Part 2: The following are some of our thoughts and market views about what might follow on from the Bitcoin ETF approvals: ๐งต
a. An Ethereum ETF will likely follow soon after as CME already offers Ethereum futures contracts. However, this also means that until other coins have a futures contract, the US will only be limited to Bitcoin and Ethereum ETFs for the time being.
b. Bitcoin and Ethereum ETFs could reverse the sharp decline in Bitcoin and Ethereum dominance in the crypto market (Chart)
c. CME market share in Bitcoin trading has risen and will continue to increase.
d. With ETFs out of the way, attention could be shifted to regulation of stablecoins. This effort would be led by Janet Yellen and the US treasury. Any negative outcomes from this would impact native crypto exchanges which depend on stablecoin as the base asset.
e. Futures-based ETF approvals could be positive for institutional derivative markets. CME options are currently a very small part of the whole crypto options market. Perhaps we could see some growth and development in CME options as a result.
f. Growth in crypto options and interest rate related instruments could come from Exchange Traded Notes (ETNs). We highlighted above the large number of Gold ETNs in Chart (orange).
ETNs are yield-focused products that actively use options, bonds and interest rate swaps to generate yield. The emergence of crypto ETNs would be of particular interest for us as a firm that is focused on crypto derivatives.
g. We previously mentioned that Bitcoin ETFs would possibly lead to the GBTC discount persisting. The discount is at a record -20% now with the approval of the new Bitcoin ETFs (Chart)
What could happen for GBTC in the future is a possible takeover and delisting. We are not sure what market impact this might have but it would be worth keeping an eye on what happens with the largest private Bitcoins treasury with 680,000 BTC.
h. One key effect of a futures-based ETF is the possible increase in yield in the space. With the ETF funds forced to buy futures instead of spot, the futures premium would be driven higher.
We discussed the recent spike in futures premium and funding rates both on the CME and other exchanges. This is something that could persist with the additional focus on futures. A โrisk-freeโ rate of 10-20% could be the new norm.
i. Strangely, this is a positive for DEXes and for Defi in general. At the end of this long article we are still confused by the SECโs view that it is safer for ETFs to be based on a derivative of physical Bitcoin as opposed to physical Bitcoin itself.
Our takeaway from this fiasco is that regulators will continue to struggle with understanding the space, driving interest away from regulated venues towards defi.
This is especially so now with exchanges like DYDX having infrastructure comparable to that of centralised exchanges. (End)
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Part 1: In the last few weeks, Bitcoin has made an impressive rally on the back of potential ETF approvals and just pushed to a 62,910 high on the back of the Valkyrie and Proshares approval. Hereโs our take on the matter. ๐งต
1. The approval of a Bitcoin ETF is a positive development. Whatever the case may be, a progressive step from the regulator is good for Bitcoin and the cryptocurrency market at large.
2. We've always said a Bitcoin ETF would be a game-changer. However, in our minds this ETF would have physical Bitcoin as its underlying. The ETFs currently in line for approval have CME futures contracts as the underlying instead.This makes a huge difference.
1/ BTC has been trading in a 53,500 - 58,000 range since the big run-up last week. Itโs also been noticeably outperforming ETH and most altcoins.
2/ In spite of the numerous liquidation-driven dips, the 54,000 TD Support Trend level has held very well. A clear underlying sense of optimism as the market awaits SECโs decision on the BTC ETF applications starting next week.
3/ Funding and forwards have also been heating up over the last two weeks since SEC chair Gensler made favourable comments about a futures-based BTC ETF. Perpetual swap funding went from slightly negative in the end of September to around 20% now.
1/ Markets are abuzz with BTC up 16% since the start of the week. The market is hopeful Q4 this year will repeat the 180% rally we saw in Q4 last year.
2/ The speed and size of the move has been surprising and was clearly caused by a short squeeze (liquidation of leveraged short positions). We highlighted this possibility on Tuesday as we observed an unusual divergence in perp funding rates.
3/ DYDX perps had positive funding at extremes of up to over 100% while the Chinese exchanges had negative funding rates.
And sure enough, a large portion of the liquidations occurred on Chinese exchanges yesterday.
1/ This week, ETHBTC cross started moving towards our 0.0850 target level [view from 03 Aug Market Update
The outsized move higher in ETHUSD has been largely spot and vol driven (rather than leverage in futures)
2/ Spot demand from unprecedented transaction amounts in NFTs along with the constant buying of calls in large blocks. All this on the back of the EIP-1559 catalyst. With this recent push through 3800 we are starting to see some funding pressure as leveraged players..
3/ ..join in on the move higher. In spite of the decisive rally, the market remains wary of potential downside risk. We can see this from the risk reversal levels:
(a) BTC risk reversals have not broken out of range and remain close to par in spite of the call buying onslaught
1/ BTC edged above the 50k level yesterday in Asia morning, a key level that BTC has not closed above since the crash on 12 May.
2/ The catalyst for the break higher was the same pattern of option flow that has been consistently pushing prices higher in the last few weeks. Around 7am in Asia, the market was hit for a large amount of call options rapidly in multiple clips, โdrive byโ style
3/ Weโve been bullish towards the 50k price level in BTC but were unsure after. We now maintain our bullish bias against the 40k support level in BTC. These are our reasons:
- Possibility of Fed taper risk pushed from September to December..
1/ 50 years ago, on Sunday 15 August 1971 Nixon took the US off Gold convertibility. This was arguably the single most important economic shift in modern economic history
2/..the 1st step in complete shift to Fiat-based monetary world. With this shift money supply became unencumbered. Central banks could now expand their monetary base without fear of claims on their reserves. Without the Gold-backed limit on money supply the floodgates were opened
3/ Since then, there has been an unprecedented rise in central bank printing. Money supply has grown in a parabolic fashion and has seen an even more exponential rise in the wake of Covid. Central banks have treated this as a free pass to print whatever they need to..