Macro Environment and Crypto Performance

David Duong, Head of Institutional Research at Coinbase, believes that the overall macroeconomic landscape is favorable for enhanced crypto performance in the fourth quarter of 2023. However, he does caution that short-term volatility could arise due to issues such as a potential U.S. government shutdown. While traditional risk assets may temporarily influence crypto markets, Duong is optimistic that any such impact will be short-lived. He argues that digital assets like Bitcoin are likely to recover swiftly, serving as a hedge against the traditional financial system’s vulnerabilities.

Federal Reserve Policy and Its Impact

Duong looks at the Federal Reserve’s monetary policy, stating that its “higher-for-longer” stance is already accounted for in market pricing. Specifically, he notes that Fed funds futures imply only 65 basis points of cuts in 2024, compared to the 100 basis points they priced in early September. He adds that the potential U.S. government shutdown could affect the Federal Reserve’s access to crucial data, which might influence its decisions in the upcoming FOMC meeting scheduled for 31 October to 1 November 2023. Strikes by the United Auto Workers and the Writers’ Guild could also affect the U.S. economy, potentially preventing the Federal Reserve from raising interest rates. Duong suggests that these factors could pave the way for a market rally through the end of the year.

Role of Macro Factors in September’s Crypto Performance

According to Duong’s report, macroeconomic factors had only a marginal impact on crypto performance in September. He highlights that Bitcoin appreciated by 3.5% in September, outperforming losses in the S&P 500 and Nasdaq, which were 3.1% and 3.7%, respectively. Duong had previously speculated that Bitcoin’s poor seasonal performance would be limited, partly due to its 10.9% depreciation in August. He also mentions that the 10-year yield in the U.S. Treasury bond market rose above 4.60%, affecting traditional risk assets more than crypto.

Market Liquidity and Regulatory Developments

Duong points out that market fundamentals are currently secondary to technical factors like liquidity. He mentions that trading volumes have decreased from an average of $38.2 billion in August to $30.1 billion in September. Regulatory developments, such as the SEC deferring several Bitcoin spot ETF applications, have been the primary focus for market participants. Duong also notes that 90% of the SEC’s staff could be furloughed in a U.S. government shutdown, leading to speculation that the SEC is trying to get ahead of this potential event risk.

On-Chain Activity and Protocol Changes

Duong also touches on on-chain activity, noting a sharp decline in the number of daily transactions on the Bitcoin network. This coincides with a proposal from Ordinals creator Casey Rodamour to replace the current BRC-20 protocol with an alternative called “Runes.” Duong states that the minting and transfer of BRC-20 tokens have driven up transaction numbers by 51% compared to the first quarter of 2023. However, per his report, the total USD value transferred on the network has remained constant.

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