What bitcoin’s rise in dominance says about the asset and the state of the industry.
An interpretation of ETF flows as bitcoin almost sets a new all-time high.
A mystery emerges with CFTC’s futures positioning data.
Bitcoin’s Dominance Rises to Highest Level Since Last Cycle
Bitcoin’s dominance, its share of the industry’s market cap (excluding stablecoins), has risen to its highest level since the 2021 cycle. The recent reading, 67.0%, is still below the last cycle peak of 74.5%, but up well off the May 2021 low of 41.7%. Bitcoin’s dominance doesn’t always correlate with cycle peaks and troughs as bitcoin tends to lose dominance to altcoins in the speculative/blowoff phase of crypto cycles and gain dominance through the correction phase of a cycle as bitcoin falls less than altcoins.
We think that bitcoin’s growing dominance says a few things about the state of the market. First, bitcoin’s role as a store of value or digital gold is attractive to traditional market investors, as expressed through the ETFs. This is opposed to ether’s “digital oil” narrative which seems to be falling flat with traditional investors if ETF flows are any indication. The other reason is a lack of compelling new use cases for blockchain-based technology. In 2017 there was the use of Ethereum as a global fundraising platform (ICO mania) and the nascent dapp ecosystem. We also had the first signs of DeFi with MakerDAO and NFTs with CryptoKitties. The 2021 cycle was marked by the explosion in DeFi applications and the proliferation of NFTs.
What has been the hallmark of this cycle, other than bitcoin and stablecoins (our analysis excludes them)? Liquid staking/restaking platforms (leverage on existing capital), roll-ups (transaction supply), and social/memecoins (social inclusion), and real-world assets (still small)? There doesn’t (yet) seem to be one or two things that have captured the industry’s collective attention the way there were in 2017 and 2021.
ETF Flows Ramp as Bitcoin Approaches All-Time High
Flows into the spot bitcoin ETFs have ramped up significantly recently, totaling $5.7B in the past 15 trading sessions. The trend in inflows began on October 11th, a day when bitcoin closed at $63,095 and the basis on CME futures ended the day at 8.8%. On October 31st, after significant inflows, the price of bitcoin ended at $69,963 after almost hitting a new all-time high. The 1m futures basis reached nearly 15% before receding below 10%, where it currently stands.
While there has been much speculation as to whether the inflows were due to basis trading or outright longs, by looking at the flows into various funds, our guess is it has been a mix of both, but largely driven by hedge funds and the basis trade. First, there has been a wide discrepancy in fund flows between the various ETFs, with BlackRock’s IBIT ETF taking in 78.4% of total flows during this period, followed by Fidelity’s FBTC with 11.0%, ARK 21Share’s ARKB with 3.2%, and Bitwise’s BITB with 2.9%. IBIT and FBTC, which collectively account for 89.4% of the flows, lean heavily toward hedge fund ownership. ARKB, which skews heavily to investment advisers, has seen uneven flows, with some days showing outflows. BITB’s flows have not been consistent either, but its ownership skews towards hedge funds. However, given the size discrepancy between BITB ($2.9B) and IBIT plus FBTC ($43.7B), we think trends in the latter two are more indicative of what is going on in the market.
The second reason has been the increase in basis. The increase in the basis, which is positively correlated to bitcoin’s price movements, has made the trade more appealing to hedge funds, incentivizing them to increase their positions on the trade. Our guess is that IBIT, as the largest and most liquid bitcoin ETF, is probably favored most by hedge funds. One wrinkle has to do with timing – IBIT’s fund flows, which were strong yesterday (Thursday) were a result of creation orders placed the day before (Wednesday). That is different than every other ETF which has creation/redemption orders on the same day as fund flows. Given that most other ETFs showed outflows on Thursday, there’s a strong chance the flows that are reported for IBIT on Friday (creation orders submitted Thursday) show a material deceleration. Also, the basis has come in substantially, now below 10% annualized, making the trade which we think incentivized much of the fund flows, less appealing.
Witchcraft at Play with CFTC COT Report Details
Each week, the CFTC publishes its Commitment of Traders (COT) Reports which shows futures positioning by futures trader types, including for the CME’s bitcoin futures. While this report is usually a wealth of information, lately some of the positioning it has been showing has been rather perplexing, with a jump in long positions by dealers, a drop in long positions by asset managers, and a jump and then a drop in long positions by other reportables.
We also know that some of the futures-based ETFs are bumping up against position limits given how popular they have become, so our initial thought was one had engaged in a swap with a bank. However, reported holdings for BITO and BITX, the two largest futures-based ETFs, clearly show the largest part of their holdings in various bitcoin futures contracts (BITO has engaged in a small swap with Societe Generale). Our best guess now is a misclassification around the types of the futures participants, but if readers have a better understanding of the matter, we are all ears.
Market Update
Bitcoin was up 2.5% on the week, closing just below $70K, but not before almost setting a new all-time high on Tuesday. Bitcoin hit $73,625 amidst renewed enthusiasm for a Trump presidency, falling just short of the all-time high set on March 14th of $73,836. We say renewed enthusiasm for Trump because Trump supporter Elon Musk’s favorite memecoin, DOGE, gapped higher as well while most other coins were up only modest amounts.
Finally, the election is upon us, and we hope to know the outcome in short order. However, we didn’t know the outcome of the 2020 election until SATURDAY. Given how close the polls have been this time around, we wouldn’t be surprised to not know the fate of the presidency until possibly well after the polls close. Prediction markets seem to be strongly favoring Trump, but as a reminder they did a poor job of identifying who the HBO documentary would suggest was Satoshi (was “Peter Todd” even trading?), suggesting they might not be the most informed views or are at least skewed by a few.
Seasonality seems to be working in bitcoin’s favor with the price rising 10.2% during “Uptober.” The outcome of the election may affect how bitcoin performs for the remaining 2 months of the year, but regardless of who comes into office, the financial condition of the US is unlikely to change meaningfully.
You are receiving this email because you signed up to receive our weekly research at www.nydig.com
This communication has been prepared solely for informational purposes and does not represent investment advice or provide an opinion regarding the fairness of any transaction to any and all parties nor does it constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Charts and graphs provided herein are for illustrative purposes only. This communication does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of New York Digital Investment Group or its affiliates (collectively NYDIG).
It should not be assumed that NYDIG will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein. NYDIG may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this communication.
The information provided herein is valid only for the purpose stated herein and as of the date hereof (or such other date as may be indicated herein) and no undertaking has been made to update the information, which may be superseded by subsequent market events or for other reasons. The information in this communication may contain forward-looking statements regarding future events, targets or expectations. NYDIG neither assumes any duty to nor undertakes to update any forward-looking statements. There is no assurance that any forward-looking events or targets will be achieved, and actual outcomes may be significantly different from those shown herein. The information in this communication, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
Information furnished by others, upon which all or portions of this communication are based, are from sources believed to be reliable. However, NYDIG makes no representation as to the accuracy, adequacy or completeness of such information and has accepted the information without further verification. No warranty is given as to the accuracy, adequacy or completeness of such information. No responsibility is taken for changes in market conditions or laws or regulations and no obligation is assumed to revise this communication to reflect changes, events or conditions that occur subsequent to the date hereof.
Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. Legal advice can only be provided by legal counsel. NYDIG shall have no liability to any third party in respect of this communication or any actions taken or decisions made as a consequence of the information set forth herein. By accepting this communication, the recipient acknowledges its understanding and acceptance of the foregoing terms.
