Commentary

Rinse, Reset, and the Uncharted Investment Frontier

Week in Review

Commentary
Commentary

Rinse, Reset, and the Uncharted Investment Frontier

Introduction

Week in Review

  • BlackRock to seed spot bitcoin ETF with $10 million
  • Bitcoin's price plunge led to $500 million in liquidations
  • Coinbase shares slipped 20% amid bitcoin's price volatility

Rinse and reset; Shaking off the old and steering to the new

Crypto markets echoed the risk-off sentiment observed in traditional financial assets, experiencing a 3.5% weekly decline in the total market cap of the crypto universe, accompanied by a rise in bitcoin dominance surpassing 51%. Among blue chips, bitcoin experienced a 1.4% drop, and ether saw a weekly decline of 7.1% compared to the preceding week. Bitcoin began 2024 by extending its positive price momentum from 2023, reaching a fresh high just under $46,000 on Tuesday (Asia am), its highest point since April 2022. However, this rally appeared short lived, as a sudden and substantial drop erased earlier gains, resulting in approximately $500 million in liquidations across crypto derivatives exchanges within a few hours, significantly skewed towards long liquidations.

BTC experienced a rapid decline, dropping to a low of $40,800 from around $45,000 within hours on Wednesday (Asia evening), coinciding with the publication of a Matrixport report discussing the potential rejection of all bitcoin spot ETF proposals by the SEC in January. The cryptocurrency community went into a frenzy circulating the post, attributing the sharp downtick to it. However, it seems unrealistic that the entire sell-off was solely driven by one report, suggesting a more complex interplay of market factors and seller sentiment. Notably, futures basis and perpetual funding rates have remained highly bid since December, signifying a market willing to incur substantial funding costs to maintain leveraged long positions in anticipation of positive price action upon ETF approval. However, as the wait for approval prolongs, elevated basis levels exacerbate trading costs, making it increasingly challenging to sustain positions over an extended period. Furthermore, on the broader macro front, crypto-related stocks and traditional financial risk assets experienced a sell-off, coinciding with a rally in the US dollar for the year so far.

Recent developments indicate that the Securities and Exchange Commission (SEC) has been actively engaging with potential issuers of bitcoin ETFs, even during the holiday season, refining details and guiding them in updating S-1 filings. BlackRock, in particular, filed its fourth amendment on Dec. 23 and aims to seed its bitcoin ETF with $10 million early January. Despite recent price fluctuations, the market remains optimistic about the approval of a spot bitcoin ETF by Jan. 10, and the current liquidation is seen as a potentially healthy prelude, with that backdrop this could be healthy as some leverage gets flushed out before the actual event.

But the ETF impact is all priced in?

The prevailing discourse within the crypto community suggests that the impact of a spot bitcoin ETF is already priced into bitcoin's value, but this notion seems improbable given the unprecedented nature of this industry event. While there may be modest (and not so strong) demand initially, the long-term implications appear significant. Despite improvements in infrastructure, acquiring bitcoin remains intricate, dissuading potential investors who must navigate technological complexities and grapple with custody and tax challenges. Even after overcoming these hurdles, the need to assess counterparty risk among mostly unregulated entities introduces further complexity.

The substantial effort involved introduces a noticeable inertia, hindering the translation of purchasing intent into actionable investment. A spot bitcoin ETF would provide investors with the option to seamlessly allocate a portion of their portfolio to bitcoin through a simple click-and-buy process from their brokerage accounts. This eliminates the need to navigate new processes related to custody, taxation, and counterparty risk, streamlining the accessibility of bitcoin investments for a broader range of investors from everyday retail investors to sophisticated institutional investors.

Financial advisors or fiduciaries face limitations in incorporating bitcoin into their wealth management strategies without an authorized bitcoin investment solution, such as a spot ETF. A substantial amount of capital within the wealth management sector has been unable to engage in bitcoin investments through conventional avenues. With an approved spot ETF, financial advisors gain the ability to guide their clients in directing their wealth towards bitcoin investments. For fund managers tasked with surpassing a benchmark, the ETF approval opens up access to one of the top-performing assets in 2023, providing a new avenue for potential outperformance.

The initial (few) days of the year so far have presented a rollercoaster ride, although it's crucial to note that we are merely at the outset of a year-long journey. Notably, key themes are painting a positive outlook for bitcoin, including the anticipated spot bitcoin ETF, the impending Bitcoin halving known for supply tightening, and the potential for interest rate declines later in the year.

Macro pulse 

At the onset of the year, global markets embraced a risk-averse sentiment, resulting in a 1.6% downturn in US equities compared to the prior week. FOMC minutes reveal a consensus that the policy rate is likely at its peak, with some members considering a prolonged status quo. The commitment to a restrictive policy persists until a sustained decline in inflation, and discussions indicate a plan to slow and eventually halt the decline in the balance sheet when reserve balances are sufficiently high. Oil futures experienced a 1.4% decline from the previous week, influenced by considerations of record US production data and weakened demand in China amid tensions in the Red Sea. Elsewhere, the US Dollar index rose 1.4% and  the 10 year treasury yield rose by 13bps while the Gold & Silver index plunged 7.1% week on week.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on January 04, 2024 

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