Q9 Markets: Unlocking the Truth

16th July 2021

Q9 Capital: www.q9capital.com

• Gradual slide reduces BTC gains to 12% YTD
• “Grayscale unlocking” creates market uncertainty
• Volumes fall more than 40% on major exchanges

The mood remains relatively muted in crypto markets with most digital assets seeing downward pressure this week, erasing the gains made in the previous one. BTC closed the week at $31.7k (-3.3%) despite rallying 4.1% in Asian hours on Wednesday, and ETH closed at $1,911 (-9.9%). DeFi names fared worse with ZRX down -19%, UNI down -16.7% and LINK down -14.9%. The gradual slide is continuing to eat into year-to-date gains, which now stand just above 12% for BTC.

There’s been a lot of debate on crypto twitter recently about the market impact of the “Grayscale unlocking”. Grayscale Bitcoin Trust has grown to become the world’s largest crypto-asset fund, and is backed by holdings in excess of 650,000 BTC — accounting for around 3% of Bitcoin’s total supply. Investors who previously subscribed directly for GBTC (instead of buying on the open market) have to wait for a six-month lock-in period before they can sell their holdings. Grayscale lacks a redemption mechanism so shares can only be sold on the secondary market. Some estimates show that 40,000 BTC ($1.32 billion) is to be unlocked over this month, with the biggest daily unlock (16,240 BTC) fast approaching on July 18th. Opinions differ about its market impact. JP Morgan analysts have stated that the “selling of GBTC shares exiting the six-month lockup period during June and July has emerged as an additional headwind for Bitcoin”, yet a recent report from cryptocurrency exchange Kraken states that “market structure suggests that the unlock will not weigh materially on BTC spot markets anytime soon.

Simply looking at the size of the unlocks is a very basic analysis that misses some basic market structure details. The vast majority of investors who subscribed directly, and are/were locked, did so with borrowed BTC or an otherwise hedged position. Many investors aren’t using GBTC as a long on bitcoin, but, rather, when shares are traded at a premium on Bitcoin, as an arbitrage play. The trade works when funds borrow Bitcoin to deposit into GBTC, then they take shares of GBTC that are worth more than the Bitcoin they borrowed. They were playing the premium of GBTC, not its price or that of BTC. If/when they unwind it’s on a spread. Yes, the spread hasn’t worked for today’s contestants and holders of GBTC would be selling their shares at a 15% discount to the NAV of the fund. This discount, however, may be priced in both on their books and in the market. At this point, it is arguably more interesting to look at the GBTC discount as an opportunity. Somebody is going to get this ETF thing done eventually. While none of this is advice, when it comes to crypto market analysis, do your own research and read more than the headlines. Quality may vary, as they say.

GBTC Daily Unlock

Source: bybt.com

The market’s fatigue can also be see in low trading volumes with some of the largest exchanges, including Coinbase, Kraken, Binance and Bitstamp, seeing falls of more than 40% in June. Lower prices and lower volatility are major reasons for the drop along with a recent spell of bad news for the asset class, including regulatory crackdowns of exchanges, mining bans in China, and questions around cryptos environmental impact. Summer can also often be a period of lower volumes in most asset classes. If you invested at the top you lost half your money. Yet again, this is a bit too basic/shallow. Despite the recent dramatic drop in trading volume, it’s still much higher than it was a year ago, and BTC is 3x over the same period.

A long term search for truth is perhaps more evident lately with institutional investors. Institutions have been net buyers of crypto for the first time in 5 weeks after a month of profit taking. A new survey of 100 chief financial officers at hedge funds worldwide has indicated that the sector is planning a significant increase in its exposure to crypto assets in the near term. The survey, suggests that if the respondents’ forecasts were broadly mirrored across the sector, assets in crypto held by global hedge funds could hit $312 billion. United States-based funds were most bullish about the new asset class, expecting to raise their portfolio exposure to crypto to 10.6% on average within five years.

In the News…

USDC backer, Circle, announced it will go public via a special purpose acquisition company, or SPAC, at a valuation of $4.5 billion; Jack Dorsey says Square will launch a Bitcoin DeFi platform. In a Twitter thread, Dorsey said that Square planned to create a “new business” with the “goal of making it easy to create non-custodial, permissionless, and decentralised financial services”, in what would mark one of the first big projects of its kind in the market; S&P Dow Jones Indices rolled out five new cryptocurrency index products including a “broad digital market,” or BDM, index that includes over 240 coins; The United Kingdom’s Metropolitan Police confiscated another £180 million in crypto on July 13; Blockchain-based fantasy soccer platform Sorare to raise $532M in funding. The NFT company’s valuation could exceed $3.8 billion. Damien Hirst has also joined the NFT party with a collection set to release through art sales platform HENI. Dubbed “The Currency,” the drop consists of 10,000 hand-painted works of art, each with a corresponding NFT.

“The Currency” by Damien Hirst

Legacy Markets

The S&P 500 Index has been making all-time highs nearly every day — 13 of the past 14 trading days, to be exact, with the SPX closing +0.9% higher week-on-week. Oil futures dropped -2.5% and Brent Crude fell by more than $1 a barrel on Thursday on expectations of more crude hitting the market after a compromise deal between leading OPEC producers and a surprisingly poor weekly reading on U.S. fuel demand. 10-year US treasury yields and the US dollar index were unchanged, while the Gold & Silver index rallied +3.3%.

Crypto Markets

• BTC/USD fell -3.3% while ETH/USD dropped -9.9%. The total market cap of the crypto universe was south of $1.3tln and Bitcoin continues to hold its dominance just shy of 46%
• EOS/USD outperformed majors with a +1.4% gain. Among large cap DeFi names UNI and SUSHI were down -16.7% and -15.6% respectively
• Annualised volatility dropped: 45% for BTC and 62% for ETH

Flows

• Thin client pad strongly skewed to buyers (6.5X buyers vs sellers)
• Buyers of ETH and BTC with a two-way flow in EOS
• Sellers of SUSHI in mild size

Q9 Capital: www.q9capital.com