The Breakdown - Bitcoin Breaks Out as ETF Flows Normalize

Episode Date: February 8, 2024

Enthusiasm is back on the agenda in Bitcoin land! NLW looks at the recent price action, Bitcoin's decoupling from rates and more. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, February 8th, and today we are talking about excitement returning to the Bitcoin markets. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, well, my wish was granted and we do not have to talk about the SEC today. Instead, we get to talk about the fact that after two weeks of sideways consolidation, Bitcoin broke out of its range on Wednesday, posting a 3.6% gain.

Overnight, Bitcoin traded at 44,500 for the first time since ETF launch week. The entire sell-the-news event has been filled back in, and it looks like we could be headed into another period of price discovery. Bitcoin led Ethereum, which gained around 2.85%, but trailed gains in Solana and other major altcoins. Short liquidations during the move were extremely mild, implying that the price action was driven more by spot positioning rather than a short squeeze. Now additionally, a new crop of Bitcoin whales have shown up over the past two weeks. Around 73 new wallets reached 1,000 Bitcoin in holdings, worth roughly 44 million. There are now around 2,060 wallets holding at least 1,000 Bitcoin, which is the largest

that category has been in over a year. Now, Bitcoin's volatility has been compressed over the past five months. Each burst of rapid price action has given way to long periods of consolidation, with each price breakout becoming less and less intense. Volatility metrics have rarely sustained such low levels throughout Bitcoin's history and typically lead to periods of more explosive price moves. Analyst Hornhairs pointed out the volatility squeeze on Twitter saying, we probably have 10 days max before a huge move on Bitcoin.

Now's the time to get your plan ready for either direction. Don't want to be stuck in a frozen panic with no plans if things launch upwards or nuke lower. It's coming very soon. Now, even more than any sort of technical analysis, this is just the vibe out there. Mikey Polito from Blockworks tweeted, Why does it feel like we're about to send?

Holderato writes, Something is brewing with Bitcoin. James Van Stratton from Cryptoslate writes, Pour one out for the lettuce hands with Bitcoin at 446. This is the part where Bitcoin slowly claws back the drop from 49K. Once we surpass it, then we go into the suddenly part. Now, staying on the theme of market analysis, let's turn to Bitcoin miners. Since the launch of the ETF, Bitcoin miners have been rapidly unloading their stash. On ETF launch day, miners transferred $1 billion worth of Bitcoin onto exchanges in order to sell. The selling has

continued since then, albeit at a slower pace. Miners' Bitcoin reserves are now at their lowest level since June 2021. A report published by BitFinex analysts said, This reduction in reserves suggest that miners are either selling off their Bitcoin holdings or leveraging them to raise capital. The primary use of this capital appears to be for upgrading machinery and mining facilities. Now, hash rate is once again making all-time highs as miners frantically bring machines online. Cryptoslate analyst James Van Stratten again wrote, Bitcoin hash rate is absolutely ripping. It's at all-time highs and up 12% in three weeks. The next difficulty change for Bitcoin could be as high as 11%.

This is the part of the cycle just before the halving where its deploy at all costs. Previous halings have seen similar rapid sell-offs from miners. Bitfinex analysts noted, selling Bitcoin now provides the capital for miners to upgrade infrastructure and is a reminder of the significant influence on market liquidity and price discovery that miners have. Now, earlier in the cycle, there was speculation that miners would hold on to their Bitcoin holdings into the halving.

Many of the largest miners are now public companies, with much better access to capital through debt and equity funding. Van Eck, head of research, Matthew Siegel, noted that the big difference between mining firm selling is not so much access to capital, though, but rather production cost. He wrote, ahead of the Bitcoin having, the public miners' behavior is beginning to diverge. Low-cost miners like Clean Spark, Riot and Cypher are selling fewer coins due to their lower cost basis. In contrast, higher-cost operations such as Argo and Terrell Wolf for selling 100% of their proceeds. So this is going to be a really interesting dynamic to continue to see, and obviously could influence the price of Bitcoin as we roll into the next big event,

which is, of course, the halving. Now, staying on the theme of follow-ups from the ETF, heading into the ETF launch, one of the open questions was how these new products would shift attention away from regulated Bitcoin futures markets. You'll remember that late last year, the CME had surged to become the largest Bitcoin futures trading venue in the world, surpassing Binance for the first time. The speculation, though, was that investors in the Bitcoin Futures ETF biddo would migrate across to spot products.

