September 2025 in Crypto: Seasonal slump avoided as Fed resumes rate cuts

September is well known for its negative seasonals in tradfi financial assets. For instance, in the period since 1927, September is the only month of the year where the S&P500 monthly performance averages below zero, with the benchmark index down more than 56% of the time. The same also holds true for digital assets. September is the worst month in terms of crypto price action (proxied by Bitcoin given it has the longest trading history of all digital tokens) as can been seen in the following table.

Bitcoin Monthly Returns

Source: coinglass

In eight of the past thirteen Septembers Bitcoin’s price has fallen, giving a 61% down ratio that is pretty much in keeping with the experience of the S&P500. Thankfully, for the bulls, this September proved to be the exception to the rule (and if history repeats it points to positive outcomes in November and December too!). Despite a significant liquidation event driven by excessive leverage among short-term traders whose positions unravelled as prices dipped, and the sentiment damaging threat of a US government shutdown, large cap tokens remained in the green, as evidenced by our flagship large cap Top10 CTI rising by 2.5% last month.

Fed Restarts Monetary Easing

Helping to buck this seasonal low point was increased conviction by investors that the Fed would, after a nine month hiatus, resume the easing cycle instigated back in September 2024. Driving such expectations was the clear weakening in the US labour market as reflected both in the August non-farm payroll report, which showed the economy added 22,000 jobs (a third of what was expected), and by the 27,000 surge in initial jobless claims taking the series to its highest level since the pandemic—an eye-catching move despite the weekly series’ usual volatility.

Fed officials are sensitive to labour market trends not only because of the potential growth implications (lower hiring typically coincides with lower economic activity as evidenced by the 77% correlation coefficient between quarterly percentage changes in employment versus quarterly percentage changes in real GDP – see image), but because promoting maximum employment is one part of their official mandate.

US Employment vs. Real GDP Growth (% quarterly change)

Source: St Louis Fred

The other key part of the Fed’s mandate is price stability¹, defined as keeping core inflation close to 2%. While inflation is still running above target—largely due to the Trump tariffs—there is no evidence of so-called “second-round effects.” In other words, higher prices have not triggered a broader cycle of rising wages and costs. Fed officials are therefore prepared to look past this one-off price level increase, since its impact should fade within a year. Unlike the post-Covid inflation shock, this episode truly looks “transitory”. Moreover, the abatement of uncertainty about the impact of the Trump tariffs erodes a key justification the Fed put forward previously for not lowering interest rates.

During the press conference accompanying the decision Fed Chair Powell made it clear that the widely-expected 25bp cut in response to the cooling labour market was best viewed as “a risk management cut”. Moreover, the dot-plot charts, which show how FOMC members expect the path of the Fed funds rate to evolve, pointed to between 25 and 50bp of additional easing by year-end, a profile consistent with the pricing of US interest rate futures.

A Golden Opportunity

Given easier monetary policy boosts global liquidity conditions, while also lowering the opportunity cost of holding zero-cash-generating assets, one would naturally expect an environment of declining US short-term interest rates to be positive for both gold and finite-supply cryptocurrencies like Bitcoin. However, the fact that the former has risen to fresh all-time highs while the latter remains well below its August all-time high attracted the attention of the crypto naysayers like Peter Schiff.

Source: X

Part of the explanation for the recent underperformance of crypto lies in the fact is that while Bitcoin is widely considered to a digital version of gold, it is also viewed as a speculative risk asset, which makes it less-recession proof than gold. But there is another factor also likely at play.

Who’s Hedging?

Gold is not just an attractive investment to hold when interest rates are falling due to the reduction in the opportunity cost of holding it. Arguably, gold’s strongest use case—given its thousand-year track record as a store of value—is its ability to hedge against the erosion of fiat money’s purchasing power (or, in its most dramatic form, a fiat collapse—a firm favourite of the crypto community!). As I have pointed out in numerous previous research reports, a fiat currency’s value is underpinned by the credibility of the fiscal authority issuing it. Given the elevated level of public debt in many countries around the world, which is projected to rise inexorably over the coming decades in most major economies, investors are becoming increasing mindful of this aspect of gold’s usefulness, especially in light of the increasingly overt political pressure being applied to central banks (including the Fed – see image) undermining their perceived independence.

Political Pressure in Meme Form

Source: truthsocial.com

Perhaps the clearest indication of this comes from the behaviour of official reserve holders, such as central banks and sovereign wealth funds. For the majority of the time since 1971, when the Nixon government closed the gold window effectively shutting the door on the gold standard and ushering in the age of a fully fiat global monetary system, these reserve managers consistently reduced their holdings (at least in relative terms) of what Keynes famously called “the barbarous relic”. However, this decades long trend ended in 2017. Since then, the yellow metal’s share has been trending higher at an accelerated pace, such that it now accounts for a quarter of all reserves – see chart. For the most part this has been at the expense of the US dollar.

