As the fourth quarter begins, market dynamics are shifting, with capital moving away from cash and towards higher-risk assets. The yield on 10-year U.S. Treasury bonds reached 5.34% last week, the highest level since 2002, while the DXY dollar index rose by 2% in September, and Brent crude hovered around $100.
The S&P 500 and Nasdaq finished the third quarter positively, with Bitcoin (BTC) rising by 43% and Ethereum (ETH) by 71%. The consecutive gains in cryptocurrencies during August and September are notable, as September is historically a weak month.
Typically, rising yields dampen risk appetite, gold prices fall alongside real interest rates, and weak economic data creates fear. However, these correlations have faltered over the past two months, indicating a shift in capital behavior.
Capital Moves Away from Cash
The primary source of purchases for risk assets has been money market funds, which saw a significant outflow of $116.5 billion last week—the largest since April—despite short-term securities yielding more than 4%. Some of this capital is returning to equities and cryptocurrencies, even with Treasury yields above 5%. This explains why indices are holding up under conditions that would typically exert greater downward pressure. Two factors contribute to this:
- Inflation remains above 3%, and high energy prices are expected to sustain this level in the future. Long-term bonds are performing poorly as defensive assets in this context: bond prices drop with each spike in oil prices, making real yields uncertain. Investors are becoming more cautious regarding long-term debt.
- Competition for clients is intensifying. Indices in the U.S., Europe, and Japan offer high yields, and a fund manager trailing behind risks losing capital. Decisions are increasingly made by algorithms with strict distribution rules, which buy at any interest rate level. Additionally, passive flows from pension contributions, index funds, and automatic rebalancing continue to enter the market monthly, regardless of news.
Investor Behavior Has Shifted in Both Markets
Over the past two months, investor sentiment has reversed. In June, cryptocurrency ETFs experienced their worst monthly performance of 2026, while equities hovered near their peaks with low volatility. Currently, the situation is the opposite.
Greed dominates the cryptocurrency market. As of September 28, the Fear and Greed Index stood at 74, with open interest rising alongside prices, as BTC approached the $86,000–90,000 range. Buyers are eager not to miss out on market gains.
Conversely, caution prevails in equities. Capital continues to flow in, but with a protective strategy: there is an increased skew in options, with major players purchasing long-dated puts. High-yield bond funds saw outflows of $2.3 billion in a week, and small-cap stocks lost 7.5% over the quarter. The VIX, indicating expected volatility for the S&P 500, hovers around 16, suggesting inexpensive protection as insurance is being bought due to its affordability.
Compared to previous cycles, the structure of capital flows has altered. Previously, cryptocurrencies followed the risk appetite in equities and reacted to falling rates, with retail investors entering late. Now, cryptocurrencies are gaining traction through institutional flows via ETFs, despite the highest rates in 24 years. Equities are buoyed by passive investments and protective strategies.
A hypothesis suggests that the divergence in sentiment creates asymmetry. Leverage in cryptocurrencies is growing faster than spot demand: ETF inflows reached $72 million in the last week, with BTC funds alone attracting approximately $2.4 billion. The fuel for growth is depleting faster than it is replenished. In equities, protection has already been purchased, reducing the likelihood of panic in response to bad news.
In Crypto: Capital Flows into Coins with Clear Demand Sources
Exchange-traded funds (ETFs) have become the primary channel for inflows. The assets under management (AUM) for crypto ETFs total $125.7 billion, with 32 funds from 11 issuers. Over the past 90 days, these funds attracted $10 billion, with $3.2 billion in the last 30 days, reversing the outflows of about $5 billion in June, which was the worst month of the year. This turnaround from significant outflows to inflows in a single quarter signifies a change in capital behavior.
The flow is uneven. According to CoinGlass, BTC funds attracted $190 million in a single day, while SOL funds garnered $1.3 million, HYPE ETFs $3.4 million, and ETH funds lost $17 million, with XRP funds losing around $3 million. The majority of capital is directed towards BTC, while other assets are selected based on quality narratives.
