Coinbase: The Fed will cut interest rates by 25 basis points and the DAT premium is disappearing.

Source: Coinbase Research; Compiled by Jinse Finance

Key Points:

• We believe the Federal Reserve will cut interest rates by 25 basis points on September 17: Weak labor and real estate markets increase the likelihood of a rate cut, but inflation trends make a conservative path more likely.
• PvP stage DAT: Many DAT's mNAV compressed to about 1, and trading volume decreased; however, NAV and supply shares continued to rise.

Federal Reserve: Current Urgency

We believe that the Federal Reserve will cut interest rates by 25 basis points (rather than 50 basis points) at the Federal Open Market Committee meeting next week (September 17) for the following reasons:

• The inflation trend remains unchanged - driven by the continued rise in core services/housing and energy, the overall CPI for August slightly exceeded expectations (month-on-month increase of 0.4%, with the median expectation being a month-on-month increase of 0.3%). This data is not enough to reverse the annualized inflation trend, and more importantly, the core CPI remains controllable. (Super core services only rose by 0.33%, compared to 0.48% in July). However, we believe this data is sufficient to prevent conservative board members from taking more aggressive cutting measures this month.
• Employment is crucial – nevertheless, expectations for job cuts continue as the U.S. Bureau of Labor Statistics downgraded its preliminary estimate of non-farm payrolls by 910,000 this week, indicating that the weakness in the labor market may have started as early as spring 2024. If so, this means that the business cycle likely peaked in early Q2 2024, and recent data suggests that we may have extended this downturn.
• Housing - We believe that housing is currently the biggest risk factor for the U.S. economy, as despite the median U.S. home prices rising by 2.9% year-on-year, the number of housing starts and permits has fallen to its lowest level in many years. Combined with weak labor market data, the outlook for the real economy is bleak from the perspective of long-term high interest rates.
• Credibility — Nevertheless, a 50 basis point rate cut would be interpreted as signaling that policy has been too tight for a prolonged period, which contradicts the guidance of “data dependency” over the past several months. A gradual policy allows the committee to update more labor and inflation data without committing to an aggressive path. From the perspective of the policy loss function, the risks for the Federal Reserve are asymmetric: the cost of being excessively accommodative and reigniting price pressures is greater than the cost of being excessively accommodative and reassessing at the next meeting.

Figure 1: The futures prices currently reflect a 100% certainty of a rate cut in September, with a very low likelihood of a 50 basis point cut.

In-depth Exploration of DAT

The mNAV of most Digital Asset Trusts (DAT) has generally approached parity, with the compression of ETH DAT being the most significant since May. We believe this indicates that the “DAT premium” is disappearing, and it has entered a valuation-constrained PvP phase. The weighted average mNAV of ETH DAT has dropped from over 5 times at the beginning of summer to below 1 time at the beginning of September (Figure 2). We believe this pattern suggests: 1) Investors are now pricing ETH DAT stocks primarily as a means of transferring underlying reserve assets, rather than for speculative “operations” driven by cryptocurrency enthusiasm; 2) Competition among issuers has offset most of the “DAT premium.”

Figure 2. Weighted average mNAV of digital asset treasury classified by asset category

The trading volume of DAT peaked in mid-August and has since declined in September, indicating that the narrative around DAT is gradually fading, while the valuation has re-anchored at the net asset value (NAV). During this period, the trading volume of DAT over the past 7 days decreased by approximately 55%, and the share of ETH DAT shrank alongside the share of BTC DAT (Figure 3). Using trading volume as an indicator of attention, we believe that the narrative around DAT is marginally weakening, which may reduce market participants' willingness to pay a speculative premium. The surge in treasury purchases in late July/August led to a spike in trading volume, followed by a consolidation of cryptocurrency prices, highlighting the liquidity-driven nature of trading: when the primary buying momentum slows and macro uncertainty dampens market sentiment, enthusiasm wanes, and mNAV retreats to around 1 (Figure 4).

Figure 3. T7D DAT Trading Volume – By Asset Category

Figure 4. T7D DAT Purchase Volume - Classified by Asset

However, despite the decline in trading volume and compression of premiums, the absorption of the balance sheet continues — the most obvious manifestation is ETH — shifting the focus from mispricing to liquidity and structural factors. The net asset value of DAT (NAV) and the total supply share held by DAT continued to rise in September (Charts 5, 6), which means that even though the equity pricing of DAT is close to the net asset value (NAV), they still serve as structural demand absorbers for the circulating supply. We believe that the rise in ownership shares combined with mNAV ≈ 1 defines the PvP phase. The cross-sectional results depend on execution and policy choices (financing mix, pace of capital purchases, treatment of staked ETH), while at an overall level, the binding variables are merely the pace and breadth of net capital purchases, rather than any persistent equity premium.

However, we note that if the cryptocurrency market regains momentum, the PvP phase may reverse, as we believe that under the risk preference mechanism, when attention exceeds major issuances, speculative premiums may reappear, forming a temporary wedge. We believe that the key factor determining whether such mechanisms can return may lie in macro liquidity—especially the trend of policy interest rates—we believe that the role of macro liquidity in shaping risk preference is greater than the fundamentals of specific protocols.

Figure 5. T7D DAT Asset Net Value – By Asset

Figure 6. The proportion of assets held by DAT in total supply