May 6, 2024
Greg Cipolaro

Research Weekly - Bitcoin Gets a Haircut


  • The DTCC haircuts collateral values for bitcoin ETFs, which may have ripple effects.
  • As prices dip, we turn to our trusted cyclical indicators to gather insights on the current cycle.
  • ETFs flip to outflows as the launch of Hong Kong spot ETFs might not have been as bad as portrayed.

DTCC Haircuts Make Holding ETFs Less Desirous

Recently, the Depository Trust & Clearing Corporation (DTCC) implemented substantial adjustments to its collateral consideration for bitcoin (or any other cryptocurrency) ETFs. After the changes, no collateral value will be given to any bitcoin ETF, giving them a 100% haircut. This is important because the DTCC plays a crucial role in facilitating securities exchanges between buyers and sellers, acting as a central securities depository offering secure custody of assets.

This change holds significant implications as it renders bitcoin ETFs burdensome for DTCC members in terms of margin and capital requirements. Consequently, holding these investment instruments becomes unfavorable for these entities. A potential ripple effect could be that stock loan desks pay clients to borrow their bitcoin ETF shares, a departure from the norm where clients, like hedge funds, typically pay to borrow stock for shorting. Furthermore, this shift may also impact the futures basis through the cash and carry trade. If hedge funds opt to purchase bitcoin ETFs as the long component of the arbitrage trade (and short futures positions), but receive no collateral consideration for these shares, it could reduce the attractiveness of this trade. We have yet to notice significant market impacts, but we remain vigilant.

The reasons behind the DTCC's recent changes are uncertain, but one thing is for sure - these modifications are likely to affect market efficiency and the demand for ETFs.

Checking in on the Cycle

Bitcoin had a challenging month in April, experiencing a 16.8% decline. Since setting a new all-time high on March 14th, the cryptocurrency has dropped by over 20%, attributed to a slowdown in ETF inflows which have now turned to outflows (next section) and hostile macroeconomic backdrop for investment assets. In addition, market technician Peter Brandt made the astute observation that trough-to-peak multiples for bitcoin cycles had been exhibiting 80% declines, which, if true for this cycle, would put the recent all-time high in March as the peak. So with that in mind, we wanted to check in on blockchain and market data that has proven reliable in helping chart the cycles.

As we have previously analyzed, downturns are a common occurrence in bitcoin's price cycles. In the cycles of 2013, 2017, and 2021, bitcoin saw 5, 13, and 10 downturns, respectively, exceeding 10%. In the current cycle, bitcoin has experienced 5 downturns exceeding 10%. Understanding the historical context of downturns in bullish cycles, this specific downturn is not of particular cause for concern.

Examining one of our preferred indicators of bitcoin cycles, we look at the proportion of bitcoins that have remained stagnant for a year or longer. This metric encompasses both secular trends, with an increasing amount of bitcoin being held for extended periods, and cyclical patterns, where the movement of bitcoins inactive for over a year has shown an inverse relationship with price fluctuations. When prices rise, long-term holders tend to liquidate their holdings, while during price decline, these coins are often socked away for future investment. Although there has been a slight decrease in the percentage of coins held for a year or more, it does not appear significant enough to signal the end of a cycle, indicating that we are likely in the middle phase.

Our other preferred cyclical indicator, bitcoin’s market cap to realized value (MVRV), a measure of the current market cap to the cost basis of each coin, reached elevated levels but well short of previous cycle highs. Typically, this ratio peaks at levels around 4.0 or higher. Again, this is another sign the cycle is underway, but likely has yet to peak.

In reflecting on the current cycle, it's clear that we are witnessing something unique and unexpected. While the last cycle, which reached its peak in 2021, was driven by bitcoin initially, it then evolved into the DeFi summer, NFT craze, and alternative layer one projects. However, this time around, bitcoin has taken the reins entirely, with limited involvement from altcoins (ETH notably absent). We are lacking a clear and cohesive narrative for alts - a smattering of layer twos, AI, or real-world assets have emerged. It seems like we have bypassed the pursuit of real-world utility, opting instead for memecoins and jpegs. Perhaps this is the extent of the current cycle, as some investors are recognizing that blockchains may not be the most suitable platforms for non-monetary applications, with cloud infrastructure serving as a better alternative. But who knows, the cycle may continue with new trends and themes yet to surface.

Investors should take into account that the recent surge in prices has largely been fueled by ETF demand, predominantly from retail and RIAs as indicated by 13F filings. It is unlikely that this momentum will transfer over to alts as seen in previous market cycles. Those invested in bitcoin ETFs are unlikely to shift their profits into alts, simply because they cannot - there are no alt ETFs. In the past, there was a rule that the market hadn't reached its peak until all alts, including the established ones like LTC, XRP, and XLM, hit new highs. However, reflecting on the peak of 2021, it is clear that the altcoin cycle peaked in April, coinciding with bitcoin's near $65K price. Bitcoin reached its peak later in the year, with the launch of BITO in November, but most alts, except for ETH, did not reach new highs. Additionally, in 2021, many alts failed to surpass their 2017 highs. It appears the rule of waiting for altcoins to reach new all-time highs before declaring a cycle peak was broken. Considering the influence of ETFs, this pattern may repeat itself.

ETFs Flip to Outflows as Hong Kong Launch Not as Bad as Portrayed

The recent shift in spot bitcoin ETFs has been notable, with a significant increase in outflows over the past week and a half. The renowned iShares Bitcoin Trust (IBIT) from BlackRock saw its streak of daily inflows come to an end after 71 days last week, followed by its first day of daily outflows on Wednesday. Similarly, the Fidelity Wise Origin Bitcoin Fund (FBTC) experienced its initial daily outflows last week, reaching a substantial $191.1 million on Wednesday, marking the largest single daily outflow excluding Grayscale Bitcoin Trust (GBTC). These outflows have undoubtedly impacted prices in recent days.

