Blockstream Markets Weekly — March 5, 2021
JPM and Bloomberg issue positive Bitcoin notes, Goldman restarts its Bitcoin desk (as Coinbase threatens a flippening), Kraken said to be raising at a $10B valuation, GBTC prints record discount as Canadian ETF sector sees record inflows, CBOE and VanEck say third times the charm on ETF application…can Bitcoin break its correlation with equities?
By Jesse Knutson
What’s happening in the markets?
You can go your own way
Bitcoin on pace to end the week modestly higher despite an end-of-week slide in US tech stocks.
Global equity declines followed comments from the Federal Reserve yesterday indicating a reluctance to reign in a surge in bond yields. Bond yields extended gains with the U.S. 10-year gaining to its highest since 2015 and the USD posting the best seven-day gain since this time last year.
While an increasing number of institutional investors have been making the case for Bitcoin as a potentially fast-moving inflation hedge, trading has looked a lot more like a risk asset than a safe haven, and Bitcoin has shown a fairly strong correlation with US tech stocks over the past several months.
It would be positive for Bitcoin to decouple somewhat from the current equity correlation. Bitcoin’s relative resilience at the moment (especially relative to other high beta tech constituents like Tesla) is a reason for cautious optimism.
Bitcoin is unique in its ability to appeal to multiple often seemingly contradictory narratives. Before the pandemic, it had a low, but increasing correlation with gold. Post pandemic it looked like a risk asset as the correlation with equities accelerated.
I wonder if the correlation with equities eventually proves to be a short-term phenomenon, a symptom of institutional investors being completely under-allocated, Bitcoin still being a relatively small asset and unprecedented fiscal and monetary stimulus.
Time will tell.
All about institutions
News flow this week was largely institutional focused with positive Bitcoin notes out from Bloomberg and JPM, Goldman Sachs re-engaging with Bitcoin trading (just as the Coinbase IPO threatens to flippen them on a market capitalization basis), Kraken said to be raising money at a $10B valuation, and a new ETF application in the works from CBOE and VanEck.
USDT breaks $36B AUM as German banks shun depositors
The Wall Street Journal reported early in the week that Germany’s biggest lenders are finally being forced to pass on negative interest rates to depositors.
Banks in Europe originally resisted passing negative rates onto clients when the ECB first introduced them in 2014. Over the course of the pandemic, though, as consumers spent more time at home, savings rates increased to the point where banks are now unable to absorb the negative rates imposed by the European Central Bank.
Meanwhile, in the world of Bitcoin and Digital Assets, Bitcoin is generating an annual yield of 6%, and USD coins like USDT are generating ~ 9%.
It’s not just Germany, though. Investors and savers are being squeezed out of the legacy system around the planet. This is certainly part of the reason why USD coins continue to reset all-time AUM highs with USDC breaking above $10B this week and USDT crossing the $36B mark.
As Glassnode pointed out earlier this week, since 4Q20 retail has probably been a larger price driver than many realize with institutional demand slightly more backfoot on price rallies, but more active on dips.
I think this is probably why we have seen typically shorter and shallower pullbacks this cycle than previous ones.
This is in line with the -24k Bitcoin decrease we saw in Coinbase wallets this week. I think this probably implies big hands accumulating and moving assets off exchange into cold storage.
All of this has happened before, and it will all happen again
A sharp decrease in funding rates (the fees paid to maintain risk exposure) is a good indication of this. This week’s funding rate reset and decrease in open interest might mean that Bitcoin has legs to run once the price begins to move higher again.
It’s also important to put this in a seasonal context. As mentioned last week, March is Bitcoin’s most consistent down month with Bitcoin ending lower seven of the previous eight years.
Given positive news flow, price resilience in the face of macro uncertainties, tentatively positive technical signals, a reset in sentiment, a consistent institutional bid, and what looks like normal seasonal weakness, I think this is a healthy spot for Bitcoin to consolidate and prepare for the next leg up.
