Source: Grayscale Research;
Translated by: Golden Finance
Key Points of This Article:
Three years after the cryptocurrency market bottomed out, debates about the 'cycle' have resurfaced. However, the drivers of cryptocurrency adoption—macro demand for scarce digital assets and increased regulatory transparency—remain in place.
In September, cryptocurrencies underperformed compared to other asset classes; liquidations of futures accelerated the mid-month decline. Leveraged traders’ positions now appear more balanced.The U.S. SEC approved a universal listing standard for crypto ETPs, the Senate made progress on market structure legislation, and the number of crypto IPOs increased.
From a returns perspective, the AI Crypto sector is dominating other sub-sectors.
During the previous cryptocurrency market cycle, prices peaked in November 2021 and bottomed out in November 2022. Now, nearly three years later, some cryptocurrency market participants are warning that the current cycle is nearing its end and valuations are set to 'peak.'
Cycles are a characteristic of financial markets and an important factor for investors to consider in their risk management process. However, there is no reason to assume that valuations will start to decline simply because the bull market has lasted three years. Economist Rudiger Dornbusch once said that economic expansions do not end because they are old—they are killed by the Federal Reserve. In other words, changes in fundamentals—often driven by tighter monetary policies aimed at controlling inflation—are what could lead to a downturn.
As with all bull markets, the recent surge in cryptocurrency valuations will eventually come to an end. For now, however, the fundamentals remain positive: macroeconomic imbalances are fueling demand for scarce digital assets, while greater regulatory clarity is driving institutional investment in blockchain technology. We believe that until these factors shift, the market correction in September may be temporary, and the cryptocurrency market could be heading toward new highs. Bitcoin's supply consistently follows a four-year cycle, but cryptocurrency valuations may not follow suit.
Leveraged long positions have been liquidated.
In September, $Bitcoin (BTC.CC)$ and other digital assets underperformed compared to other market segments, particularly precious metals and AI-related stocks (Chart 1). These two categories, along with the broader traditional capital markets, may have benefited from the Federal Reserve's interest rate cuts and strong inflows into exchange-traded products (ETPs).
Crypto assets appreciated in early September but plummeted sharply later in the month. This sudden decline may be associated with the liquidation of long positions in perpetual futures contracts—a unique feature of the cryptocurrency market structure. For instance, according to Glassnode data, on September 25, the total liquidation of ETH perpetual futures contracts reached $277 million, marking the largest single-day liquidation since April 2021 (Chart 2). Following the liquidations, funding rates (the cost of holding leveraged long positions) declined, and prices stabilized, potentially indicating a more balanced positioning among speculative traders.
Simplified approval process for crypto ETPs
Beyond price performance, the most significant development in September was arguably the U.S. Securities and Exchange Commission (SEC) approving a universal listing standard for crypto ETPs. This decision streamlines the approval process for exchanges to list crypto ETPs, provided the underlying tokens meet certain technical standards for trading on qualified venues. Grayscale anticipates that more crypto assets will comply with these standards, and investors can expect a substantial increase in the number of single-asset crypto ETPs offered on U.S. exchanges. In addition to approving the universal listing standard, the SEC also authorized the listing and trading of certain Bitcoin options products.
Further progress on crypto market structure legislation was made in the U.S. Senate—the next major step by Congress following the GENIUS Act, which covers stablecoins. The Senate Banking Committee released a new draft of the market structure bill. It includes enhanced protections for decentralized finance (DeFi) applications and developers, which have been widely welcomed by the crypto industry. Additionally, a group of 12 Senate Democrats released a framework for crypto market structure legislation. This framework has also received positive responses from key stakeholders, indicating there is still room for bipartisan cooperation to continue. The House version of the market structure bill, known as the CLARITY Act, passed in the House with bipartisan support in July.
