Bitcoin Fundamental Briefing, August 2024

THE DEAD SEASON

This month we do not have any loud events. And confirmation of this we see in price action – it stands relatively quiet, in significantly narrower range than before. Everything goes by its turn. This is not the exceptional performance – other markets do the same. Probably it is natural – at the eve of big events nobody wants to make sharp moves and take big risk. Position of K. Harris and D. Trump in relation to crypto industry is different and it is really bit stake on the table for crypto world. 

Still, we consider the one thing as the major event of this month. And we consider it below. It is IMF call to all G7 governments to be finally involved in the process of accommodation of blockchain tendency and cryptocurrencies. Although this news has passed almost unsigned, as a lot of other IMF calls. We suggest that the really big things are hidden under this call. 

 MARKET OVERVIEW

The month has begun from collapse, a kind of “Black Monday” due BoJ rate hike and massive unwinding of short yen positions. And BTC has not escaped the big mess.

Digital assets are a victim in part of the unwinding yen carry trade, as speculators adjust to higher interest rates in Japan, according to Hayden Hughes, head of crypto investments at family office Evergreen Growth.

“Those investors are also fighting a drastic increase in hedging costs based on the volatility in the US dollar-Japanese yen trading pair,” Hughes said.

 Bitcoin was down more than 16% and saddling second-ranked Ether with the steepest fall since the collapse of FTX in 2022.  Ether shed over a fifth of its value before paring some of the slide to change hands at $2,419. Most major coins nursed losses.

Total liquidations in bets on crypto were about $1.1 billion in the 24 hours,  Overall, Bitcoin and Ether investment products saw outflows of $400 million and $146 million, respectively, in the week ended Aug. 3, according to CoinShares Ltd. data.

The amount of Bitcoin held in reserve by the companies who earn a profit by validating transactions on the blockchain has dropped to a three-year low in the wake of the April software code adjustment that slashed revenue.

The total amount Bitcoin held by miners has dropped to around 1,510,300 tokens as of Aug. 3, according to report from crypto researcher Kaiko. At recent prices, the amount is worth around $86 billion, or around 8% of all the Bitcoin in circulation.

Higher network fees following the halving briefly mitigated the loss in revenue for miners, but this was short-lived and average fees have since fallen to $2 from a post-halving high of $143, according to Kaiko. Despite an overall trend of selling, public mining companies have actually increased their holdings of Bitcoin by 60% to 54,000 tokens since January 2023, according to US Securities and Exchange Commission filings. 

Hedge funds, pensions and banks continued to lavish capital into exchange-traded funds that invest directly in Bitcoin, as more traditional investors embrace the asset class that US regulators begrudgingly helped push into the mainstream at the beginning of the year.

There were 701 new funds reporting spot-Bitcoin ETF holdings following to second-quarter 13F reports with the SEC, data compiled by Bloomberg show, bringing the total number of holders to almost 1,950.

It is constantly reported about big inflows in ETFs . Although they look optimistic but not too stable, according to JPM analysis below. 

Morgan Stanley gave thousands of financial advisers the green light to solicit eligible clients to purchase spot-Bitcoin exchange-traded funds as soon as next week, according to a person familiar with the matter.

The company in a memo told its 15,000-strong adviser base they can offer some clients to buy either BlackRock Inc.’s iShares Bitcoin Trust or the Fidelity Wise Origin Bitcoin Fund the person said.  Morgan Stanley’s decision may pave the way for other banks that have been reticent to offer digital assets to consider tapping into the sector. 

Analysts flagged the risk of disposals of Bitcoin seized by the US government — which is thought to hold roughly $12 billion worth of crypto — as among the challenges for digital assets.

Possible US government sales are “resulting in this temporary downward price pressure,” said Khushboo Khullar, venture partner at Lightning Ventures, which invests in Bitcoin-linked firms. “We expect this gap to close soon,” she added.

Appetite for crypto exposure is fraying. One example of that comes from the so-called funding rate for Bitcoin perpetual futures on the Binance exchange, the largest for digital assets. These contracts are often used by speculators as they have no set expiry. But CryptoQuant figures show the funding rate — the cost for the positions — is the most negative since 2022, signaling diminished ardor from fast-money traders.

