Source: Coinbase

Compiled by Wuzhu, Golden Finance

Market view

Investor sentiment is positive

Our impression of the Token2049 conference is that the sentiment of cryptocurrency investors seems quite positive, although this may be related to the event coinciding with the 50 basis point rate cut by the Fed on September 18. However, despite many market participants being bullish on BTC, we encountered some skepticism towards ETH as the token does not appear to have benefited from the launch of the US ETH ETF over two months ago. (Please note that many attribute this to the recent surge in Ethereum Layer 2 activity, but we have previously explained why we believe this is an incomplete reason for ETH's underperformance compared to its peers.) Furthermore, some believe that there are more higher beta tools based on ETH today than in the previous cycle, leading to crowding out effects.

At the same time, we have not seen any significant shifts in themes within the crypto community, consistent with the outlook we presented by the end of 2023. That is, people seem to be more focused on emerging alternative Layer 1 networks rather than Ethereum Layer 2 networks, as well as the potential for Bitcoin Layer 2 to enhance programmability for miners. Demand for applications for general consumers is also more urgent compared to crypto infrastructure protocols, corresponding to a broader review of crypto fundamentals.

Finally, some announcements were made at both events, including:

• Sui announced a partnership with MoviePass and the inclusion of USDC on the network. Sui is also accepting pre-orders for its SuiPlay0X1 handheld gaming device, which was previously teased 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 attract attention at the conference. This highlights the potential utility of Telegram Mini Apps and the expansion of TON in the L1 of the crypto ecosystem.

• Solana Mobile has launched its second-generation phone Seeker, succeeding the Saga phone, which is planned for release in 2025 and is now open for pre-orders.

• Contrary to expectations prior to Breakpoint, Jump Crypto did not announce when the new Solana client Firedancer will go live on the mainnet (currently on testnet), but they did confirm that an early version named Frankendancer has already been released.

• WisdomTree announced the creation of WisdomTree Connect, a platform for tokenizing real-world assets (RWA), which "enables customers to interact over time with any token issued by WisdomTree on any supported blockchain in any wallet."

• Solana seems to be attracting more RWA projects to join its platform, with Franklin Dupton announcing plans to launch a currency 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 tokenized assets on its platform.

• Coinbase announced that cbBTC (wrapped bitcoin) will soon be introduced on Solana, after launching on Ethereum and Base earlier this month. Please note that the Sky community officially voted to abandon wBTC as collateral on its platform starting from October 3rd.

Macro Outlook

Looking ahead, we are optimistic about the prospects for the fourth quarter of 2024. This is mainly based on our positive view of the current macro environment and the aforementioned special factors. For example, just last week, we believed that the 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 stimulus measures. Subsequently, China announced a large-scale fiscal and monetary double-stimulus plan, including record rate cuts, liquidity support for stocks, and a decrease in the bank reserve requirement ratio—all aimed at "promoting lending and easing existing loan burdens." The reduction in the bank reserve requirement ratio should be particularly favorable for market liquidity; we previously found that market liquidity is positively correlated with BTC performance. Nevertheless, we expect these measures to have a delayed positive impact on the performance of cryptocurrencies.

In the U.S., despite concerns about the labor market raised at the last FOMC meeting, the economy remains resilient. GDP data for the second quarter of 2024 came in higher than expected, at 3.0% (Bloomberg median was 2.9%), reaffirming our view that the short-term risk of an economic downturn remains low. However, we are monitoring the possible start of a strike at ports along the U.S. East Coast (and Gulf of Mexico) next week (October 1st), which could weigh on the economy in the fourth quarter of 2024. JPMorgan estimates that the supply disruptions caused by the strike could result in a daily loss of about $5 billion to the economy. Nonetheless, we believe concerns about the strike's impact on inflation are exaggerated, as shipping costs remain only a small portion of commodity costs. This does not change our view of the macro situation in the cryptocurrency market at present.

Spot BTC ETF Options?

The U.S. Securities and Exchange Commission (SEC) has officially approved spot Bitcoin ETF options, notably Blackrock's iShares Bitcoin Trust (IBIT), which could not be traded until these contracts were also approved by the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC). The timetable for this is still uncertain. But we believe that this means greater liquidity and trading volume for the asset class, as the product is likely to primarily expand Bitcoin adoption among institutional investors (and possibly to a lesser extent retail investors). While CME does have Bitcoin futures options, from a management perspective, these options are cumbersome for U.S. institutional investors.

However, IBIT options will allow this group to directly trade options on the underlying bitcoin and help minimize credit risk by having clearinghouses as counterparties. This provides a new entry point for institutions into this space, which could lead to new derivative/revenue-enhancing strategies that were previously impossible. In short, we can see more market participants entering this space, thereby attracting more liquidity. On the other hand, we believe the impact on BTC spot prices may be minimal (at least initially), and the impact on volatility may be lower. (Please note that the impact on implied volatility ultimately depends on whether most end-users are option sellers or option buyers.)

On-chain Activity

In the past week, with on-chain activity generally recovering, Ethereum transaction fees have increased slightly. Although the absolute number of transactions and active addresses remain stable, the average gas price over the past 10 days (September 16 to 26) has risen by 498% compared to the average price of the previous 30 days. The average transaction fee on Ethereum is now $1.69, up from $0.09 at the beginning of the month. (As a reference, the averages are $6.45 and $0.59 respectively. They are elevated due to a group of high-priority and complex transactions.)

There is no single driving factor behind the increased activity. Trading volume on the decentralized exchange (DEX) on Ethereum has slightly increased by 9% week-on-week. The USDC deposit rate on the lending platform Aave has also moderately increased from 3.5% to 4.5%, indicating a slight increase in leverage. Meanwhile, with the increase in fees, the total transfer volume of ETH increased by 17% week-on-week.

That being said, the increase in mainnet Ethereum activity is lower than the WoW changes in L2 and Solana activity - although the latter did not see similar fee increases. DEX trading volumes on Base and Solana increased by +28% and +35% WoW, while average transaction costs remained unchanged. (In fact, the average Base gas cost decreased by 10% WoW.) We believe this is due to the sensitivity to block space constraints on mainnet Ethereum, demonstrating successful block space expansion through integrated networks and L2.

Coinbase Trading Insights

Recently, there has been a high correlation between the cryptocurrency and stock markets, close to 50%, thanks to the global loose monetary policies of the USA and China. ETH has seen a significant rebound, rising by 8% in the past 7 days, outperforming BTC. Altcoins continue to attract new buyer attention. Some of the top-performing industries in the past week have been gaming, expansion solutions, and Layer-0, each rising by 17%, 11%, and 9% respectively. Overall, key indicators suggest a strong market. Funding rates are stable, and open interest is close to the six-month average level. Overall, this indicates that the market is ready to enter typically strong months for cryptocurrencies, with BTC rising in 8 out of the last 10 Octobers.