Grayscale's latest report: The investment market expects Trump to win, ETP inflows reach a new high, encryptionAI accelerates integration

Source: Grayscale Research

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Summary of key points:

• As the market pays more attention to the US election, BTC saw a pump in October. Opinion polls show that the competition for the White House seat is very intense, but the changes in financial assets and the implied odds of the prediction market indicate that investors now believe that the probability of Trump winning is higher.
• BTCexchange trading products (ETP) saw a large net inflow this month, although some of the new demand may reflect Hedging funds' basis trading (they may go long on BTC ETP and short BTC futures).
• The intersection and integration of encryption and AI technology continue to have far-reaching effects, including autonomous chatbots promoting their own MEME coin. Although due to the fun nature of these projects, it is easy for people to overlook their true significance, they indicate that blockchain technology can be an effective tool for economic value intermediary between humans, AI agents, and networked physical devices.

The market expects Trump to win the election in October.

American voters will go to the polls on Tuesday, November 5th, and this election is expected to have a significant impact on the digital asset industry. Despite polls showing a tight race for the White House, investor expectations seem to have shifted towards a victory for former President Trump in the past month. For example, at the end of September, the odds on the blockchain-based prediction market Polymarket slightly favored Vice President Harris. However, by the end of October, Polymarket's presidential election market showed a 65% probability of Trump winning (Chart 1). While prediction markets are not foolproof and Harris could still win the election, the shift in investor expectations towards a Trump victory seems to have pumped the asset market.

Figure 1: prediction market shows higher odds of Trump winning the election

The financial market's anticipation of a higher probability of Trump's victory can only be inferred indirectly, but Grayscale Research believes that the cross-asset returns in October are consistent with the 'Trump trade' (Chart 2). From a macro perspective, the rise in the US dollar and the depreciation of the RMB may reflect people's awareness of tariff risks. Similarly, bond yields rise (bond prices fall), gold prices pump, which may reflect expectations of increased budget deficits and intensified inflation during President Trump's term. BTC rose by 9.6% this month and is one of the better-performing assets on a risk-adjusted basis. Trump is enthusiastic about BTC and cryptocurrency, so the rise in BTC price may reflect the market's expectations for government support for the regulatory environment for BTC. In addition, BTC, like gold, may be responding to potential macro policy changes during President Trump's term.

Figure 2: BTC is one of the outstanding assets in October.

The results of the US presidential election may have a significant impact on the digital asset industry. The next president and Congress may enact legislation targeting cryptocurrency and may change tax and spending policies that affect a broader financial market. Grayscale Research believes that given the role the Senate plays in confirming key regulatory appointments (such as the chairs of the US SEC and CFTC), changes in Senate control may be particularly relevant to cryptocurrency.

However, at the voter level, the data shows that Cryptocurrency is a bipartisan concern, with Democrats slightly more likely to hold BTC than Republicans. In addition, specific candidates from both parties have expressed support for Cryptocurrency innovation. Regardless of which party is in power, Grayscale Research believes comprehensive bipartisan legislation may be the best long-term solution for the American digital asset industry.

BTCArbitrage trading weakens the impact of SpotBTC ETP net inflows on price pump

In October, there was an increase in demand for SpotBTCexchange trading products (ETPs) listed in the United States. As of October 31, the net inflow totaled 53 billion US dollars, higher than the 13 billion US dollars in September, reaching the highest level since February. Since the launch of SpotBTC ETP in January, the net inflow total has exceeded 242 billion US dollars, and the US ETP currently holds about 5% of the total BTC supply.

The net inflow of Spot ETPs this year may put upward pressure on the price of BTC. However, this relationship may not be one-to-one, partly because hedging fund trading is becoming more popular. Specifically, hedging funds (or other mature and/or institutional investors) can buy BTC ETPs while simultaneously shorting BTC futures of equivalent value in USD. This strategy aims to profit from the difference between Spot and futures prices, sometimes referred to as BTC "basis trading" or "arbitrage trading". Because this strategy involves both buying BTC (through ETPs) and selling BTC (through futures), it should not have a significant impact on the market price of BTC.

There is currently no exact measure, but according to a report from the Commodity Futures Trading Commission (CFTC), since the launch of SpotBTC ETP in January, some hedging funds have increased their net short positions in BTC futures by nearly 5 billion US dollars. ** Based on this estimate, Grayscale Research believes that out of the $24.2 billion net inflows into the listed SpotBTC ETP in the US this year, approximately $5 billion may be used to hedge spot/futures positions, thus may not have contributed to the pump in BTC price (Chart 3). **

Chart 3: Hedging funds may pair BTC ETP longs with futures shorts

Block chain becomes the value intermediary of AI agent

Despite the significant pump in BTC price in October, the returns of other segments in the encryption market are disappointing. For example, the Cryptocurrency Sector Market Index (CSMI), a comprehensive index developed in collaboration with FTSE/Russell, fell by about 6% (Chart 4). The worst-performing segment in the encryption industry is the utility and service encryption industry. This diversified encryption industry includes many tokens related to Decentralization AI technology, some of which have experienced a pullback this month after a pump earlier this year, including FET, TAO, RENDER, and AR.

Figure 4: The utility and service industries lag behind other encryption sectors.

Despite some Tokens' valuations falling, the Decentralization AI theme remains the focus of the crypto market. We believe this is largely due to new applications showcasing 'AI agents' for blockchain use - software capable of understanding objectives and making autonomous decisions.

A key 'character' is Truth Terminal, an AI chatbot created by researcher Andy Ayrey. The chatbot has an account on X (formerly Twitter) and autonomously interacts with other X users (i.e., without any input from Andy). The innovation lies in Truth Terminal expressing interest in creating the Meme coin GOAT and then storing the new Meme coin in the associated blockchain Address. After owning the Meme coin, Truth Terminal takes measures to promote the Token to its social media fans.

Due to the strong interest in this narrative, related Meme coin has also appreciated about 9 times, leading many to call Truth Terminal the 'first AI proxy millionaire'. Although the project may seem humorous and lighthearted, it demonstrates that AI agents can understand economic incentives and can use blockchain to send and receive value. Other innovative projects are making breakthroughs in the shared ownership of AI agents, and there will be many use cases in the future.

Although still in the early stages, the latest wave of Decentralization AI applications may in a tangible way fulfill one of the promises of blockchain technology: it can serve as the core financial infrastructure of the future, acting as an intermediary of value between humans, AI agents, and possible physical devices. We believe that, compared to traditional payment infrastructure, using permissionless blockchain can be a better way for AI agents to accumulate and transfer resources.

Summary

The US presidential election on November 5th could dominate the Cryptocurrency and TradFi markets in the short term. The digital asset industry is facing some important issues, and the results of the White House and the Senate and House of Representatives could to some extent affect the development of the US Cryptocurrency business. At the same time, we are encouraged by the bipartisan ownership of digital assets, many macro trends driving BTC adoption, and recent technological breakthroughs, particularly at the intersection of Cryptocurrency and AI. Therefore, regardless of the outcome of next week's election, we are optimistic that Cryptocurrency will continue to thrive in the United States.