Concerning ETH ETFs, It’s been a month since the much-anticipated Ether ETFs launched in the US — but investors still don’t seem too interested.

The nine exchange-traded funds that hold the second-largest cryptocurrency directly saw investor outflows Thursday for a sixth consecutive day, the longest streak of withdrawals since their debut on July 23. During the same period, US ETFs holding crypto bellwether Bitcoin saw inflows daily, according to data compiled by Bloomberg.

“Bitcoin is generally the crypto ‘onramp’ for traditional investors,” Noelle Acheson, author of the Crypto Is Macro Now newsletter. “While Ethereum may eventually catch up as diversification becomes more of a priority, for now Bitcoin is likely to continue to outperform.”

“It’s important to note that whatever outflows happen to the ETF, it is a relatively small section of the market,” Ouellette said. The funds account for about 2% of Ether’s market capitalization, he said.

The launch of the Ether ETFs was much more muted compared to that of the Bitcoin ETFs, which kicked off a historic start in January.

Bitcoin touched $65,000 for the first time in about three weeks, aided by reviving demand for dedicated US exchange-traded funds amid signs that the Federal Reserve is set to loosen monetary policy. 

Fed Chair Jerome Powell on Friday gave the clearest indication yet that the central bank is on course to cut benchmark rates from a more than two-decade high, portending a more favorable liquidity backdrop for global markets. Powell’s signal spurred a $252 million net inflow.

The spot-Ether ETFs launched in July have suffered eight consecutive days of net outflows totaling nearly $112 million, their longest losing streak so far, according to data compiled by Bloomberg.

Ether is yet to regain ground lost in a sharp selloff earlier in August when an unwinding yen carry trade pummeled crypto markets as well as global equities. Bitcoin has risen about 8% since then, while spot-ETFs for the largest token have drawn inflows.

POLITICAL ISSUES

Last time we’ve talked a lot about D. Trump plan to use Bitcoin to form national strategic reserve and use it to fill US Debt obligation. There are different opinions on this subject, but now the scientific idea goes further. If initially K. Harris and Dems in general were distant from crypto currency topic, now, after D. Trump statements and his speech on Crypto conference, they have to take part and try to get some crypto electorate off the D. Trump’s team.

A strategic Bitcoin reserve, however, would be much more ambitious. Trump says that he favors this, while Wyoming Republican Senator Cynthia Lummis is planning a bill establishing one. Her idea is that bolstering the dollar with a digital hard asset will “secure our nation’s standing as the global financial leader for decades to come.” This strategic Bitcoin reserve “would be required to hold onto the Bitcoin for 20 years,” and could only be used during that time period to pay down the national debt. Rather than replace the dollar, then, it appears Bitcoin is now intended rescue it.

Under Lummis’s proposal, the US would buy approximately 5% of the total Bitcoin supply — about $68 billion at current prices — over a period of time. That sounds like the government taking a degree of control. However, Stephane Ouellette, CEO and co-founder of Frnt Financial, believes the proposal strongly supports a more libertarian financial system:

If the US began shifting its interest toward self-custodied cash, the concept of a central bank would drastically change, if it remained an idea at all. Governments would see their ability to censor political opponents drastically decrease, and we’d simply be entering a paradigm with an asset that is much more free-market oriented at its center. This was in effect the plan. “Hyper-Bitcoinization,” which is the final boss of Bitcoin adoption, sees it at the center of the global financial system, which necessitates moments like these and figures like Trump shifting their viewpoint.

Lummis argues that the reserve would “supercharge” the dollar and bolster the US economy. On that basis, Trump’s love for Bitcoin is hard to reconcile with his oft-stated preference for a weak currency that helps US exporters. And Bitcoin can, of course, like all risky investments, go down as well as up. A detailed version of the bill might provide more clarity. Undeniably, a nascent asset like Bitcoin could benefit from additional legitimacy through increased government holdings. 