📬 Register your email to receive Blockstream Markets Weekly delivered straight to your inbox. 📬
Bitcoin markets news
- Restarted its cryptocurrency trading desk and will begin dealing bitcoin futures and non-deliverable forwards for clients from next week, a person familiar with the matter said. The team will sit within the U.S. bank’s Global Markets division
- The bank is also exploring other opportunities in the Digital Asset space including Central Bank Digital Currencies, Bitcoin ETFs and Digital Asset custody
- Includes investments from Fidelity and Morgan Stanley
- Plans an aggressive increase in mining capacity by the end of 2025
- Will trade under the ticker GWAC on the Nasdaq
- There are a number of interesting ideas in this report. It is definitely worth a read
- 1. Bitcoin looks like it is actually replacing gold to some degree
- 2. Discount in the GBTC looks similar to panic selling in the previous cycle which could imply a run to $100k. Though, I think this overlooks the structural shift towards ETFs which is helping to exacerbate the discount
- 3. ‘One-year active supply’ is still very low. This implies that price is not yet high enough to tempt longer-term Bitcoin holders to bring a significant amount of coins to market
- Finally, I thought this was quite a good observation:
“In 2020, the benchmark crypto gained legitimacy with declining volatility vs the opposite in most assets. In 2021, we see little to stop the process of old-guard gold allocators simply focusing on prudent diversification”
- This is basically a reiteration of JPM’s existing thesis and not dissimilar to the Bloomberg view above
- The JPM note highlights that Bitcoin’s volatility would need to drop substantially before it can match gold in terms of market value. The Bloomberg note above also highlights decreasing volatility
- Kraken said to be raising money at a $10B valuation
- Says in interview that Bitcoin could surpass gold in market value and could eventually surpass many other asset classes
“In the near-term people see [Bitcoin] surpassing gold as a store of value, so $1,000,000 as a price target within the next 10 years is very reasonable”
- Eyes a direct public listing sometime next year
- Highlights the record gap between the futures premium and GBTC discount
- I don’t think this is necessarily capitulative selling, though. It’s certainly being influenced, to some degree, by the emergence of ETFs in Canada and the increased probability of ETFs in the US
- February saw a total of $5.2B of inflows into Canadian ETFs, the second-best month ever
- The Purpose Investments Bitcoin ETF saw $400M traded during the first two days of its listing, that has cooled significantly this week to ~ $20M in turnover/day
- Cboe said in a filing earlier this week that the SEC sought approval for the VanEck Bitcoin Trust
- This is at least the third time (third time’s the charm!) that Cboe and VanEck have teamed up on a Bitcoin ETF application
- Cboe was the first U.S. regulated exchange to list Bitcoin futures but discontinued the product in June 2019
- Cites analysis from Glassnode that estimates there Bitcoin’s freely circulating supply is only about 4 million coins at the moment
- That number has also been getting smaller each month over the past year
“This has never happened before for such an extended period of time, and could lead to a massive supply squeeze soon”
DeFi rates fall below 10%
- May point to an increase in institutional / high net worth interest
Chart credit Skew
Increase in daily Bitcoin users
- This probably implies that this cycle has considerable upside left yet
- As Willy Woo notes,
“Like prior cycles, I expect this peak to top out higher than the ones before it.”
Chart credit Glassnode via Willy Woo
Bloomberg: GBTC panic selling may imply run to $100k
- As mentioned above, I think this reflects the success of the two Canadian ETFs listed last week and the increased probability of a US ETF in the coming months than it is a reflection of Bitcoin panic selling
- Perhaps a bit of both
Chart credit Bloomberg
Long-term holders waiting for higher prices
- Chart shows ‘one-year active supply’ remains low. Current level is similar to early 2016
- Note that both the 2017 and 2013 peaks occurred at similar levels
Chart credit Bloomberg
Bitcoin is replacing gold
- Bitcoin is expected to attract more inflows as holders of gold diversify and as BTC/Gold continues to set new highs
Chart credit Bloomberg
A repeat of the January wedge?
- Former hedge fudge manager and founder of Real Vision, Raoul Pal, highlighted the potential for Bitcoin to break higher à la the end of January of this year
Chart credit Raoul Pal