The Breakdown - Bitcoin Shows the Growing Supremacy of the ETF

Episode Date: January 30, 2024

NLW covers the latest on the Bitcoin spot ETF. BlackRock's offering is over $2B in AUM, while Fidelity is close behind at $1.8B. He discusses why it's an affirmation not only of Bitcoin but of the ETF structure. 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 Monday, January 29th, and today we are catching up on ETFs, markets, and more. 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 Well, friends, like I said at the top, today is kind of a catch-up on everything that has been a big theme for the past few weeks' day, and first, of course, let's talk ETF. The BlackRock Bitcoin

ETF has achieved the milestone of two billion in assets under management. After a little over two full trading weeks, Ibit is the leader of a very strong pack. Fidelity's product trails just behind with over $1.8 billion in AUM. The arc in Bitwise ETFs have each accumulated an extremely solid half a billion in assets as well. Now, alongside rapid asset accumulation, other metrics are also demonstrating the efficiency of the ETF wrapper. Price arbitrage has now almost entirely closed, with price premiums on the new ETFs collapsing to less than a quarter of a percentage point. On the first Monday of trading, this premium was closer to 1%. The GBTC discount is almost completely eliminated at this point and crossed over into a minor intraday premium at times late

last week. Remarking on a chart of premium compression, Bitwise CIO Matt Hogan wrote, This is the most beautiful chart I've seen in a long time. The ETF wrapper is an incredible thing. Eric Balcunis wrote, shrinking arbitrage bands, a beautiful site, the US ETF ecosystem doing its thing. George Kikvazze responded, the whole Bitcoin ETF performance is such an egg on the face of regulators, huge volumes, huge liquidity, decrease of spreads, in the end, consumer benefits. James Safart responded to that, it's a real thing of beauty, whatever is happening to the price of Bitcoin, this is making things so much more efficient for allocators and anyone looking for Bitcoin exposure on the TradFi rails. This was my view and expectation all along, but now it's an

objective fact. Now, one of the most interesting statistics from Friday session was volume. Between them, the Fidelity and BlackRock ETFs are now trading more in aggregate volume than GBTC. By itself, Ibit did three quarters as much volume as GBT, and it's closing the gap rapidly. Friday was the first day that Ibit traded even half as much as GBT, and more than doubled its volume compared to Thursday. After the first few days of trading, JPMorgan analysts noted that the additional liquidity associated with GBT could give it a continued reason to exist. However, with that liquidity advantage quickly eroding, it could lead to another wave of outflows as intraday traders migrate to the leading ETFs. The note from JPMorgan suggested that, quote,

perhaps an additional $5 billion to $10 billion could exit GBTC if it loses its liquidity advantage. Still, GBT outflows did slow down again on Friday, with $255 million leaving the fund. flows across the 10 products in aggregate were net positive, which is the first day all week that the new ETFs managed to keep up with GBT outflows. Now, in addition to just the arbitrage compression and the benefit to consumers, the launch of these Bitcoin spot ETFs have also reified for many the role of ETFs themselves. Investor Fred Kruger writes, very clear that ETFs are eating the entire financial world. We're not moving to a Bitcoin standard, we're moving to an ETF standard.

Bitcoin is just there for the ride. The key word here is standardization. ETFs bring all financial assets into a single ultra-tax-efficient ultra-low-fe standard. No other form of ownership can compete. Not mutual funds, not closed-end funds, not Coinbase in the case of Bitcoin. Not hardware wallets again for BTC, not purpose with leverage. Everything gets standardized. BlackRock is the new standard oil.

Larry Fink is the new Rockefeller. Now, putting some context on just how impressive the performance of these ETFs has been is Nate Garasi from the ETF store who wrote, Out of 600 plus ETFs that have launched since the beginning of 2023, Ibit now in top three based on current assets will likely be number one by next week. FBTC in top 7. ArkB and BitB both in the top 25, in two weeks. Now, one of the remarkable things about the high-velocity launch of the ETFs is that we

haven't really seen advisor networks and marketing budgets fully being utilized. Bitwise is the notable outlier, having worked the phones for weeks before launch and releasing a successful launch advertisement. but for the large firms, the process is still in its early stages. BlackRock only just held their first Bitcoin education session for advisors on Friday. They released a fairly bland advertisement around the launch, but again, the saturation marketing has not yet begun. A rule change from Google, which goes live today, could change that dynamic.

Google's ad policy will now allow a limited selection of crypto products to be advertised across the expansive Google Ad Network. The change will allow, quote, advertisers offering cryptocurrency coin trust targeting the United States. Now, this seems fairly limited to allowing ETF issuers to promote their products. Bitcoin commentators are wildly enthusiastic about the potential. The Bitcoin therapist wrote, Google processes 100,000 searches per second. Bitcoin is going to have unprecedented levels of institutional and retail exposure. Prepare accordingly. Now, another potential catalyst on the horizon is Bitcoin being added to model portfolios published by asset managers.

