The Breakdown - Bitcoin Smashes $57,000 and Retail is Still Nowhere to Be Found

Episode Date: February 27, 2024

Despite retail investors remaining distinctly uninterested in crypto, the numbers just keep going up. Bitcoin went on a tear, hitting $57,000. NLW looks at ETF flows, open interest 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 Tuesday, February 27th, and today we are talking Bitcoin at 57K and all of that. 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 at the show notes or go to bit.ly slash breakdown pod. Hello friends. Well, yesterday was all about Satoshi, so it makes sense that today is Bitcoin being a total badass. The Bitcoin bull market is firmly back in action with a breathtaking 10%

intraday gain on Monday. Bitcoin topped out at 57,000 during the early evening, making a new two-year high. The last time we saw Bitcoin hit these levels was way back in November 2021, well before any of the catastrophes of crypto winter were even on the horizon. At these elevated price levels, there just isn't much trading data, meaning we're headed in. into pure price discovery mode. Earlier in the day, Alex Thorne, the head of research at Galaxy Digital tweeted, with Bitcoin trading at 54.5K, only about 5% of all BTC supply has ever moved when prices were higher than now. It's mostly air up there. Getting specific, Bitcoin has only spent 80 days above these levels throughout its history. The last level that has any semblance

of normal volume historically was 60, that means that basically everyone who has ever bought and held Bitcoin is now in profit, and there's very little guidance for traders moving forward. Bitcoin has climbed the wall of worry and we're about to see what this new cycle really looks like. Chris Berniske from placeholder ventures writes, Lots of friends telling me they're already at personal all-time highs after gutting it through the bear and through red volatility, and though red volatility goes hand in hand with green, we're still early in this cycle. Feels good. Never forget the lessons of 22. Welcome newbies with an open mind. Bloomberg's James Safart writes,

We've reached the, I don't even need to check the price of Bitcoin myself because everyone is just posting about it on Twitter level of this bull market. Trader Gebus writes, it's pretty difficult to wrap your head around the fact that it hasn't even started yet. And of course, what he's referring to is the fact that retail is by and large not here. Mikey Bolito from Blockworks writes, The magnet to all-time highs is getting stronger. The countdown until retail returns is nearing its end. That's when the first real send begins. Orlando Cosme says, Think about how manic the state of crypto was the last time Bitcoin was at 55K. Tourists everywhere, your uncle, old friend from college, an Uber driver asking you about

the latest all-coin. Now? Dead silence from those people. Crypto is still dead as far as they're concerned. Unsurprisingly, ETFs continued to be the biggest narrative driver for Bitcoin. Monday was the highest volume day for the nine new ETFs, beating out the launch day for the first time. Together, the products did $2.4 billion in trading volume. The strong volume was driven by an unusually big trading day for the BlackRock ETF. The fund recorded $1.3 billion in volume alone, outperforming its previous high by 30%. This placed the BlackRock product at 11th place in trading volume among all ETFs, and that number was also high enough to place in the top 25 among all single stocks. Bloomberg's senior ETF analyst Eric Bokunas tweeted,

insane number for newbie ETF, especially one with 10 competitors. One billion per day is big-boy level volume, although enough for even big institutional consideration. He added, not totally sure on the reason besides price rally generating interest, but it does seem like these things really see heightened action on the first day after the weekend. The BlackRock ETF is now consistently outperforming GBT in terms of volume, so we may see some additional outflows associated with GBT losing its liquidity premium. Traders, as opposed to longer-term holders, typically want to trade the most liquid instrument. That was GPTC for the first few weeks, but it seems clear that BlackRock's product is now the most liquid Bitcoin ETF available.

You'll remember that last week, we saw some aberrant volumes that looked suspiciously like high-frequency traders testing out their algorithms on the new market. On Wednesday, VanEx ETF recorded 23 times its average daily volume, but experienced relatively sedate inflows. That implied that the product saw a lot of rapid trading, but very little fresh demand. CoinShare's head of research, James Butterfield, said, We have noticed a few of the ETFs have experienced this in Europe, too. We suspect there are some quant funds executing high-frequency intraday trades. He added that, some ETFs get used for high-frequency trades, but it is typically

futures that are used. Overall, yesterday saw 515.5 million added to the 10 ETFs overall, the largest inflow in almost two weeks. Fidelity led the charge with over 240 million in inflows, followed by Arc putting up its second largest day with 130 million. Black Rock was a little calmer, with only 111,000. $7.8 million worth of inflows, which is around 60% of its average. Those mild flows give more credence to the idea that the ridiculously high volume was indeed high-frequency traders letting

the Algos loose on BlackRock's ETF. Grayscale only recorded 22 million in outflows on Monday, its lowest day ever, and cut in half from the previous low, which was set on Friday. Whale Panda, who has been doing a fantastic job of keeping up with the ETF inflows posted, The supply in the previous range of 50.5K to 52.5K obviously dried up, which caused the initial jump to 54K, and then after hours, Bitcoin continued up to 56.5K. Honestly, couldn't have wished for a stronger start to the week. There isn't a lot of supply in this range, so if inflow stays strong, will be above 60K quite fast. Last week's Coin shares report on crypto fund flows demonstrate just how different the new post-ETF market is. This is the theme we've been talking about a lot, both on the show that I do with Scott Melker on Fridays slash Saturdays for you guys listening on the podcast.

