Crypto values saw a dip in early August, triggered by concerns about the U.S. economic trajectory and instability in broader financial markets. Ethereum's performance was weaker than expected, possibly due to a high level of open interest in futures and sell-offs from major holders.
If the U.S. economy continues on the path toward a "soft landing," Grayscale Research anticipates a recovery in token prices. Even in a scenario with weaker economic conditions, Grayscale believes the risk of significant price drops could be more contained than in earlier periods.
By midweek, following a sharp decline between Friday, August 2, and Monday, August 5, the broader crypto and financial markets began to stabilize (refer to Exhibit 1). Despite the general lack of correlation between major cryptocurrency prices and other asset classes, fluctuations in traditional markets can still impact crypto values.
Early August saw drops in Bitcoin and Ethereum prices
The primary trigger for the downturn was a U.S. employment report for July, released on Friday, August 2, which fell short of expectations. The report showed a rise in unemployment rates typical of previous recessions. This fueled fears of an economic slowdown, leading to underperformance in cyclically sensitive assets like stocks, while safe-haven assets like U.S. Treasury bonds, the Japanese Yen, and the Swiss Franc gained strength.
Stocks outside the U.S. and strategies that bet against U.S. equity volatility saw notably poor performance. Bitcoin and Ethereum both dropped, although Bitcoin showed better resilience on a risk-adjusted basis. Ethereum, in contrast, underperformed against both other crypto assets and numerous traditional market sectors, which we will explore further below. Solana emerged as a strong performer among major cryptocurrencies.
Ethereum's performance lagged behind other market segments
Although Ethereum tends to have greater price swings than Bitcoin, its recent underperformance was more significant than usual. Exhibit 3 highlights some of the largest price drops in Bitcoin since 2020, alongside corresponding Ethereum declines. Historically, Ethereum has fallen around 1.2 times as much as Bitcoin during market downturns.
This trend continued during the most recent bear market phase. However, in August 2024, Ethereum’s price fell roughly 1.8 times as much as Bitcoin’s, indicating additional downward pressures.
Ethereum’s price typically declines 1.2 times more than Bitcoin during downturns
One likely reason for Ethereum’s sharper decline is the large buildup of long positions in perpetual futures. In May 2024, following the SEC’s approval of spot Ethereum exchange-traded products (ETPs) in the U.S., traders significantly increased their futures positions, likely anticipating price increases once regulatory approval was finalized.
After the ETPs began trading in July 2024, many of these long positions were closed during the recent price drop, exacerbating the sell-off. On August 4, Ethereum experienced a 7.6% price drop within three minutes, with total futures liquidations reaching $340 million on that day alone.
The sell-off occurred mostly during the U.S. overnight session and saw a considerable spot price discount on Binance compared to Coinbase, suggesting that leveraged traders in Asia were heavily involved.
Ethereum futures leverage increased in May 2024
Another factor contributing to Ethereum’s decline may have been the actual and anticipated selling by large holders, including Jump Crypto, Paradigm, and the Golem Network, which holds significant Ethereum reserves.
Although the exact amounts sold are unclear, data from Arkham Intelligence suggests that these entities collectively held approximately $1.5 billion worth of Ethereum before starting to move their assets. A reduction in active validators and an increase in staking rewards further suggest shifts in Ethereum’s token supply, which could be affecting market sentiment.
Broader Market Stabilization and Future Outlook
After the early-August turbulence, the broader financial markets calmed. Notably, the VIX index—a measure of implied volatility for U.S. stocks—dropped to 26% by Thursday's close, after hitting an intraday high of over 60% on Monday.
Whether this stability persists will depend on upcoming macroeconomic data and potential policy actions from central banks. Important data releases include the weekly unemployment claims (published each Thursday), the Consumer Price Index (set for release on August 14), and the next employment report (due on September 6).
While the Federal Reserve is expected to lower interest rates during its meeting on September 18, the market is more focused on how monetary policy might evolve after that. Additional guidance might be provided at the Jackson Hole Symposium from August 22-24.
Decline in market volatility over the past week
If the U.S. manages to avoid a recession and continues along a path of gradual economic cooling, Grayscale expects a recovery in token prices, with Bitcoin potentially retesting its all-time highs later this year.
However, even under weaker economic conditions, Grayscale sees limited potential for significant price declines, due to factors like steady demand from newly listed U.S. ETPs, reduced credit from centralized lenders, and subdued altcoin performance year-to-date.
Political changes in the U.S. regarding the crypto industry may also mitigate risks compared to previous cycles (refer to July 2024: Bitcoin Goes to Washington).
Navigating Economic Cycles with Digital Assets
Investing in digital assets is inherently risky, with the possibility of partial or total loss of funds. For crypto investors, the uncertainty of macroeconomic conditions remains a short-term challenge. However, Grayscale believes that policymakers are likely to respond swiftly to economic downturns, through increased monetary and fiscal measures.
This less disciplined approach to policy is one reason some investors choose Bitcoin as a hedge, suggesting that economic weakness could strengthen Bitcoin's long-term investment appeal.
Important Considerations
Investments in digital assets carry significant risks, including the potential loss of the entire investment. These assets may not be suitable for investors unable to withstand such losses. The information provided here has been thoroughly researched by Grayscale Investments, LLC, unless otherwise noted. It should not be considered investment advice or a recommendation for any financial product or strategy.