Macro Environment and Crypto Performance
In the fourth quarter of 2023, David Duong, Head of Institutional Research at Coinbase, believes that the macroeconomic landscape is favorable for enhanced crypto performance. However, he does warn that short-term volatility may arise due to factors like a potential U.S. government shutdown. While traditional risk assets might temporarily influence crypto markets, Duong remains optimistic that digital assets such as Bitcoin will recover quickly and serve as a hedge against vulnerabilities in the traditional financial system.
Federal Reserve Policy and Its Impact
Duong examines the Federal Reserve’s monetary policy and notes that its “higher-for-longer” stance is already factored into market pricing. He points out that Fed funds futures imply only 65 basis points of cuts in 2024, compared to the 100 basis points priced in September. The potential U.S. government shutdown could impact the Federal Reserve’s access to crucial data, potentially influencing its decisions in the upcoming FOMC meeting. 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. These factors could pave the way for a market rally through the end of the year, according to Duong.
Role of Macro Factors in September’s Crypto Performance
According to Duong’s report, macroeconomic factors had minimal impact on crypto performance in September. Bitcoin appreciated by 3.5% during the month, outperforming losses in the S&P 500 and Nasdaq. Duong had previously predicted that Bitcoin’s poor seasonal performance would be limited due to its depreciation in August. He also highlights that traditional risk assets were affected more by the rise in the 10-year yield in the U.S. Treasury bond market compared to crypto.
Market Liquidity and Regulatory Developments
Duong emphasizes that market fundamentals currently take a backseat to technical factors like liquidity. Trading volumes have decreased from August to September, and regulatory developments, such as the SEC deferring Bitcoin spot ETF applications, have been the main focus for market participants. With the potential for a U.S. government shutdown, speculation arises about the SEC trying to get ahead of this event risk by taking action before it occurs.
On-Chain Activity and Protocol Changes
Duong also mentions a significant decline in the number of daily transactions on the Bitcoin network, coinciding with a proposal to replace the current BRC-20 protocol with an alternative called “Runes.” The minting and transfer of BRC-20 tokens have driven up transaction numbers in comparison to the first quarter of 2023. However, the total USD value transferred on the network has remained constant.
Hot Take: Crypto Performance Outlook
The overall macroeconomic landscape seems favorable for crypto performance in the fourth quarter of 2023. Despite potential short-term volatility caused by factors like a U.S. government shutdown, digital assets like Bitcoin are expected to recover swiftly and act as a hedge against vulnerabilities in the traditional financial system. The Federal Reserve’s monetary policy and potential impact from strikes by United Auto Workers and Writers’ Guild could contribute to a market rally through the end of the year. Additionally, while macroeconomic factors had minimal impact on crypto performance in September, market liquidity and regulatory developments remain key areas of focus. On-chain activity has experienced changes with proposals for protocol replacements.
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