Insight
October 4, 2024
Bitcoin bounced back after falling in Q2, up 2.5% in Q3. Although bitcoin was up on the quarter, we’d classify most of the trading action since the March all-time high as largely rangebound. Bitcoin has traded in a range between $70K and $54K for much of the past 6 months, unable to make a decisive move one way or the other.
At play during the quarter was the (near) resolution of numerous bankruptcies, including the long-running Mt Gox bankruptcy, which saw billions in bitcoins returned to creditors. The US government and German authorities (BKA) were also notable sellers during the quarter. While these overhangs at times weighed on bitcoin’s price, our conclusion from trading action is that the fear of these coins potentially coming to market weighed on the price of bitcoin more than the actual selling.
Frustratingly for bitcoin investors, many other traditional asset classes fared better during the quarter as lower interest rates outweighed recessionary fears. There was a significant rotation this quarter as tech and large cap growth stocks, which have outperformed for several years, underperformed utility stocks, real estate, and small cap value stocks. Gold continued its run, setting new all-time highs for the asset.
Bitcoin is still the best performing asset (class) in 2024, but its lead has narrowed. Volatility has spiked this year (in August, the VIX hit levels only seen 3 times previously in its history) and other asset classes, such as precious metals and certain equity industries have gained on the asset. Still, most asset classes are having a banner year, again. 2023 saw significant returns for stocks and precious metals as well. 2024 seems to be playing out the same way that 2023 did.
The third quarter is usually bitcoin’s weakest, (using median return - averages are skewed by outliers) so the slight gain the asset put up this quarter isn’t surprising. Bitcoin typically struggles throughout the summer months and this year was no exception. Bitcoin did, however, buck normal trends in September, putting in a gain, while the month is typically its weakest.
Bitcoin’s rolling 90-day correlation with US stocks continued to rise during Q3, ending the quarter at 0.46. While bitcoin’s correlation with equities rose, the most recent level is still low, implying that bitcoin offers significant diversification benefits to multi-asset portfolios. Thinking of bitcoin as a “levered US equities” is incorrect as the long-term average of its 90-day rolling correlation is only 0.12.
The emergence of large holders of bitcoin that were either distributing bitcoins or selling on the open market was the dominant theme during the quarter. The bankruptcy resolutions of Mt Gox and Genesis as well as the selling of forfeited assets held by the US and German governments resulted in nearly 204K bitcoins changing hands beginning at the end of Q2 and into Q3. With an average price of $62K per bitcoin during Q3, that’s over $12.6B worth of bitcoins that changed hands. Our analysis of price and trading volume on exchanges following Mt Gox distributions showed little impact, if any, indicating that creditors were not in a rush to sell their newly acquired bitcoin. Still, the persistence of the news and the potential for selling weighed heavily on market sentiment.
If $12.6B worth of bitcoin changed hands last quarter from large holders, the flip side was continued demand from the US spot ETFs, which gathered $4.3B in total flows. The big winner continues to be BlackRock, whose iShares Bitcoin Trust out-gathered the next nearest competitor, Fidelity, by a 4.6x.
This quarter finally saw the launch of a competitive response from Grayscale with the Grayscale Bitcoin Mini Trust, which sports an industry-low sponsor fee. While the fund gathered a respectable $422M during the quarter, putting it solidly in 3rd place, the hit to the Grayscale franchise has already been felt. However, given GBTC’s size and high fee, even after all of the outflows the ETF still accounts for roughly 2/3 of the spot ETF industry’s revenue.
The other big news in crypto ETF land during the quarter was the launch of ether (Ethereum) based ETFs. While it seemed initially that they were cannibalistic to flows into bitcoin ETFs, today with some hindsight their launch has disappointed even the lowest expectations. During the first quarter of launch, Q3, ETH ETFs collectively had $523M of outflows, something not expected of opening a new asset to a new investor class.