Large firms, including BlackRock and Fidelity, publish these models to provide their network or financial advisors with a range of default allocations to suggest to clients. These models cover a range of investment styles and risk appetites, but at the moment, none of them include even a small allocation to Bitcoin. There's no real indication that this will change anytime soon, but a recent change to the BlackRock models gives a glimpse into what this could do to Bitcoin allocations. On Thursday, BlackRock shifted a portion of their suggested equity allocation from growth to value. The change affected BlackRock's target allocation market, which seeks to maintain balance exposure across stocks and bonds. The change was a small tweak, representing between 1% and 5% of portfolios using

the model depending on risk appetite. And yet, an adjustment that small was still enough for a massive reallocation of assets. Five billion in assets was shifted from BlackRock's growth ETFs into their value funds. One of the value funds, the U.S. Equity Factor Rotation ETF, ticker DYNF, saw its AUM skyrocket from 46 million to 2 billion in a single day. This massive rotation implies that somewhere north of 50 billion worth of investment portfolios are tracking these BlackRock models. It also means that a 1% allocation to Bitcoin in the most popular models would trigger inflows which dwarf the first two weeks of ETF trading. Today's episode is brought to you by Cracken.

For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building

something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, PVI, DBA, Crakken. Now, of course, the asset managers who launched Bitcoin ETFs are being vindicated in their

decision, but those who missed out are coping in a couple of different ways. Vanguard was undoubtedly the highest profile firm who chose not to take part in the ETF launch. They took a very clear stance from day one that investors on their platform would not be allowed to get Bitcoin access, going so far as to remove the availability of BITO and GBTC, which had previously been accessible. Janet Jackson, Vanguard's global head of ETF Capital Markets, explained the decision in a Q&A last week. She doubled down on the firm's position, stating, while crypto has been classified as a commodity, it's an immature asset class that has little history, no inherent economic value, no cash flow, and can create havoc within a portfolio.

Charles Schwab was another large firm absent from the ETF launch. Although investors on their platform have been allowed to buy the new ETFs, Schwab has no product of their own to offer. Analyst suggests that Schwab could be considering launching a product, using extremely low fees to carve out a place in the market. Bloomberg's Eric Balcuna said, they may shock the world and offer something that is 10 basis points in a few months. I wouldn't be surprised they could have something up their sleeve. He added, it's consistent with what we've seen from Schwab overall. They're more methodical with their approach to product development than others. They trade the first mover advantage for having a more thoughtful lineup that can stick with them for the long term. Now, currently,

Bitwise is the cheapest ETF offering an annual fee of 20 basis points. BlackRock and Fidelity are currently sitting at 25 basis points. Now, most funds, including these three, haven't started charging fees yet, with promotional fee waivers until certain AUM targets or time limits are hit. For reference, Schwab is roughly twice the size of Videlity in terms of assets under management and about the same size as fangard. Now, some think Schwab getting in is absolutely going to happen at some point. Nate Garaci again said, Schwab to enter spot Bitcoin ETF race? I say it's already a foregone conclusion. Simply put, Schwab not going to sit around and let Fidelity control the crypto narrative, period. Too much money at stake with these brokerage firms. Now, another story that many of you

will have been keeping close track of is the price. And after two weeks of negative price action for Bitcoin, the impulse to sell the ETF news could be finally wearing off. A slowdown in GBT outflows has allowed traders to become a little bit more constructive, pushing Bitcoin up above $42,000 over the weekend. Friday's trading saw a 5% daily increase digging Bitcoin out of the hole and coming off of lows below the $40,000 level. Aside from GBTC overhang clearing, Friday saw a few other noteworthy catalysts. A large options expiry at the end of the week was skewed to the bullish side

with a max pain point of $41,000. Over 3.75 billion in notational value was bet on this, representing around 30% of open interest. Now that the ETF bets have been cleared, options have a much smaller footprint in the Bitcoin market, allowing a little more price discovery in the short term. Friday's jump in price also drove a big day of short liquidations. Almost 96 million in shorts were wiped out across all crypto pairs, according to coin glass data. Now, that's only around two-thirds the size of the large short liquidations from earlier this month, but it still indicates that leverage traders are still active. A spike in open interest on Friday surrounding the price move suggests that bulls are reentering

