Coinbase Q4 Crypto Market Outlook: Constructive growth is expected to enhance market liquidity and support BTC performance

Compiled by: Wuzhu, Golden Finance

Market View

Investor Sentiment is Positive

Our impression of the Token 2049 conference is that the sentiment among cryptocurrency investors seems quite positive, although this may be related to the Federal Reserve's decision to cut interest rates by 50 basis points on September 18. However, while many market participants are optimistic about BTC, we encountered some skepticism regarding ETH, as the token does not seem to have benefited from the launch of the spot ETH ETF in the U.S. over two months ago. (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 relative to its peers.) Additionally, some believe that higher beta tools benchmarked against ETH (such as L2 tokens) are more prevalent than in the previous cycle, leading to a crowding-out effect.

Meanwhile, we have not seen a significant shift in themes within the crypto community, which aligns with the outlook we presented at the end of 2023. That is to say, 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 L2 to provide enhanced programmability for the network and new revenue streams for miners. The demand for general consumer applications is also more pressing compared to crypto infrastructure protocols, corresponding with a broader scrutiny of crypto fundamentals.

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

• Sui announced a partnership with MoviePass and will integrate USDC into its network. Sui is also accepting pre-orders for its SuiPlay0X1 handheld gaming console, which was previously teased in April.
• Days before the event, The Open Network (TON) announced a partnership with Tada, a popular ride-hailing app in Southeast Asia, continuing to draw attention at the conference. This highlights the potential utility of Telegram Mini Apps and TON's expansion as an L1 in the crypto ecosystem.
• Solana Mobile launched its second-generation phone, Seeker, as a successor to the Saga phone, which is set to be released in 2025 and is now open for reservations.
• Contrary to expectations before Breakpoint, Jump Crypto did not announce when the new Solana client Firedancer would go live on the mainnet (currently on the testnet), but they did confirm that an early version called Frankendancer is already live.
• WisdomTree announced the creation of WisdomTree Connect, a platform for tokenized real-world assets (RWA) that "enables customers to interact over time with any WisdomTree-issued token on any supported blockchain in their wallet."
• Solana also appears to be attracting more RWA projects to its platform, with Franklin Templeton announcing plans to launch a money market mutual fund on the network, similar to its products on Stellar, Arbitrum, and Polygon.
• The tokenization-as-a-service provider Securitize also announced native support for Solana through the integration of Wormhole, aimed at providing cross-chain functionality for assets tokenized on its platform.
• Coinbase announced that cbBTC (wrapped Bitcoin) will soon launch on Solana, following the platform's earlier launch on Ethereum and Base earlier this month. Note that the Sky community officially voted to discontinue wBTC as collateral on its platform starting October 3.

Macroeconomic Outlook

Looking ahead, we maintain a constructive outlook for Q4 2024, primarily based on our optimistic view of the current macro environment and the specific factors mentioned above. For instance, just last week, we believed that a more significant impact of the Federal Reserve's decision to cut rates by 50 basis points is that it provides cover for other monetary authorities to take more stimulative measures. Subsequently, China announced a massive dual fiscal and monetary stimulus plan, including record interest rate cuts, liquidity support for stocks, and a decrease in bank reserve requirements—all aimed at "promoting lending and alleviating the burden of existing loans." The decrease in bank reserve requirements should particularly benefit market liquidity, and we have previously found a positive correlation between market liquidity and BTC performance. That said, we expect the positive impact of these measures on cryptocurrency performance may be somewhat lagging.

In the U.S., despite concerns raised about the labor market during the last FOMC meeting, the economy remains resilient. GDP data for Q2 2024 came in above expectations at 3.0% (with a Bloomberg survey median of 2.9%), reaffirming our view that the risk of an economic recession remains low in the short term. That said, we are monitoring a potential strike at East Coast (and Gulf Coast) ports in the U.S. that may begin next week (October 1), which could weigh on the economy in Q4 2024. JPMorgan estimates that supply disruptions from the strike could cost the economy about $5 billion per day. However, we believe concerns about the strike's potential impact on inflation are overstated, as shipping still accounts for only a small portion of goods costs. This does not change our view on the macro conditions of the cryptocurrency market.

Spot BTC ETF Options?

The U.S. Securities and Exchange Commission (SEC) has officially approved options for spot Bitcoin ETFs, specifically BlackRock's iShares Bitcoin Trust (IBIT), although these contracts cannot be traded until they are also approved by the Options Clearing Corporation (OCC) and the Commodity Futures Trading Commission (CFTC). The timeline remains uncertain. However, we believe this signifies greater liquidity and trading volume for the asset class, as the product may primarily expand Bitcoin adoption among institutional investors (and possibly to a lesser extent, retail investors). While CME does have Bitcoin futures options, these options are cumbersome for U.S. institutional investors from a management perspective.

However, IBIT options will allow this group to trade options directly on the underlying Bitcoin, helping to minimize credit risk as investors will face the clearinghouse as the counterparty. This provides a new entry point for institutions into the space, potentially leading to new derivative/yield-enhancing strategies that were previously not possible. In short, we could see more market participants entering this space, attracting more liquidity. On the other hand, we believe the impact on the spot price of BTC may be negligible (at least initially), while the impact on volatility may be lower. (Note that the effect on implied volatility ultimately depends on whether most end-users are option sellers or buyers.)

On-Chain Activity

In the past week, as on-chain activity generally rebounded, Ethereum transaction fees saw a slight increase. Although absolute transaction numbers and active addresses remained stable, the average gas price over the past 10 days (September 16 to 26) rose by 498% compared to the average price over the previous 30 days. The average transaction fee on Ethereum is now $1.69, up from $0.09 at the beginning of the month. (For reference, the average fees were $6.45 and $0.59, respectively. They are elevated due to a set of high-priority and complex transactions.)

There was no single driver behind the increase in activity. Ethereum decentralized exchange (DEX) trading volume saw a slight increase, growing 9% week-over-week. The USDC deposit rate on the lending platform Aave also moderately rose from 3.5% to 4.5%, indicating a slight increase in leverage. Meanwhile, with the increase in fees, the total transfer volume of ETH grew 17% week-over-week.

That said, the increase in mainnet Ethereum activity was less pronounced compared to the week-over-week changes in L2 and Solana activity—although the latter did not experience a similar increase in fees. DEX trading volume on Base and Solana grew by +28% and +35% week-over-week, respectively, while average transaction costs remained unchanged. (In fact, average Base gas fees decreased by 10% week-over-week.) We believe this reflects the sensitivity of block space limitations on mainnet Ethereum, demonstrating the success of integrating networks and L2 to expand block space.

Coinbase Trading Insights

Recently, the correlation between the cryptocurrency and stock markets has been high, nearing 50%, thanks to global easing policies in the U.S. and China. ETH has seen a significant rebound, rising 8% over the past 7 days, outperforming BTC. Altcoins also continue to attract renewed interest from buyers. Gaming, scaling solutions, and Layer-0 are some of the best-performing sectors, rising 17%, 11%, and 9% over the past week, respectively.

Overall, key indicators suggest a strong market. Funding rates are stable, and open interest is close to a six-month average. Taken together, this indicates that the market is ready to enter the months when cryptocurrencies typically perform well, with BTC rising in 8 out of the last 10 Octobers.