Crypto valuations retreated in August 2024 alongside a brief spike in broader financial market volatility. Bitcoin outperformed while Ethereum underperformed relative to the broader crypto market. Fed Chair Powell signaled that rate cuts are coming soon, which could support Bitcoin as well as other assets that compete with the U.S. Dollar (e.g., physical gold). Ethereum’s scaling strategy may be creating uncertainty among some investors about its longer-term outlook, even though activity on its Layer 2 networks has increased significantly. The month also saw rising stablecoin market capitalization, upgrades to a number of key protocols, and a growing debate about digital privacy. Global equity markets were little changed during August 2024 as a whole, but this belied significant intra-month volatility. Following a weaker-than-expected jobs report on August 2[1] [2] Market Byte: Late Summer Storms [3]
At the same time, the news of softer labor market conditions may have affected the views of Fed policymakers. At his speech at the annual Jackson Hole conference on August 23, Fed Chair Powell said that “the time has come” to reduce rates, partly reflecting the fact that “downside risks to employment have increased.” Interest rate futures now imply that the central bank will reduce policy rates by 100 basis points (b.p.) over the three remaining Federal Open Market Committee (FOMC)meetings this year (Exhibit 1).
Exhibit 1: FOMC expected to cut rates by ~100 b.p. over next three meetings
Taken together, the short burst of volatility and signals of likely rate cuts left a number of changes on markets (Exhibit 2). Returns on certain strategies at the center of the storm — including short volatility strategies and FX carry trades — declined significantly, the U.S. Dollar weakened against major currencies as well as the price of gold, and defensive assets like high-quality bonds and consumer staple stocks outperformed[4]
Exhibit 2: Ethereum underperformed during August pullback
Dollar weakness and lower interest rates, if they continue, should be positive for Bitcoin’s valuation, in our view. Like physical gold, Bitcoin is an alternative money system that competes with the U.S. Dollar in international markets. Lower U.S. interest rates erode the Dollar’s competitive advantages and can benefit assets that compete with the Dollar, including other fiat currencies, physical gold, and Bitcoin (for more details, see Market Byte: Crypto and the End of Fed Tightening
Exhibit 3: Bitcoin negatively correlated with value of U.S. Dollar
As noted above, Ethereum significantly underperformed in the early August drawdown and failed to rebound as meaningfully later in the month. In part, this reflected, in our view, long positioning in both CME-listed and perpetual futures. In May 2024, around the time that the Securities and Exchange Commission approved issuers’ 19b-4 filings for U.S. spot Ethereum exchange-traded products (ETPs), traders significantly increased gross positioning in perpetual futures and net positioning in CME futures[5]
More fundamentally, the Ethereum network is going through a major transition, which may be creating uncertainty about its future among some investors. As we have covered extensively in previous work[6] Exploring the Ethereum Ecosystem [7] [8]
Exhibit 4: Ethereum scaling strategy is working
The FTSE/Grayscale Crypto Sectors family of indexes also declined during August, albeit by less than Ethereum (Exhibit 5). Despite the setback for the marketplace overall, there were a few notable bright spots, particularly in the Currencies Crypto Sector and Financials Crypto Sector .
Exhibit 5: Bitcoin performed better than most Crypto Sectors
ZCash (ZEC), for example, a privacy-preserving asset in the Currencies Crypto Sector, gained 29.5% in mid-August before retreating later in the month. Earlier in August, the founder of ZCash joined Shielded Labs to develop a “Crosslink” hybrid consensus mechanism. Historically a Proof of Work protocol, this upgrade would add Proof of Stake as a finality layer to designed to enhance network security and allow ZEC holders to stake. This initiative has garnered significant support, with donations from Ethereum founder Vitalik Buterin and others.[9]
The Aave protocol, a component of the Financials Crypto Sector, was another standout. The protocol reached an all-time high in weekly active borrowers[10] [11] The proposal is anticipated to go live by the end of 2024 but still requires community approval. In related news, the Maker protocol rebranded to Sky and introduced a number of other updates to the project related to its Endgame strategy.[12]
Stablecoin market capitalization rose again in August and is now approaching its previous all-time high (Exhibit 6). Importantly, a software update from Apple may bring increased stablecoin payment adoption to developed markets.[13] USDC stablecoin will soon be available on iPhones, thanks to Apple's decision to open up near-field communication payment functionality to third-party developers.[14] This feature, which is separate from Apple Pay and doesn't involve a direct relationship between Circle and Apple, could enable USDC transactions via tap with FaceID confirmation and blockchain settlement. Separately, Latin American ecommerce platform Mercado Libre announced the creation of its own USD-linked stablecoin[15] [16]
Exhibit 6: Stablecoin market capitalization rising
Lastly, toward the end of the month there was increasing focus on the potential connections between blockchain technology and digital privacy after Telegram founder Pavel Durov was arrested in France. Authorities there said the charges were related to “failing to mitigate misuse” of the encrypted messaging application for criminal activities.[17] TON , the asset powering The Open Network — a smart contract platform natively integrated with Telegram — dropped over 20% following the news before slightly recovering in the following few days.[18] Elsewhere in the Smart Contract Platforms Crypto Sector , the Near protocol launched Nightshade 2.0, which is intended to make the chain even faster, while the Stacks protocol introduced its long-awaited Nakamoto upgrade.[19]
Bitcoin’s price has held in a fairly narrow range since the first quarter, as crypto markets have benefited from positive fundamental news on the one hand but sources of selling pressure on the other. Grayscale Research believes that the selling pressure — from the German government, Mt Gox estate, and others — is mostly behind us, and that improving fundamentals should increasingly show through. If the U.S. labor market holds up, Fed rate cuts and shifting U.S. politics around the crypto industry could allow prices to retest their all-time highs later this year.
The main downside risk to valuations, in our view, is a further increase in the unemployment rate and possible recession. Investors should therefore carefully monitor upcoming labor market data, including the next monthly employment report, scheduled for September 6. Even if recession risks emerge, however, Grayscale Research believes that there is very little tolerance for a deep economic downturn, and we think that there is incentive for policymakers to print and spend at the first sign of trouble. The undisciplined approach to monetary and fiscal policy is one reason why some investors choose to invest in Bitcoin; a period of economic weakness could therefore reinforce the longer-term Bitcoin investment thesis.
[1] BLS .
[2]
[3]
[4]
[5] Coinalyze
[6] Ethereum’s Coming of Age: “Dencun” and ETH 2.0 , The State of Ethereum , The Battle for Value in Smart Contract Platforms , and Your Ethereum Questions Answered .
[7] Decrypt .
[8]
[9] Cointelegraph .
[10] Cointeleraph
[11] The Defiant .
[12] Blockworks .
[13] Forbes .
[14] Decrypt .
[15] CoinDesk .
[16] Reuters .
[17] CNBC .
[18] Axios .
[19] Near.org and Stacks.co https://docs.stacks.co/nakamoto-upgrade/what-is-the-nakamoto-release .
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