Bitcoin Fundamental Briefing, October 2023

READY TO ROCKET?

This month the sentiment has changed drastically. Market is so inspired with soon approvement of BlackRock or Grayscale ETF this month, that totally ignored the fundamental background and some calling to common sense.

As it usually happens in periods of group breakdowns and financial fevers, nobody hears the voice of common sense. Maybe it is too conservative view, but we have to ask some reasonable questions, concerning the fair price of Bitcoin, ETF or any other cryptocurrency, and how it is going to generate free cashflows to confirm its price, what return you could count on right now. Other words speaking how reasonable current and maybe future price of BTC and why people are paying it right now. What things have change and what now is going on the market.

MARKET OVERVIEW

Bitcoin retreated from the more than one-year highs that were fueled by expectations of fresh demand from exchange-traded funds.

The largest digital asset rose as much as 11.5% to top $35,000 before paring some of the gain to trade at $33,517 as of 11:43 a.m. in New York on Tuesday, taking its year-to-date rebound from 2022’s digital-asset rout to 102%.

The possible approval in coming weeks of the first US spot Bitcoin ETFs is stoking speculative ardor for the token. Asset managers BlackRock Inc. and Fidelity Investments are among those in the race to offer such products. Digital-asset bulls argue the ETFs would widen adoption of the cryptocurrency.

A US federal appeals court on Monday also formalized a victory for Grayscale Investments LLC in its bid to create a spot Bitcoin ETF over objections from the US Securities and Exchange Commission.

The SEC has so far resisted allowing ETFs that invest directly in Bitcoin, citing risks such as fraud and manipulation in the underlying market. The court ruling and flurry of applications from investment heavyweights to start spot funds stoked speculation that the agency will relent.

ETF Ticker

Bloomberg Intelligence ETF analyst Eric Balchunas on Monday flagged on X, the platform formerly known as Twitter, that the iShares Bitcoin Trust “has been listed on the DTCC” with the ticker IBTC. The listing appears to have been taken down, Balchunas said on Tuesday.

“Not totally shocked, my guess is they were told to or want to wait until they are days not weeks or months away,” Balchunas said. “As I said yest, it was surprising to see it on there.”

BlackRock, the world’s largest asset manager, operates the iShares business. The DTCC is the Depository Trust and Clearing Corp., which undertakes clearing and settlement in US markets.

Bitcoin also surged 10% intraday at the start of last week on ETF hype. On that occasion, an erroneous report that BlackRock had won approval to launch a fund caused the move and the rally cooled once the mistake came to light.

Ether, the second-largest token, jumped as much as 8.5% to briefly exceed $1,800 in Bitcoin’s slipstream on Tuesday. Smaller coins such as BNB, XRP and meme-crowd favorite Dogecoin initially climbed sharply before moderating.

Coinglass data shows that about $387 million worth of crypto trading positions, mostly from speculators who were betting on lower prices, were liquidated in the past 24 hours. 

SEC Clampdown

The SEC has already allowed ETFs that hold Bitcoin and Ether futures. But the agency overall has intensified a crypto crackdown following last year’s market crash and blowups like the bankruptcy of the FTX exchange, whose co-founder Sam Bankman-Fried is on trial for fraud.

Bloomberg Intelligence analysts Elliott Stein and James Seyffart have said “approval of a spot Bitcoin ETF looks inevitable” and that a batch of funds is likely to be given the green light, though the timing remains uncertain.

Bitcoin remains below its pandemic-era, 2021 peak of almost $69,000, squeezed by rising interest rates that hit demand for risky assets. The token’s correlations with assets such as stocks, bonds and gold have ebbed lately, stoking questions about whether mainstream investors have disengaged.

“Liquidity is somewhat better than before,” said Justin d’Anethan, head of business development in the Asia Pacific at crypto market maker Keyrock. “Prices have now recuperated and with it a certain amount of liquidity — still nothing compared to the euphoria of 2020-2021, though.”

At least 3,445 tokens or trading pairs have been delisted or inactive for so long that they’ll likely be dropped in the wake of the turmoil in the cryptocurrency market over the past few years, according to data compiled by Kaiko. That’s already 15% higher than for all of 2022, and double the amount the prior year, the researcher found.