If it is more or less clear what D. Trump intends to do, at least slogans are very loud, Dems position on crypto currencies are less definite. Initially they where unfriendly.  Support for Trump is largely driven by the Biden administration’s crackdown on the industry and backlash toward prominent skeptics including Democratic Senator Elizabeth Warren of Massachusetts, who has warned of crypto’s risks to consumers. Securities and Exchange Commission Chair Gary Gensler, who has lodged a slew of lawsuits against many of crypto’s biggest players over the last few years, is viewed as the industry’s main antagonist.

But now Senate Majority Leader Chuck Schumer aims to get cryptocurrency rules in the US passed into law this year, he said at an event convening supporters of Vice President Kamala Harris within the digital-asset industry.

“I want to bring members on both sides of the aisle here in the Senate together to create momentum so we can pass sensible legislation that helps the United States maintain its status as the most innovative country in the world,” Schumer said, adding that he hoped to see rules passed into law by the end of 2024. Crypto is here to stay, no matter what,” he added.

The grassroots gathering came as Harris seeks a reset of relations with the crypto industry. Democratic candidate Harris is yet to clarify her stance on the digital-asset industry, though the Financial Times reported in July that her advisors had approached crypto companies in search of a “reset” of relations.

Michigan Democratic Senator Debbie Stabenow told Harris supporters at the event that she wanted to “reaffirm the fact that we are committed to keeping this innovation in the United States, supporting the growth and at the same time protecting the interests of consumers.”

Meantime, in recent days and to not loose momentum, Vice President Kamala Harris will back measures to help grow digital assets, a policy adviser to her campaign said, highlighting efforts to court an emerging cryptocurrency industry expanding its political influence.

“She’s going to support policies that ensure that emerging technologies and that sort of industry can continue to grow,” Brian Nelson, senior campaign adviser for policy to the campaign, said when asked about the vice president’s efforts to engage the crypto community during a Bloomberg News roundtable at the Democratic National Convention on Wednesday.

Harris’ team is signaling they’re still interested in implementing safeguards on the industry, which has seen the collapse of numerous high-profile companies.

“Obviously, they’ve expressed that one of the things that they need are stable rules, rules of the road,” Nelson said, pointing to a Harris speech that laid out the initial pillars of her economic policy last week.

In remarks during a campaign event in swing-state North Carolina last week, Harris did not specifically mention digital assets but vowed that if elected president she would “focus on cutting needless bureaucracy and unnecessary regulatory red tape” and encourage “innovative technologies while protecting consumers and creating a stable business environment with consistent and transparent rules of the road.”

So, as Arthur Hayes said – 

They think Trump says the right things and so he’s going to make it happen faster. [Donald] Trump or [Kamala] Harris, it doesn’t matter. Crypto donates a lot of money…. But I don’t think you’ve donated enough to outpace a JPMorgan, a Morgan Stanley, a Citibank, a Goldman Sachs.

And if you think about who is staffed and all of these agencies, it’s all people who came from these banks. So while it’d be great if Trump got elected and he did all these things, I think he might run into the same problem he ran into his first term.

You can say all these nice things and try all these policies, but if the entire government organisation is opposed to them, then nothing gets done.

FORECASTS

Metafide CEO Frank Speiser says by year end Bitcoin could hit $100k and Ether could hit $4k. He also discusses the use case for a bitcoin strategic reserve in an interview with Tim Stenovec and Katie Greifeld on “Bloomberg Crypto.”

Glassnode points on positive mood in general and tendency to accumulation without and “sell-off” sentiment in short-term. Although doesn’t specify particular levels:

With a degree of uncertainty rife amongst market investors, capital continues to flow down the risk curve, leading to a significant expansion in Bitcoin dominance, with the leading asset now commanding a staggering 56% of the total market capitalization.

In spite of the tempestuous and choppy price action, the resolve of Long-Term Holders remains resolute, with a clear preference for HODL and acquiring coins. Alternatively, Short-Term Holders have carried the vast majority of the losses across the recent downturn. Nonetheless, the degree of locked-in losses suggests a possible overreaction towards the event.

A signal from the Bitcoin derivatives market points to the growing risk of a “short squeeze” that can stoke sharp rallies in the largest digital asset, according to cryptocurrency specialist K33 Research.

