This week in Crypto
At the end of last week, the largest expiry of Bitcoin options in the history of the BTC exchange traded derivatives market took place. This was not only a milestone in the institutionalization and financialization of the market, but as open interest continues to increase in the options markets, these events provide potentially very tradable events for speculators and risk-takers.
With very large open interest, it is possible that price action can get pinned between certain predetermined strike levels as the date of expiry approaches. As time reduces on an options contract, the sensitivity to the rate of change of the underlying price of Bitcoin increases, this is also known as the Gamma of the option. As price moves up and down towards opposing strikes, traders need to dynamically hedge the option with increasing pressure, as a result of the increased Gamma. This process can play out as the option expiry approaches, which in turn creates a reduction in volatility until the contract expires. Once the options expire, the hedging required for option books to remain delta neutral is no longer needed in such great volume, and the large open interest which creates these ‘’pinned’’ market conditions are gone, allowing price action to revert back to more fundamental drivers.
As we noted last week with the entrance into the crypto market of Morgan Stanley and Goldman Sachs, we expect the open interest of the derivatives markets to continue to expand as sophisticated institutional money will, in greater numbers, seek to express market views with derivatives contracts. The greater the open interest in this derivatives market, the greater the potential effect on the underlying price of Bitcoin and the more pronounced these contract expiries may be until the trade is crowded out. It feels like little coincidence that with the record $6.4bn March options expiry now behind us, price has rallied ~16% as the fundamentals of the market kick back in. These being the continued and accelerating institutional adoption to the backdrop of a global money printer burning red hot with a side of close to zero interest rates.
Chart showing BTCUSD price action with the green arrow indicating when the record options volume expired
This week’s dose of institutional adoption comes hot off the back of our comments last week regarding institutional FOMO that we believe will drive this market higher. After Norwegian billionaire, Kjell Inge Røkke released his incredible Bitcoin thesis for his new oil and gas spin-off Settee, fellow Norwegian billionaire Øystein Stray Spetalen has now followed his lead and waded into the market. Having previously said Bitcoin was a ‘’nonsense currency’’ and citing the (ill-informed) environmental impact of mining, Spetalen has been quoted as saying.
“When the facts change, I change….I realized that I had been wrong. And when I also read that Kjell Inge Røkke had got into Bitcoin, it was quite obvious. I can’t bear to see that Røkke makes money and not me”
Øystein Stray Spetalen
Currently, there are over 3,300 USD billionaires and close to 50m USD millionaires in the world. Clearly, not every high-net-worth individual has a mindset like Spetalen, but many will and countless more will equally not want to be left behind as wealth preservation becomes a major concern with any fiat denominated security they hold. Hard, scarce asset allocation will continue to be a major trend for private wealth portfolios as this decade plays out, and Bitcoin will be central to this as FOMO drives the market and number goes up.
Earlier this week, it was announced that Visa would allow payment settlements via USD stablecoin USDC, which is an enormous milestone for the adoption of stablecoins by credit card companies and payment service providers. We expect to see similar such announcements from such companies in the near future. This type of mainstream acceptance of digital currency into incumbent payment rails further legitimises the asset class and its potential to disrupt the status quo.
Elon Musk made good on his promise to accept Bitcoin for his Tesla EV’s last week, and for a man that seems to get things done, this was not that surprising. The encouraging part of this story is that Tesla will not only run their own nodes and use their own payments software (in part) to accept payment in Bitcoin, but Elon has gone on the record stating that all BTC acquired from sales will be kept as BTC and not converted to fiat. This is a bold move and provides a signal to the market and his peers that the (former) richest man in the world is actively accumulating more Bitcoin, which he fully intends to hold indefinitely. Zooming out, Tesla is not just investing in Bitcoin, they are actively participating in the network and have even contributed to open-source projects such as BTCPay Server, as seen below. Watch this space with this type of committed mindset and approach to the Bitcoin protocol, Tesla and Elon will undoubtedly do more to shape this market in the coming years.
As we stated back in January, our view that a Bitcoin ETF approval is practically a certainty for 2021 was given a major boost last week as Fidelity Investments filed an application with the SEC, joining Valkyrie, VanEck, NYDIG, and Galaxy Digital. The difference here is that Fidelity brings proper institutional clout. They know how regulators and politics work, and they have a level of credibility and gravitas that others who have tried (and failed) simply do not possess. The links between Fidelity and the US Government and regulators run deep, and if Fidelity can’t get this over the line, then the market will suspect foul play. With the Canadian ETF, Purpose Investment crossing $1bn in AUM in just over a month last week, we believe a US ETF could have magnitudes more inflows than its Canadian competitor and, if SEC approved, will provide more solid retail onramps into the market.
Should a US ETF become a reality, then the regulatory moat surrounding Bitcoin will become considerably deeper. With clear routes for retail investors to allocate savings into Bitcoin via an ETF. The thought of an outright ban from US regulators now seems very far off. However, trouble is possibly brewing down the line regarding privacy and the growing utility of Bitcoin and the wider crypto market.
Last week the Financial Action Task Force (FATF) fired another warning shot at the crypto industry. We have discussed many times in this Weekly how the so-called slow creep of regulation is progressively nibbling away at the decentralized and permissionless nature of Bitcoin and cryptocurrencies, which stands antithetical to the progressive surveillant nature of the state. Frustratingly, FATF’s recent updated recommendation goes further than all previous drafts and will have significant ramifications should it be implemented.
It is worth noting that although FATF, via its behind closed-door meetings, can only produce non-binding ‘’recommendations’’ regarding financial crime to its members, failure to implement their will can result in heavy diplomatic costs and isolation from the US banking system which is often used as a threat to coerce states to the whim of US regulators and the FATF draft recommendations.
The main concerns with the latest draft surround the expansion of the VASP definition. Virtual Asset Service Providers (VASPs) are being recommended to now include non-custodial parts of the industry. This could include layer 2 infrastructure including lightening node operators, multi-sign holders, smart contract substructures as well as decentralized exchanges and many components of DeFi. This could cripple many parts of the industry and likely create a bifurcated market with clean, regulated coins stuck in a walled garden of banks, custodians and regulated exchanges that all provide the burdensome reporting that the FATF recommendation requires. The other market would be the grey unregulated market where coins move peer-to-peer without the need to provide the regulators (the US) with the name and physical address of each party in the transaction. If this theory plays out, then this grey market would be constantly under attack from law enforcers.
As we have seen in November last year, the US DoJ seized ~70,000 Bitcoin from ‘’Individual X’’ who was historically linked with the Silk Road. Up until their seizure, one could argue these coins were tainted via their association with the nefarious activities of the Silk Road. Now they are in the possession of the US Government, one could argue their value has transitioned from grey market to the walled garden on the regulated market and have been cleaned in the process. We maintain that it would be a terrible move for the US to auction the Bitcoin as it has done with previous seizures, but this example of seizure from the grey market and redeployment into the regulated market is the direction that FATF is likely pushing for.
With recent reports that the Biden administration is already pushing for greater spending and with the warning signs that inflation is here and will become more acute, the fact that an unelected group of people can make recommendations to the financial powers in the world that slows and prohibits the general population from making sovereign decisions about how to protect their wealth is concerning.
Crypto and Bitcoin have promised financial inclusion and freedom to anyone with an internet connection and a mobile device. Regulating this freedom away from those that need it most and turning it into the preserve of the rich and powerful under the guise of regulation and maintaining a monopoly on currency is yet another example of the ‘establishment’ flexing their muscle.
Crypto weekly performance: 1st April 2021. Source www.bitgur.com