that could cause a collapse in volume and open interest in the underlying CME futures markets. It appears that the opposite has happened. In January, the CME saw its highest monthly volume for Bitcoin futures since October 2021 when the futures ETF launched. 73 billion in Bitcoin futures were traded on the CME in January, which was up 42% from the previous month. And while open interest on the CME has pulled back significantly over the past week, likely reflecting traders' unwinding positions put on to speculate on the ETF launch, Wednesday's price action appears to have brought speculators back, with open interest increasing by 9% in a single day. Now, prior to Wednesday's price move, analysis on where Bitcoin was headed

in the short term had been mixed. One of the big changes since the ETF's launched had been a change of outlook at the Fed. Jerome Powell's appearance on 60 minutes last weekend had drilled home that rate cuts would be delayed until at least May, and could be much smaller than expected when the cutting cycle begins. Markets went from pricing in six rate cuts this year to only three. Despite this change in rate expectations, Bitcoin's price remained steady, which some viewed as an anomaly. Bitfinex head of derivatives, Yag Kunner said, The market is currently pricing the Fed being more dovish than Federal Reserve Chair Powell's statements would imply. He thought that crypto markets could decline over the short term as the rate cut delay sinks in.

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Yuay Yang said, the rate cut delay less likely soft landing as well as dot-com bubble type patterns showing in AI stocks are worrying the markets turning into risk-off sentiment now. That could lead to a broad sell-off triggered by any new event, such as CPI data. Now, while one green candle does not make for a full-blown rally, it's worthwhile to ask why Bitcoin was able to rally in the face of such rate-cut delays. One possible explanation is that Bitcoin has shaken off its typical rate sensitivity. According to a research report published by Fidelity last month, Bitcoin and Gold have both become decoupled from interest rates over the past year. The report said, we saw a complete decoupling of this relationship as real rates

continue to rise, with inflation subsiding and Treasury yields screaming higher at one of the fastest paces in history, with Bitcoin not only holding steady but then rallying. Could this be due to an idiosyncratic event such as the anticipation of a spot ETF? Perhaps. But we do not think so, because gold has also been showing similar behaviors recently. Fidelity suggested that Bitcoin and gold could be sniffing out structural problems, rather than reacting to short-term changes in interest rates. They suggested that increasing fiscal deficits in the U.S. could be the looming problem. If that's the case, then it makes sense that Bitcoin would shrug off a six-week delay in rate cuts. Now, of course, obviously the biggest driving force of price action at the moment is the dynamics

around the newly launched ETFs. The products are beginning to settle into their grooves after 19 days of trading. Grayscale outflows were the big story over the first two weeks, but the flood has turned to a trickle. The past two days of GBTC outflows were each less than $100 million. That's a dramatic reduction compared to the half a billion dollars that were fleeing GBTC each day in the beginning. BlackRock appears to be establishing its position as the highest volume fund. This week had seen a back and forth between Black Rock and Greyscale to see who would record the highest volume each day. However, Wednesday's session saw $340 million in volume for Black Rock far exceeding their recent performance. Overall, the product lineup is seeing continued high volume. Wednesday trading saw volume

rise to hit $1 billion after a few soft days. If a billion dollars in volume is anywhere close to the stable level for this group of ETFs, they will be competitive with top 10 ETFs. Looking at individual performance, BlackRock's ETF was a top five performer in terms of inflows for January. The only funds that outperformed it were the longstanding and gigantic index funds, which tracked the S&P 500 and NASDAQ indices. More generally, inflows are now firmly positive. The group of products have seen net inflows of 1.7 billion since launch and have been positive for national. nine days straight. Wednesday's net inflow was $145 million, much higher than the five-day average of $73 million. Now, the nine new Bitcoin ETFs were on track to pass micro-strategy in terms of Bitcoin

holdings today, having already surpassed the Bitcoin stash held by Tether and the aggregate holdings of publicly listed miners. Investor Fred Kruger tweeted, it will have taken less than 30 days for the new nine to overtake micro-strategy in Bitcoin holdings. ETFs are eating the world. They ate every other asset class and they're having Bitcoin for dessert. Now, CoinShare's latest report confirmed that fund outflows have reversed, not only in the U.S., but globally as well. Last week saw 700 million added to digital asset funds worldwide. That's the second largest inflow since the bull market peak of 2021, only outperformed by

