June 23 Commentary

News Highlights

1. BlackRock files for bitcoin ETF in push into crypto
2. Prime Trust Has ‘Shortfall of Customer Funds,’ Nevada Regulator Says
3. MicroStrategy buys $347M worth of Bitcoin
4. Crypto Exchange Backed by Citadel Securities, Fidelity Goes Live
5. IMF says banning crypto assets may not be effective long-term
6. FTX Debtors Release Second Investigative Report
7. FTX begins talks to relaunch international cryptocurrency exchange
8. New UK financial law includes ‘crypto hub’ provisions and web3 rules
9. Sotheby’s launches blockchain-fueled program for generative artists
10. Tether’s Banking Relationships, Commercial Paper Exposure Detailed in Released Documents
11. SEC sues Binance and CEO Changpeng Zhao for U.S. securities violations

Figure 1: Time series of the total crypto market cap since the beginning of May. After a consistent downtrend, and briefly dipping below $1T, the sudden positive sentiment stemming from the Blackrock ETF application has caused the market to move back to initial levels in just over a week. source: TradingView

Commentary:

The month of June 2023 unfolded amidst a storm of unfavourable news and regulatory actions, culminating in the SEC’s lawsuits against Binance and Coinbase. This chain of events triggered a nearly 10% plunge in Bitcoin’s value, pulling the broader market down to a low of less than $1T in total market capitalization, as depicted in Figure 1. However, the market sentiment experienced a dramatic turnaround from June 15th, following BlackRock’s announcement of filing for a Bitcoin spot ETF. This news acted as a catalyst, propelling Bitcoin to the higher end of its trading range, with gains surpassing 20% from its lowest point, and simultaneously boosting a significant portion of the overall market.

The SEC’s lawsuits against Binance and Coinbase allege that BNB, BUSD, SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, COTI, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO are securities. These assets collectively represent approximately 8% of the total crypto market cap. These so-called securities underperformed Bitcoin, while Bitcoin and Ethereum (and associated L2s) generally outperformed, having evaded the securities label. The disparity in performance during the final weeks of June was substantial, as illustrated in Figure 2.

Figure 2: Relative performance for a basket of the largest liquid cryptocurrencies. Dispersion in June has been substantial, with Bitcoin and its forks gaining more than 10% (BCH is off-scale, with returns over 100%), while ADA, BNB, and MATIC have lost a third of their value. source: TradingView

BlackRock, with its history of successfully securing approval for its ETFs, has led many to conjecture that its decision to file for a spot Bitcoin product stems from confidence in its approval. The timeline of the approval process remains uncertain, potentially taking place as early as the end of Summer, or as late as Spring 2024. BlackRock’s selection of Coinbase as its custodian implies that any potential fallout for Coinbase from the SEC case will not be severe enough to jeopardize the business. Regardless of the SEC lawsuit’s outcome, Coinbase is likely to emerge relatively unscathed. Binance, conversely, has already been charged with wash trading and market manipulation by the CFTC and SEC. Given these circumstances, it is challenging for the SEC to disregard Binance’s significant influence when evaluating the “manipulability” of the spot BTC market during the ETF application review. If Binance’s dominance in the crypto market were to be significantly reduced, it would be much easier to envision how BlackRock’s proposed solution for market surveillance would be sufficient. Thus, given that BlackRock filed, we can infer their expectations.

While the crypto market has largely functioned in its own insulated bubble over the past few weeks, major equity indices such as the S&P500 and Nasdaq have experienced steady gains. These gains have led to their outperformance over the overall crypto market by more than 10% and 20% respectively in the second quarter of the year. However, on a year-to-date (YTD) basis, Bitcoin and the broader crypto market have capitalised on the liquidity surge on broader markets, which began towards the end of Q4 2022, significantly outperforming even the best-performing equity indices. At present, the battle against inflationary forces seems to have reached a deadlock. Rising rates have lost their potency, offset by an inflationary increase in deficit due to higher interest payments on government debt. A prolonged period of mild inflation and a long, shallow recession appears to be the base case scenario. In this environment, the crypto market will need to leverage its inherent strengths to thrive, without relying on a global inflow of liquidity that would otherwise lift all boats.

Figure 3: 3-month time series of 24h cumulative derivative volume on major exchanges broken down by type (perpetual swaps in green, futures in red, and options in blue). It is immediately clear that perpetual swaps dominate the market in terms of trading activity. During the second half of June, volumes increased meaningfully compared to previous weeks, with higher peaks and a more consistent hourly profile. source: Laevitas

The announcement of BlackRock’s filing for a spot Bitcoin ETF acted as a catalyst, sparking a surge in market activity, as evidenced by the increased trading volumes depicted in Figure 3. While overall activity has not reached record levels, higher spikes of activity and consistently higher volumes were observed throughout the month. This suggests a heightened level of engagement from traders and investors, likely driven by the potential implications of BlackRock’s ETF filing.

Despite the uptick in activity, the market growth in notional terms was relatively modest. The perpetual swap open interest contracted over the first half of the month, only to recover and barely surpass its initial value during the last two weeks. This pattern indicates a cautious market response to the regulatory actions and subsequent ETF filing, with investors potentially waiting for further clarity before making significant moves.