but also in a couple other podcast appearances I've done recently as well. Crypto funds saw 570 million worth of inflows for the week, dominated by the U.S.-based Bitcoin ETFs as usual. This number was both exceptionally large, but also extremely disappointing to see. Weekly inflows above 500 million are basically unheard of at any point in Bitcoin's history other than at the extreme top of the 2021 cycle, but this was the lowest week of inflows since the ETF launched, excluding the two weeks of outflows while the heaviest GPDC selling was occurring.

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, DBA, DBA, Cracken.

We are essentially in uncharted territory so far as market structure goes, with such a strong and persistent bid from the US ETFs. However, last week's fund flows were less than a quarter of the previous week, which would be viewed as a dramatic drop-off during any other period, but doesn't seem so bad because the flows are at such high levels, and if you're getting the idea that we are in unprecedented territory where we're just not exactly sure how to interpret everything, you are correct. We've still had four weeks of consecutive inflows, and the total assets under management for crypto funds is at local highs. We're about 20% below the all-time high set in November 2021. Taking a look at the rest of the data from the report, most regional funds were slightly positive

as well, with Swiss and Brazil both experiencing minor inflows, although Canadian funds saw 17.8 million in outflows, which could represent investors and traders continuing to migrate to the U.S.-based ETFs. Digging a little deeper on trader activity, Monday's price movement triggered a massive short liquidation, but traders kept flocking back for more. 176 million in short positions were wiped out, although Bitcoin futures open interest remains near all-time highs. Open interest has almost doubled since the beginning of February and now sits at $22 billion in notional value. Traders continue to pile into the markets on the CME, which now commands 30% of Bitcoin futures open interest, extending their lead on finance, which sits at 24%. This shift

to more institutional betting could explain why big moves are no longer making a dent on open interest. CME traders are generally well capitalized and are forced to keep leverage to a reasonable level, at least compared to the degeneracy that happens on crypto-native exchanges. Sentiment on the CME, though, is highly polarized. Hedge funds have recorded high, short, with 3.8 billion worth of open positions betting on Bitcoin's price falling. Asset managers, largely the ETF issuers are taking the other side of that trade. They're holding record high, long open interest holding 3.6 billion in open positions. Rebecca Stevens, senior research analyst at the block said, both previously hit high the week of spot Bitcoin ETF approval

and have seen movement in line with BTC price action, but it is an indication that Bitcoin bets from institutions haven't really scaled back after the launch. The options market is set for a massive squeeze if price continues higher. Traders have been shifting their positions up alongside price rises and are now clustering around $60,000 levels. As price approaches these levels, marketmakers need to buy spot Bitcoin to hedge their exposure. Kelly Greer, American head of sales for Galaxy Digital's, put some numbers around this effect. For every 1% move higher, dealers need to buy $17 million in spot markets. Checkmati from GlassNode summed up what's different about this rally as compared to the last time Bitcoin hit 57K in 2021. He said,

this time short sellers continue to bet against the prevailing uptrend getting liquidated as a result. At triple market peaks, it's the levered longs that get wiped out. Right now, it's the short. Now, one interesting thing happening right now is that as this insatiable ETF bid continues, exchanges are running low on coins. Bitcoin held on exchanges has been trending down for months and is now at around 10% of overall supply. That's the lowest level since 2017, dropping below anything seen during the height of the last

bull run. Coinbase in particular is running on a very low float, with around 2% of the overall Bitcoin supply available on their exchange. That level hasn't been seen since 2015. It's impossible to know whether any particular price move is driven by a supply shortage or how big a price move will be enough to bring on new supply from profit taking. Over recent weeks, miners have been providing a little additional liquidity on the margins, keeping the supply from reaching critical levels. We're not quite there yet, but the current setup makes it seem like

there won't be enough Bitcoin to go around. Justin DeAnathan, the head of APAC business development for market maker Kirok said, you're seeing the inexorable rise of an asset with a set and hard-coded supply relative to an inflationary fiat currency. There's only so much supply, a supply that is set to have in a matter of months, but the demand unleashed by the U.S. spot ETFs seems to be relentless. Summing it up even more simply, Mikey Polito again from Blockwork says, Good morning to everyone going through their first Bitcoin sell-side liquidity crisis. Of course, it wouldn't be a Bitcoin rally without Saylor getting involved. And although Bitcoin is up a lot since the beginning of the year, it's always a good

time to buy more, in Michael Saylor's opinion. MicroStrategy added 3,000 Bitcoin to their stash over the past two weeks, spending around $155 million. That gives this tranche and average price of $51,800. which seems cheap in retrospect. This is a large increase from the 850 Bitcoin purchased in January, when it seemed like Microstrategy might be slowing down a little. The new purchases were funded with share sales, which has been ongoing since November. Micro Strategy now holds 193,000 Bitcoin worth around $9.9 billion. The stack is now more than $4 billion in profit, with an average

