Q9 Markets: E.T.Fone Everyone
15th October 2021
Q9 Capital: www.q9capital.com
- SEC may approve a BTC futures ETF next week
- BTC dominance rises, futures surge
- Crypto market cap passes $2.5tn
Optimism is sky-high in crypto and the $6.7tn ETF industry that after nearly a decade the first US Bitcoin ETF could begin trading as early as next week.
Speculation around a potential US launch has fuelled a rebound in Bitcoin, with crypto breaking above $58,000 this week for the first time since May. Bitcoin has surged by over 90% since breaking below $30,000 in late July, tearing ahead of many alt-coins which often outperform. Bitcoin’s market dominance has reached its highest level in 8 weeks, with BTC now accounting for nearly 46% of the total crypto market cap and regaining a $1tn mkt cap of its own.
Should regulators give the greenlight, four futures-backed Bitcoin ETFs could begin trading on US exchanges this month, with deadlines for applications from Invesco Ltd., VanEck and Valkyrie approaching. Valkyrie Investments updated its futures-backed ETF prospectus with the ticker BTF on Wednesday — typically a sign that an issuer is nearing launch. On Wednesday, Cathie Wood’s ARK Investment Management jumped on the bandwagon and filed plans to launch its own Bitcoin futures ETF in partnership with European crypto asset manager 21Shares.
Gary Gensler in August said he would be receptive to a futures-based ETF. He repeated this sentiment two weeks ago while speaking at an asset-management conference in Washington DC.
Institutions have been rushing to buy Bitcoin futures in expectation of the ETFs’ approval. In recent days, the annualised premium on CME Bitcoin futures prices over Bitcoin’s spot value was 15%, compared with about 7.7% on average over the first nine months of the year.
The CME also plans to raise the cap on the number of BTC futures contracts that a single firm can hold. The move could help make room for a new big player… such as an ETF. These are all encouraging movements for some providers who have had applications pending for eight years.
Bitcoin Price in USD, 90 Days
Pros and Cons of a Futures Based ETF
We are still a long way from a physically backed ETF being approved. The SEC has no oversight over the spot market and crypto exchanges so until it is under their remit, it’s going to be tough to get a spot-based product listed on a traditional exchange. Oversight isn’t a problem with Bitcoin futures as venues such as CME are regulated.
On the plus side, regulated institutions (pension funds, insurance firms, asset managers, et al) will be able to easily purchase an instrument that tracks the price of Bitcoin. It also means that the holding will fit nicely into a traditional brokerage account as a separate line.
However, futures-linked ETFs are vulnerable to divergences in the prices of the futures and the underlying assets they track — and given the volatility of Bitcoin, it will be hard to synthesize. These products have a downside and often underperform the underlying asset. A futures-based ETF often underperforms the underlying asset due to longer-dated futures contracts trading at higher prices than shorter-dated contracts (this is called Contango bleed in the market). The ETF also has to roll forward the futures contracts and charges fees to unit holders, both of which eat into performance. Many financial advisers are opposed to offering their clients synthetic products, preferring physically backed alternatives.
The bottom line is that a spot ETF could follow the same settlement and data procedures that the CME does to mark its futures contracts. This should theoretically be transparent enough for the SEC. However, as we noted above it’s a question of jurisdiction. CME will serve as the middleman and the additional cost will be passed to the ETF consumer.
This isn’t what everyone’s looking for in a BTC ETF, but it’s a step in the right direction.
What does this Mean for Markets?
Crypto hype-men such as Anthony Pompliano have seized upon the idea, tweeting that things could “get insane.”
However, given the ease of access to crypto markets relative to previous years, it’s unclear that a Bitcoin ETF launch would spark a flood of demand. Individuals can already easily buy and sell digital assets on crypto exchanges and institutional investors have been able to gain crypto exposure through vehicles such as the Grayscale Bitcoin Trust and proxies such as MicroStrategy and COIN.
A futures ETF will definitely be a positive — it’ll expand the breadth of the participants that can start buying Bitcoin and taking part in the ecosystem… but will it be impactful as it would have been a few years ago? Maybe not in the short term… we’re already seeing institutional demand satisfied via other avenues… but we are very early. This is probably a buy the rumour sell the fact, but in the end this is actually a big deal type story.
But will we actually get approved? While ETF issuers are clearly hopeful, there’s no way to know what regulators are really going to do. It’s far from certain that the current round of speculation is anything more than wishful thinking. Despite the fervour and articles like this with the typical people who “asked not to be named”, it’s possible the can gets kicked down the road again.
Crypto is checkered with pop-and-fizzle events. From the Coionbase listing to El Salvador’s rollout. A futures-based ETF approval would undoubtedly be good news. Maybe not a game changer, but do note that nothing above is actually bearish, just degrees of bullish.
In the News…
- G7 finance leaders lay out guidelines for CBDC’s. They stated that any digital currency issued by a central bank must “support and do no harm” to the bank’s ability to fulfil its mandate on monetary and financial stability, and must also meet rigorous standards.
- Russian President, Vladimir Putin, thinks cryptocurrencies have value — but he’s not convinced they can replace the US dollar in settling oil trades. While Russia continues to enforce a ban on crypto payments as part of a law that took effect in January, the country has no plans at this time to completely prohibit trading by its citizens.
- Coinbase wants the US government to create a new regulator to oversee the cryptocurrency industry.
- The IMF is worried about the “cryptoization” of the developing world. In its “Global Financial Stability Report,” released Tuesday, the global financial institution said “cryptoization,” or the use of digital currency by a country, carries “significant risks and is an inadvisable shortcut” for developing countries trying to boost their economies.
- Nearly 45% of consumers around the world will use crypto for payments by 2023: New study
- Crypto use surges in Afghanistan amid Taliban takeover
- A major international airport in Venezuela is reportedly preparing to start accepting crypto as payment for tickets and other services
- Bakkt crypto exchange partners with Google for payments. Millions of retailers currently accept Google Pay as a form of payment, potentially giving Bakkt users the ability to pay in crypto at a variety of stores and online markets.
- China’s escalated crypto mining crackdown sparks a new round of cat and mouse play
- Sotheby’s launches curated NFT platform called ‘Sotheby’s Metaverse’. The platform will include curated NFTs from the Sotheby’s team and allows individuals to purchase NFTs using ETH, BTC, USDC or fiat currencies.
Legacy Markets
In traditional markets, fears of price pressures lurching out of control continue to weigh over the risk sentiment and push bond yields higher. Bloomberg data shows stagflation — a combination of slow economic growth and relatively high inflation — is a major talking point in the market right now.
Market-based measures of inflation expectations are also rising across the globe in the wake of the energy crisis. This favours perceived inflation hedges like gold and Bitcoin.
Oil futures rallied +3.5% and the SPX rose +0.9% largely driven by strong earnings data. The US dollar index dropped -10bps and 10-year US treasury yields slipped 3bps while the Gold and Silver index rallied +8%.
Crypto Markets
- BTC/USD rallied +6.5% and ETH/USD rose +5.5%. The total market cap of all-crypto crossed the 2.5tln mark and Bitcoin’s dominance rose above 45%
- EOS/USD dropped -2.2% and YFI/USD was the outperformer among blue-chip DeFi names, posting +9.7% in gains
- Annualised volatility declined in crypto markets to 47% for BTC (vs 87%) and to 65% (vs 71%)
Flows
- Two-way flow slightly skewed towards clients buying (1.3x buyers vs sellers) on muted volumes
- Net buyers in BTC and net sellers in ETH and LINK
- Mild buying activity in EOS and LTC
Q9 Capital: www.q9capital.com
