The Bitcoin price is stable this week, circling around the $62,000 mark. The impact that followed the announcement of the first US Bitcoin ETF (BITO) three weeks ago is now fading. The ETF’s assets under management stabilised around $1.25 billion for 32,000 ETF shares outstanding. As mentioned two weeks ago, BITO doesn’t hold the Bitcoin spot. Instead, it holds both CME Bitcoin futures and treasury bills: a mix that will most likely underperform the Bitcoin spot price substantially given that futures are trading at a premium.
Now that two future-linked Bitcoin ETFs have been approved, lawmakers are asking the SEC to approve a spot Bitcoin ETF. They explained correctly in a letter sent to the SEC Chairman Gary Gensler that a Bitcoin spot ETF ‘inherently provides more protection for investors’, and that a future-linked ETF ‘may impose substantially higher fees on investors due the premium at which Bitcoin futures typically trade, as well as the cost of rolling futures contracts each month’. A spot bitcoin ETF would certainly be more appealing to long-term investors as BITO is expected to underperform the Bitcoin price by at least a few percentage points each year.
The Bitcoin price marked a pause that can be explained by the high leverage observed during the past two weeks. This leverage is created and maintained at a significant cost. As explained in previous articles, the market would likely correct in the near-term, or at least consolidate before seeking new highs. The market’s leverage is still high: the December future reached an excessive 20% annualised spread on Deribit just a few days ago. But the rate settled back the following days around 15%. The daily average BTC funding rate is above 12% annualised on Binance. The CME open interest reached $4.36 billion, its highest monthly level on record.
The probability of a crash is still significant given that the aggregated Open Interest of Bitcoin Futures is still near April’s highs. But if the news flow continues to support the cryptocurrency sector, the most likely scenario would point towards a consolidating BTC until the most leveraged future positions expire, or until future premiums narrow. This analysis also applies to the Ether market, where the Open Interest of Ethereum Futures is now above $13 billion, regularly printing all-time-highs these last two weeks.
Daily average BTC funding rates on futures exchanges annualised. Includes Binance, BitMEX, Bybit, FTX, Huobi, OKEx.
Regardless of the market’s risk leverage, the long-term performance potential is intact. Coinmetrics published yesterday a tweet that compares the trajectories of BTC and ETH with their 2017 (post-halving) trajectory. The tweet mentioned that Bitcoin is only up 7.3x ($8,600 to $62,970) compared to the 29.5x top observed in the previous cycle, and Ethereum is only up 24.8x, compared to 120x in the previous cycle. This harmless exercise would have put Bitcoin at $253,800 and Ethereum at $22,300. Adoption in the US is still accelerating. New York’s Mayor-Elect mentioned this week that his first paychecks could be paid in Bitcoin. New York, like Singapore and other financial cities are openly striving to become cryptocurrency hubs. Bankers are also rather bullish on the main cryptocurrency as JP Morgan renewed its $146,000 prediction for Bitcoin as reported by Markets Insider. Goldman’s analysts project Ether could reach $8,000 by the end of the year if inflation pressures keep on rising. The Fed Chairman Jerome Powell believes inflation rates could ease in 2022 once the pandemic ends. A shift in the Fed’s position would likely trigger a severe correction across all traditional and crypto markets.