Figure 4: Monthly time series of total perpetual swaps Open Interest (OI) broken down by trading venue. It should be noted that, overall, the market did not increase in size over the month. source: Laevitas

As shown in Figure 4, Binance continues to dominate the derivative market Open Interest (OI), but Bybit, Bitget, and OKX collectively represent an equivalent market share. The longer tail of exchanges, including Deribit, Bitmex, Bitfinex, Huobi, and Kraken, together represent less than 10% of the market and approximately $2bn in OI.

The heightened trading volume during the second half of the month can be attributed to the undeniably stronger demand for long Bitcoin exposure, with both Futures and Perpetuals displaying an increase in their premium to spot. This suggests a bullish sentiment among traders and investors, likely driven by the potential for a Bitcoin ETF and the broader market recovery.

Figure 5: 3-month time series of the average annualised 3-month basis on major derivatives trading venues. The yield implied by the premium of the futures on the spot indicates the sentiment of traders that, in aggregate, have a higher demand for long rather than short exposure. Rates increased consistently over June, having moved from 2%-4% to 4%-6% and more. source: Laevitas

Figure 6: 3-month time series of the OI weighted average of the funding rates on the largest perpetual swap BTC markets (green, LHS axis), superimposed to the price time series of Bitcoin (red, RHS axis). Rates over June have increased and more consistently shown a skew towards a demand for long exposure. source: Laevitas

In particular, Figure 5 shows how the rolling 3-month annualised basis for the largest derivative contracts has been consistently climbing from the beginning of the month when it was trading just above zero since mid-April. In line with the Future basis, funding rates on perpetual swaps show a spike in long imbalance shortly after the announcement of the BlackRock Bitcoin ETF. Since then, this has evolved into consistently higher demand for long exposure and consequently higher rates, as shown in Figure 6. This suggests that traders and investors are increasingly willing to pay a premium for long exposure, indicating a bullish sentiment in the market.

The latter half of June was marked by a positive price momentum, largely driven by the catalyst of the Bitcoin ETF. For Tether, this period served as a “stress test” following the release of certain documents by CoinDesk that detailed past investment practices employed by Tether to generate returns on the assets backing the USDT stablecoin on a 1:1 ratio. These practices included investments in Chinese Commercial Paper (CP) and Over collateralized Bitcoin Loans. After a brief depegging event, primarily triggered by the immediate deleveraging of some market participants on the news, USDT traded to lows of 0.996 for a few hours, and overall experienced a discount larger than 0.1% for less than a day, as illustrated in Figure 7.

Figure 7: Monthly time series of the hourly price index for the leading stablecoins: USDT in green, USDC in blue, and BUSD in yellow. Following a report from CoinDesk on Tether investment and lending activities during previous years the USDT stablecoin quickly depegged, but by less than 0.5%, and found parity/premium to USD again swiftly. source: TradingView

Institutional investors responded swiftly to the news of BlackRock filing for a spot ETF, as evidenced by the Open Interest (OI) on the CME Bitcoin Future, as well as the significant inflows into publicly traded Bitcoin tracker products. The third week of June, as displayed in Figure 8, was one of the most robust of the recent months, with a weekly inflow of $200m.

Figure 8: Weekly flows in publicly traded crypto products. After consistent outflows over the previous months, the third week of June reported record inflows of approximately $200m. source: Bloomberg

Demand for GBTC also surged on the prospect that the Grayscale product could be converted into an ETF if BlackRock’s filing is successful. This caused the discount to NAV to narrow 10 points from 45% to 35%, as shown in Figure 9.

Figure 9: 12-month time series of the GBTC Grayscale product compared to its Bitcoin holdings. Following the BlackRock Bitcoin ETF application, with the hope of finally seeing the trust converted into a product that allows redemptions, has gained considerably, closing the discount from 45% to 35%. source: TheBlock

The influence of macroeconomic factors, which have significantly shaped the crypto market landscape over the past quarters, is expected to diminish over the next one or two quarters, barring any catastrophic market events. Instead, the micro-dynamics of the crypto markets will take center stage in the coming months. Key players such as BlackRock ETFs, Grayscale, and the regulatory actions against Binance and Coinbase will all play pivotal roles in shaping the market trajectory.

In our previous commentaries, we anticipated a quiet Summer. However, significant catalysts, such as the BlackRock Bitcoin ETF filing, operate on their own timeline, often disrupting market expectations. Despite these developments, our baseline scenario remains one of a relatively tranquil Summer, with the effects of today’s catalysts likely to manifest in the market around September/October.

Looking at the broader picture, we observe a growing trend among large asset managers and financial institutions to develop and offer crypto products and investment opportunities to their clients. This is a strategic move aimed at retaining the capital they custody and preventing a potential exodus of Millennial wealth in the coming years. An increasing number of investment opportunities are moving on-chain, driven by the scarcity of Bitcoin, the stable yield of Ethereum, and the anticipated surge of tokenized real-world assets.

Institutions are making their entrance into the crypto space slowly but surely. It’s a gradual process that could suddenly accelerate, transforming the market almost overnight. The journey from the depths of despair that we experienced towards the end of last year to the acceptance of crypto as a new asset class, and the blockchain as a superior settlement layer, may not be as long as we think. The crypto market is evolving rapidly, and we are at the cusp of a new era in financial innovation and investment opportunities.