Regulatory clarity for the digital asset industry in September continued to drive institutional activity. More cryptocurrency companies went public, including Figure Technologies (FIGR), which uses blockchain technology to enhance the efficiency of home equity loans, and the exchange Gemini (GEMI). Additionally, several traditional financial institutions, including BlackRock and Nasdaq, announced plans related to tokenized assets. Efforts are also underway to launch new regulated financial products, including 'continuous' (i.e., perpetual) futures and stablecoins compliant with the GENIUS Act.
AI Crypto Sector Stands Out
From the perspective of the cryptocurrency industry, artificial intelligence (AI) has been the top-performing segment, driven by several standout projects (Chart 3). Strong returns were primarily attributed to Near (NEAR), Worldcoin (WLD), and Aethir (ATH). NEAR, founded by a leading figure in the AI industry, is a blockchain platform tailored for AI use cases, and adoption of its NEAR intents product continues to rise. Worldcoin, founded by Sam Altman, aims to provide digital identity solutions. The rise in the WLD token price may be partly linked to the new digital asset treasury (DAT) Eightco Holdings (ORBS). Aethir, operating in the GPU market, benefited from a new collaboration with Chainlink and the new DAT.
Story Protocol (IP), a blockchain focused on intellectual property, emerged as another standout in the AI crypto space despite significant volatility during the month. Attention was primarily focused on announcements made at the project’s Origin Summit during Korea Blockchain Week. Story partnered with the award-winning Korean webtoon brand Solo Leveling. This collaboration will allow Solo Leveling to explore on-chain intellectual property models and potentially launch a memecoin. Story also collaborated with gaming company Verse8 to bring web3 brands Moonbirds and Azuki into AI-generated games, enabling creators to remix and monetize these brands by enforcing licensing and royalties on-chain.
Beyond AI-related applications, the most closely watched category in the industry is arguably decentralized exchanges (DEXs) for perpetual futures. Among them, Hyperliquid has taken the lead, becoming one of the top three revenue-generating applications in the crypto space. However, Hyperliquid faces new competition from Aster, a perpetual futures DEX backed by Binance founder Changpeng Zhao (Chart 4). Regardless of the outcome, it is encouraging to see DEXs capturing trading volume from centralized alternatives—decentralization being a core premise of blockchain technology and DeFi.
Finally, the stablecoin sector continues to evolve. For example, Plasma, a Layer 1 ecosystem focused on stablecoins, launched its mainnet and XPL token in late September. Within a week, its stablecoin supply rapidly grew to USD 60 billion, making it the fifth-largest blockchain in terms of stablecoin supply, surpassing Coinbase’s Layer 2 ecosystem BASE (Figure 5). Meanwhile, Tether, the largest stablecoin issuer, announced plans to raise USD 15 to 20 billion, with a valuation of approximately USD 500 billion, positioning it alongside OpenAI and SpaceX as one of the world's most valuable private companies.
Future Outlook
As mentioned above, the cryptocurrency bull market is driven by macro demand for scarce digital assets and regulatory clarity supporting adoption. These two factors are likely to return to investors' focus by the fourth quarter of 2025.
The Federal Reserve resumed rate cuts in September and signaled the possibility of one or two more cuts before the end of the year. All else being equal, lower interest rates should be viewed as favorable for the cryptocurrency asset class (as they reduce the opportunity cost of holding interest-free assets like Bitcoin and may support investor risk appetite).
Meanwhile, various macroeconomic factors could weigh on cryptocurrency valuations, including potential slowdowns in GDP growth and/or geopolitical tail risks. Of course, an unexpected shift by the Federal Reserve from rate cuts to rate hikes should also be regarded as a risk factor for cryptocurrency valuations.
From a regulatory perspective, potential positive market catalysts may include the introduction of Staking functionality in crypto ETPs, additional altcoin ETP listings, and Senate approval of a market structure bill. That said, these developments are at least partially priced in, so any obstacles could be considered downside risks to valuations.
Editor/joryn
