May 19, 2023
Greg Cipolaro

Research Weekly - What's Holding Bitcoin Back?


  • We look at the factors contributing to a malaise in bitcoin price action.
  • The cost of insuring US debt against default rises as brinksmanship around the debt ceiling ratchets up a notch.
  • A new large corporate owner of bitcoin emerges. We look at the implications.

A Look at the Lull in Bitcoin

The price of bitcoin was down 0.4% on the week, essentially flat. But with the ongoing rally in risk assets, including equities, while bitcoin trades sideways, investors have been asking themselves: what’s up with bitcoin? We look at some of the factors that might be affecting markets.

Profit Taking. A first and natural response to the question is that nothing is up with bitcoin. After rallying 71.9% in the first quarter, bitcoin has fallen 6.1% during the second quarter, bringing its year-to-date return to 61.5%. After a rally like we saw in 1Q, it is only natural for some investors to take profits. Some of the signs of investor exuberance, like a positive basis on futures and growing open interest have abated. The 61.5% year-to-date return still far outpaces any other asset class. On a year-to-date basis, the Nasdaq Composite is up 21.7% and gold is up 7.3%.

Banking Crisis. On the main drivers of bitcoin during the first quarter, the regional banking crisis seems to have receded, for now. Last week, we wrote about the declining draws on Fed liquidity facilities, which had fallen from the peak crisis highs, as a sign that the worst of the crisis might be behind us. Regional bank stocks are up significantly (the SPDR S&P Regional Banking ETF (KRE)), and no new concerns about bank failures have emerged recently. Given that bitcoin shined during the banking crisis, the lack of incremental fireworks removed what had been a significant catalyst for bitcoin.

Regulation. The prospects of increased regulation have been an overhang over the industry since the beginning of the year. Enforcement actions have come throughout the industry from the SEC, CFTC, DoJ, and state regulators and enforcement divisions, like the NYAG, many of which we have previously highlighted.

Bitcoin Miami. Right now, the center of the Bitcoin world is Miami, where the annual conference put on by BTC Media, Bitcoin 2023, is occurring. Even though attendance this year is reportedly down by half, the three-day event is still the largest annual gathering of Bitcoin technologists, investors, companies, and enthusiasts in the world. In the past, the conference has been the platform for numerous important announcements, such as El Salvador’s intention to make bitcoin legal tender.

While the conference has been celebrated as a venue for all things Bitcoin, unfortunately, that enthusiasm has not always translated into price appreciation. The event has been surrounded by adverse external events, such as the collapse of LUNA/UST in 2022 and the China ban in 2021, so it’s hard to read too much into it. Seasonality might come into play, but historically the conference has not acted as a price catalyst.

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Seasonality. Average monthly returns tend to wane as we transition from spring to the summer months. “Sell in May and go away” is an old market adage and it appears to apply to bitcoin as well. Average monthly returns peak in April and then descend throughout the summer before flipping to a negative in September. It may be that seasonality is a bit more pronounced this year with such a strong start to the year in 1Q.

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Mt Gox. Sometime this year, 138,000 bitcoins worth approximately $3.7B are expected to move into the hands of bankruptcy creditors. The fear has been that after waiting over 9 years, creditors, who have seen the value of their bitcoins appreciate significantly in that time, will sell their bitcoins, negatively impacting price. The bitcoins are presently set to be distributed by October 31, but the resolution of this case has been delayed numerous times over the years. It is difficult to predict the exact timing or how coins will be distributed but the specter of the movement of these coins certainly has investors on edge. False alerts from industry data providers on the movement of Mt Gox coins and coins seized from Silk Road have negatively affected prices recently.

Cost of US Default Rises as Yellen Warns Congress

The cost of insuring US Treasuries against default, the spreads on 5-year credit default swaps (CDS), have risen to their highest level since the global financial crisis. The rise in CDS spreads comes as the legislators continue to work on a deal to raise the debt ceiling but have yet to come to an agreement. Earlier this week, Treasury Secretary Janet Yellen sent a letter to Speaker of the House Kevin McCarthy, warning him that the Treasury could bump up against the debt ceiling as early as June 1. Treasury already enacted extraordinary measures, such as postponing the funding of certain obligations in January, to continue to fund the government. While the exact time the ceiling would be reached is still subject to several factors, raising the debt ceiling is a matter of “when” not “if.”

