As bitcoin rallies on the FOMC rate cut, we look at what market data says about how traders are positioning for the next move.
Corporations continue to adopt bitcoin, but some reported metrics require a deeper inspection.
We look at factors driving gold to new highs and wonder if bitcoin could be a beneficiary as well.
Rate Cut Unleashes Animal Spirits, But Are Traders Buying the Move?
On Wednesday afternoon, as expected, the FOMC lowered interest rates, the first reduction since 2020. The market had been split on whether the FOMC would go 25 or 50 bps and while there was initial volatility post-announcement, markets, including bitcoin have rallied in the wake of the 50 bps cut. However, data from options markets imply that traders may not be fully convinced of the sustainability of the move.
Looking at the day-to-day change in implied volatilities (post announcement) for options across the strike spectrum, an unexpected pattern emerges – an increase in implied volatility (IV) for downside protection (buying puts on bitcoin) and a decrease in IV of options used to position for an upside move (buying calls on bitcoin). These are short-term views expressed by traders (28-day expiry options).
Our interpretation of this dynamic is that traders aren’t entirely convinced of the longevity of the rally and may be expecting bitcoin to stay rangebound. If traders had instead been expecting a short-term breakout to the upside, we would expect to see the reverse – a decrease in implied volatility for lower strikes (implying lower cost for insuring against down moves) and an increase in implied volatility for options with higher strikes (implying higher cost for gaining upside exposure).
Whether or not traders’ views of spot expressed in the options market are correct remains to be seen. If risk assets continue to move higher, as the prospect for a “soft landing” increases, bitcoin may continue to enjoy continued momentum. We are also coming into the seasonally strongest period for bitcoin returns, the fourth quarter. On the flip side, bitcoin is bumping against the 200-day moving average ($64K), which may prove to be upside resistance.
Corporations Continue to Embrace Bitcoin, But Some Financial Metrics Require Deeper Inspection
This week, another public company, Cathedra Bitcoin, announced it would adopt bitcoin as a strategic investment in its corporate treasury, joining the ranks of MicroStrategy, Metaplanet, Marathon Digital, and Semler Scientific. Cathedra said it would reposition itself away from bitcoin mining and instead focus on maximizing its bitcoins holdings.
Focusing on bitcoin as a balance sheet investment is a strategy employed by MicroStrategy to great success, making it one of the best-performing stocks (period) since adopting the strategy. Last quarter, MicroStrategy unveiled a new corporate metric “bitcoin per share” and defined the quarter-to-quarter change in this ratio as “bitcoin yield.” We’ve received numerous questions on the metric, so we felt important to highlight its definition for readers as it is not “yield” as one would typically define it in the traditional financial market sense. Shareholders of MicroStrategy shares are not entitled to a return or dividend in bitcoin somehow, rather “yield” in this context is the increase (or decrease) in MicroStrategy's bitcoins per share (assumed diluted shares outstanding).
As a reminder, the bitcoin asset generates no yield and confers no rights to its owners. In that sense, it is very much like gold. While bitcoin holders have long sought to generate returns on their holdings, the avenues available to them have been limited to lending or derivatives strategies (e.g. covered call overwriting), until recently. The crypto lending market suffered catastrophic consequences in 2022 as the result of certain players with poor risk management and underwriting practices, and as a result, the rest of the industry suffered and lending markets have yet to return to prior levels. Derivatives strategies have direct analogies with traditional financial markets, making them familiar to most sophisticated investors, but still are not without market risks. Finally, a new category of “yield” has emerged in the form of using bitcoin to validate blocks on proof of stake (PoS) networks. While this is an appealing proposition, it still involves technical as well as currency exchange risks (with the PoS network’s native coin).
Given the digital asset industry’s habit of commandeering commonly understood financial terms but making substantive changes, we urge investors to dig into the details of these and not just take the names of the strategies for granted. While these names are often helpful in simplifying a complex industry and making it accessible to traditional market participants, they often require a critical eye to understand their true meaning.
Gold Continues to Rally as Long-Standing Relationship Breaks Down
Gold is having a banner year, up nearly 25% year-to-date, and continuing to set new all-time highs almost daily. Historically, real interest rates, the yield on 10-year TIPS, have been a significant contributing factor to gold’s price. However, two years ago, that relationship began to break down and other factors seemed to be affecting gold’s price more. We look at what instead might be driving gold's price and if those factors might affect demand for digital gold, bitcoin.
Gold is often thought of as an inflationary hedge, but outside of the 1970s and early 1980s, real rates have been a bigger determining factor affecting price. That relationship broke down two years ago as the following chart illustrates, and if investors had been keying off that long-standing relationship, they may have missed the continued outperformance.
The big driver of the breakdown of the relationship was central bank purchases led by China. Demand from central banks jumped 140% from 2021 to 2022 and remained at an elevated level through 2023 and into the first half of 2024. In addition, rising geopolitical and macroeconomic uncertainty as well as rising government debts around the world are playing to its strength as a safe haven asset.
How does all this translate for bitcoin? While central banks and governments outside of El Salvador have yet to emerge as significant purchasers of bitcoin, geopolitical uncertainty plays into bitcoin’s strengths as a non-sovereign backed store of value. Bitcoin probably won’t act as a hedge to a drop in S&P 500, something we’ve explored before, but as a hedge against major geopolitical events (see the section in BlackRock’s research), bitcoin tends to shine.
Market Update
Bitcoin screamed higher this week, much of it on the heels of the FOMC’s 50 bps cut. Most major asset classes benefitted as well, with long-term US Treasuries being the one exception. Most of our market observations were covered earlier in this piece but we will follow up on something we wrote about last week, altcoins. Without this being a commentary or analysis of any particular altcoin, our observation is that they can act as leading indicators. The fact that they have bounced off the same low several times now (take your pick of SOL, ADA, AVAX, etc.) and are starting to set higher highs and lows could be seen as encouraging for the broader digital asset market.
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