Coinbase and Binance have dropped more than 100 tokens this month alone. In fact, Coinbase delisted 80 pairs so far in October, more than in any other month this year, and since at least 2021, according to researcher CCData. Exchange OKX has already delisted 172 tokens this year, while Coinbase has delisted 176 pairs, per CCData.

Ether is ceding ground to market bellwether Bitcoin with investors seeking refuge in the most widely-held digital asset while the recent downturn in crypto prices deepens.

The second-largest digital currency by market value has slumped around 18% since June, while Bitcoin was down around half that amount during the same period. Ether dropped as much as 5.4% to $1,639 on Monday, and the original cryptocurrency slipped as much as 2.3% to $27,290.

That has helped to reduce Ether’s percentage of the total capitalization of the $1 trillion crypto market to 17.8% from around 18.4% at the start of the year, according to data compiled by CoinMarketCap. Meanwhile, Bitcoin’s dominance has risen to 50.3% from 40%.

ETF HYPE

Michael Novogratz says he expects the US Securities and Exchange Commission will finally approve exchange-traded funds that invest directly in Bitcoin this year.

“It’s gonna get approved,” Novogratz, the founder and chief executive officer of Galaxy Digital Holdings Ltd., said during an interview on CNBC. “We actually think it’s gonna happen in 2023. The most significant piece is the SEC lost in the court. Galaxy is partnering with Invesco on an application”

In August, Grayscale Investments LLC won what some industry observers called a watershed victory when a US appeals panel overturned the SEC’s rejection of a plan to convert its Bitcoin trust to an ETF. The SEC declined to appeal the ruling last week.

Meanwhile, the futures-based Ether exchange-traded funds that started trading on US markets last week have “failed to attract meaningful volume and boost crypto markets,” according to Kaiko.

“It could be that the Ethereum futures ETF launches may have caused Ethereum to be overbought by investors or traders, and the launches were rather mundane and underwhelming,” said James Seyffart, an analyst at Bloomberg Intelligence.

“The holy grail is the spot Bitcoin ETF,” Balchunas said. “This is Ether and futures. They’re like the opening band that nobody’s heard of.”

In the first year after the launch, the inflow to the spot bitcoin ETF will amount to $ 14 billion, in the second – $27 billion, in the third — $ 39 billion. Such estimates were received by Galaxy Digital analysts. 

ETF Features

Experts explained that a spot exchange-traded fund based on digital gold has the following advantages compared to current alternatives:

• increased efficiency through commission fees, liquidity and price tracking;
• convenience — access through a wider range of channels and platforms;
• compliance with regulatory requirements, which may lead to lower volatility.

According to experts, the spot bitcoin ETF is able to accelerate the popularization of the asset by:

• enhanced accessibility for individuals represented in all categories of well-being;
• official recognition by regulators and key players in the financial services industry.

Market Potential Capitalization

As of October 2023, assets at the disposal of broker-dealers amounted to $27.1 trillion, banks — $11.0 trillion and RIA — $9.3 trillion. In total — $48.3 trillion.

Analysts predicted that the RIA channel will reach a capacity of 50% by the end of the first year after launch and will increase to 100% by the end of the third. For broker-dealers and banks, they allowed slower growth with values of 25% and 75%, respectively.

Based on these calculations, they estimated the TAM Bitcoin-ETF in the US at ~ 14 trillion at the end of the first year, ~ 26 trillion at the end of the second and ~ 39 trillion at the end of the third.

Based on the assumption that 10% of the total available assets in each welfare channel will be invested in the product with an average distribution of 1%, Specialists received an influx of funds into bitcoin ETFs in the amount of $14 billion, $27 billion and $39 billion for the first, second and third years after registration.

Gold Comparison

According to the WGC, as of September 30, the AUM of “gold” ETFs was ~3282 tons (~$197.8 billion) or ~1.7% of the gold supply. On the same date, there were 841,637 BTC (~$21.7 billion) in bitcoin products, or 4.3% of the total volume of coins issued.

Given that the capitalization of gold is ~24 times higher, and the supply in investment instruments is 36% less than that of bitcoin, analysts assumed that the inflow of funds in dollar terms would have an 8.8 times greater impact on the digital gold market compared to the precious metal market.

Experts applied the previously obtained estimate of the inflow of funds for the first year in the amount of $14.4 billion (~$1.2 billion per month or ~$10.5 billion on an adjusted basis using the resulting multiplier (8.8x)) to the historical relationship between the flows of funds in “gold” ETFs and changes in asset prices. As a result, experts estimated the impact on bitcoin at +6.2% in the first month.

