What Makes Bitcoin, Ethereum's Rally "Impressive" & Fallout in Failed Clarity Act Vote

Adam Lynch (0:11)

Hi, everybody, welcome to Crypto Corner. My name is Adam Lynch, and I'm a Director, Global Equity Research and Strategy here at the Schwab Center for Financial Research. Today, I'm going to talk to you about a couple of topics related to the crypto markets. First of all, what we're going to go through are Bitcoin and Ethereum price levels. We'll talk some technicals and fun flow data. But then I want to note a little bit of risk that we've seen increasing in the market. We'll talk about that. Then what we're going to do is end up talking about what's been going on in DC since we saw the Clarity Act fail last week.

Bitcoin and Ethereum are both up about 10 percent the past week, with Bitcoin trading up around 84,500 and Ethereum up around 2675

This recent rally has lifted the overall cryptocurrency market to over $3 trillion again. The primary catalyst for this move was essentially the August 19th announcement that the US. Treasury was going to increase buybacks of those long-dated bonds. That essentially increased risk appetite across the board, and crypto rallied alongside equities and other risk assets. Year-to-date fund flows for Bitcoin ETFs turned net positive this week, up about 300 million year-to-date. But roughly 4.6 billion has poured into the market since August 19th. So we have seen quite a bit of movement in the past five days or so. This is essentially a pretty strong signal that institutional money is reengaging with the crypto market. We've seen maybe a little bit of progress on some Middle East diplomacy, optimism around Trump and GE meeting this week. We're also a couple of things that contributed to that positive sentiment. But overall, what we've done is we've moved past a couple of major events with the crypto failure, bed rate hikes. So I'm pretty impressed with how the crypto market overall has weathered the storm. But as prices go up, leverage is building and so is risk. What we've seen is that these Bitcoin traders are piling back into those perpetual futures contracts with open interest in them climbing back to levels that we last saw in July.

That was essentially just before a record wave of short liquidations sent prices soaring. So now as prices are rising, traders are borrowing more money to essentially amplify their bets. And the same dynamic that happened back in July could work in reverse here. So if prices dipped, it would essentially force some liquidations and that can just cause a downward spiral of prices. So we just want everybody to know that the positioning that we're seeing out in the market is essentially giving us a little bit of not necessarily concern, but it does increase the risk of sharp, rapid price swings in either direction. And it's something that we want everybody to be aware of.

And then finally, what's happened in DC since the Clarity Act failed in the Senate? Well, we've seen some pretty nice progress. Immediately after it failed, the CFTC Chairman Michael Selig said that his agency is locked in and ready to ship its rules for the new frontier of finance. They have since actually filed two rules proposals with the White House. One of them is regulation crypto asset transactions and regulation crypto assets markets. And the other essentially is granting some relief to passive software providers, so they don't have to register as introducing brokers. Nothing is really known about these. They're still confidential, but it's still nice to see some progress being made. And then the SEC also made a move. They essentially announced a tokenization framework. It's basically an innovation exemption for the next five years, which basically gives these tokenized securities venues, the ability to trade tokenized US stocks without having to go through registering as an exchange. So again, not much is known about that one either, but it is clear that these agencies were ready to start picking up where our legislators essentially left off.

And as for clarity, well, House Majority Whip Tom Emmer says that the act could return after midterms and still pass before the end of 2026

Seven of the Democrats who oppose the current version have since stepped forward and say that they remain committed to negotiating. So who knows? But it would have to get done during that lame duck period between the election and the end of the current Congress in January, which is usually a difficult time to get things done. I think the more interesting thing related to politics and crypto is going to be some of these close Senate races that we see out there that could be influenced by crypto PACs trying to tip the race one way or another, thinking forward to that next Congress that's going to come into power in January. In fact, the industry's dominant super PAC has already announced a revenge campaign against former Senator and former Senate Banking Committee Chair, Sherrod Brown, in Ohio's 2026 race. He's seen as one of the chief obstacles to crypto legislation, and it's definitely going to be a close one to watch from a crypto angle.