now the GPTC flows have slowed down. That said, although Bitcoin has climbed off recent lows, Chris Berniske is still on the lookout for further downside. The placeholder venture's partner wrote, continue to think we go lower to consolidate than most people expect due to variables that are too many to explain in detail via tweet, e.g. Crypto-market-specific, macro adoption, new product development, etc. As for the denial out there, takes time for partiers to sober up, saw lots of drunkenness over the past month. Berniske says he expects to draw down to at least the $30,000 to $36,000 range if not testing an even lower level before Bitcoin makes a sustained push for new all-time highs. He added, The path to get there will be volatile, expect fakeouts and will take months to play

out. Drawing in his long history with crypto investment, Berniske continued, before you get mad with we're just starting the cycle, Chris. Mostly agree, I call the cycle bottom in November 2020, and continue to believe the long-term trend remains robust. I've seen a lot of crypto-volatility over the last decade plus. Recently, I've specifically been discussing a local top and local low, not a cycle wide top and low. Now, trying to highlight where we are in the cycle, he concluded, don't ignore that we also just saw many of our first parabolas in the cycle, and now it's breaking, and macro looks precarious on a number of levels. New product innovations are close, but not quite there yet. Things still feel insular. Never said a majority de-risking, just counting my bullets

and sharpening my blade. Now, Bernisky isn't the only one that sees volatility and the potential for major drawdowns before a sustained move higher. Earlier last week, former Bitmec CEO Arthur Hayes also predicted that Bitcoin could hit $30,000 before trying for new highs. He noted, quote, A 30% correction in the EATF approval high of 48,000 is 33,600. Arthur's thinking is that Fed rate cuts are not yet certain, and any sign of renewed inflation could easily short-circuit the policy easing. Now that those two guys have set a frame, others are coming in as well. Barry Paul tweeted this morning just before I went to record, for example, I'm tentatively on the other side of the sell-the-news meme betting against Arthur Hayes and Chris Berniske. I don't have much opinion on the

macro side view that as a toss-up over the next three months. On the crypto- idiosyncratic side, we see very low leverage levels, neutral sentiment, and healthy market positioning. I think the pattern matching of the ETF approval to previous events like the 2017 futures listings are bad analogies. All of those comparable events occurred far later in the bull cycle in the context of far greater bullish leverage and hype. In my opinion, were in a medium time frame bold trend, prices likely higher in six months. Now, one of the questions that people have as it comes to ETFs are what they're going to do to exchanges. Well, one exchange that doesn't seem like it's going to have much of a chance to find out

is Binance U.S. The Alaska Division of Banking and Securities has denied a license renewal for Binance U.S., meaning the exchange will no longer be able to serve residents of the state. Florida's Office of Financial Regulation had previously issued an emergency suspension order against Binance U.S.'s' money transmitter license as well. The suspension reportedly occurred the week after Binance founder, CZ, pleaded guilty to violating anti-money laundering policies in November. Regulators across Arkansas, Illinois, and South Dakota have reportedly made an agreement with Binance U.S. that they will be allowed to continue operating.

But the deal required that the exchange must make the transfer of CZ's voting rights irreversible. Interestingly, last week, unsealed court documents showed that CZ had attempted to pledge his entire stake in Binance U.S. to secure permission to travel home to the UAE, pending sentencing. The judge rejected this last stitch application in December with details previously being redacted. Now, in terms of exchanges that have survived this last winter, investment bank Oppenheimer has raised their rating of Coinbase stock, claiming that the exchange has proved its toughness over the past year. Their research note said, the stock was under extreme scrutiny during crypto winter, while many peers went under, coin is still standing and fighting for its business

in the industry. We believe the company is stronger than many people realize and the management team is tougher than most investors think. The upgrade lists a range of factors, but highlights that Coinbase has a good chance of prevailing in litigation against the SEC. Oppenheimer also noted that Coinbase stands to benefit from their infrastructure buildout as a new wave of investors enter the market and boost trading volume. Coinbase, of course, serves as the custodian for most of the newly launched ETFs, which will provide a steady stream of additional revenue. Now, that rating upgrade stands in contrast to J.P. Morgan's assessment earlier last week, which had downgraded Coinbase highlighting the lacklester ETF launch, or at least lackluster according to them, based on its failure to boost Bitcoin's

price. Oppenheimer, for their part, pointed out that trading volumes are already elevated this year and anticipated a continued increase over the following two years. They suggested that the prospect of Fed rate cuts and the halving could catalyze a 66% increase in trading volume this year. The report predicted that there was a good chance Coinbase would return to profitability later this year and estimated 25% revenue growth. So, friends, lots going on to kick off this week. A little later, I'll come back with some China updates as it continues to be a very dynamic situation. That's going to do it, however, for today's breakdown. I want to say one more big thank you to my sponsor for today's show, Cracken.

Go to crackin.com slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other. Peace.