Keeping the inflow constant, but adjusting the multiplier downward on a monthly basis, taking into account the correction for the growth of the price of the first cryptocurrency, analysts modeled a gradual decrease in the monthly yield of digital gold from +6.2% in the first month to +3.7% by the last month of the first year.

Galaxy Digital estimated the additional inflow into bitcoin-based investment products in the range of ~$126 billion to ~$454 billion in the long term.

Professional traders are becoming more and more optimistic. In an interview, the interlocutors reported that new buyers have entered the market, who are quickly buying Calls. The indicator of the OI of the Deribit exchange ($12.4 billion) approached the highest levels in history.

The volume of open positions (OI) on bitcoin futures on CME exceeded 100,000 BTC for the first time. over the past day, the OI on the platform has grown by 4380 BTC.

The total indicator of perpetual contracts on offshore exchanges for the same period fell by 26,735 BTC. As a result, the CME share by this metric has grown to a record 25%, which is close to the value of Binance (29%).

Besides, Grayscale Investments has entered into an agreement with the “daughter” of the London Stock Exchange FTSE Russell to launch indices tracking the dynamics of cryptocurrencies by group.

Optimism regarding the SEC registration of many spot bitcoin ETFs has “increased”, a positive decision should be expected within “months”. JPMorgan analysts came to this conclusion, writes The Block.

Still, in September, JPMorgan doubted that the launch of the product would change the rules of the game for the crypto market due to low interest in ETFs in those jurisdictions where they were allowed.

On October 19, the discount of the bitcoin trust from Grayscale Investments to NAV decreased to the lowest 12.54% since November 2021.

At the beginning of the year, the figure was 48.31%. The situation in July was dramatically changed by BlackRock’s submission of an application to launch a bitcoin ETF. After that, GBTC quotes from Grayscale Investments increased by 57%, the discount decreased from 41.7% to 29.3%. The continuation of the dynamics in recent days has been facilitated by the absence of an SEC appeal against the decision in the case against Grayscale.

FORECASTS

So, on a background of ETF approvement by SEC, there are multiple forecasts on the BTC price were made.  We avoid here any forecasts, like “BTC will hit $1mln in 12 months” and take a look only on realistic numbers with explanation of reasons, why this should happen. First one comes from CryotoQuant:

The capitalization of the cryptocurrency market will grow by $1 trillion if the spot bitcoin ETF is approved in the United States. Such estimates were received by CryptoQuant analysts. Experts noted that the event will lead to the next wave of adoption of the asset class by institutional investors.

In their opinion, after the victory of Ripple and Grayscale over the SEC, the chances of such an outcome have significantly increased by March 2024, when the deadline for decisions on applications will come.

The approval of the product will lead to an influx of $155 billion (~1% of the AUM of management companies) into the bitcoin market, which can raise the capitalization of digital gold by $ 450-900 billion. This amount is equivalent to a third of its current value.

In their estimates, analysts were based on the dynamics of MVRV since 2013. At the moment, the market capitalization is $545 billion, the realized capitalization is $396 billion.

At the peak of the market in December 2017 and from March to November 2022, the market capitalization increased from three to almost five times more than the realized capitalization. This means that for every $1 of fresh money, the market capitalization has increased by $3-5.

Given this historical relationship, analysts received the aforementioned $450-900 billion in the event of an influx of $150 billion to the market. In terms of price, this means an increase of 82-165%, up to $50,000-73,000.

QCP Capital is not optimistic about the sustainability of the recent rise and stated that BTC may test the critical support level of 25k in the last quarter of 2023, the approved futures Ethereum ETF may divert demand from the spot market, the lower-than-expected core PCE…

Experts gave four arguments in favor of the forecast with the price returning to $25,000:

1. So far, this aggressive rebound has been almost entirely driven by external factors such as expectations of the upcoming SEC approval of the first futures ETFs on Ethereum, the slowdown of Core PCE and the neutralization of the shutdown for at least the next 45 days. Experts questioned the availability of additional “fuel”.

2. Expectations of negative dynamics of futures ETFs on Ethereum based on the behavior of similar bitcoin-based instruments two years ago.

