encryption market and the movements of Polymarket on the eve of the election

Author: Tanay Ved & Matías Andrade Cabieses Source: Coin Metrics Translation: Gate.io, Golden Finance

Key Points:

• Historically, BTC has experienced significant pumps after elections, but the returns in each cycle have been decreasing: about 8000% (2012), about 1750% (2016), and about 600% (2020). They usually coincide with BTCHalving and major policy shifts by the Federal Reserve, forming a series of catalysts that reduce market uncertainty.
• Historically, the actual Volatility of Bitcoin (BTC) increases before and after the US election, and typically remains high for about 30 days after the election.
• The odds for the 2024 election on Polymarket have experienced drastic Fluctuation: from an even split in October, to Trump leading by 34%, and recently shifting to 62% for Trump and 38% for Harris. Trading patterns indicate high international participation, with peak volume occurring between 01:00-04:00 Eastern Time in the United States.
• As the election approaches, the trusted Spot volume of major currencies (BTC, ETH, SOL) is twice the recent average, reaching 19.7 billion US dollars, while the outstanding BTC futures contracts have reached nearly a historical high of 34 billion US dollars.

Introduction

As people's expectations for the 2024 US presidential election grow stronger, the global market is ready for the possible outcome, which will have a significant impact on the dynamics of the digital asset and encryption ecosystem. There have been some political developments prior to the election, and prediction markets such as Polymarket are playing an increasingly important role in predicting sentiment, on par with traditional polls. For more information on the operation of prediction markets and Polymarket, please refer to our recent SOTN journal 'The Power of Polymarket and Collective Intelligence'. Now, as the election results approach, the encryption market is regaining momentum, with BTC (BTC) breaking $70,000, just a step away from its historical high. Looking ahead, the election results may further shape the policy landscape of encryption and affect market sentiment for the coming months.

In this issue of the Coin Metrics* Network Status Report, *we analyzed the historical performance of BTC (BTC) before and after the previous elections, delved into market trends, and studied the Polymarket data driven by the 2024 election.

Historical Performance of BTC During the US Election

The potential outcome of digital asset is the most followed issue by market participants, we can review BTC's performance in past elections to see if they have had a significant impact.

Source: Coin Metrics Reference Intrerest Rate

The chart above shows the BTC return rate in the year before and after the past three U.S. presidential elections, as well as the upcoming 2024 election (highlighted in orange). It is worth noting that the BTCHalving, major policy shifts by the Federal Reserve, and presidential elections usually occur within this time frame, followed by a significant pump in prices. Although the return rate has decreased in each cycle, historically, BTC has experienced significant price appreciation around 100 days after the election, as the periodic reduction of BTC issuance, monetary policy changes, and the drop in market uncertainty due to the election results have boosted market sentiment.

While the positive outcomes of these events are evident, these trends also reflect the rise of BTC as part of a broader market cycle, which is also influenced by global monetary policy and the expansion of Money Supply. The performance of BTC during election cycles may be consistent with these structural factors rather than implying a direct relationship.

Source: Coin Metrics Market Data

As each election approaches, market participants process new information and adjust positions based on election results, often leading to increased volatility. The chart shows actual volatility over the past 7 days, with volatility typically rising before past elections (in 2016 and 2020) and staying elevated for around 30 days after the election. While volatility leading up to the 2024 election has remained relatively subdued, it may rise in the coming days.

Polymarket User Behavior

Since early October, the odds of Donald Trump and Kamala Harris winning the presidential election on Polymarket have greatly expanded, from about 50% each to Trump leading by about 34%. However, last week, this gap has reversed, with Harris' chances of winning the election reaching 46%, narrowing the gap between the two candidates. Similar changes in odds have also appeared in regulated prediction market Kalshi and some other predictions.

Source: Polymarket.com

To understand how Polymarket users affect the odds of candidates winning in a year, we can study the average trading volume patterns of different stocks. The chart below shows the 7-day rolling average bet size, revealing significant patterns in the trading behavior of different election outcomes. Throughout the period, the average trading volume of 'Trump YES' and 'Trump NO' stocks is higher (971 USD and 955 USD respectively), with occasional peaks indicating shifts in sentiment caused by external events or larger, concentrated bets. On the other hand, the trading volume of 'Kamala YES' and 'Kamala NO' positions is generally lower (274 USD and 622 USD respectively), indicating early disagreements. As the election approaches, the trading volume of different stocks tends to converge, creating a more stable market environment.

Source: Coin Metrics Labs

We can further analyze the trading activity on Polymarket for the 2024 election. We can use a simple heuristic method to segment the bets on Polymarket: if a trader trades more than 50 times and supports or opposes two candidates, they will be classified as market makers, distinguishing them from traders who only support one candidate and make up the rest of the activity on Polymarket. Although market makers account for only a small portion of the total number of traders on Polymarket, they drive a significant portion of the trading and volume on the platform.

Source: Coin Metrics Labs

One question about trading in Polymarket is based on the fact that Americans are not allowed to participate in these markets. We can first look at the standardized volume of different prediction market contracts related to Biden, Harris, and Trump, which trade hourly. There is an obvious pattern indicating that most trading activity occurs outside typical trading hours in the United States.

Source: Coin Metrics Labs

Although we did see some volume in the Biden winning market during the US trading session, the highest volume period is always the US overnight session, especially between 01:00-04:00 Eastern Time, because the overall volume of the Biden winning market is much lower than the Trump winning market and the Kamala winning market. This time aligns more with the trading hours in Europe and Asia. However, given that US political news influences trading patterns, significant trading activities during the US daytime session serve as a clear evidence that international traders are actively monitoring and responding to US political developments. Most of the volume occurs outside the US trading session, but significant volume still remains during the US session, indicating that the global trading community is deeply influenced by the US, although its main headquarters are not in the US.

Mainstream Token and AltCoin prospects? Indicators worth following

There has been a lot of discussion about the prospects of the digital asset market in different fields and how the election results may affect its development trajectory. By segmenting the market into major currencies (BTC, ETH, and SOL) and AltCoins in the datonomy™ field (excluding stablecoins and on-chain derivatives), it is found that there is a significant difference in the trusted 14-day Spot volume. Currently, the volume of major currencies is 19.7 billion US dollars, while the volume of AltCoins is 5.4 billion US dollars. Although the volume of major currencies is about twice the past average level, the overall level is still relatively low, waiting for the election results and potential policy changes to confirm the directional trend.

Source: Coin Metrics Market Data Digest and datonomy™

While Trump's victory is seen as beneficial to BTC and the broader encryption assets, as he proposed measures around BTC and participated in projects such as World Liberty Financial (a Decentralized Finance lending protocol), the reactions of various industries to these two outcomes are still to be observed. As the election approaches, some indicators may become indicators of market sentiment changes. The ETH/BTC ratio is 0.035, close to the level in April 2021, while the SOL/ETH ratio is close to a historical high of 0.07. Speculative activities intensify, and BTC futures contracts approaching a historical high (34 billion USD) have not been closed. Therefore, it is expected that implied Volatility will further increase, reflecting market expectations.

Conclusion

As the US election approaches, the expectations of global market participants and the encryption ecosystem are increasing. Although the election result may affect the short-term trend of digital assets, the industry will still continue on a sustained and long-term rise as market uncertainty subsides. As we have seen in past cycles, BTC has shown resilience in multiple elections, consolidating its position as a non-political macro asset. As the wider encryption ecosystem continues to mature, we can expect that over time, more investment participation and deeper on-chain adoption will shape its evolution.