Alongside ETFs, narratives surrounding perpetual futures and real-world assets (RWA) are in play. Demand for HYPE, a native token of the Hyperliquid ecosystem, is supported by purchases from Hyperliquid Strategies and protocol buybacks financed by fees. ONDO, a leader in RWA, is growing due to the institutional narrative of tokenization, but it faced record open interest at the end of September, posing a risk of leverage liquidation. SOL gained 60% over the quarter amid ETF inflows.
Capital is favoring coins where three factors align: institutional narratives, real money in ETFs or treasuries, and clear revenue or token buybacks. This leads to a rotation: the market is no longer driven solely by BTC, dividing into flow leaders and others.
Why Poor Data Doesn’t Deter the Market
The employment report for September was weak, showing an increase of only 29,000 jobs against a forecast of around 90,000, with unemployment at 4.2%. The market interpreted this as positive, with the probability of an interest rate hike in October dropping below 20% by October 5.
This reflects a factor that media outlets often underestimate. Signs of overheating in the artificial intelligence sector exist, but capital investments in data centers, energy, and construction are supporting the economy and could enhance productivity. Part of the rise in unemployment is structural, as automation and robotics replace hiring. Companies are maintaining profits with less hiring, which alleviates pressure on rates, allowing the market to digest weak statistics without fear of recession. In my view, the overall market condition is good.
Gold also confirms this logic. The metal remains around $4,150–4,200, despite real yields on bonds—adjusted for inflation—being approximately 2.9% and a strong dollar, conditions that previously exerted much more pressure on gold. The September correction of 6.6% has removed speculative layers, and there has not been a mass capital exit. Central banks continue to purchase gold regardless of rates, for the same reasons that private managers are more cautious about long-term debt: trust in long-term bonds is waning.
Weaknesses: Geopolitics and Winter Diesel Supply
The primary stressor for markets is the conflict with Iran. They are currently weathering this turmoil as participants anticipate a resolution. If no de-escalation occurs by year-end, serious issues could arise: winter is approaching, and diesel is already in short supply. Russia has extended its diesel export ban until the end of October, while China has halted fuel exports for October.
The first spike in diesel prices occurred following the onset of the war with Iran in late February, with prices rising by 96 cents a week by March 9. A summer retreat to $4.58 was followed by a new surge, with weekly highs on September 21 surpassing the 2022 record. The peak winter demand is looming.
Rising diesel prices will feed into inflation via transportation and production. If this pressure persists, the Federal Reserve may need to raise rates further, prompting new selling pressure on long-term bonds. I estimate that a risk window could open after the U.S. elections on November 3, when the administration may lose its incentive to keep fuel prices in check.
A key indicator to monitor is the outflow from high-yield bonds, which remains moderate for now, indicating that the credit market does not confirm deterioration.
Q4: Scenarios and Conclusion
The structure of the cryptocurrency market is positive: the bottom of the current cycle is likely around $57,800. BTC has recorded three consecutive months of growth, and institutional inflows have returned. ETH outperformed BTC in Q3 (+71% compared to +43%), despite lagging in the previous two quarters. BTC has approached the $86,000–90,000 area, where early buyers are taking profits.
Base Scenario, 50%: BTC consolidates in the range of $78,000–92,000. Pullbacks to $78,000–81,000 are bought, with a breakout to the upper limit by year-end. Flow leaders (HYPE, SOL, RWA sector) outperform the market, while high-leverage coins lag.
Positive Scenario, 20%: De-escalation occurs, with the Fed pausing in October and December, leading BTC to $90,000–95,000 and ETH to $3,100–3,400.
Negative Scenario, 30%: Strikes against Iran post-elections and oil prices exceed $110. BTC could drop to $60,000–65,000 with quick buybacks and a double bottom, while equities may correct by 8–12%, with small-cap stocks and highly leveraged coins experiencing the largest declines.
Conclusion: High inflation and competition among funds have driven capital from bonds and cash into riskier assets. Equities are supported by passive flows and protective strategies, while cryptocurrencies have established their own institutional channels and are driven by greed, resulting in a reversal of sentiment. Capital is favoring coins with real inflows, narratives, and revenues, leading to a bifurcation in the market between flow leaders and others. Media outlets are amplifying fears around rates and the AI bubble, but the mechanics of capital flows suggest continued growth, contingent upon a de-escalation of international political tensions ahead of winter.
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