K33 said the seven-day average annualized funding rate on Aug. 20 was the lowest since March 2023 — when US bank failures rattled investors — indicating a prevalence of downside wagers.

“Perpetual swap funding rates have averaged at negative levels over the past week, while open interest has sharply increased,” K33 analysts Vetle Lunde and David Zimmerman wrote in a note. “This suggests aggressive shorting, structurally creating a setup ripe for a short squeeze.”

In such a squeeze, surprise price jumps force fast-money traders to close out bearish bets, adding fuel to the bounce. 

K33 said notional open interest — or outstanding contracts — in the perpetuals market rose by the equivalent of almost 29,000 Bitcoin over the past week. The seven-day average annualized funding rate on Aug. 20 was minus 2.5%. Such rapidly increasing open interest alongside a negative funding rate is a comparatively rare backdrop, Lunde and Zimmerman said.

Bitcoin Bulls Revisit $100K Year-End Target as BTC Spikes Over $62K

“Now that the Bank of Japan has indicated they will not raise interest rates further — and Jump Trading will run out of coins to sell, just like Germany did a few weeks ago — I do not see the price going much below $50,000 (other than a quick wick), perhaps ever again,” Transform Ventures founder Michael Terpin told CoinDesk in an email Friday.

“If Trump wins, a rush of new buyers could take the bitcoin price over $100,000,” Terpin said, adding that the six months after the halving have had pullbacks — and this fifth bitcoin cycle is no exception. “October and November are historically strong months for bitcoin, especially in the year of the halving and the year after,” he said.

Arthur Hayes mostly speaks about the same 100K level for BTC and 4K for ETH but appealing to different reasons – big new T-bills issues that should attract RRP funds. As A. Hayes suggests, some amount of these funds come to crypto markets, when they out of RRP accounts. 

We have some doubts concerning this relation, because the balance between RRP, TGA, Bank reserves accounts are more complex. Besides, RRP has only 400 Bln left, so with 300+Bln of new T-Bills issues, hardly 100 Bln will be send to crypto market. 

Analysts optimistic as liquidity ticks and Bitcoin ‘forced selling’ is over

Here investors in general point on positive sentiment, showing an example, how strong BTC resists to German government sell off and Mt. Gox payments. Second reason is coming cycle of liquidity expansion that should positively impact on BTC performance:

Some traders point on 150K level, arguing that BTC turn positive in two months after US Dollar sets the new high. 

Among bears we could mention QCP Capital.

Post-Jackson Hole, the desk saw aggressive Call Spread buying, but also witnessed heavy selling of calls around the 100k strike out to Mar 2025. While the move higher in price has been decisive, the vols are indicating hesitation in the market. As front-end vols drift lower, it is likely that BTC spot will continue to chop around the 62k-67k range in the near term.

CONCLUSION

This time we would like to touch just two major topics. First is, so-called, Japanese yen carry trade unwinding. Second – political role of the blockchain technology and BTC in particular that was announced by IMF recently. 

Why we’re so concerned with recent “Black Monday” action in August. There are multiple reasons for that. First is, BTC has dropped for ~13%. Second – no carry positions unwind in reality happened. Those who read our FX market reports know that. We believe that hardly BoJ has raised rates voluntary, this action was agreed with the US, no doubts. This was a kind of test. When carry trades really under closing it triggers big turnover in Central Banks swaps, but this time we haven’t seen it. So, big headache is still ahead. 

Another reason why we’re talking about it – the US-JP rate gap is narrowing. The Fed intends to cut while JP is tighting the rate. It means that the carry trade close is just a question of time. Test shows the impact on BTC. Real carry unwinding will lead to multiple scale of sell off in the US techs, which could push BTC below the floor.  In general we treat Japan as one of the possible start points of global financial crisis. Their banks have big leverage investing the US assets and already are hard breathing. So, by the US command, they could become the starting point of the global collapse and take all accusation off the US. 

