Triple Down on Bitcoin

15 June 2021

Market Recap

Monetary sovereignty gives powers-that-be the authority over their land, And as much as bitcoin and digital assets potentially challenge/complement that power, sovereign nations have been pondering over how best to treat the new ‘asset class’. El Salvador made bitcoin legal tender, requiring businesses to accept payments in bitcoin and allowing tax payments in bitcoin. IMF cautioned against the move, saying it raised “macroeconomic, financial and legal issues”. Basel Committee also erred on the side of caution in its consultation, assigning 1,250% risk-weight to bitcoin, making it very capital-intensive for banks to carry bitcoin on their balance sheet. In terms of price action, last week started with FUD on Bitcoin security with various news outlets reporting that the FBI ‘seized’ bitcoin ransom related to Colonial Pipeline, as well as continued reports of mining rigs being shut down in China (Chart 2).

Chart 2: Bitcoin 7-day Moving Average Hash Rate, from Source: The Block

However, bitcoin bounced strongly from $31k level, forming a double bottom and painting a technically better picture, supported by MicroStrategy’s $500mio bond offering to double (or triple) down on its bitcoin purchase, and announcement from Interactive Brokers that it would be offering crypto trading to customers by end of summer. BTC is currently trading bid (MSTR’s bitcoin purchase is expected to be executed today/tomorrow), and rotation into ‘safe’ bitcoin continues with bitcoin dominance now higher by 3 percentage-points to 44.9% (Chart 1) on weekly basis. Rest of digital assets suffered double-digit declines; legacy coins (BCH, LTC, ETC, TRX, XMR) fared slightly better, and THETA (-4.5%) and TFUEL (+22.0%) also outperformed in anticipation of Theta 3.0 Mainnet Launch on June 30.

Chart 1: Bitcoin Market Cap Dominance, from Source: Coinmarketcap

In the TraFi side, State Street is setting up a 400 employees-staffed business unit dubbed State Street Digital dedicated to digital assets, tokenisation, and cryptocurrency. Alan Howard continued crypto shopping spree despite the slump in crypto prices, most recently putting money behind Copper.co, a London-based custody provider, and Kikitrade, an Asia-based crypto trading app. GIC invested $70mio in OSL-Parent BC Group.

On the macro side, interest rates and inflation seemed to continue to dominate sentiment. 10s yield decreased throughout most of the week, seemingly pushed lower by recent assurances from the Fed that they would keep monetary policy highly accommodative for “some time” and that the inflation would prove to be temporary. On Thursday, yields jumped briefly following core CPI rose 0.7% in May (Est. 0.4% MoM); Senate also reached a deal on $762bn infrastructure plan, significantly less than initially proposed $2tn, but also would not raise corporate taxes. The lower yields helped push the S&P 500 Index to a record high amidst light summer trading, favouring growth stocks while weighing down on financials.

(June 14, 2021 Top 5 Crypto KPI)

What is Happening?

Silvergate Bank cuts ties with Binance, disabling USD deposits and withdrawals for international users. This comes just 6 months after Binance started to offer Silvergate funding options last December. Binance mentioned it is working to provide an alternative USD solution. It is also worth noting that Chinese websites (Baidu and Weibo) have censored keywords associated with Binance, together with other Chinese exchanges, Huobi and OKEx.

Interactive Brokers will start offering crypto trading at the end of summer, joining a growing list of payment providers and online broker-dealers that allow their customers to trade digital assets, including Robinhood, Venmo, Paypal and Square. IB cited customer demand, but it is yet unclear as to which cryptocurrencies IB will offer, or when exactly the services would be available. Nevertheless, with 1.49 million client accounts and client equity of US$ 348.3bn, IB could offer a very convenient avenue for existing platform users to access the crypto market.

Conclusion

Satori remains cautious of two particular structural risks in the market. First would be miners’ inventory position — although miners’ bitcoin flows to exchanges have been decreasing (Chart 3), Chinese miners who are unable to relocate their rigs overseas may be forced to liquidate their holdings. Second would be the outsized importance of MicroStrategy on bitcoin prices given their use of leverage to purchase bitcoin; two particular levels we are looking at are ~$25k (break-even price) and ~$18k (insolvent price). Aside from that, it is worth noting the unexecuted volume on Bitfinex (bitcoin that went into Bitfinex but did not get executed; Chart 4).

Chart 3: Bitcoin Miners to Exchanges Flow, from Source: CryptoQuant
Chart 4: Unexpected Volume Index, from Source: CryptoQuant

Good Luck!