Market View
On performance
BTC performance has been sluggish since spot bitcoin ETFs were launched in the US, despite these funds capturing $824M in net inflows since January 11. Part of that has had to do with the rebalancing of allocations away from less efficient bitcoin holding vehicles to more efficient ones like ETFs – as well as the rotation away from higher fee products in some jurisdictions to the lower fee products in the US. That said, there were around $371M in net ETF outflows between January 22 and 24, though it’s unclear what part of that includes reported FTX sales of their (remaining) 22.3M shares outstanding in Grayscale Bitcoin Trust (GBTC), if any. Supposedly, over 2/3rds of their GBTC holdings have been confirmed to be sold as of January 22, according to Bloomberg.
All of this is to say that we still have an incomplete picture of the market dynamics currently at play, including the full extent of displaced ETF flows. For example, there’s been little transparency with regards to the continued liquidation proceedings at insolvent Three Arrows Capital, who had once been the largest holder of GBTC with 38.9M shares. This may explain why global bitcoin spot volumes (across multiple centralized exchanges) have come down this week, according to CoinMetrics – albeit at $9.1B per day, this is still 1.8x higher than the 4Q23 average. Volumes associated with spot ETFs in the US currently account for around $1.5B daily (see Chart 1).
What has been clear is that bitcoin prices have triggered some key liquidation levels on the way down. We’ve previously mentioned that some market players may have been stocked up on bitcoin spot inventory ahead of the ETF launch and sold CME futures, both as protection and to take advantage of the basis. While, normally, unwinding these structures should only have a nominal impact on underlying performance, we suspect closing these positions at scale may have also impacted market liquidity and disrupted CTA signals at a particularly inopportune time.
This latter point is consistent with what we’ve seen in terms of the large spike in open interest for CME bitcoin futures in the ten days prior to the launch of these ETFs, when the number of outstanding contracts peaked at 27,250 (a notional value of US$6.3B). In recent days, the open interest on CME bitcoin futures seems to be stabilizing near 22,400 contracts ($4.5B) – in line with the December average. Volumes are also beginning to settle near the December average of $2.6B (see Chart 2). This suggests many of those positions have since been unwound, which if true, may at least relieve one source of short-term bitcoin pressure.
Nevertheless, other sources of technical selling pressure remain. For example, we recently received a reminder that the Mt. Gox Rehabilitation Trust plans to repay 141,686 BTC to creditors sometime before October 31, 2024. There have been reports that the trustee is completing its identity verification process in preparation for making payments. So far, no bitcoin has been distributed, and the trustee is still sitting on 137,891 BTC in its wallet, a balance that has remained constant since May 2018.
Soft landing at last?
The Federal Reserve meeting on January 30-31 will be the most important macro event to watch next week with the board in a black out period until then. Recent US economic data seems to be affirming the soft landing scenario that markets have mostly priced in; we recently saw a combination of stronger than expected GDP growth alongside PCE indicators reinforcing the disinflationary trend. The odds of the US avoiding a recession or even a sustained contraction seem higher today than they were two months ago, as reflected in a much less inverted US 2y10y yield curve. Total corporate profits are up 50% since 2020. How this will affect the Fed’s policy stance remains the key question, particularly with regards to the likelihood of cuts in March and the tapering of the quantitative tightening program.
March may be a pivotal macro month for other reasons as well. The Bank Term Funding Program (BTFP) will expire on March 11, and officials have recently signaled that it will not be extended. Note too that the interest rate on the lending program was recently adjusted up. In our view, the fundamental risks to regional banks haven't changed materially since the BTFP was enacted in 2023 with continued low long-term bond valuations and weakness in commercial real estate loans. Any fallouts here could heighten bitcoin’s narrative as a safe haven asset amid the instability in existing systems.
Finally, the draining of assets in the Reverse Repo Purchase (RRP) facility over the last year may become a problem in the months ahead, potentially unsettling market liquidity conditions with little recourse to alternatives. Thus, we expect a continued choppy period throughout the next one or two months until the market receives more directional certainty closer to these March deadlines.