But this is not all yet. This drop could be used by the US government (after elections, for example), to grab all bitcoins off the market and create so called “Strategic reserve”. Then they could start pumping BTC again. The bottom line here is simple. If you even not trade on FX market, we suggest you to keep an eye on the news stream dedicated to Japan, its main indicators (mostly GDP and Inflation). With the coming rate cut in the US and another Japan hike in December anything could happen. 

Second is political clash in the US. Both candidates want to make the crypto industry the hostage of this struggle and both are pulling it in its favor. Here we have to keep pragmatic view. It is naive to suggest that politicians wish all goods to crypto industry. Most likely that they just want to use it in its own interests. From this perspectives all loud slogans means nothing. D. Trump is just a showman. Crypto industry slowly but stubbornly is taking under government control via ETF and exchanges. It is not a free market anymore and we should not be surprised too much if we will see unexpected sharp moves in any direction. Market could be easily manipulated now, it is on a manual control. 

By these reasons I wouldn’t give BTC and Gold an equal place. Some observers contend Bitcoin’s sharp tumble supports the notion that crypto is an asset class particularly attuned to potential dangers — such as the Federal Reserve waiting too long to cut rates and plunging the economy into a recession.

“It is unrealistic to think that institutional investors are allocating capital to Bitcoin for the same reason as gold,” said eToro analyst Josh Gilbert. “These two assets don’t play the same role in investment portfolios. If investors panic or are looking to deleverage, crypto is often the first asset on the list,” Gilbert said.

As you understand the reason is not in maths correlation absolutely. Now to IMF…

Experts from the International Monetary Fund suggested that regulators create their own payment systems based on distributed ledger or blockchain technologies. This will solve the problems of insufficient regulation of cryptocurrencies and transparency of the banking system, according to the report “Programmability in payment and settlement systems“.

The new settlement system should be based on the principle of openness of the code base, which will give third-party developers access to information about accounts and money transfers. 

This is just the next step to set the total control over public finances.  Blockchain technology is needed for stricter control over finances. Along the way, it solves a bunch of useful and re-distributive problems (for example, it is possible to reform the settlement and payment departments of banks and accumulate all balances in the Central Bank), but the main thing is control.

“Independent” crypto here acts as the goat-provocateur at the slaughterhouse. It accustoms people to the idea that a virtual wallet is normal, and the fact that you can “accidentally” lose access to it or you will not be able to withdraw funds is a matter of life. In general, it removes blocks and fears. Through greed, coin pumps, tales of protection from hyperinflation, etc.

At the same time, without the introduction of a state crypto (CBDC), there is no particular sense in the existence of an “independent” crypto. And the system is expensive – computing power, specialists, mining etc. All this can be financed and developed only if you have saddled the cash flows. But states are in no hurry to introduce anything, and sometimes they even resist, because they are afraid of losing the same control.

 As a result, the fork appears to be as follows:
Either they will still be able to implement the state crypto and an independent crypto (primarily Bitcoin) will be attached to it as a semi-official tool and a narrow product;
Or the introduction of state crypto will be sabotaged and money for supporting independent crypto will simply stop being allocated (primarily advertising budgets)

In both cases, investors will be the last thing on their minds. Here’s what you need to understand: the inclusion of “independent” crypto into a financial system with a clear and legal status does not guarantee growth in quotes. Quite the contrary: there will be regulation, bureaucracy, and boredom. 

So, crypto industry gradually is losing their basics that it was made for – independence, anonymous, transaction safety, storing safety, inflation protection. BTC shine is becoming blur. Gradually it is becoming a toy and tool in the hands of power clans of Deep state and politicians. Now some degree of freedom still remains but the question is for how long? I would think twice before include BTC in strategic long-term investing portfolio. 

Indeed, BTC could cost $1 mln or even $150 Mln but it doesn’t mean that it becomes more expensive, it just will mean the devaluation of US Dollar. If in early times, currency devaluation manifested in raising yields and inflation, extended in time and not easily identified – now everything could happen just before our eyes. US government prints money, grab 80%+ of BTC free flow  via ETFs, pumps BTC price – and, bingo, pays out all national debt, devalued in multiple times with BTC … It sounds a bit rough but this is the core idea that will be packed in colorful wrap.