Market View
The recent rally in BTC has triggered around US$256M in short bitcoin liquidations since the start of December. Catalysts for the 2.5 standard deviation bitcoin move (based on a 40-day window) ostensibly appeared to be centered around moderating US rate expectations as the 10y Treasury yield fell nearly 30bps over the last seven days to 4.1%. But if US yields were the driver, that upside wasn’t captured by either the S&P 500 or the Nasdaq, which have both been moving sideways, suggesting idiosyncratic factors are likely at play for crypto. Notably, equities may be range-bound because several sell-side banks have called for a pullback following the pace of gains in November.
Spot bitcoin ETFs remain an important part of the narrative for digital assets. The updated S-1 filings by BlackRock and Bitwise on December 4 contain a level of detail that, in our view, signals a high level of scrutiny by the SEC but also removes some potential grounds for denial. Specifically, the major changes to BlackRock’s filing address a range of concerns from custody arrangements (all bitcoin under custody will now only be stored in a cold vault vs the previously proposed mix of hot and cold) to creating an Intraday Indicative Value (IIV) calculation for increased shareholder transparency. Importantly, BlackRock’s filing included details on a $100,000 seed capital investment and detailed a process by which this could be converted into “Seed Creation Baskets” during its launch, which further indicates its readiness to go live.
Interestingly, a lot of the recent crypto appetite seems to be coming from institutional investors, as evidenced by the CME futures basis rising to as much as 29% annualized on bitcoin and 27% on ether early in the week. This suggests that institutions without recourse to BTC and/or ETH spot access may have been paying a larger-than-average premium for crypto exposure at the moment. That said, the front month on both are now back to around 20% (as we publish) with daily volumes averaging $2.5B and $439M on open interest of $5B and $675M respectively. Meanwhile, the percentage of long-term bitcoin holders (defined as those holding tokens longer than 120 days) has continued to climb to 86% in early December, suggesting that the recent price appreciation has not yet enticed long-term Bitcoin holders to take profit – in contrast with 15-20% drops in long-term holders during the 2017-18 and 2021-22 cycles. See chart 2.
Furthermore, the recent increase in onchain net long positions does not appear to be heavily driven by leverage, but instead by new and returning flows to the space. See chart 3. The previous 2021-22 cycle showed a strong correlation between dollars borrowed on Aave and sharp increases to ether price, with borrowing increases often preceding price rallies by a matter of hours or days. In contrast, during the 40% increase in ETH ($1540 to $2200) from October 12 to December 5, 2023, outstanding borrows on Aave rose a relatively meager 4.4%. In our view, this could suggest there is a potential for more levered upside due to the capacity for further capital deployment into 2024, contingent on financing conditions.
Separately, there has been some controversy around the usage of bitcoin ordinals, following comments from a Bitcoin Core developer that inscriptions are “exploiting a vulnerability” and hoping that it will be “fixed [by] next year”. This conversation, however, remains purely at the discussion phase and has yet not reached consensus within the community. Given that ordinal transactions constitute approximately 50% of daily transaction count and up to 30% of peak transaction fee revenues to miners, we think it's unlikely that major Bitcoin Core changes directly addressing ordinals will be made in the near term. Still, we think that the substantial adoption, usage, and now pushback against ordinals is worth watching as it may reveal the current state of Bitcoin technical and social governance. Note that the only major upgrade to the Bitcoin protocol over the past 5 years has been the Taproot upgrade in November 2021.
