IN TODAY'S ISSUE:
- Futures report highlights positioning of major investors, but the way it's portrayed in the media and by the sell side is often misleading.
- Grayscale halts daily outflow streak as ETF flows are likely mostly retail driven given ownership reports.
- What the downward difficulty adjustment says about miner economics.
What CME Futures Reveal About Positioning
The weekly Commitment of Traders (COT) report released by the CME provides key insights into market participants, offering valuable information for analysis. However, the industry's tendency to focus on net positions over gross longs and shorts, and the disregarding of trader classifications by some sell-side brokerage firms has led to misconceptions and peculiar conclusions about the market and its participants. We urge readers to read the explanatory notes accompanying the COT report and recognize these reports lag the market by up to two weeks (last data is from 4/30 for example) as important caveats. This week, we unpack the report and offer some improved ways to think about the data.
Dealer Longs Abate as ETF Inflows Slow
Dealers (sell-side of the market, typically banks) are usually short futures, and do so by design, but the emergence of the spot ETFs changed that dynamic a bit. With the launch of spot ETFs, many market makers and Authorized Participants used bitcoin futures as the offsetting hedge to their short when seeing inflows. A trade dealers could be engaged in is selling (shorting) the ETF shares in the market and buying futures as a hedge as inflows ramped. As a result, we saw a jump in dealer longs (again, this is a reason not to net longs and shorts) when the ETFs launched and inflows grew. Now with inflows slowing (even flipping to outflows), we see long positions coming off.
Asset Managers Positively Correlated with Bitcoin Price
The asset managers classification is almost entirely comprised of futures-based ETFs and are almost entirely long positions. Their positioning (number of futures contracts) appears to be highly correlated with spot. This isn’t surprising as bitcoin tends to be a price momentum driven asset. With bitcoin cooling off the past few weeks, we also see a slowdown in the growth in the number of futures contracts held by the asset manager category.
Leveraged Funds Show a Tale of Two Investors
Leveraged funds consist of commodity trading advisors (CTAs) and hedge funds. There are two types of strategies employed here (which is why (again) disaggregating longs and shorts is extremely important), directional trades and arbitrage activities. Directional trades, outright longs or shorts, are likely driven by CTAs and price momentum strategies. As the price of bitcoin goes up, so should long positions and vice versa. As bitcoin’s price has been flat to down since the March high, we have also seen longs come off, like driven by these momentum strategies.
The short side of the leveraged fund positioning has been driven by arbitrage activity and should be positively correlated with basis (difference between futures and spot prices). Given the increase in basis with the rise in spot (they seem to be positively correlated as well), short positions likely grew to take advantage of that dynamic. Now that basis has come in with a cooling in spot, we see short positions come in as well.
Not Much to Glean from Other Reportables
For completeness’s sake we’re including other reportables, traders that don’t fit into one of the 3 prior categories, but the information we can glean from it is limited. The position size is typically small and because this is a “catch all” category, their investment motives are not easy to understand.
GBTC Halts Outflow Streak as Retail Likely Driving ETF Demand
Last Friday, GBTC broke its streak of daily outflows after 78 trading days, marking its first daily inflow since transitioning to an ETF on January 11th. During this steak, investors redeemed $17.5B from the fund, converting to cash and possibly re-investing in a lower cost competitor fund. While we don’t know the reason for the sudden $63.0M daily inflow, looking at holder reports coming via 13F filings, demand for the ETFs largely seem driven by investment advisory firms, brokerages, and retail investors. 13F position reports are required by investment managers with over $100M in discretionary assets and are due 45 days after the end of the quarter (May 15th). While the filing deadline still has not passed, a quick analysis of filings so far reveals that most (+95%) of holders of spot ETFs are not known, meaning they do not trigger the 13F filing requirement. To us, that means most of the shares are likely in the hands of retail investors, not institutional investors. We plan to give a full analysis of holders next week once the filing deadline has passed.
Difficulty Revised Downward as Uneconomical Hash Rate Likely Comes Offline
On Thursday morning, Bitcoin’s difficulty was revised downward by 5.6%, a sign that some hash rate has come offline. This was the first “full” difficulty retargeting since the halving and likely more accurately reflects actions by miners in the wake of the 50% reduction in the block subsidy. The previous difficulty adjustment window straddled the halving which did not allow for a complete picture on what miners might be doing with their hash rate. Also, the spike in fees in the wake of the halving caused by the launch of Runes gave us a less than stable look at miner revenue. Now that the hash price has settled in a more stable range, miners should have a clearer picture of economics.