The reason is the lack of direct impact of demand for a new asset on the spot supply. In fact, the exchange-traded fund “absorbs” purchases of physical cryptocurrencies, experts stressed

3. While continued government funding is positive in the short term, it increases the risks of a shutdown after the expiration of the specified 45 days.

4. The real leaders are gold and the real yield on US Treasuries. If the deal between Republicans and Democrats again provokes the growth of the latter, then risk markets will face much more “pain”.

Crypto token ether could rise five-fold by end-2026, StanChart says

Ether may hit $8,000 over the next two years as it becomes more widely used in blockchain-based covenants known as “smart contracts,” as well as gaming and the “tokenisation” of traditional assets, StanChart Head of FX Research, West, Geoff Kendrick wrote.

“We see the $8,000 level as a stepping stone to our long-term ‘structural’ valuation estimate of $26,000-$35,000,” wrote Kendrick, who also heads the bank’s digital assets research. That valuation assumes future use cases and revenue streams that may not have emerged yet, although the real-world use cases of gaming and tokenisation should support their development.Kendrick told Reuters that the structural valuation estimate was “very long term, say 2040.”

Investment company ByteTree Asset Management has raised the market signal for bitcoin from neutral to bullish, as digital gold becomes a haven from losses in trading US stocks and bonds.

In any event, it all comes down to demand against a fixed supply. Bitcoin’s demand is summarized by its network activity, or dollar-equivalent value transferring over the blockchain. That currently implies a fair value above $25,000. That has fallen since last month but appears to be settling down. This simple idea helps us to understand how powerful a wave of institutional investors would be for Bitcoin. Regulators, spot Bitcoin ETFs in the US please, and stop banning them in the UK.

As a bottom line – “Bitcoin futures look good, especially if you compare them with the crisis in the bond market,” Charlie Morris, founder and investment director of the firm, wrote in an analytical report. First of all, bitcoin is a real safe haven from Uncle Sam’s bonds,” Morris stressed. If we can hold $25,000, which we probably will, bitcoin will be in a bull market, albeit inactive,— Morris believes.

Ledn:

“In the near term, I expect the market to sell into this rally,” John Glover, chief investment officer of Ledn, told CoinDesk in an email. “In the absence of new capital flowing into digital assets, I believe that this is what this rally will be: short-lived.”

Glover expects a more durable appreciation will materialize later this year and early next year as bitcoin appears to be finished with its corrective move.

“I do believe that BTC prices will be higher in three months than they are today as technically we’ve completed the sell off and I now look for a sustained rally into Q2 2024,” he said.

Matrix Port:

The Matrixport research pointed out that if the BlackRock Bitcoin ETF is approved, a conservative estimate is that the price of Bitcoin will rise to $42,000; an optimistic estimate is that with an inflow of $50 billion money, Bitcoin may rise to $56,000.

As a justification for their forecast, experts pointed to the likely inflow of funds in the amount of $24-50 billion from regulated investment consultants (RIA) in the United States. This industry has 15,000 professionals to whom clients have entrusted $5 trillion in capital, the report says. The $50 billion Matrix port mentioned is equivalent to 1% of their AUM.

HOT NEWS

In recent few days there were a wide stream of news. Thus, on 24th of October An influx of $43 million into public Bitcoin funds has happened. This is 10% of the total amount since the beginning of the year in one day:

Today, on 30th of October, 30,000 bitcoins over the past 5 days have been bought by whales – major market participants. The X-channel Ali made the calculations on October 28.

Interest among whales and funds is associated with the possible approval of applications for spot bitcoin ETFs. The U.S. Securities Commission may approve Black Rock’s application for an ETF. This is evidenced by the preparation of the company itself. To express their confidence in the approval, Black Rock launched a preliminary fundraiser for the purchase of bitcoins, which will be used as collateral.

CONCLUSION:

In fact, we have two major views on ETF approvement subject. The proponents tell that BTC has to raise for a few times because 13 largest funds have ~ $13 Trln AUM and even minor part of investing of this capital will push BTC price higher. Even 0.5-1% of these assets could increase BTC price for 50-100% now. 

Opponents point on few issues with ETF launch that shows no interest among investors. We have Jacobi ETF, launched in EU that is not popular and shows anemic inflows. Also multiple ETF were launched in Asia that also do not show some explosive demand. Even recent ETH ETF failed investors’ expectations.  And now many traders worry that market could turn to “Sell by fact” mode. 