Gold Is Back In Vogue

Source: X

The fact that central banks and other international reserve holders have been upping their allocations to gold is an important signal. Why? Because by their actions – not words, actions, and actions matter! – they are implicitly signalling a loss of faith in the global fiat monetary system. After all, why hold zero-yield gold when they can own interest-bearing fiat currencies, which can be directly used to support international trade—unless, of course, they are concerned about the health of the system, a system they know intimately, since they are its lynchpin. This doesn’t mean that a US dollar collapse is imminent for reasons I have explained previously, but it is important nevertheless.

Motives And Means

As well as being best placed to assess the health of the global fiat money system, central banks and reserve managers are also the most risk-averse investors because their asset allocation decisions are driven not by returns, as is the case for profit-maximizing private investors², but by the need for liquidity and safety; two characteristics that ensures against losses that could otherwise undermine national financial stability.

Given their strong risk aversion, it’s no surprise that central banks prefer gold as their financial safety net. It’s a familiar asset, they already have the infrastructure to store bullion securely (self-custody being the safest option³ — remember “not your keys, not your coins”) and its price volatility is far lower than Bitcoin’s (around 15% versus 80% historically). For reserve managers seeking to hedge fiat risk, gold therefore remains the obvious choice—helping explain its recent rally and outperformance relative to Bitcoin. That said, this advantage may not last much longer.

Concomitant with its rising market cap, Bitcoin’s price volatility has been trending lower. Indeed, over the past year or so its volatility has fallen markedly and is quickly approaching that of gold – see image. This potentially makes it more interesting for reserve managers, especially in light of the push to establish strategic Bitcoin reserves in the US and other nation-states.

Annualized 90 day Price Volatility

Source: Author calculations

Moreover, what happens if regular people, or even large organizations, also start to worry about the health of the global fiat money system? Neither have access to secure vaults to self-custody gold bullion. They could, of course, decide to store it in third party vaults but then they are exposed to custody risk (governments are well aware of the locations of these vaults and there is precedent for them seizing privately held gold).

Bitcoin seems a rather obvious alternative. Not only can it be securely stored on nothing more spacious than a thumb drive, it can be transferred across the global in less than an hour and at very little cost⁴. And now for the kicker.

Currently, the market cap of gold is $25 trillion, compared with the total market capitalization of crypto of roughly $4 trillion and just over $2 trillion for Bitcoin. In a scenario where crypto adoption continues to expand as worries over the global fiat money system spread beyond international reserve holders, its ability to serve as a reliable store of value will become increasingly visible. This is because it takes a lot more capital to move the price of an asset whose market cap is $5 trillion than it does to move one whose market cap is $50bn, ie. price volatility will decline further. Admittedly, this is a process that will take time, and there will be bumps along the road (arguably there is one such bump at the moment – see next section), but it will happen.

Tied Up In Knots

As anyone even vaguely familiar with the crypto industry knows Bitcoin is no stranger to controversy. Indeed, one could even call it a design feature because as a decentralized currency no single person or entity is tasked with steering its evolution (unlike many other crypto projects). It is entirely driven by crowd dynamics meaning it is Bitcoin users that decide what constitutes Bitcoin. The natural consequence of this framework is that change can only occur when there is an overwhelming consensus in favour. Sometimes these changes are relatively uncontentious, in which case implementation goes smoothly, but given how many Bitcoin users there are globally occasionally they are highly contentious.

One of the most famous examples of this was the 2015-17 blocksize wars, where two camps formed, one wishing to raise the size of Bitcoin transaction blocks to boost transaction bandwidth while the opposing camp favoured maintaining small blocks to avoid blockchain bloat, which serves to discourage decentralization by increasing the cost of running a full node. A more recent controversy was the introduction of ordinals, which I covered in an earlier research note.

The latest controversy to hit the Bitcoin network relates to the so-called OP-Return Limit code change, which has been heating up ahead of the release of Bitcoin Core v.30 due at the end of this month.

Digging Into The Details

I appreciate that getting into the nitty gritty of Bitcoin code changes may not be everyone’s cup of tea but this change is relatively straightforward to understand. Essentially, it relates to the way in which data can be embedded in Bitcoin transactions so as to be stored immutably on every downloaded copy of the Bitcoin blockchain. At present the OP-Return, which is an unspendable transaction that does not bloat the UTXO (Unspent Transaction Output) set, is limited to 80 bytes. This means users are permitted to store up to this amount of data, which is equivalent to a very small (25 x25 pixel image⁵) black and white image or 80 ASCII characters, on the Bitcoin network. Back in July 2023, well-known Bitcoin Core developer Peter Todd first proposed scrapping the limit (Pull Request #28130 and #32359) and, as mentioned, the change is due to be included in the Bitcoin Core release at the end of the month.

