Market Commentary
Bitcoin Market Commentary: New Highs
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Tuesday, October 26, 2021

And just like that, bitcoin’s price reaches new all-time-highs, boosted by increased volume related to the launch of futures-based ETFs.  

The price of bitcoin crossed April 15th's close of $63,410 on Tuesday, just 188 days later, with new highs also created on Wednesday of this past week. The new intraday high is $66,976 as per the Bloomberg, with October 20th’s close of $65,996 our new reference.

While early-week strength was exciting, price pulled back around 8% from highs, with reduced volume in futures ETFs and general profit-taking warranting a retest of $60,000. Price closed at $61,160 by the end of the week, gaining 3% from the week prior.

Near-term, traders and investors focus on strong seasonal tailwinds into the end of the year, while remain weary of potential monetary tightening in 2022. So far, bitcoin has been unfazed by the both the potential for lower-than-expected spending ($3.5 trillion likely reduced to $1.9 to $2.2), as well as the narratives related to tapering and hiking schedules in 2022.

This resilience has not gone unnoticed, and despite a macro picture that is less perfect than last year, strong adoption and the potential for sticky inflation has been more than enough for many asset managers to increase exposure.

Trends illustrated on-chain show strong adoption and accumulation. Financial integration has driven much of the performance in 2021, and this trend is likely to to continue as education, awareness, and ease of access pushes onward.

This week, we discuss the rise in open interest, the decline in crypto-margined futures, and revisit seasonality.

CME Open Interest Hits New Highs

ProShares Bitcoin Strategy ETF (BITO) launched on Tuesday with over $1 billion in dollar value traded on day one, with another $1.3 billion traded on Wednesday. Price followed volume on the way up, with bitcoin moving higher on both Tuesday and Wednesday, but declined on decreasing BITO volume through the end of the week ($474 million in trading volume on Friday). Valkyrie Bitcoin Strategy, ticker BTF, launched on Friday as well, with $78 million in value traded.

As a result, open interest on CME futures contracts hit new highs, with first-month CME futures reaching a notional value of $2.1 billion as of Friday’s close:

Across all expirations, a total of 17,120 contracts have been opened, with approximately $5.2 billion in notional exposure. BITO owns approximately $1.2 billion in notional futures exposure (thus far 1679 contracts of October and 2133 contracts of November, with 5 BTC per contract).

Increasing trading interest is a positive for bitcoin’s emergence as a macro asset.

Given this new accessibility, weekly flow updates from Coinshares illustrate a new, clear high of over $1.4 billion in inflows to crypto-backed funds:

While futures-based ETFs are probably not the best option for long-term investors, the overall effect on sentiment is certainly a positive thus far.

Crypto-Margined Futures Continue to Decline

A large culprit of bitcoin's early volatility was the significant amount of leverage that was crypto-margined, which often created a cascading effect when prices declined. Liquidations led to more liquidations, and the space was generally instable with high amounts of crypto-margined futures. These platforms include Okex, Kraken, and Binance to name a few.

A positive of growing regulation and professional interest is the decline of crypto-margined futures. With both increasing CME open interest and increasing use of stablecoins and fiat as collateral, the proportion of all futures margin collateralized by crypto has declined to just 44.5% from 70.2% in April:

With this maturation of market leverage, the overall landscape becomes healthier, and volatility should continue to decline going forward.

Revisiting Seasonality

As we mentioned in late September, seasonality in October, November, and December is traditionally strong. Five-year average returns are 23.7% in October, 6% in November, and 25.2% in December.

When comparing bitcoin’s advance this year relative to prior years, we see that while bitcoin is up 110.9% YTD, there is potential for more room to run:

Most notably, bitcoin gained 305% in 2020, and 1375% in 2017. Bitcoin even gained 5428% in 2013.

If October ends with Sunday’s closing price of $61,160, the average 6% in November and 25.2% in December would result in a price of ~$81,167 by year-end.

Stay Tuned,

Joseph Orsini, CFA
Director of Research

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