Ecoinometrics -December 23, 2020

Grayscale vs GLD...

Bitcoin doesn’t have a true ETF... yet. But GBTC, the Grayscale Bitcoin Trust, is as close as it gets in practice.

Gold on the other hand has a bunch of ETFs. The largest of them by assets under management is the SPDR Gold Trust or GLD.

And if it is unlikely that this halving cycle will see Bitcoin flip the market cap of gold, chances are that GBTC will flip GLD...


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GBTC vs GLD

The total size of the physical gold market is pretty big. Of course, contrary to Bitcoin, you can’t check your node to see what the actual supply of gold is. But estimations for the gold market cap range from $9 trillion to $12 trillion.

That means in order for Bitcoin to flip gold we’d need to see one BTC trade anywhere between $400k and $600k.

That’s a 20x to 30x growth from the current price. Possible but unlikely during this cycle.

However there are some Bitcoin instruments that might catch up with gold in the next few years.

Take Grayscale. Its current AUM is $14 billion. By comparison GLD, the largest gold ETF, has an AUM of $70 billion. That’s only a 5x multiple from GBTC.

So can GBTC overtake GLD during this halving cycle? 

Yes. Yes it can. 

Hear me out.

In the absence of a Bitcoin ETF, the Grayscale Bitcoin Trust is the only place where the traditional ETF buyers can turn to.

With the growing interest for Bitcoin that means more inflow for GBTC which means a larger AUM.

At the same time more inflow also means Grayscale will buy more Bitcoin at a time when the halving has reduced the supply of new coins. 

This is guaranteed to push Bitcoin higher which again means a larger AUM.

But wait, there’s more!

As all this is helping create the conditions for an exponential growth of the price of Bitcoin some will decide to drop gold and get BTC instead.

That means a potential outflow from ETFs such as GLD which in turn would make GBTC catch up to them even faster…

How realistic is that? Well, I’d say there are signs this has already started.

Since June the Grayscale Bitcoin Trust added $10 billion to its AUM. And while GLD had a spike between June and August, it hasn’t been able to keep expanding.

Compare that to the smooth growth of GBTC...

And of course this coincides with an increase of the rate at which Grayscale is buying new BTC.

For sure that helps with supporting the price. 

Remember that mid October Bitcoin was trading around $11k. As of today one BTC is worth more than $23k. 

When you look at the chart of their daily purchase you can be confident they are playing their part in the bull market.

Time to drop gold I guess.


CME Bitcoin Derivatives

What’s new this week in the world of cash settled Bitcoin derivatives? Not much I’m afraid.

In some sense that’s good. The fact that institutional investors are trying to get their hands on physical BTC rather than playing with paper money makes for good foundations.

That means they understand the game. Accumulating physical coins is the safe play if you are in it for the long run. 

If you buy paper BTC you’ll do well during the bull run, especially if you make good use of the leverage that a derivatives contract can give you. 

But if you are going to hodl then making full use of the auditable nature of the Bitcoin ledger is the way to go. Who knows how much paper contracts three ways removed will be built on top of the blockchain…

Anyway, back to the CME derivatives.

The December contract is about to expire and naturally that’s creating the conditions for:

  • A rise in the open interest.

  • Larger than usual daily traded volumes.

  • Time spreads that are blowing up.

This is what you get when it is time for the futures to roll over during a bull market. It is almost done though. 

So expect to see less activity after we switch to the January contract. After all, as I’ve said above this is a spot driven market.

Christmas came early for the calls in the options market. At the close yesterday 90% of the calls on the December contract are in the money. That’s obviously a record.

We’ve seen some protective puts pop up pretty close to the money. But again most of the activity is in buying calls at $30k, $50k, even $60k for the first quarter of 2021.

Did someone say bullish...

Bullish is not the impression you get from looking at the Commitment of Traders though:

  • Retail traders are decreasing their long positions.

  • The smart money is decreasing their long positions.

  • Asset managers are decreasing their long positions.

Again, no need to worry about that. We aren’t in a derivatives driven market.


That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.

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Cheers,

Nick


The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:

  1. Click on the subscribe button right below.

  2. Follow Ecoinometrics on Twitter

Done? That’s great!