Opening bell │ #10 │ 22nd April

Report highlights:

1. Small on-chain investors have returned, potentially claiming over a third of Bitcoin’s new supply for the remainder of the year.
2. ETF investors showed signs of renewed interest last Friday, marking the first positive inflows in weeks. With the halving in effect and retail investors accumulating once more, the sell pressure could be as low as less than 300 Bitcoins for prices to remain stable.
3. With reflation concerns emerging, the Federal Reserve is likely to continue addressing these issues through speeches than through rates.

Gold

Sticky Federal fund rates lag an explanation for recent gold price movements?

The recent spike in gold prices raises numerous questions about the reasons behind this surge, particularly as U.S. ETF investors have been shedding tons of the precious metal for eight consecutive months. This trend prompts a deeper look into market sentiments. Are investors bracing for a disaster? There’s no clear indication of that. Are Federal Reserve rates unattractive? Quite the contrary. A more likely explanation might be the typical lag between rate hikes and their impact on prices should investors now be expecting a recession.

Ethereum

Ether staking dynamics bring supply stability and yield for investors.

Had Ethereum not transitioned to Proof-of-Stake, its supply would have seen a 3.1% increase. However, since the Merge, the supply of Ether has actually decreased by 0.2%. Additionally, with heightened activity on the blockchain, 38% of the circulating supply is now held in smart contracts. This represents a 46% increase in the amount stored on the blockchain since the Merge, primarily through staking and restaking platforms. Currently, staking yields stand at 3.2%.

Long-term retail on-chain investors?

Halving, retail accumulation could mute new supply overhang to a mere 300 Bitcoins daily.

Small retail investors who store their assets on-chain and hold between 0 to 1 Bitcoin have accumulated over 1.4 million BTC. This group of investors has generally shown little price sensitivity and has been one of the few consistently observable buyers on the blockchain (see chart 1). This year, these investors began to take profits, offloading nearly 20,000 Bitcoins before re-entering the market at the cryptocurrency’s peak price (see chart 2).

While no single investor in this group can significantly impact the market alone, collectively, their actions have begun to influence supply dynamics more than demand dynamics as we enter an era where only 450 Bitcoin rewards are distributed per day. From 2010 until the end of 2023, this cohort on average took 33% of the new supply each year (see chart 3).

Last year, the daily growth rate of total holdings for these addresses was 0.02%. However, in 2024, following a negative trend, these investors are showing a daily growth rate of 0.012% since the peak in Bitcoin’s price.

Simple calculations indicate that, whether considering the daily growth rate of the holdings or the average annual uptake of new supply, only about 300 Bitcoins would remain surplus to the supply needed by these on-chain investors.

Supply can originate from various sources, including large investors and assets held on exchanges. Thus, examining transparent market data could prove beneficial. Bitcoin ETFs, a key driver of this year’s bull run, warrant close monitoring.

At the current price of $65,000, a total net inflow of $5 billion would suffice to cover any surplus new supply until the end of the year. This would translate to a daily net inflow of $29 million, considering only trading days. Including weekends and holidays, the daily selling pressure from new supply would amount to just $19 million.

By the 2028 Halving, this small cohort could potentially absorb all the available supply unless prices move significantly forward.

1: 0-1 BTC address holdings |? mn BTC

2: 0-1 BTC holdings in 2024 |? mn BTC

3: Bitcoin inflation vs 0-1 address holdings? |? BTC %

4: 0-1 BTC address accumulation of new supply vs growth in holdings

5: USD inflation value of new bitcoin supply

ETF flows?

Kismet: Soft ETF markets show signs of re-entry, halving gives boon for price support.

Opinions vary on whether the Bitcoin Halving was anticipated in the market prices.

Some argue it was foreseeable, given that the reward reduction is widely known and not a secret within the industry.

This perspective is supported by the recent negative flows in US Bitcoin ETFs over the last two weeks, suggesting that the event might have been a case of “sell the news.” The critical consideration now is how the market will adjust its demand expectations in response to the new supply dynamics.

In evaluating the ETF markets, it’s insightful to consider the growth in Bitcoin accumulation beyond what was initially introduced by Grayscale when it transitioned from a trust. As of January 11, when ETFs began trading, there were already 619,000 BTC under management in GBTC. Since then, an additional 215,000 Bitcoins have been acquired, totaling 834,000 BTC. Even as the price of Bitcoin surpassed its peak, the trend of accumulation continued to a level of 222,000 BTC. Geopolitical tensions have potentially influenced market behaviour towards a downturn in net positive flows.