Despite recent outflows from IBIT, GBTC's lead in AUM for spot ETFs in the US continues to narrow. Currently, GBTC only leads IBIT by $1.1B and the outflows have yet to cease. Initially, GBTC had $28.6B in AUM at the start of ETF trading, while BlackRock entered the race with a modest $10.4M seed investment. The fact that only $1.1B now separates the two is a testament to BlackRock's marketing and distribution efforts. Despite Grayscale's effort to launch a competitive response, the Grayscale Bitcoin Mini Trust (BTC), a cost-effective alternative to GBTC, there have been no recent regulatory movements. NYSE Arca has yet to file a 19b-4, which, once received by the SEC and published in the Federal Register, would initiate the 240-day approval process.

We have observed some misleading information regarding the launch of the Hong Kong ETFs, which started trading on April 30th. While the initial trading may have been lackluster for the 3 spot bitcoin ETFs, it did not hinder significant AUM growth from coming into the funds. It appears that these ETFs received substantial seed investments, as the collective first day AUM of $248M did not seem to match the cumulative first-day trading turnover of only $11M. As of today, the Hong Kong spot ETFs collectively have $249M in AUM.

The rise of spot bitcoin ETFs in the US has been truly remarkable, especially in comparison to traditional gold and precious metals ETFs. Currently, the ratio of AUM in US spot bitcoin ETFs compared to US spot gold ETFs is 46.2% and the ratio to total US spot precious metal ETFs is 39.3%. Even though gold remains a dominant asset with a staggering total value of $15.4 trillion, it's fascinating to note that bitcoin, with a value of $1.2 trillion (7.8% of that gold), is relatively more owned in the ETF format than gold. We think this underscores the increasing attraction towards bitcoin as an investment option for diversification and return purposes.

Market Update

Bitcoin's price took a significant dip of 8.3% this week, briefly dropping to $56.5K on Coinbase. Factors such as ETF outflows and escalating rate expectations due to persistent inflation have been the primary triggers for this decline. However, there was a shift in sentiment midweek as bitcoin and other risk assets rebounded when the FOMC decided to maintain interest rates at their current levels, as anticipated. However, Chair Powell's comments during the press conference did not entirely eliminate the potential for the easing of interest rates later this year. Additionally, the Fed announced plans to slow down its balance sheet reduction starting in June, which is a step towards easing one of the measures of quantitative tightening. While bitcoin is still influenced by unique factors like spot ETFs, it's becoming increasingly important to pay attention to broader macroeconomic factors as more traditional market investors are getting involved in the market.

While traders might be focused on the short-term, the recent change in market sentiment coupled with the belief that the cycle is still underway (see above) opened the door for an interesting trade idea we highlighted earlier this week (link).

As for traditional asset classes, equities rallied on the back of the news from the Fed, with the S&P 500 up 0.3% and Nasdaq Composite up 1.5%. Oil and gold fell 0.9% and 5.5% respectively, while bonds also reacted positively to the news from the Fed. Investment grade corporate bonds were up 1.3%, high yield bonds rallied 1.0%, and long-term US Treasuries rallied 1.6%.

Important News This Week


Bernstein Says Slowing Bitcoin ETF Flows Are a 'Short-Term Pause,' Maintains $150,000 Price Target - The Block

Bitcoin 'Call Writing' Back in Vogue as Cash And Carry Strategy Loses Shine - CoinDesk

Kraken Unit Quietly Claims Pivotal Position in Bitcoin ETF Boom - Bloomberg

Bitcoin Options Positioning Anticipates Summer Slowdown - The Block

Regulation and Taxation:

Wasabi Wallet Blocked for US Citizens - zkSNACKs

ZkSNACKs to Sunset CoinJoin Anonymizing Service Amid US Coin Mixer Crackdown - The Block

SEC Has Secretly Considered Ethereum a Security Since 2023, Says Consensys in Unredacted Lawsuit - Decrypt

Rep McHenry Says Gensler Knowingly Misled Congress - X

Early Bitcoin Investor Charged with Tax Fraud - DOJ

Binance Founder Changpeng Zhao Gets 4 Months in Prison - CoinDesk


Tether Releases Q1 2024 Attestation: Reports Record-Breaking $4.52 Billion Profit - Tether

IT’S LIVE! Coinbase Integration of Bitcoin Lightning Powered by Lightspark - Lightspark

Coinbase Integrates Bitcoin’s Lightning Network in Partnership with Lightspark - Coinbase

This $2.8 Billion Coal Miner Has Been Mining Bitcoin, Too - Decrypt

MoonPay Integrates PayPal to Allow US Users Easier Access to Crypto Purchases and Sales - The Block

MicroStrategy Unveils Plan for Bitcoin-Based Decentralized Identity Using Ordinals - CoinDesk

Block Implements Bitcoin Purchase Program - Block

Block's Blueprint for Corporate Balance Sheets - Block (PDF)


New Research Suggests Bitcoin Mining Centralized Around Bitmain - Protoss

First Taproot Asset Transaction Occurs on Mainnet - X

MicroStrategy DID Specification - MicroStrategy

OCEAN Innovates: Bitcoin Miners Offered First Ever Lightning Payouts Using BOLT12 - OCEAN

Upcoming Events

May 15 - April CPI reading

May 23 - SEC response deadline for spot ETH ETFs

May 31 - CME expiry

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