Ecoinometrics - Indexing

October 13, 2021

The Bitcoin ETFs season is upon us and it is increasingly likely that the SEC will approve something this time. Here is why...

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 one thing, click on the subscribe button right below:

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The SEC hasn’t yet ruled on a Bitcoin ETF. But while they have been kicking the can down the road for a long time, it seems extremely likely we’ll have at least a Bitcoin futures ETF approved this year. If this is all we get then that’s not ideal, but hey you take what you can get.

Why are we very likely to get a Bitcoin futures ETF though? 

Well for once Gary Gensler, the SEC chairman, has said he is favourable to it. Words are wind though. Actions are what matters.  

And it turns out we did get some action from the SEC. You can read the full report in the Financial Times, but the short version is that the SEC did approve some ETFs focused on investing in crypto stocks, i.e.:

  • Bitcoin miners.

  • Companies with substantial Bitcoin hodlings.

  • Exchanges.

  • ...

So you have ETFs holding stocks that hold Bitcoin. That’s not exactly the same as ETFs holding futures that are indexed on Bitcoin… but damn that’s pretty close. I mean any ETF that holds MicroStrategy is basically tracking Bitcoin moves at this point.

All in all, what we are seeing is a pretty natural progression for the SEC. If you do a parallel with gold it is like:

  • ETFs on gold miners = ETFs on Bitcoin stocks. Done. 

  • ETFs on gold futures = ETFs on Bitcoin futures. Very likely this fall.

  • ETFs on physical gold = ETFs on “physical” Bitcoin. Soon™...

 Things are moving in the right direction.

No decoupling

There is a thesis floating around which goes like that:

  • Web3, DeFi, Dapps, and NFTs represent a potentially huge market.

  • This huge market could be bigger than the market for a global store of value asset.

  • But all these things are mostly happening on Ethereum.

  • So at some point the market cap of Ethereum is bound to flip Bitcoin.

Maybe. For that to work we need to assume a bunch of things.

First thing is that Web3, DeFi, Dapps and NFTs all end up accruing to Ethereum. I mean, it seems pretty clear that Bitcoin is the winner in the store of value category. But for decentralized web apps I don’t think Ethereum has eliminated the competition entirely.

It certainly has a larger community of developers than its competitors. And it also has a first mover advantage. So for sure it seems the safe bet in the Dapps platform category. 

But until ETH successfully switches to its proof of stake model there are still high execution risks.

Something else we are assuming is that the market size of Bitcoin is going to end up in a similar ballpark as that of physical gold.

My personal thesis is that Bitcoin will at least match the current market cap of physical gold in the years to come. At least. But there are a bunch of scenarios that could see it rise much higher. 

One such scenario that is plausible in the long term is that Bitcoin could be used as a pristine collateral asset powering the global financial system. 

After all, there is no counter party risk with BTC, the supply is finite and everything is auditable. So it is perfectly suited to be used as a collateral. If that happens then its potential market expands considerably… and Ethereum might still be playing catch up.

Regardless of what will come in the future, the decoupling hasn’t happened yet. Bitcoin is climbing its way out of the drawdown that started in April and, oh surprise, the correlation between ETH and BTC is also going through the roof...

And while ETH has been growing faster than BTC during this cycle, the ETH/BTC pair remains much below its all-time high from 2017.

So all I’m saying is that we aren’t yet at a point where web3 is getting so big that ETH is moving independently of BTC. That in my opinion makes it less likely that we’ll get a flippening event any time soon. 

But that doesn’t mean ETH won’t perform well. And if your thesis is that Ethereum will dominate web3 applications the same way Bitcoin is dominating as a store of value asset then by all means don’t wait to take a position.

CME Bitcoin derivatives

Wait a second. What year are we in? I’m asking because I have some feeling of déjà vu in the CME Bitcoin futures market.

The year is 2020. The month is October. Bitcoin is about to start a 4x parabolic move. Retail traders are getting on the trend. The smart money is taking the opportunity of large futures premium over the spot market to run the classic arbitrage play: sell BTC futures, buy spot to get a neutral position, pocket the premium.

So yea, October 2021 is starting to smell like that. At the moment we don’t see any major spike in traded volume. But looking at the open interest on the futures it is clear that the smart money is loading up on the basis trade.

That probably doesn’t tell us anything about where prices are going. But at least it shows that Bitcoin is back in the spotlight.

On the options side not much has changed. The volume is low. The puts outnumber the calls 3 to 2. And right now 47% of the calls for October are sitting on strike prices above Bitcoin’s all-time high. 

Let’s see if fortune favours the bold in the next couple of weeks.

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