IN TODAY'S ISSUE:
- As bitcoin rallies to new highs, we look at some of the underpinnings of the rally.
- We examine numerous market factors to uncover trader positioning and fund flows into the asset class.
- We explore the relationship between spot ETF fund flows and hedge fund basis trading.
The Underpinnings of the Rally
Bitcoin continued to rally after the US elections, setting another all-time high this week. While the Trump administration is starting to come into view with the naming of candidates for the various positions that are to be filled, we thought it might be helpful to look at the underpinnings of the rally. We have fielded numerous questions as to the composure of the rally, and use this note to explain flows, positioning, and the relationship between ETF flows and hedge fund basis trading.
Positioning
Funding Rates Jump But Have Yet to Show the Same Euphoria as March
Funding rates on perpetual swaps jumped to levels not seen since the ETF-induced rally that peaked in March. Perpetual swaps (perps) are a popular way for offshore traders to get leverage on their crypto exposure, with a positive funding rate indicating an optimistic bias by traders and a negative funding rate indicating a pessimistic bias. Unsurprisingly, funding rates spiked along with the rally in spot, with longs increasingly willing to pay shorts (the other side of the trade) for upside leverage. That has moderated a bit with the price hovering around the $90K level. While funding rates aren’t as persistently positive as they were during the March rally, they are still elevated compared to historical averages.
Basis Hits Mid-Teens Percentages
The basis on CME-listed bitcoin futures, the annualized difference between futures and spot price, hit mid-teens percentage levels during the recent rally. Futures are one of the main ways onshore traders can get leverage on directional views and therefore tends to be positively correlated with the price of bitcoin. We think this jump in the basis is reflective of enthusiasm, but like perp funding rates, are still below the levels seen in March.
Open Interest Up, But Not as One Might Expect
Open interest on futures contracts (offshore perps and onshore CME futures) is up in the rally, but not by a substantial amount. Our analysis is on the number of bitcoins represented by the open interest as the change in price tends to have an overwhelming impact on dollar open interest analysis. While open interest in bitcoin terms is up 6.5% since the election, it’s probably not as large as one might expect given that spot is up 26.1% since the election.
"Coinbase Premium" Not as Meaningful as Some Make it Out to Be
We dispelled this notion once before, but apparently, it bears repeating because we are still seeing some public analysis cite this factor. Coinbase-traded bitcoin (USD quoted) has traded at a premium to Binance-traded (USDT quoted) bitcoin, but only by 1 bps on average since the election. The public analysis fails to consider the price of tether, which when normalized, removes most of the “premium” Coinbase-traded bitcoin supposedly trades at.
Flows
Stablecoin Supply Grows Post Election
Stablecoins are an important avenue for investors to convert their cash into crypto, especially offshore. Total stablecoins outstanding jumped substantially in the wake of the election, up $6.2B. This is indicative of new money coming in off the sidelines to purchase digital assets, such as bitcoin. Most of the stablecoin issuance comes from USDT rather than USDC, as USDT is the main quote currency for offshore exchanges. Onshore trading venues tend to rely on the USD as the quote currency for trading with traditional banking conduits (ACH, wire) used to move dollars onto exchanges.
Tether Flips from a Discount to a Premium
The price of tether (USDT), the industry’s largest stablecoin, has been trading at a substantial premium to $1.00, also a sign of strong demand for inflows into crypto exchanges. It was only 3 Fridays ago that the WSJ published an exclusive look into what was supposedly a DOJ investigation into Tether’s activities, sending the price down significantly. Not only has no action come forth, but an article that came out today suggested the DOJ would scale back its prosecution of cryptocurrency-related crime. With the rally in crypto prices and growth in stablecoin demand, tether’s price has now flipped from a discount to a premium. Again, this is another sign of increased demand for investor access to the digital asset ecosystem.
ETFs Gather $4.4B of Inflows Since Election
Since the election, spot ETFs have gathered $4.4B of net inflows, with over 70% going to BlackRock’s iShares Bitcoin Trust (IBIT). The total spot bitcoin ETF industry has now hoovered up $27.8B of inflows since launching in January. ETFs are an easy way for traditional market participants to play the outcome of the election, so we don’t find it surprising to see funds come into the ETFs.
