01 Mar 2021
Crypto prices ended the month on a weak note as market pulled back across the board from all-time highs. Bitcoin is ~20% off the $58,370-high on 2/11. Top 10 coins have retreated between 20–25%. The sell-off was led by a flash crash in Kraken, where ETH dropped from $1,800 to $700, and ADA from $0.835 to $0.156. Market has been trading heavy since despite relatively bullish developments of Bitfinex/Tether settlement with the New York Attorney General, Coinbase filing S-1 for direct listing and Square disclosing additional purchase of $170mio of Bitcoin, as well as MicroStrategy’s actual purchase of 19,452 bitcoins last week. Nonetheless, to put things into perspective, February still set the largest absolute monthly gain ever, and the market is still sitting on a huge bag of unrealised profits. Given the circumstances, it is worth pointing out 2 potential risks in the market:
- Leverage in the Grayscale Trust: Many players (most famously Three Arrows and BlockFi) have been using GBTC and ETHE as part of their cash-and-carry strategy, banking on Grayscale Trust’s NAV premium over futures premium. With crypto-ETFs on horizon, Grayscale Trust’s premium almost gone (Chart 1, 2), and additional 280mio GBTC shares created in the last 6 months (that will be free-standing in 6 months), it is entirely feasible that the NAV might turn negative, causing massive losses and creating negative feedback loop in both the spot and funding market.
- Regulatory risk: High profile purchase of Bitcoin by Square and Tesla and MicroStrategy’s debt-raising to buy Bitcoin would definitely put cryptocurrencies under regulatory scrutiny.
In the alts space, Cardano and Solana finished the week in green, as idiosyncratic news drove bullish sentiments in these tokens. Both are Layer 1s — Cardano would be undergoing hard fork at the beginning of March to become decentralized, mutli-asset smart contract platform, and Solana recently launched Raydium, a highspeed, low fee automated market maker. On the macro side, the speed of rising bond yields caught the market off-guard, as 10- and 30-year Treasury yields rose to as high as 1.56% and 2.35% respectively. This dragged down risk sentiment and major benchmarks pulled back; tech was the most affected while commodities and cyclicals outperformed as vaccine progress fueled reopening optimism. Over the weekend, House passed $1.9tn COVID relief bill, sending it to the Senate, and market is awaiting for approval of the JNJ vaccine.
What is Happening?
First publicly traded bitcoin ETF in North America, Purpose Investment’s Bitcoin ETF (Ticker: BTCC), saw its AUM swell past $600mil since it started trading on the Toronto Stock Exchange on 2/18. The Ontario Securities Commission was quick to approve second bitcoin ETF by Evolve Fund Group (Ticker: EBIT) — both funds initially charged management fee of 1%, but EBIT promptly lowered management fee to 0.75%. Launch of bitcoin ETFs saw Canada’s close-ended funds (3iQ’s The Bitcoin Fund, Ninepoint Bitcoin Trust, CI Galaxy Bitcoin Fund) collapse in premium to trade at a discount (Chart 3). This could be indicative of what might happen to GBTC once bitcoin ETF gets approved in the US. Furthermore, unlike GBTC, the Canadian close-ended funds have monthly and annual redemption features and the NAV discount should adjust over time — this may not be the case for GBTC.
Both crypto and risk assets are going through a period of consolidation. This round of crypto pullback is seeing differentiation within alts space as the race for ERC-20 continues. Although we remain wildly optimistic on the disruptive nature of blockchain and digital assets to revolutionize traditional finance, we are erring on the side of caution for the next few weeks as March is traditionally a weak month for Bitcoin performance. We advocate taking some chips off the table (and go fishing) and let the rates market sort itself out. We will let you know when the time is ripe to re-strap back to your full risk-on position.