Including GBTC, the ETF market saw minimal selling, with BTCO experiencing ten days of no inflows, yet it saw renewed activity last Friday, indicating a calming of market nerves. Following the halving, daily Bitcoin inflation has been reduced to 450 coins, which is less than half of the average daily purchases since reaching its highest value. However, from April 1, as geopolitical tensions escalated, the daily average fell below 100 BTC, primarily due to significant outflows from GBTC. Nevertheless, last Friday, only two of ten ETFs recorded outflows, one of which was GBTC.

What sell-off from ETF? BTC accumulation above grayscale starting point still above price peak levels.

US bitcoin ETF daily inflows? |? $mn

Inflation

Spirits of Federal-past summoned: Reflation, game theory and credible threat.

Financial markets are always forward-looking, in contrast to the Federal Reserve, which is anchored to the Consumer Price Index and other key economic indicators, making decisions based on past data.

However, what transpires between these decisions can be crucial.

Every Chair of the Federal Reserve, including Jerome Powell, understands their ability to adjust interest rates, but the effectiveness of such actions is debatable.

After the Great Financial Crisis, massive quantitative easing efforts failed to elevate inflation to the target of 2%. Ben Bernanke, who led the Federal Reserve during the crisis, once shared an insightful parable following the dot-com bust.

He said, “Suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.”

Does Powell expect market efficiency merely based on his public comments to give him directional power?

His statements over recent months have shown little consistency. In December 2023, Powell remarked, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

Yet, less than two weeks later, a shift in tone suggested that rate cuts were a discussion point, leading investors and betting markets to anticipate up to six cuts within the year, though now the expectations have moderated to potentially just one cut.

Last week, Chair Powell gave another significant speech in Washington, stating, “Given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”

Following this, the stock markets trended downward, reacting not to actual rate changes—the last of which occurred in August 2023—but to the perceived credibility of Powell’s threats.

If Powell is applying a game theory tactic learned from Bernanke, he might also be drawing lessons from former Chair Paul Volcker, who in the 1980s raised rates to a staggering 19% in response to soaring inflation. Current concerns suggest a potential reflation, as historical cycles indicate that these are not isolated events but recur in multiple waves.

Inflation exceeding 5% has often heralded severe crises, such as in the 1990s when it reached 9%, and from July 2006 to August 2007, when it remained above 5%, with recessions following as the solutions. It is commonly said that no one can predict the Federal Reserve’s actions, but it is clear what they monitor and aim to achieve. The central issue seems to be the bank’s reactive stance, waiting for economic indicators rather than preempting market movements.

Further speculation from sources like the Financial Times and Bloomberg suggests that high interest rates are inadvertently increasing disposable income through returns on money market funds. With most household spending dedicated to mortgages, the effective interest rate on outstanding debt remains at 3.8%, still below pre-COVID levels, which, coupled with the widespread use of credit, could be contributing to persistent inflation.

Perhaps the market is more attuned to what the Fed says than to what it actually does.

And perhaps Jerome Powell isn’t too worried about reflation. But the topic is circulating and part and parcel of investor discussions, meaning, part of market movements.

Derivatives

Be weary of spikes in Bitcoin funding rates.

Bitcoin funding rates, commonly used to gauge investor sentiment, do not always offer a clear picture and can vary significantly across different exchanges. For instance, Huobi, which primarily serves Asian markets, has seen spikes in its average funding rate frequently followed by downward market turbulence.

Although it is not an infallible indicator, there is a noticeable pattern that has recurred several times over the past year.

Derivatives

Perpetual volumes on track for record quarter.

With just over a week remaining in April, perpetual volumes on derivative exchanges have already surpassed the totals for January and February.

To date, nearly $5 trillion in volume has been traded, and it appears set to easily exceed the $8.8 trillion traded throughout all of 2023, with more than eight months still to go in the calendar year.

Derivatives

Annualized dated futures premiums trading below 2024 average.

Futures premiums, which were previously at a 30% premium above Bitcoin’s index price, have decreased to just 10%, representing the lowest cash and carry return observed this year. Across the four contracts referenced in the chart, the average premium stood at 14%. Considering all-time-highs recently, massive yields for months and geopolitical tensions, the reduction in premiums might be a temporary reprieve rather than a bearish indicator.

30 day correlations?

Bitcoin, US Dollar Index & SP500 in historically bullish correlation environment.

It has been noted that Bitcoin tends to perform well in a market environment where it has a low correlation with the US Dollar Index (DXY) and a high correlation with the S&P 500. Previous studies by Copper have indicated that the markets generally turn bullish when both correlation indicators reach extreme values. Although currently these indicators are slightly below the extreme thresholds observed in the study, they are nearing the levels that have historically coincided with significant upward movements in Bitcoin.

BTC / DXY correlation

BTC / S&P 500 correlation

BTC / Gold correlation

BTC / WTI crude correlation

BTC / Nasdaq 100 correlation

Economic calendar

Key events this week : US in focus with macro economic prints.

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