Market View
Next week will be extremely busy for markets on the back of the US elections on Tuesday (November 5) and the Federal Reserve meeting (November 6-7) immediately following those. The combination of month-end portfolio rebalancing, disappointing earnings releases from key members of the “Magnificent Seven”, and uncertainty ahead of the US elections have led to some derisking this week but not before bitcoin tested all-time highs. Principally, our long term view hasn’t changed. Over the next few months, we remain constructive in the face of potentially greater deficit spending by the US government, as this means more USD circulating in the economy and thus a boost for any assets denominated in USD such as crypto.
US elections
With respect to the US elections, our Head of US Policy Kara Calvert spoke to us in an interview on our Coinbase Markets Podcast earlier this week. Here’s what she had to say (excerpted quotes, edited for clarity):
Question: Where are we in terms of how crypto is impacting the current US election?
Kara: When you think about these razor thin margins that we're seeing across the country, the expectation is that the presidential race will be decided really across four to seven swing states – places like Nevada, Michigan, Wisconsin and Pennsylvania. In some of those places, they are actually getting nearly as many [crypto] advocates or more advocates signed up for Stand with Crypto than decided the presidential election in 2020.
Question: Are we going to know the results on the night of the elections?
Kara: It is not guaranteed that we will know who won the presidential election on Tuesday night. I think we can all hope that we do, but potentially not. The House is similar. There are some districts in the House where those members of Congress are running on razor thin margins, and it may be too close to call. The differential between a majority vs a minority in the House is only a few seats. The Senate is a little more clear, as the expectation right now is that that will flip to a Republican Senate.
Question: What does the day to day look like for you and your teams leading up to such a big event like this?
Kara: We've been working with our partners at Stand with Crypto, figuring out how to turn out the vote for the 52 million crypto owners in America who will decide the fate of this election. So we've been spending time with them at places like Ohio, Arizona, Nevada, Michigan and Wisconsin. They've had get out the vote rallies in every single one of those states.
Question: What does crypto regulation look like under a Trump or Harris administration?
Kara: Former President Donald Trump made it pretty clear, particularly at Bitcoin 2024, that he will do things like protect the ability to use a self-hosted wallet, protect the ability to own bitcoin and own other digital assets. He also made, I think, some pretty remarkable statements about stablecoins and making sure that there is responsible and reasonable regulation around stablecoins and the market structure for digital assets.
Vice President Kamala Harris has also made it clear that she is open and that there will be a change of regime. There will be a change of approach between Biden and Harris. She's identified digital assets as one of the areas of innovation that she thinks that we should explore, making sure that it's paired up with consumer protection.
Innovation and consumer protection aren't mutually exclusive. And so the hope is that, if she's elected, that she would come in and truly make some of those really big, important changes that we need in order to continue to be competitive as a country and make sure that our industry can continue to thrive.
Question: What might happen to Gary Gensler’s role as Chair at the SEC after the elections?
Kara: Gary Gensler was nominated and confirmed by the United States Senate back in 2021. He has a five year term, but the chairman always serves at the pleasure of the president. So either a new President Harris or a new President Trump could come in and ask him to step down as the chair where he would then be a commissioner. I think there's a lot of questions about whether he can, in fact, be fired, and I'm sure that there will be some legal testing of those theories. But ultimately, he could be asked to step down by either candidate.
Question: What are the other key agency appointments for crypto advocates, to pay attention to besides the SEC chair?
Kara: I would put the CFTC in that category, particularly as we think about what is happening in terms of the ability to provide futures and other derivatives, like ETF options. Additionally, I would say the prudential regulators are also very key.
Question: Do you think that the legislature will prioritize crypto over the next two years?
Kara: I absolutely do, because we have more pro crypto friendly candidates coming into office and making it very clear that they want regulation that is appropriate for crypto and that protects consumers and protects innovation.
For the full interview, please listen to our latest podcast.
