Insight
June 14, 2024
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.
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.
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.
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.
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.
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.
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.
Investing:
Bernstein Analysts Raise Bitcoin Price Target to $200,000 by End of 2025 - The Block
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
Companies:
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
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
This report has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This report does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this report. The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this report may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this report, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Information furnished by others, upon which all or portions of this report are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this report to reflect changes, events or conditions that occur subsequent to the date hereof. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this report or any actions taken or decisions made as a consequence of the information set forth herein. By accessing this report, the recipient acknowledges its understanding and acceptance of the foregoing terms.