While the decline in difficulty should give remaining miners a commensurate bump in daily revenue, the hash price has fallen substantially since the halving. This has almost entirely been due to the 50% reduction in the block subsidy, exactly what halvings are designed to do. The other impact has been normalization of fees now that the launch of Runes is receding in the rearview mirror. Bitcoin’s price has also stopped the meteoric ascent it experienced, which was a nice tail wind to the hash price during 1Q.
Why have miners taken hash rate offline? The reduction is an implied 35 EH/s based on an estimated network hash rate of 620 EH/s and about 1MW of power assuming these were Antminer S19 Pro (110 TH/s). The reason could be operational or economic, but likely the latter. Operational disruptions at mining facilities, for reasons like extreme weather conditions, can affect the network hash rate, usually over the short term. But our guess given the proximity to the halving is the reduction is due to economics. The halving has the effect of reducing the hash price, the value miners receive for the hashes they provide to the network, and increasing breakeven price levels at which mining rigs are profitable. Our guess is that older rigs combined with high-cost power were likely taken offline. As a reminder, past halvings saw difficulty reductions peak at 5.4% - 14.7%.
Market Update
Bitcoin continued to bounce around the low $60K range this week, lacking a clear direction as traders are eagerly anticipating the next catalyst following a slowdown in ETF flows. Investors may get that next week when the April CPI is reported on Wednesday, with a slowdown in inflation seen a positive sign for rate cuts and higher than expected inflation likely reason to keep rates higher for longer. Risk assets like stocks continued to perform well over the past week, with the S&P 500 up 3.0% and Nasdaq Composite up 3.2%. Bonds performed well this week, with investment grade corporate bonds up 1.0%, high yield corporate bonds up 0.5%, and long-term US Treasuries up 1.9%. Gold rallied 1.3% on the week, hitting a new all-time high, and oil rallied 0.4%.
Important News This Week
Investing:
Bernstein Analysts Double Down On $150,000 Bitcoin Price Prediction - The Block
More Than 90% of Stablecoin Transactions Aren’t Real, Study Finds - Bloomberg
Bitcoins Worth $44 Million Moved for The First Time in A Decade - The Block
Deutsche Bank Cites Nearly 300 Failed FX Pegs as Stablecoin Risks - Bloomberg
Regulation and Taxation:
Behind Nigeria’s Arrest of Binance Employee, Claims of a Bribe Request - NYT
From Richard Teng, Binance CEO: Tigran Gambaryan is Innocent and Must Be Released - Binance
CFTC’s Behnam Warns Crypto Industry That More Enforcement Actions Are Coming - Blockworks
Prometheum's Contentious Answer to U.S. Crypto Compliance Is Running Late - CoinDesk
DoJ Claims Tornado Cash Indictment Is Not About ‘Free Speech’ - Protos
QCP Receives In-Principal Approval from Abu Dhabi Regulator - CoinDesk
Companies:
Swan Announces Managed Bitcoin Mining Service, Partnership with Tether - Swan Bitcoin
Chris Dixon’s Campaign to Overhaul Crypto’s Grifty Reputation - Bloomberg
Wintermute Announces Liquidity Support for Hong Kong ETFs - The Block
Revolut Launches UK Crypto Exchange as Digital Assets Recover - Bloomberg
EDX Markets Launches Singapore-Based EDXM Global - EDX
Crypto Derivatives Principal Trader Arbelos Markets Raises $28M Led by Dragonfly Capital - CoinDesk
DCG, parent of GBTC Sponsor, Reports Q1 Revenue of $229M - CoinDesk
How Crypto Giant Tether’s New CEO Is Remaking The Company For The Apocalypse - Forbes
Binance Pledged to Thwart Suspicious Trading—Until It Involved a Lamborghini-Loving High Roller - WSJ
Upcoming Events
May 15 - April CPI reading
May 23 - SEC response deadline for spot ETH ETFs
May 31 - CME expiry
