Grayscale: How will the US election results affect the crypto market?

summary

• Bitcoin has rallied in October as markets focus on the U.S. election. Polls show a tight race for the White House, but changes in financial assets and implied odds in prediction markets suggest investors now see a higher chance of Trump winning.

• Bitcoin exchange-traded products (ETPs) have seen significant net inflows this month[1], although some of the new demand may reflect pairs trading by hedge funds (who may be long Bitcoin ETPs and short Bitcoin futures).

• The intersection of crypto and AI technologies continues to bring thought-provoking developments, including autonomous chatbots that promote their own memecoins. While it’s easy to overlook these projects due to their playfulness, they demonstrate that blockchain technology can be an effective tool for mediating economic value between humans, AI agents, and networked physical devices.

U.S. voters will go to the polls on Tuesday, November 5, in an election that is expected to have a significant impact on the digital asset industry. While polls suggest a tight race for the White House, investor expectations appear to have shifted toward a victory for former President Trump over the past month. For example, at the end of September, odds on blockchain-based prediction market Polymarket showed Vice President Harris with a slight edge over Trump at the time (for background, see Polymarket: Cryptocurrency’s Election-Year Breakout App). However, by the end of October, Polymarket’s presidential election market showed a 65% probability of Trump winning (Exhibit 1). Prediction markets are not infallible, and Harris could win the election, but the shift in investor expectations for a Trump win appears to have driven asset markets over the past month.

Figure 1: Prediction markets give Trump a higher chance of winning

Whether financial markets are pricing in a higher probability of a Trump victory can only be inferred indirectly, but Grayscale Research sees cross-asset returns in October as consistent with a “Trump trade” (Exhibit 2). From a macro perspective, the dollar appreciated and the yuan depreciated, perhaps reflecting increased perceptions of tariff risk. Similarly, bond yields rose (bond prices fell) and gold prices rose, likely reflecting expectations of wider budget deficits and higher inflation under Trump’s presidency. Bitcoin appreciated 9.6% for the month, making it one of the better risk-adjusted performers. The former president has shown great enthusiasm for Bitcoin and cryptocurrencies, so its appreciation may reflect expectations of a Bitcoin-friendly regulatory environment. Moreover, Bitcoin, like gold, may be reacting to potential macro policy changes under Trump’s presidency.

Figure 2: Bitcoin was one of the best performing assets in October

The outcome of the U.S. election could have a significant impact on the digital asset industry. The next president and Congress are likely to pass legislation targeting cryptocurrencies and could make changes to tax and spending policies that affect broader financial markets. Grayscale Research believes that a change in control of the Senate could be particularly important for cryptocurrencies, as the Senate plays an important role in confirming presidential appointments to key regulatory agencies, such as the chairmen of the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC). However, at the voter level, data shows that cryptocurrency is a bipartisan issue, with Democrats holding a slightly higher percentage of Bitcoin than Republicans. [2] In addition, specific candidates from both parties have expressed support for cryptocurrency innovation. Regardless of which party is in power, Grayscale Research believes that comprehensive bipartisan legislation may be the best long-term solution for the U.S. digital asset industry .

Demand for U.S.-listed spot Bitcoin exchange-traded products (ETPs) increased in October. Net inflows totaled +5.3 billion as of October 31, up from +1.3 billion in September and the highest level since February. Since the launch of spot Bitcoin ETPs in January, net inflows have totaled +24.2 billion, with U.S. ETPs now holding approximately 5% of the total Bitcoin supply.

Net inflows into spot ETPs this year could put upward pressure on the price of Bitcoin. However, the relationship may not be one-to-one, in part due to the growing popularity of hedge fund trading. Specifically, a hedge fund (or other sophisticated/institutional investor) may buy a Bitcoin ETP while simultaneously shorting an equivalent amount of USD in Bitcoin futures. This strategy seeks to profit from the difference between the spot and futures prices and is sometimes referred to as a Bitcoin “basis trade” or “carry trade.” [3] Because the strategy involves buying Bitcoin (via the ETP) and selling Bitcoin (via futures), it should not have a significant impact on the market price of Bitcoin.

There is no definitive measure of such activity, but a report from the U.S. Commodity Futures Trading Commission (CFTC) suggests that some hedge funds[4] have increased their net short positions in bitcoin futures by nearly $5 billion since the launch of spot bitcoin ETPs in January.[5] Based on this estimate, Grayscale Research suggests that of the $24.2 billion in net inflows into U.S.-listed spot bitcoin ETPs this year, approximately $5 billion may have been in paired spot/futures positions and therefore may not have contributed to bitcoin price appreciation (Figure 3).

Figure 3: Hedge funds may pair long positions in Bitcoin ETPs with short positions in futures

Despite the sharp rise in the price of Bitcoin in October, returns from other crypto market sectors were lackluster. For example, the Crypto Sector Market Index (CSMI), a composite index we developed in partnership with FTSE/Russell, fell by about 6% (Exhibit 4). The worst-performing market sector was the Utilities and Services crypto sector. This diverse crypto sector includes many tokens related to decentralized AI technology, some of which have retreated this month after rising earlier this year, including FET, TAO, RENDER, and AR. [6]

Figure 4: Utilities and Services Lag Behind Other Cryptocurrency Industries

Despite some pullbacks in valuations of certain tokens, the decentralized AI theme continues to dominate the cryptocurrency market. [7] We believe this is largely due to new applications demonstrating the use of blockchains by “AI agents” – software that can understand goals and make autonomous decisions.

A key emerging figure is Truth Terminal, an AI chatbot created by researcher Andy Ayrey. The chatbot has an account on X (formerly Twitter) and interacts with other X users autonomously (i.e., without any input from Andy). The innovation in this case is that Truth Terminal expresses interest in creating the memecoin $GOAT and then deposits the new memecoin into an associated blockchain address. [8] Once it has ownership of the memecoin, Truth Terminal takes steps to promote the token to its social media followers. Due to widespread interest in the story, the associated memecoin appreciated by approximately 9x,[9] leading many to dub Truth Terminal the “first AI agent millionaire.” While the project was intentionally humorous and lighthearted, it demonstrated that AI agents can understand economic incentives and can use blockchains to send and receive value. Other innovative projects are making breakthroughs in co-owned AI agents, with many future use cases. [10]

While these are still in their early stages, the latest wave of decentralized AI applications may deliver on one of the promises of blockchain technology in a tangible way: it could serve as the core financial infrastructure of the future, requiring value mediation between humans, AI agents, and potentially a variety of physical devices. We believe that using a permissionless blockchain could be a superior way for AI agents to accumulate and transfer resources than traditional payment infrastructure.

The U.S. election on November 5th is likely to dominate crypto and traditional financial markets in the short term. The digital asset industry faces important questions, and the results of the White House and both houses of Congress may affect the development of crypto businesses in the United States to a certain extent. At the same time, we are encouraged by the bipartisan ownership of digital assets, the numerous macro trends driving Bitcoin adoption, and recent technological breakthroughs, especially at the intersection of cryptocurrencies and artificial intelligence. Therefore, regardless of the results of next week's election, we are optimistic that cryptocurrencies will continue to develop in the United States.