Markets: DXY and Fed
Because bitcoin value is often denominated in USD, bitcoin performance tends to be very sensitive to USD cycles. That is, a stronger multilateral USD (DXY index) can put pressure on cryptocurrencies more broadly. What was interesting about bitcoin’s performance during October is that it convincingly broke out of its descending channel, in spite of exceptional USD strength. While this has muddied the relationship between bitcoin and the DXY in the short term, we also don’t think there’s anything structurally unsettling happening here. The USD retracement had more to do with stretched positioning and a messy economic outlook, as front-end yields have widened by 45bps over the last month.
Ultimately however, we don’t believe the Federal Reserve’s policy path has materially shifted for November and December, making two additional 25bps rate cuts the most likely scenario. This is barring any surprises for nonfarm payrolls, which will be released by the Bureau of Labor Statistics after we publish our report. Expectations there have been dampened by port strikes in the Southeastern US as well as Boeing’s union strikes. For now, it seems even the most hawkish among the Fed board still see the neutral rate closer to 2.5% to 3% compared to today’s 4.75%-5.00% range. On the other hand, we don't think the Fed has significant room for maneuver here.
Bitcoin versus everything else
This week, US spot bitcoin ETFs had two of the biggest inflow days on record totaling US$1.76B, contributing a total of $5.3B of inflows in October. In contrast, ETH ETFs have remained relatively stagnant with only $30M of inflows this month – less than 0.6% that of BTC ETFs – despite the overall crypto complex growing from $2.33T to $2.54T (9%). At the same time, the circulating stablecoin market cap remained flat in October according to DefiLlama (with alternative sources like Artemis even indicating there has been an $8B reduction)
In our view, this reflects a continuation of the trend where new capital to crypto this bull cycle has been heavily concentrated on BTC via the ETF complex, without meaningful “trickle down” rotations into other crypto assets. Indeed, BTC has outperformed the overall crypto market as its dominance reached new yearly highs of just over 60% this week. Some of this increase in dominance has come at the expense of ETH, whose price has remained flat in October while BTC gained 12%.
At the same time, this also suggests to us that the performance of alts has been comparatively more leverage driven than BTC. Even as altcoin capital flows have remained flat (as proxied by stablecoin market cap), stablecoin borrow rates for onchain markets like Aave have increased from the 4% handle in September to 5% range now. Perpetual funding rates have also steadily risen from lows of 5% early this month to 12% as we go to publish. The absence of new stablecoin inflows combined with rising borrow and funding rates suggest bullish expectations going into next week’s elections and FOMC meeting.
Longer term positioning
The expanding CME BTC basis (up from 6% at the start of October to 14% as we go to publish) also indicates bullish positioning as investors net buy long exposure in futures. Although some of the increased CME open interest (OI) represents short positions taking advantage of the basis trade, the $2.5B increase in OI in October represents less than 19% of the $13.3B net increase in BTC ETF market cap over that same period. Furthermore, the CFTC’s Commitment of Traders (CoT) report on October 22, 2024 showed that 50.4% of CME BTC OI was on the short side, suggesting that a maximum of 10% of the increase in BTC ETF exposure has been hedged via CME futures.
Bullish positioning is also reflected in the options markets on Deribit. OI by strike suggests heavy positioning by option buyers at the $80,000 ($296M notional value) and $70,000 ($214M) strikes for the November 29 expiry. For December 27, the dominant thresholds are $100,000 ($587M) and $80,000 ($543M). Furthermore, the max pain points for both November 29 ($66,000) and December 27 ($62,000) expiries remain below the current BTC price. In our view, if bitcoin prices remain well above the max pain price, option sellers may need to cover or hedge these positions, which could generate some upward pressure.
Separately, the implied volatility premium for options expiring November 8 suggests the market is positioning for high levels of volatility in the next week on the back of US election results, employment data, and the next FOMC meeting. Interestingly, key strike levels for November 8 are the same as that for the November 29 expiry at $80,000 and $70,000. We think this indicates market anticipation that the majority of November’s volatility could be concentrated within its first two weeks.
