June 14, 2024
Greg Cipolaro

Research Weekly - Bitcoin Bounces Around


  • We look at some of the factors at play as bitcoin continues its sideways trading action, even as risk on assets roar to new highs.
  • While macro factors are gaining importance on bitcoin's price, asset-specific factors like fund flows into spot ETFs continue to hold greater significance.
  • The secular growth in futures shorts is likely associated with the basis trade, yet intriguing developments have unfolded beneath the surface of the derivatives markets.

Rangebound Trading Continues

Since hitting nearly $74K in mid-March, bitcoin has largely been stuck in a trading range, bouncing between $60K and $72K (with a brief dip to the $56.5K level). However, while bitcoin has seen see-saw trading the past few months, other risk-on assets, like equities, have soared to new highs on renewed hopes that the worst of inflation is behind us. Given the noticeable dichotomy between the performance of these asset classes, we wanted to delve deeper into some of the dynamics at play.

Correlations With Equities Rise, but Still Weak

It is important to note that while some similar macro factors may influence both bitcoin and equities, their correlation remains low. Although correlations have slightly increased from zero to 0.26 (90-day rolling), this is still considered weak. With such minimal correlation, it is understandable why equities may be soaring while bitcoin may not follow suit. The US dollar index, which is likely driven by other macro factors such as inflation and interest rate differentials, has been much more important for correlations to bitcoin than equities.

Macro Factors at Play

As bitcoin has evolved and attracted a more sophisticated investor base, its relationship with macroeconomic factors has also changed. While there may be some overlap in the data, indicators such as Fed Funds futures, global M2 (money supply), and real interest rates are playing an increasingly crucial role in understanding bitcoin's price movements. Ironically, inflation, which was once a key focus for bitcoin investors, still does not seem to have a significant impact on the cryptocurrency's price fluctuations. Certainly, inflation readings are having impact on bitcoin’s price (equities too) as Wednesday’s CPI release demonstrates, but that impact appears to be short lived.

The takeaway from factors like 12m Fed Funds futures (the market’s expectations of the Fed Funds rate 12 months from now) is that when rate expectations are declining or stable, that’s a supportive environment for bitcoin price action. However, when rate expectations are rising, that crimps bitcoin price. If forward rate expectations continue to decrease due to declining inflation data, this could potentially bolster bitcoin price performance in the future.

ETF Flows Still Important

While macroeconomic factors may play a growing role in influencing bitcoin's price movements, its idiosyncratic factors, the unique characteristics specific to bitcoin, that are still most important in driving price. Factors like adoption, usage, and ownership remain crucially important for bitcoin's growth, underscoring the significance of emerging sources of demand like spot bitcoin ETFs.

As mentioned, fund flows play a crucial role in shaping price movements. Addressing concerns that recent flows haven't impacted prices, a quick calculation paints a different picture. Since May 10th, with Bitcoin closing at $60,652, a net inflow of $3.6B entered the spot Bitcoin ETF complex. During this time, Bitcoin's market cap increased by $118.5B, a 32.8x increase compared to cumulative ETF flows. This aligns closely with the 35.3x money multiplier from ETF fund flows since they began trading, suggesting this relationship still holds.

Futures Shorts Likely to do with Basis Trading

Concerns have been raised regarding the increasing short futures positions being taken by leveraged traders on the CME. This increase in short positions, which has seen growth over the past few years, is predominantly linked to the basis trade - shorting futures and hedging by buying spot. Despite the growth in short positions, however, the trade still presents attractive potential returns, explaining the continuation of this trend. With the convenience of spot ETFs available today, the trade has become even more accessible for traditional market participants. It wouldn't be surprising if some of the capital inflows into the spot ETF complex are associated with this trading activity.

Halving Was Not a Price Catalyst

While we didn't align with this perspective, there was indeed a persistent group of investors who believed the halving would spark a price surge. However, as history has shown, the halving failed to serve as a price catalyst once again. The idea of decreased daily supply is an important one, just not that has proven to be a tradeable event. Despite this, however, we think the halving remains a significant indicator in bitcoin's price cycles, serving as a guidepost along a longer time frame.

Market Update

The price of bitcoin fell 5.5% this week as largely rangebound trading continues. Bitcoin was unable to sustain the mid-week price bump temporarily given by the weaker than expected CPI print. Going forward, traders will be focused on MicroStrategy which is closing the offering on $700M in convertible notes, the proceeds of which are expected to be used to buy bitcoin. The deal is expected to be closed on Monday.

CryptoQuant, a blockchain analytics firm, caused a stir this week by suggesting that Marathon Digital had sold off some of its bitcoins, a claim that was later refuted by the company. While CryptoQuant did detect the movement of coins, this is the extent of what blockchain analytics can definitively confirm. The assumption that the bitcoins were sold rather than used as collateral is a shortcoming of blockchain analytics capabilities and where CryptoQuant misinterpreted the data. The key takeaway from this situation is that while the blockchain is often seen as an unchanging source of truth, interpreting the real-world implications of such data can be a complex task.

Finally, we observed a significant options trade that took place on BITO this week, involving the purchase of approximately 650,000 call spreads and the sale of 4,800 futures contracts ($1.6B notional value). Interestingly, this trade, which didn’t affect price, was swiftly unwound the next day, likely connected to the repositioning of fund holdings within the 2x Bitcoin Strategy ETF (ticker: BITX) by its issuer, Volatility Shares. The fund holds its exposure to bitcoin primarily in listed futures contracts. However, for various reasons, like regulatory, capital requirements, and contract limits, issuers may be forced to diversify exposure into other instruments, like listed options.

Important News This Week


Bernstein Analysts Raise Bitcoin Price Target to $200,000 by End of 2025 - The Block

Cboe Announces Expanded Collaboration with FTSE Russell to Drive Innovation in Digital Asset Derivatives - Cboe

Regulation and Taxation:

Terraform Lab Agrees to Pay $4.47 Billion Penalty in SEC Civil Case - Bloomberg

Trump Pitches Himself As 'Crypto President' at San Francisco Tech Fundraiser - Reuters

Donald Trump Says He Wants All Remaining Bitcoin to Be 'Made in USA' - CoinDesk


Semler Doubles Down on MicroStrategy Playbook With $150 Million Bitcoin Buy - Decrypt

Bitfarms Announces Adoption of Shareholder Rights Plan - Bitfarms

Riot Comments on Bitfarms’ Adoption of Shareholder-Unfriendly Poison Pill - Riot Platforms

Riot Platforms, Inc. Reports Beneficial Ownership of 14% in Bitfarms Ltd. - Riot Platforms

Tether to Invest More Than $1 Billion in Deals Over Next Year - Bloomberg

Paxos Cuts 20% Of Workforce Despite Having More Than $500 Million On Balance Sheet - The Block

ERCOT CEO: Texas' Power Grid Needs Larger Increase Than Expected to Handle AI, Bitcoin Mining - CoinDesk

MicroStrategy Announces Pricing of Offering of Convertible Senior Notes - MicroStrategy

Bitcoin Fees Are Skyrocketing Again—And It's Not Because of Runes or Ordinals - Decrypt

Upcoming Events

June 17 - Expected close date for MicroStrategy convert offering

June 28 - CME Expiry

July 11 - June CPI release

July 25 - Bitcoin 2024 conference

July 31 - FOMC interest rate decision

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