Besides, when fake news was released on ETF approvement, BTC price jump was not too strong, somewhere around 3.5 – 4K. And there were no real outflows of cash from exchanges, suggesting that recent jump was purely due speculative activity. 

But the fact is that BlackRock wants to launch them. And this is the fattest ETF organizer in the world. And indeed the largest private financial company.

The launch of an ETF will allow an almost unlimited number of people to absolutely legally buy the two main cryptocurrencies with automatic payment of taxes, and all this through familiar brokers, and not crypto exchanges. Black Rock’s tool will cover almost half the world.

It is precisely this thing that is now, maniacally accelerating the narrative that Bitcoin is the new gold and saves not only from inflation (which is a complete fake), but also from de-globalization (of course, also a fake).

And here is the third reason of ongoing processes that are not widely covered in the news.

If these basic ETFs are approved, then the road will open to leveraged ETFs and indices of the top 5/top 10 cryptocurrencies.

In short –  brokers, ETF organizers and banks are stupidly squeezing business from crypto exchanges. They want to equate crypto to commodity assets and start trading it on the usual infrastructure.

At the same time, the bulk share of holders will not have the cryptos itself on their hands.

And this job is partially done. We’ve mentioned statistics in the beginning of the report. CME slowly but stubbornly takes trading volumes out from Binance.  

The open interest (OI) indicator for Bitcoin futures contracts (BTC) reached $15.83 billion. This is the highest level since the beginning of June 2022. Since October, this figure has increased by 33.5%. In addition, the “current reserves” of options on the flagship cryptocurrency are also at a high level – about 15 billion. They reached a historical peak of 17.73 billion as of October 27. This became known thanks to the Coinglass platform.

In addition, CoinDesk reported that “the regulated Chicago Mercantile Exchange (CME) is rising among the largest Bitcoin futures markets in terms of open interest, reminiscent of the early stages of the 2020-2021 bull rally.”

With nominal OI of 3.54 billion, CME is the 2nd largest BTC futures exchange, up from the 4th position it was just a week ago, according to Coinglass data. Contingent open interest refers to the US dollar value captured in the number of active or open contracts.

Experts noted that the 1st place in the list is held by the offshore exchange Binance with OI of 3.83 billion. This is just 8% higher than that of CME. In addition, renowned reporter Colin Wu and other experts reported last week that open interest in CME futures settlement surpassed 100,000 BTC for the  first time in history. Similarly, CME’s market share rose to a maximum of 25%.

Thus, in the near future the Americans will finish squeezing Binance and the Asian guy CZ out of their market so that he does not manipulate the spot price… and it will be the turn to approve a spot Bitcoin ETF.

So, behind this process, that on a surface looks like simple ETF approvement process for investors’ comfort, in reality it is a part of the US financial policy. That’s why BTC market is becoming a political tool and could relate somehow to the problem of the US national debt and budget deficit, as well as centralization of banking system and supervision over crypto market. Now only naive person could talk about “invisibility” and “privacy” of cryptocurrencies. As a result, few big funds under control of the FED or SEC will control the whole market via single exchange (supposedly CME). And we think that this is the primary object of all this mess around ETF.

Speaking about investors reaction, I express only my personal opinion. I’m a bit sceptic on this by few reasons. Futures ETF exist for a long time, and in general, there is no problem to find way for investing in BTC now. I suppose that ETF is just a tool that brings some comfort but doesn’t change the valuation of the asset itself. Results of other ETFs shows muted reaction of investors and chances that everybody start “Selling on fact” look not small.

Second reason is relative valuation. You can’t hold BTC in hands, but you could do it with gold and any other commodity. 5%+ interest rate is just around the corner. Stocks gradually start to fall and potentially will become attractive again. So, among all these multiple options,  why particular BTC should become a leader in demand? That is what make me doubt on its long-term perspective. 

Analysts tell that it is “unique” and can’t be confiscated, opposite to physical assets. Concerning second argument – I think we could forget about it, as romantic of decentralized “private” market is in the past for a long time. Speaking about its “unique” feature – I do not see any problem to make BTC #2, 3 etc. with the same algorithm and this is particular the way how other cryptocurrencies have appeared. There is no problem to do this, except some psychological mental limitations and perception. Thus, as I’m a bit conservative, I do not like this hype around. But, of course it is not forbidden, because any “gold rush” works for some time, if you definitely know when to out.