ETF launch week. Year-to-date inflows now sit at $1.5 billion. GraceKills' GBTC recorded only $927 million in outflows. Clearly still a massive loss of assets, but modest compared to the $2.2 billion which fled the fund in the previous week. Now, while the Bitcoin ETFs have clearly found their niche with buy-and-hold investors, to be an optimal trading instrument, they need options markets to be approved. Options applications are currently awaiting SEC approval. Grayscale CEO Michael Sondenshine made a public plea for speedy approval earlier this

week, tweeting, I think it's never been more important for the crypto and ETFs to advocate for the development of a robust listed options market for spot Bitcoin ETFs. Although GBT has been listed in the public market since 2015, it was never accompanied. by listed options, as they aren't a feature of the over-the-counter market. The first Bitcoin Futures ETFs began trading in the U.S. on October 19, 2021. It was only one day later that listed options were made available. Like Bitcoin Futures ETFs, these kinds of products are able to rely on rules that allow them to go automatically effective. In contrast, options on Spot Bitcoin ETFs cannot benefit from automatic effectiveness and must instead go through a potentially lengthy

review akin to the 19B4 process for Spot Bitcoin ETFs themselves. Options are good for investors, whether retail or institutional, and contribute to a robust and healthy market. Options support price discovery and can help investors better navigate market conditions or achieve desired outcomes, such as generating income. The same way Bitcoin futures ETFs and spot Bitcoin ETFs should and are now treated the same, so too should listed options on these products. Now, options approval will help boost the liquidity of the ETFs overall, but could also add an extra dynamic to the competition between funds.

Nate Garassi, the president of the ETF store, explained, Timing of options approval on spot Bitcoin ETFs are becoming more important. Liquidity leader in an ETF category has historically been able to charge higher fees. Part of becoming and remaining a liquidity leader involves having a robust derivatives ecosystem developed around the underlying ETF. The longer approval on spot Bitcoin ETF options takes, the worst for current liquidity leader GBTC, allows competitors time to catch up. In my opinion, options should be approved without delay, period.

But something to watch regarding competition in this category. Finally, with her Bitcoin ETF hitting its stride, ARC CEO Kathy Wood is doubling down on one of the original Bitcoin narratives, Digital Gold. In an interview this week, Wood said, relative to gold, Bitcoin has been rising. There's now a substitution into Bitcoin, and we think that is going to continue, now that there is a less friction-filled way to access Bitcoin. Wood expects Bitcoin to prove itself as a risk-off asset during this cycle, particularly when the banking system shows further signs of weakness.

She noted that Bitcoin demonstrated this reaction during March of last year, while major regional banks were detonating Bitcoin's price increased by 40%. Now this weakness in the regional banks has shown back up recently, with New York Community Bankorp stock prices plummeting last week. Wood said, the regional bank index was imploding and here again the regional bank index is acting up. This idea that Bitcoin is a flight to quality or a flight to safety is reasserting itself here.

Recent analysis from Fidelity has shown that Bitcoin's correlation to gold increased last year. It currently sits at 0.8, with 1 being a perfect correlation. That's the tightest correlation in Bitcoin's history. Adding some credence to the risk-off asset narrative, Bitcoin is also decoupled from its inverse correlation with interest rates. And personally, I think that this is going to be a big part of the discussion heading into the halving. Part of what makes the halving such a powerful event is that even before there are any actual

impacts from the reduction of supply available, it serves as such a strong narrative reminder of how different it is to all the other assets out there that just continue to inflate and grow in terms of. of their supply. Now, whether there will be things happening in the larger macro economy that draw the contrast quite as strongly as we saw in 2020 when the COVID-era money printers were just revving up remains to be seen. But I anticipate more people remembering this whole side of the Bitcoin story as we get closer to that event. For now, though, that is going to do it for today's breakdown. I want to say one more big thank you to my sponsor for today's show, Cracken. Go to Cracken.com

and see what crypto can be. Until next time, be safe and take care of each other. Peace.