We highlighted reasons as to why ETH ETF demand might underwhelm, including lack of catalysts, ETH’s utility use case rather than as a store of value investment, and comparably little demand for ETH futures ETFs. Still, we expected positive net inflows, not outflows.
Presidential candidate Donald Trump made a significant appeal to the crypto industry with his appearance at the Bitcoin 2024 conference in Nashville in July. Trump had already embraced the industry starting in May by bringing Trump NFT holders to his Mar-a-Lago resort, but it wasn’t until his appearance at Bitcoin 2024 that he made a broader pitch to the industry, including establishing a “bitcoin reserve” from forfeited bitcoins. Trump’s embrace of the industry may be good voter calculus as 52 million Americans hold crypto according to the Stand with Crypto non-profit.
While candidate Harris hasn’t embraced the industry as warmly as Trump, both would be a substantial upgrade to the treatment the industry has received under the Biden administration. Regardless of which candidate wins, the industry should be better off.
While a Trump win is likely to be an outright win for the industry, if he loses, he’s unlikely to go quietly into the night. This may prove to be a surprising benefit to an asset that derives its value from being detached from financial intermediaries and political institutions.
Corporate ownership of bitcoin, while still a small cadre, was on the rise during Q3. MicroStrategy continues to run the playbook of issuing debt (convertible notes) and acquiring bitcoins, now up to 252,220 in total or $15.2B. But Q3 also saw Marathon Digital purchase $249M worth of bitcoin after issuing convertible notes and Semler Scientific, Metaplanet, Cathedra, and OneMedNet all either adopted bitcoin treasury strategies or added to their investments.
It was recently reported that custody heavyweight BNY Mellon got an exemption from complying with SAB 121, the controversial accounting requirement put forth by the SEC that requires public companies to report custodied crypto on their balance sheet, a practice that deviates from the normal accounting treatment of keeping custodied assets off-balance sheet. While there is speculation as to how BNY Mellon is approaching the digital asset custody opportunity, the news has certainly caught the attention of the industry.
While providing custody for the various spot ETFs is a possibility, either as a replacement or as a backup custodian, we think neither will be a significant economic opportunity. The bigger opportunity, in our view, would be the custody of digital assets that represent real-world assets (RWAs). The success of BlackRock’s and Franklin’s tokenized money market funds, BlackRock USD Institutional Digital Liquidity Fund (BUIDL - $520M in AUM) and Franklin OnChain U.S. Government Money Fund ($428M in AUM) has not gone unnoticed.
In mid-September, the FOMC lowered interest rates for the first time since 2020. While a cut was broadly expected, the FOMC delivered a bigger rate cut than many had expected, boosting markets, including bitcoin prices. Then a week and a half ago, the PBOC announced significant monetary measures designed to boost China’s slowing economy, resulting in a jump in local stock prices and pushing gold to a new all-time high. Global monetary aggregates were already zooming to new highs, but this latest round of activity is likely to add fuel to the fire.
It was quiet across the bitcoin network this past quarter, with the exception of the launch of the Babylon staking protocol, which temporarily spiked network traffic and thus fees. Miners continued to digest the halving in April, which resulted in a dip in difficulty reflective of uneconomical hash rate coming offline. Most public miners, however, have committed to the expansion of their hash rates, with the acquisition of land, facilities, and even consolidation within the industry. The summer months with storms and high energy prices that lead to curtailment often don’t give the best short-term read on the hash rate, but as we head into fall, it is very clear that the expansion of network hash rate is underway.
The presidential election in November is the big event of Q4, with Harris and Trump running neck and neck. While both candidates will be improvements over the Biden administration regarding their attitude towards crypto, Trump, if he wins, will deliver bigger gains for the asset class given his full-throated endorsement of the industry. Also, if Trump takes the White House, expect to see a change in the head of the SEC as well, with Gensler being replaced with someone likely to be more pro-crypto. If Harris wins, we shouldn’t expect Trump to go quietly into the night. Instability caused in the wake of the election could also be a benefit to an asset whose strength comes from operating outside of the confines of traditional political and social institutions.