The rationale for introducing the change is that it simplifies Bitcoin’s code and also helps support sidechains, which are one method to increase Bitcoin’s notoriously low transactional bandwidth (approximately seven transactions per second). Reinforcing this point, proponents of the code change argue that the limit is already ineffective with users able to bypass it by putting arbitrary data on the blockchain in ways that undermines the network by forcing nodes to store it rather than being able to prune it as is the case with OP-Return.

They also argue that without the 80 byte limit, miners could benefit from additional demands for block space from users that would help drive up fees, something the Bitcoin network will have to achieve if it is to maintain its security budget without jeopardizing the 21 million supply cap. Finally, in an appeal to history, supporters of the Bitcoin Core update point out that in the original Satoshi design there was no limit on OP-Returns, it was only introduced in 2014, so in a sense they are simply returning Bitcoin to its original state.

Opponents to the change, by contrast, argue that by making it easier for users to store data unrelated to Bitcoin transaction validations they are undermining Bitcoin’s primary role as a financial instrument, as well as increasing network strain and potentially causing chain bloat.

There is also the question of what type of data users of the Bitcoin network may end up storing and the potentially very significant legal implications that flow from this⁶. When one syncs to the Bitcoin network as a full node, one is obliged to download the full transaction history all the way back to the genesis block (how else is one able to verify that a transaction is valid in a trust-minimized way?). With the Bitcoin Core v.30 update this would mean full nodes are required to download data files with zero up-front content moderation. As the following poll by @GrassFedBitcoin on X clearly demonstrates, this is not an overwhelming attractive proposition for Bitcoin users – see image.

Source: X

Furthermore, as the recent prosecution of one of the Tornado Cash developers, Roman Storm, demonstrated, the act of releasing software that other users are able to use in support of criminal activity – in his case criminals using coin mixers to obfuscate the original source of the funds – can result in a custodial sentence even though he never personally used their own software to engage directly in any criminal activity. As pointed out by another X user, if Roman Storm can be found guilty then does it not logically follow that by altering the Bitcoin code base in a way that allows users to store multiple digital copies of potentially illegal images they too could be considered culpable? – see image.

Source: X

Critically, even though Bitcoin Core’s code base is the most popular software for full nodes to run, it is not the only one available and hence, when the Bitcoin Core v.30 upgrade comes users can simply choose to not to upgrade if they wish to respect the 80 byte OP-Return limit. Either they can continue running older versions of Bitcoin Core, which will still work because of the backwards compatibility of the code, or they can choose to run different software. One of the most popular alternatives is Knots, a derivation of Core maintained by Luke Dash Junior, a well-known and vocal Bitcoin developer, which will continue to respect the 80 byte OP-Return limit.

Despite all the heat generated by the recent OP-Return controversy, it remains the case that users are the ultimate arbiters of Bitcoin. It will be they who collectively decide whether the network will permit more non-transaction data to be stored on the blockchain or not, in much the same way that they previously determined that Bitcoin Cash and Bitcoin SV – two well-known hardforks of the Bitcoin blockchain – were not Bitcoin even though all three cryptocurrencies have an identical genesis block. Hence, this is by no means an existential crisis for the seminal cryptocurrency, but simply a little bump in the road.

With that said, roll on Uptober!

1 The Fed is often said to have a dual mandate but there is actually a third element, “to promote moderate long-term interest rates”. Given the US fiscal outlook, this often-overlooked objective will become increasing important and, in my opinion, is likely to be the basis for the eventual adoption of yield curve control. My reason for saying this, and it applies not just to the US but many other leading economies, is there are no politically viable alternatives for the kind of fiscal consolidation needed to reduce budget deficits and put government finances on a sustainable path. Cuts to public spending are largely off-limits, while tax hikes would be self-defeating given where economies are positioned on the Laffer Curve—a theme I’ve highlighted in many research notes over the years.

2 Interestingly, last month Morgan Stanley’s CIO, Mike Wilson, advocated shifting away from the classic 60-40 equity/bond asset allocations to 60/20/20 equity/bond/gold reflecting his belief that gold provides a more effective hedge than bonds – see: https://cryptoslate.com/why-morgan-stanleys-revised-60-20-20-portfolio-is-a-wake-up-call-for-investors/

3 Media reports last month indicate the PBoC – China’s central bank – is offering gold custody services to ‘friendly’ central banks [https://www.bloomberg.com/news/articles/2025-09-23/china-courts-foreign-gold-reserves-in-bid-to-boost-global-clout].

4 Anyone who thinks that they can move large amounts of gold around the globe for the cost of a hundred US dollars or so, please contact your local central bank I am sure they will be very interested in hearing from you!

5 Nerd alert: One byte = 8 bits and as each bit can has two states (one black, one white) the size of the image is equal to √640 ≅ 25 x 25 pixels.

6 The public discussion that took place last month across various social media sites centred on illegal data, including a topic that is so depraved I don’t even want to mention it, but I am sure you can guess.