cost basis of $31,500 per Bitcoin. Bitcoin-R-Berry horse writes, imagine telling the entire world the strategy you're employing in real time, with hundreds of hours of robust, eloquent, and irrefutable justification about why it will work, it then overwhelmingly working by any reasonable measure and people still being skeptical to employ that strategy. We're so early. What is happening, though, outside of Bitcoin? Prior to Bitcoin's astounding Monday pump, the price narrative had been squarely focused on Ethereum. Eith trailed the Bitcoin move on Monday, rising by around 6%. But that caps off a month, which has seen an overall 40% pump for Ethereum. ETH is now firmly above 3,000 and the leverage traders are flocking to the order books.

Daily open interest in Ethereum futures on both finance and bybit have reached all-time highs. The CME is trailing crypto-native exchanges with a more muted increase in OI, suggesting perhaps that institutional traders are paying more attention to Bitcoin at the moment. You-Hoddler, Chief of Markets, Russell and Lekina said, The large increase in open interest in ether futures shows the elevated interest from risk traders in leveraged positions who look for higher volatility. And when it comes to Ethereum's price, investment firm Bernstein doesn't think that it was just anticipation of a spot Ethereum ETF that drove it above 3,000. In a new report, analysts got into

the weeds about fundamental drivers in this year's Ethereum outperformance. They listed supply dynamics, restaking protocols, the Denkune upgrade, and Uniswap's fee switch as major contributors to Ethereum's price action. Ethereum supply is down slightly since the switch to proof of stake was completed in September 2022. We're not quite at the hyper-deflationary money that was hyped up heading into the merge, but consistent period of strong fees have led to a 0.2% decrease in supply since then. Both the percentage of Ethereum staked and the percentage locked up in smart contracts have had a meaningful uptick so far this year, with both currently at all-time highs. Similar to Bitcoin, supply of Ethereum on exchanges has been continuously falling over the past year. There's now only 11% of Ethereum supply available on centralized exchanges, which is an all-time low.

A little bit beyond the scope of what we normally talk about here, but the rise of restaking protocols is an interesting catalyst to drive token growth. If you haven't been following Ethereum ecosystem developments, restaking protocols allow Stake-Eath to be pledged a second time in a security layer. This juices the yield received from staking for the user. In return, it allows new networks, app chains, and layer two systems to piggyback on ETH security, solving the cold start problem that makes new networks difficult to economically secure. This means that new projects can join the Ethereum ecosystem much faster with more complex designs by allowing them to just pay for security instead of needing to establish a new token first. The Bernstein analysts suggest that the Denkoon upgrade would be a major factor for ETH price when it arrives in a little over two weeks. They wrote,

lower fees and higher throughput on layer 2 networks would in the short term reduce congestion on layer 1, but would drive overall higher volume to the Ethereum ecosystem of multiple interoperable layer 1, 2, and 3 chains. This is all happening in the shadow of a uniswap fee switch, which is the subject of a new proposal to distribute fees to token holders who participate in governance. Previous attempts to turn on the fee switch have always been defeated, but this proposal was put forward by the Uniswap Foundation and is widely expected to be passed by a governance vote. Burnstein analysts called this the quote, return of defy, writing that this proposal is, quote, giving rise to hope that token economic designs could get better. Overall, even with yesterday's

outsized Bitcoin pump, Ethereum is still outperforming to date. The analysts wrote, We believe this is quite significant as a signal to understand the crypto bull market is getting wider. Now, the question might be, is there anything that could stop this? Well, Nansen analysts are concerned about macroheadwinds, which could put an end to the crypto rally. The recent slate of macroeconomic data has shown no sign of weakness that could justify the much-anticipated Fed rate cuts. January's inflation data showed sticky inflation above the 2% target, and that stickiness was largely centered on shelter and services, both of which have significant lags in the data. The last jobs report came in hotter than expected with a surge in hiring alongside wage rises.

Growth isn't showing any signs of slowing down, and it's an open question how strong the U.S. economy is currently, and whether major multiple recessions around the globe will drag the domestic economy down, but for now, there's just no justification for deep rate cuts. Nansen research analysts wrote, we should now be looking for any sign of growth weakness as the next catalyst for cryptocurrency prices. They added, I think H2-2024 is more likely to see a shallow recession and growth slowdown, which would be a headwind for Bitcoin. Still at the moment, the economy seems to be in the Goldilocks zone for many risk assets. Strong growth with inflation slowing has provided

support for the stock market over recent months. The major risk on the horizon is the potential for another wave of inflation to show up as it did in the 1970s. But honestly, right now, things are looking good, and it's a good time to be in these markets. One more big thank you to my sponsor for today's show, Cracken. Go to cracken.com and see what crypto can be. And until next time, be safe and take care of each other. Peace.