The irony is that despite the rise in CDS spreads, other financial markets ignore the probability of default. The CBOE Volatility Index (VIX) is down to 16.1, a level not seen since 2021 before the Fed began to raise the specter of increasing rates, equity indices like the Nasdaq Composite continue to scream higher, and stores of value like bitcoin and gold trade heavy. Much of this feels like the setup going into the 2011 debt ceiling negotiation, which ultimately wreaked havoc on financial markets due to the US debt downgrade. While another downgrade seems unlikely this time, in many ways, the US is in a worse financial position than in 2011. The debt to GDP ratio, for example, is 30% higher today than in 2011. Bitcoin was not a viable investment alternative in 2011 given its size and lack of maturity, but this time is different. Today, bitcoin is a viable alternative for those wishing to opt out of the machinations of the US fiscal and monetary system and into one programmatically driven, governed by code, not the whims of politicians and monetary policy setters.

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Tether Becomes Second Largest Corporate Holder of Bitcoins

Tether Holdings Ltd, the issuer of the Tether (USDT) stablecoin, has recently emerged as the second largest corporate bitcoin owner. Despite numerous controversies throughout its history, USDT remains wildly popular and according to the recently released 1Q Consolidated Reserves Report (CRR) is overcollateralized to the tune of $2.4B. While it has been known that Tether owned bitcoins for quite some time, the extent of its ownership was never known until this week. The 1Q CRR revealed that Tether held $1.5B worth of bitcoins or about 52,700 bitcoins at quarter-end prices.

It is not clear when Tether bought the bulk of those coins, but a statement from the company indicates it will continue to allocate up to 15% of its net operating profit to buy bitcoin. Tether generated nearly $1.5B in profits in 1Q23, and given where yields are, it is likely that the company will have substantial profits in the future. An annualized run rate of $6.0B in profits would translate to $900M of incremental bitcoin buying. That’s not enough to supplant the most significant corporate owner of bitcoin, MicroStrategy, which reportedly owns 140,000 bitcoins, but it is certainly a significant demand driver.

Market Update

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The price of bitcoin fell 0.4% on the week, essentially flat. Equities rallied with the S&P 500 up 0.7% and the Nasdaq Composite zooming up 3.0%. Gold struggled on the week, falling 3.0%, while oil rallied 1.4%. Bonds fell, with investment grade corporate bonds down 2.1%, high yield bonds down 0.8%, and long-term US Treasuries down 3.2%.

Important News This Week


Paul Tudor Jones on Bitcoin (@4:50) - CNBC

Treasury Secretary Yellen's Letter to House Speaker Kevin McCarthy - US Treasury


Mint the Future with Taproot Assets v0.2 - Lightning Labs

Paving the Way for Lightning’s Mainstream Adoption - Lightspark

Marathon Digital Holdings Collaborates with Brink To Raise Up to $1 Million To Support Bitcoin Core Developers - Marathon Digital

Regulation and Taxation:

SEC Calls Coinbase's Suit Over Digital Asset Rules Petition 'Baseless' - The Block

EU’s MiCA Crypto Legal Framework Inches Towards Law With EU Council Finance Ministers’ Sign-Off - CoinDesk

Gensler: SEC 'Stands Ready to Help' as Crypto Startups Face Wave of Enforcement Actions - Decrypt

US Crypto Tsar Promises Crackdown on Digital Platforms - FT


BNY Mellon Commits to Long-Term Digital Asset Initiatives - BlockWorks

The Rise of FTX, and Sam Bankman-Fried, Was a Great Story. Its Implosion Is Even Better. - NYT

Upcoming Events

May 26 - CME expiry

June 2 - Jobs report

June 13 - CPI reading

June 14 - FOMC rate decision

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