollar substitute on exchanges. Tether's main use is that it provides a certain stability to the otherwise volatile cryptocurrency space and provides liquidity to exchanges and banks that cannot trade in US dollars. View more (USDT) supply has increased slightly since the beginning of September.
Chart 5: Stablecoin market value has stabilized after falling
Stablecoin adoption appears to have driven Tron’s token outperformance compared to other large-cap tokens. In September, TRX price rose 15%; the total locked value (TVL) of stablecoins hosted on Tron is higher than any other blockchain, even surpassing Ethereum. A large portion of the TVL comes from Tether (USDT), which is primarily hosted on Tron and currently accounts for an average of 35-40% of the network’s daily transactions.
Tron leads in TVL, largely due to lower transaction fees, with TRC-USDT transfers far outstripping ERC-USDT, with daily average volume approximately 15x higher (Exhibit 6). USDT’s strong adoption on Tron demonstrates product-market fit for stablecoins and highlights their growing importance in the contemporary cryptocurrency ecosystem.
The symbiotic relationship between USDT’s success on Tron and TRX’s recent price surge may be a sign that stablecoins are becoming an increasingly important part of the modern cryptocurrency market mechanics.
Chart 6: Tether activity on Tron is much higher than Ethereum
Stablecoins aside, the cryptocurrency market remains focused on the continued development of Layer 2 blockchains — something Grayscale Research discussed in a recent report.
Notably, social media app friend.tech on BASE collected more total fees in September than decentralized exchange Uniswap. Other strong performing DeFi tokens from a price perspective were AAVE, CRV, and MKR, as well as the oracle protocol token LINK - which we attribute to its recent partnership with Swift and BASE.
Finally, Toncoin (TON) briefly surpassed TRX to become the tenth largest crypto asset by market cap. The project announced integration with messaging app Telegram at the Token 2049 conference in Singapore (the TON project was originally started by Telegram's founder). While we are optimistic about the prospects of crypto integration with messaging apps, investors should consider factors such as the liquidity of the asset when evaluating its valuation. It is worth noting that most of TON's supply is owned by a few whales and the token's trading volume is extremely low compared to its market cap. For example, according to The Tie, TON's market cap is more than 200 times its monthly trading volume.
In our view, Bitcoin's resilience, along with the significant losses of traditional assets, illustrates the diversification benefits of digital assets and the steady improvement of industry fundamentals. The next major catalyst for Bitcoin prices could come from the approval of a spot ETF. In its previous legal dispute with Grayscale, the SEC lost and needs to appeal for a retrial by October 13; if the SEC abandons the appeal, it will reconsider Grayscale's pending application (to convert Grayscale Bitcoin Trust GBTC into a spot Bitcoin ETF), as well as other spot Bitcoin ETF applications currently under consideration.
Despite these encouraging signs, the broader financial market backdrop may remain challenging for the time being: the Federal Reserve is still tightening policy, government bond yields may still be searching for a new equilibrium, and a “soft landing” for the U.S. economy is uncertain. However, Bitcoin’s recent stability suggests that once the macro backdrop improves, its valuation may begin to recover.