The Breakdown - The Surprise Second Biggest Bitcoin ETF Inflow Day Ever

Episode Date: June 6, 2024

ETF's aren't supposed to behave like this. They're not supposed to have a nearly $900m inflow day five months in after the hype has purportedly dissipated. Then again, when did Bitcoin ever do things the way others did? 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 Wednesday, June 5th, and today we are talking about the second biggest day of ETF inflows ever. 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.L.Y slash breakdown pod. Well, friends, Bitcoin summer is in full effect with interest rushing back into the Bitcoin ETFs. After faltering a little since April, the Bitcoin ETFs have now recorded 16 days of net

inflows in a row. This streak has seen almost $2.9 billion in fresh capital flow into the funds. That's a pace of around $180 million per day in new demand. And keep in mind that at current prices, the block reward only produces around $32 million worth of Bitcoin per day. So ETF demand is vastly outstripping new supply. To sum, that means this is beginning to appear like the supply squeeze that so many analysts were looking towards when the ETFs launched. There is obviously a ton of additional supply that can be brought onto exchanges as prices rise, meaning the metric of comparing ETF flows to mining rewards is only so useful,

but this is the metric that analysts have settled on to judge how demand is looking, and it seems like excessive demand is firmly in the driver's seat. So, digging into the flows a little deeper, this is mostly a story about outflow settling down. Over the past two weeks, Grayscale has only registered 100 million daily outflows twice, while Arc added a third major daily outflow. Other than that, it's basically been inflows across the board. BlackRock's fund is currently ticking over at almost $100 million per day and has now reached the milestone of becoming a $20 billion ETF. This took just

144 days to achieve, which is the fastest pace to $20 billion by a ludicrously large. The previous record holder was a J.P. Morgan income fund, which took almost three years to hit that mark. After building up over the past two weeks, Tuesday's inflows were insanely large. Fidelity led the way with 378 million, with BlackRock chalking up 275 million and Arc adding 138 million. This was Fidelity's second largest day ever. Overall, Tuesday's session added over 887 million to the Bitcoin ETFs, coming in, as I said, a close second to the billion dollar day we saw in mid-March. Bloomberg ETF analyst Eric Balcunas has been calling this the third wave of investor interest, but has said it is now turned into a title wave. Balcuna said,

The ability to bounce back with renewed interest after a couple nasty sell-offs is rare for hot sauce-type strategies. Show staying past. It's hard to overstate how much of an impact the Bitcoin ETFs have had on asset manager performance in 2024. Of the 429 ETFs managed by BlackRock, Bitcoin flows represent 26% of their total so far this year. For fidelity, that figure is 56%. The cumulative impact on Bitcoin supply is also incredible in scope. So far this year, the ETFs have sucked in more than 234,000 Bitcoin. That's almost a year and a half of post-having block rewards. President at ETF store Nate Garassi summed up the excitement and disbelief yesterday when he wrote

Nearly 900 million into spot Bitcoin ETFs today. That's right, close to 1 billion inflows in a single day, five months after launch. I was told several months ago that all of the D-Gen retail investors who wanted to buy had already done so, and there was nobody left. How can this be? And indeed, one of the things we don't have a clear view on is who is piling into the Bitcoin ETFs and why. We have a little information on large funds getting in on the action with a huge number of positions showing up in SEC filings over the past month. A lot of these are likely to be inventory buildup for market makers and trading firms. which may not need to hold these positions for the long term. There's probably also a fairly large

basis trade happening in the hedge fund community, with firms going long-spot Bitcoin and short the futures. The long-term ETF holders are more likely to come from the wealth management and pension system. Last month, one of the most striking allocation disclosures was a $163 million purchase from the Wisconsin pension system. The news went a little under the radar at the time, but the purchase is gathering attention in the Midwest. Over the weekend, David Krause, a finance professor at Milwaukee's Marquette University went on PBS, Wisconsin to talk about the investment. He noted that this allocation was way ahead of schedule, with most finance professionals believing it would take years for Bitcoin to show up in state pension funds. Krause pointed out that the

Wisconsin pension system, quote, has always been innovative. This is a fully funded pension fund, so in a way they have the luxury of being able to invest for the long term. They don't need to worry as much about liquidity as, say, the pension fund for the state of Illinois, which is only funded at 50% of its level. When asked that the state employees should be alarmed that their pension now holds volatile, Klaus said, a lot of assets are volatile. If you were to really look deep down into the portfolio, you would see that a lot of assets are quite volatile in nature. Yeah, Bitcoin has moved around a lot, but supply and demand are starting to balance out. And I do think the investment community is beginning to understand this more as a viable alternative investment. On top of that,

the investment is only one-tenth of a percentage point of the fund, about the same as the fund's exposure to Netflix or Costco stock. Krause said this was just a toe in the water, adding, I think it's just an entry point. I think they're testing to see the reaction of the public to whether or not there's resistance to owning this, and they're using it as a trial run, because it is really not going to impact the portfolio substantially until you maybe get a 1% or 2% positioning. Krause went on to explain the benefits of adding a little Bitcoin to the mix, namely diversification and an inflation hedge. Krause's opinion was that the Wisconsin allocation would encourage other well-funded pension systems to adopt Bitcoin as they can, quote, afford to go through

