Commentary

BTC ETF Outflows, ETH SEC Victory, Dual Asset ETFs

Week in Review

Commentary

BTC ETF Outflows, ETH SEC Victory, Dual Asset ETFs

Introduction

Week in Review

  • US-listed spot bitcoin ETFs saw significant outflows
  • SEC closed Ethereum 2.0 investigation
  • Hashdex proposed a new ETF that would own both spot ETH and BTC

Looking into the future amidst ETF outflows and BTC whales selling

In contrast to TradFi risk assets which saw gains, the cryptocurrency market experienced declines. The total market capitalization of the crypto markets dropped by 4.4%, while bitcoin's dominance remained above 54%. Among the blue chips, bitcoin fell by 4.8% over the week, while ether remained unchanged compared to the previous week. US-listed spot bitcoin ETFs saw significant outflows totaling $714.4 million in daily net outflows in the past week. This coincided with selling activity from long-term bitcoin holders and miners over the past two weeks. According to a report from CryptoQuant on Wednesday, long-term bitcoin holder whales sold $1.2 billion during this period, likely through OTC markets.

Since bitcoin prices traded over $70,000 in late May, traders have been reducing their holdings, as reflected by the declining UTXO (unspent transaction output) age bands tracked by CryptoQuant. Created after every bitcoin transaction, UTXO represents the amount of digital currency left after a cryptocurrency transaction is completed and allows traders to track buying and selling patterns across various market cycles. Generally, a reduction in UTXO age indicates increased bitcoin activity and selling, while an increase points to more holding. Some opine that miners are shifting their focus to the fast-growing artificial intelligence sector due to the diminishing mining rewards post halving, leading them to sell their bitcoin rewards rather than hold them. Both cryptocurrency mining and AI development rely heavily on powerful computing chips, which miners already have in abundance.

The report highlighted that if the combined ETF outflows and the sell-side liquidity from long-term whale holders are not absorbed OTC, brokers might need to offload this risk onto exchanges. However, to hedge their exposure, dealers can turn to derivatives markets instead of selling in spot markets, using perpetual swaps or dated futures, with the acquired coins as margin. While leverage has dropped and the basis has narrowed across the board, exchanges like Binance and ByBit have seen funding for coin-margined perpetuals remain positive over the past seven days, making these swaps more attractive for selling than spot trades. Additionally, a recent CryptoQuant report shows there are currently 2,825,703 bitcoins left on exchanges, down from around 3,039,000 in January 2024. Low exchange reserves, or exchange balances, indicate low selling pressure and potential supply shocks due to the limited supply available for purchase.

According to analysts at Bernstein, bitcoin bears arguing that the spot BTC ETF trade has peaked overlook two critical factors. The analysts contend that early retail-driven allocations and institutional participation focused on the "cash and carry" basis trade, rather than substantial net long positions, which suggests ETF flows are not fully validated. Despite institutional spot bitcoin ETF participation standing at just 22%, recent 13F filings and increased liquidity in CME bitcoin futures post ETF launch support the basis trade.

However, Bernstein's analysts highlight that major wirehouses and large private bank platforms are poised to approve spot bitcoin ETFs in Q3 or Q4 this year, echoing sentiments from Bloomberg ETF analyst, Eric Balchunas, and Bitwise CIO, Matt Hougan. While the basis trade is largely hedge fund-driven (approximately 36% of institutional allocation), the next wave involves evaluating long positions. They emphasize that allocations by financial advisors reflect genuine demand, with 13F disclosures showing modest but increasing allocations (0.1-0.3% of portfolios).

Moreover, they anticipate significant growth as larger advisors approve ETFs and allocate more within existing portfolios. Another bullish factor is the growing adoption of bitcoin as a treasury reserve asset, buoyed by new FASB guidelines facilitating balance sheet management with mark-to-market gains. This trend is expected to drive fresh demand from corporate treasuries in 2024.

ETH SEC victory and Hashdex's dual asset ETF

Consensys, known for products like the MetaMask wallet, announced in a recent blog post this week that the US Securities and Exchange Commission (SEC) has concluded its investigation into Ethereum 2.0, sparking a modest rebound in the price of ether that helped recover the majority of the week's losses. The SEC informed Consensys on Tuesday that it will not pursue enforcement actions following the investigation. This development follows the SEC's recent approval of spot ether ETFs in the United States, signaling progress towards final approval of the applicant’s Form S-1 registration statements for trading. In response to this news, ether whales showed confidence, with blockchain analysis firm Lookonchain reporting a significant purchase of 5,603 ETH, valued at approximately $19.6 million. The options market also saw notable activity, highlighted by a large block purchase of 30,500 ETH notional calls with a strike price of 4000 expiring in September.

According to a report from The Block, prospective issuers of spot ETH ETFs received feedback from the SEC last week on their S-1 forms with a deadline of this Friday to submit revised versions. Although their 19b-4 forms were approved in May, the effective launch of trading hinges on the approval of these S-1 forms, a process without a strict timeline. Currently, the forms are being revised and resubmitted to the SEC for further review, followed by iterative adjustments until finalized. Initial drafts were submitted on May 31, following the approval of the 19b-4 forms, with expectations for prompt feedback the subsequent week, although actual comments were delayed by two weeks. Chair Gary Gensler mentioned that the SEC has indicated a target for approval this summer, noting that timelines will depend largely on how swiftly issuers respond to the agency’s feedback.

With US spot bitcoin ETFs already trading and ether funds poised to follow suit, Brazilian asset manager Hashdex aims to launch a fund that will encompass both assets. If approved, this fund would represent another significant milestone in a year already marked by several developments in crypto funds.. The proposed Hashdex Nasdaq Crypto Index US ETF intends to invest in BTC and ETH exclusively, explicitly excluding crypto securities, tokenized assets, or stablecoins. The underlying index of the fund currently weights BTC at approximately 70% and ETH at 30% as of May 27, with the potential for inclusion of other crypto assets meeting specified criteria such as being listed on US-regulated platforms or serving as derivatives underlying such instruments. The filing emphasizes a passive investment strategy aimed at mirroring index performance, whether it rises or falls, without attempting to outperform it. The proposal from Hashdex was submitted by Nasdaq and is pending a registration statement (S-1) submission for the ETF. The ETF will be traded on Nasdaq.

Macro pulse 

This week, traditional financial markets displayed a risk-on sentiment. Oil futures rallied by 3.1%, and US stocks rose by 1.2%, printing a fresh all-time high. Federal Reserve officials reiterated the necessity for more evidence of cooling inflation before considering rate cuts. Policymakers have maintained borrowing costs at their highest levels in two decades for almost a year and show no urgency to reduce them. Last week, Fed officials projected only one rate cut for 2024, down from the three cuts forecasted in March. Elsewhere, the US Dollar index climbed 0.8%, the 10-year US Treasury yield slipped by 8 basis points, and the Gold & Silver index decreased by 1.4% compared to the previous week.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on June 20, 2024 

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