Crypto Corner - Summary of the Week 18/10/2021

Written by: Yves, Head of Trading at Wirex

After six months of hardship and wandering, the Bitcoin price finally printed a new all-time-high (ATH) this week. The BTC/USD pair reached $67,016 on Wednesday (source: Bitstamp). The first cryptocurrency’s performance was also met by Ether a day later. The ETH/USD pair reached $4,375, but fell a few dollars short from its ATH. Although a few more cryptocurrencies joined the Bitcoin rally in the past two days, including Solana (SOL/USD +20%), this rally concerned mostly the two largest cryptocurrencies by market capitalisation. The push is coming from institutions looking for increased exposure in the cryptocurrency market through the two most liquid and only currencies quoting on the regulated CME futures exchange. Institutions were largely reassured by the SEC stance and its approval of the first US Bitcoin ETF, namely the ProShares Bitcoin Strategy ETF (BITO). As a result, they accelerated their investments in a sector that can’t be ignored anymore.

For its first trading day, the BITO share price initially soared by nearly 5%, pulling up the price of the first CME Bitcoin future. BITO’s assets under management are now above $1.1 billion only a few days after launch. It is mainly invested in the CME futures with the shortest maturities (October-BTCV1 and November-BTCX1) and the the fund has yet to roll all its October futures before they expire next Friday.

Source: Tradingview - Performance of the Bitcoin CME ETF (nearest maturity) versus performance of the spot BtC/USD price in %.

Source: Holdings and positions of the US ETF BITO as of 20/10/2021

Indeed, the BITO ETF is actively managed and the futures roll is discretionary. But the roll, which consists this week of selling the October futures held, and buying the November futures, comes at a cost because the market is in contango, which means that the price of the November future is above the price of the October future. Furthermore, the price difference between the November and October futures soared quickly these last few days because the first future has only one week left to converge to the spot BTC/USD price, and the price of the second future is inflated by an extraordinary demand. The ETF’s net asset value (NAV) performance will suffer as it has seven days left to roll more than half its size on a particularly high spread. In fact, the NAV performance will likely suffer with every roll as the market is usually in contango. Hence BITO will very likely underperform Bitcoin over time.

Source: Tradingview - Price of the first CME Bitcoin future subtracted from the second CME Bitcoin future

As BITO stated in the description provided to the SEC:

“Rather than roll the futures contracts on a predefined schedule, the Subsidiary will roll to another futures contract (which the Adviser selects from a universe of futures contracts) that the Adviser believes will generate the greatest roll yield. However, there can be no guarantee that such a strategy will produce the desired results.”

Bitcoin’s first two futures have hardly been in backwardation since May 2019 as observed on the graph above. In this context, undesired results are certainly more likely to be the norm. The December future implied yield is now above 16%, which means that a delta-hedged Bitcoin position (long cash and short December futures) would return a 16% annualised rate until the futures expiration date. With a June yield estimated at 13%, selling the higher December future now seems very appealing. From the opposite side, holding the December future is very expensive. This is the consequence of a highly leveraged market that’s been exacerbated by BITO’s large futures investment.

The BITO launch is the outcome of years of Bitcoin ETF applications submitted to the SEC. Institutions have been eagerly waiting for a positive signal from the SEC, a legal confirmation that Bitcoin is here to stay. The US adoption is accelerating. We mentioned in our previous weekly articles that the country recently became the first bitcoin miner, and that cryptocurrency hubs are rising in several states. Bloomberg reports this week that the Houston firefighters pension fund recently invested $25 million in Bitcoin and Ether. Coinshares reports that ‘digital asset investment products [targeting institutions mostly] saw inflows totalling $80 million last week’. As the current momentum is largely fuelled by leverage, and as leverage is currently very expensive to keep, the market should likely correct in the near-term, and potentially consolidate before seeking new highs.

data taken at 11:47 am 22/10/2021


The above is an opinion piece and therefore should not be taken as financial advice. Please do your own research thoroughly when looking at Cryptocurrency.

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