maybe several cycles. Frankly, what was really striking about this interview was how mundane it was. In contrast to breathless Bitcoin evangelists that show up in mainstream financial media, this was a soft-spoken, tenured professor explaining why Bitcoin just makes a lot of sense as a pension investment. Perhaps more than anything we've seen this cycle, this interview was emblematic of what true institutional adoption will look like. No hype, just a rational discussion of the merits of Bitcoin delivered at a Midwestern pace. And in terms of the slow drumbeat building, Fidelity Head of Digital Asset Strategies Matt Horn has argued that most investors should be making a small investment in Bitcoin, regardless of their investment thesis around the asset class. Speaking with CNBC, he argued that

investors and advisors are overanalyzing Bitcoin when in all likelihood their conclusion will be to buy a small allocation. Horn said, most investors are saving money, investing money with an advisor to meet some longer-term goal such as retirement. A non-zero position in something like Bitcoin could make sense for a lot of clients, given a long-term horizon in position sizing that's appropriate for their risk. He pointed out that most analysts are settling on an allocation between 1% and 5% after doing the work, saying, if it does go to zero, the impact on the broader portfolio is minimal because of its position size. And if it does what many of us expected to do gain over time, then you want to make sure your clients have some of that exposure in there. Horn also noted that Bitcoin

doesn't fit in standard asset modeling because of its short history, which could be a sticking point. Quote, it's tough because a lot of professional investors are able to model out every other asset class given the amount of data that's at our fingertips now. With digital assets, you don't have the luxury, and I think that's fine. That's why you just have to understand why you might want to own this, understand the potential of the technology, and then position accordingly. When it comes to price, healthy ETF flows have pushed Bitcoin to the top of its range. Prices rose above 71,000 on Tuesday evening and are now within striking distance of all-time highs. liquidations have been extremely mild so far this week, with futures open interest only recently returning

to highs. Funding rates have barely moved, so for now this looks like a slow grind higher. Glass note is a little concerned that higher prices will trigger a wave of selling from long-term holders who have held their coins for longer than three months. They wrote in Tuesday's report, we can expect that this cohort's incentive to sell more supply will grow should prices climb high and elevate their unrealized profit further. Although analysts expect some profit taking at these levels, they wrote that the current conditions are, quote, typical of the early euphoric phase of a bull market. They forecast volatility to return to the market after a week of relative stability, writing, long as short-term holders have experienced a reset in their sell-side risk ratio,

suggesting a new equilibrium has been found. This indicates that the market is ready to move, and volatility expectations for the near future should be heightened. Real Vision's chief crypto analyst Jamie Cuts had a similar forecast, tweeting, after some nice coiling pricing action since March, my boring Bitcoin trend model triggers. He noted that a recent report from the FDIC that 63 U.S. banks are at risk of collapse, due to sitting on 517 bill. billion in unrealized losses. With the dollar yields and corporate credit spreads all down this week, cuts added, can you smell that sun? That's the smell of central bank liquidity in the air. Taking a longer-term view, some analysts are noting that this halving cycle is shaping up well.

James Van Stratton of Cryptoslate pointed out that Bitcoin is up 11% since the having, its best start ever to a cycle. Moving over to political news for just a minute, the SEC will shut down their Utah office later this year. The agency noted that Utah has long been their smallest regional office and has experienced, quote, significant attrition. In crypto, the Utah office became notorious within the industry for its enforcement actions against Debtbox. That case featured SEC lawyers presenting misleading evidence to the court and ultimately ended in sanctions for a quote, gross abuse of power. The case was dismissed last week with the SEC order to reimburse 1.8 million in legal and administrative fees. The two litigators responsible for that case were

pushed out of the agency over the controversy. The closure will reduce the SEC's regional footprint from 11 offices to 10. Current staff will be reassigned and jurisdiction will be transferred to the Denver office. Paul Grewell from Coinbase tweeted, attrition, is that what we're calling unprecedented misrepresentations in bad faith, warranting unprecedented sanctions by a federal judge? Interestingly, Bitwise, CIO, Matt Hogan thinks the market is vastly underestimating the importance of the political shift in crypto. In a blog post, he argued that no one outside of the crypto bubble has noticed the change

in the air around Washington. At recent conferences, Hogan said that, quote, people's eyes glaze over when he talks about crypto-related political developments. Hogan wrote, The tide has changed, but the water hasn't come in yet. Wake me up when the action happens. But here's the thing. If people understood the ramifications of the shift in D.C., the crypto market would be at new all-time highs. Giving an example, he reminded readers that the asset management industry manages $20 trillion

in wealth. Bitwise has surveyed investment advisors each year since 2018 about crypto, asking them what the blocker is to adding a crypto allocation. Every year, the top answer is regulatory uncertainty. Two-thirds of advisors gave that response in 2023. Hogan concluded, If you think Black Rocks move into the crypto space positively impacted the market, imagine if all of Wall Street accepted crypto as a normal part of the market. Talk about mainstream. The market will wake up to the fact that we are in a new era for crypto, and when it does, I suspect it will move the industry towards all-time highs. But until it does, there may just be some alpha lying around. So friends, that is it for today's breakdown. It's a little

bit quiet out there. We're kind of just settling into some new norms, but still there is a lot bubbling and brewing. And in particular, I'm still keeping a close eye on what happens next with the whole political election cycle. Appreciate you listening wherever you are. And until next time, be safe and take care of each other. Peace.