The news of BNY Mellon’s SAB 121 exemption seems to have awakened the traditional custodians to the opportunity within the digital asset industry. While it is probably too late for them to get into the ETF custody game in a meaningful way, perhaps only as a backup custodian, we would expect them to look at asset tokenization, like what BlackRock and Franklin Templeton have done with their money market funds, as the bigger opportunity. We would expect to see further developments in this area during the coming quarter.
While we had been hopeful for meaningful legislation to take place this year, it doesn’t seem like a market structure bill (FIT 21) or stablecoin legislation, is on the table until a new administration is sworn into office. Nothing meaningful is likely during the lame-duck session post -election, so hopefully, we see some movement on these items early next year, once a new administration is sworn into office.
ETF Options Move Closer to Trading
With the SEC approving options on IBIT, the stage is set for eventual trading. The Options Clearing Corp (OCC) still must get approval from the SEC to settle the options, and the CFTC still has to give the nod, but those to us are a matter of when not if. We don’t think bitcoin ETF options get hung up indefinitely like they did for palladium and platinum ETFs. We would expect options on other bitcoin ETFs to eventually get the green light. We think this could all happen by year-end, but of course subject to the whims of regulators, some of which, like the CFTC, don’t have structured timelines for approval.
ETF sponsors have made noise lately with the filings for two ETFs based on two new crypto assets, XRP (XRP) and Solana (SOL). Given that the SEC is in active litigation against Ripple Labs, creator of XRP, and has asserted that SOL is a security in lawsuits against Coinbase and Binance, the latter of which was amended to remove the mention of Solana. Still, neither asset has futures that trade on a regulated exchange of size, a fact that was critical in Grayscale’s win over the SEC which required the agency to treat spot and futures on a like-for-like basis. Still, with election season upon us, we may have a wholesale change in administrations and regulators, perhaps something that plays into the sponsors’ strategy.
The world’s money supply, global M2, continues to hit new all-time highs, a trend likely to continue as the US and China employ looser monetary policies. While not a perfect fit with bitcoin price, the two do seem to have some relationship over the past 7 years. This isn’t an entire surprise as a fixed supply asset like bitcoin should be the beneficiary of expansionary monetary policies.
The chief antagonist of bitcoin markets in Q3, large sellers, are mostly behind us now. All the bankruptcies in 2022 have paid back creditors or are about to do so, as in the case of FTX. The FTX creditor distributions, however, will be conducted via cash and the 21.4K bitcoins the estate held a year ago have likely been converted into cash at this point. Given this, the FTX creditor distributions could end up being a net positive for bitcoin as investors get cash back that they may put to work in the market, rather than an overhang. The remaining Mt Gox coins, creditors who have elected for final repayments, will have to wait until the finality of the bankruptcy, which may take many more months to resolve.
The exception is, however, for governmental holdings of bitcoins as the result of forfeitures. The US and UK governments hold collectively $16.8B worth of bitcoins. UK officials have talked about selling its $3.9B stash to shore up the nation’s finances, but no concrete plans have been put forward. As for the US government, we would expect to continue to see it sell down its position, but unfortunately, no plans regarding amounts and timing are available.
The fourth quarter is one of bitcoin’s best quarters from a performance standpoint. There are numerous catalysts for investors to keep their eyes on – the election, monetary easing, elimination of overhangs, and geopolitical instability to name a few. While investors might be frustrated with the rangebound trading over the past 6 months, rest assured, as compared with the previous cycles, bitcoin is exactly where it was at this time in the previous two.
Wednesday, October 9th at 10:30am ET
Join NYDIG for our quarterly webinar. Topics will include:
• Market Structure Developments: What does spot bitcoin ETF listed options mean for the market?
• Regulatory Shifts: How are traditional financial services companies addressing the digital asset industry opportunity?
• The Macro Environment: What do rate cuts, the US elections, and China stimulus mean for bitcoin?
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