The Impact of Hedge Fund Basis Trading and ETF Fund Flows
There has been quite a bit of discussion on the nature of the flows into the ETFs given how big they have been. On one hand there are investors, such as retail, investment advisors, and family offices, that are likely expressing long directional views by purchasing the ETFs. On the other hand, there are hedge funds, which are likely purchasing the ETFs as part of arbitrage activity, shorting futures and buying ETF shares to hedge their exposure. Given the jump in the basis recently, it would be no surprise to see ETF flows driven by hedge funds engaged in this type of trade.
The following scatter plot and regression define the relationship between hedge fund futures shorts and ETF fund flows. All else equal, for every dollar in weekly ETF fund flows, the weekly change in basis shorts is expected to increase by 30 cents. This model explains approximately 51% of the variance in weekly changes in basis shorts, with strong statistical significance (t-stat of 6.4). We used the CFTC’s “Leveraged Funds” category as a proxy for hedge funds and lagged IBIT flows by 1 day to account for the discrepancy of creation/redemption mechanism compared with the other spot bitcoin ETFs. This analysis shows that hedge fund basis trading strongly influences ETF fund flows.
Market Update
Bitcoin rallied 14.3% on the week and hit a new all-time high of $93,495 on Wednesday. Bitcoin’s rally continues while other post-election trades, such as equities, have lost a bit of steam. Bitcoin is now up 105.8% year to date, far surpassing every asset class. Bitcoin’s market cap also passed to the total market value of silver, an important milestone in the asset’s history.
While it may take some time for bitcoin to surpass gold’s $17.1T market value (bitcoin is at $1.8T), the trend in gold, which had been a winning trade until the election, has reversed course. Bitcoin may have taken some shine from the gold trade as the “faster horse” in the race, but there are likely other demand characteristics at play.
With the bitcoin cycle “back on” following the election, many have asked where prices could ultimately go. While we seem to be enjoying a bit of a honeymoon period following the election, we expect the administration and policies to come further into view in the coming weeks. While there are cyclical indicators we think could be a good guide for investors, ones we hope to delve into next week, we may be off script a bit here. Never before has bitcoin and crypto been a political imperative, which should be a good thing for investors. We suggest taking a long-term view and sitting back to enjoy the ride.
Important News This Week
Investing:
Investment Consulting Primer to Bitcoin - Canterbury Consulting
Bitcoin Traders Make $100K Price Bets Through CME Options as Price Hits Record High - CoinDesk
Under Trump, Crypto Market Cap Could Surge Fourfold in Two Years: Standard Chartered - CoinDesk
Regulation and Taxation:
Car Keys, Football, and Effective Administration - SEC
Former Alameda Co-CEO Sam Trabucco Agrees to Forfeit $70M, Yacht, Apartments to FTX Creditors - CoinDesk
Pete Hegseth, Who Said Trump Is 'Making Bitcoin Great Again,' Nominated for Secretary of Defense - The Block
Crypto Industry Lobbies Trump and His Allies After Election Wins - NYT
‘Bitcoin Jesus’ Fights IRS Tax Evasion Case from Spanish Island - Bloomberg
Republicans Keep Control of US House, Ushering in Crypto Friendly Lawmakers to Lead Key Committee - The Block
Trump taps former SEC Chair Jay Clayton for US Attorney for the Southern District of New York - The Block
Manhattan US Attorney to Scale Back Crypto Cases, Prosecutor Says - Reuters
Companies:
Genius Group Adopts Bitcoin Treasury Reserve Strategy - Genius Group
Arca and BlockTower Intend to Merge, Unlocking Synergies and Growth Opportunities - Arca and BlockTower
Upcoming Events
Nov 29 - CME expiry
Dec 6 - Jobs report
Dec 11 - Nov CPI reading
Dec 18 - FOMC rate decision
