How a Potential ETF is Impacting Bitcoin Futures Markets - Oct 11, 2021


Week of Monday October 11th to Sunday October 17th

Market Commentary 💬

Bitcoin 🟠

Bitcoin closed its second consecutive week of double digit gains last week, finishing higher by 13.45% at $54,714. From a technical standpoint, it broke through all of the resistance levels we had been tracking, on stronger volume than last week. Usually a very positive sign. 

Wednesday saw a huge rally in bitcoin price. While these large, sudden moves are often driven by “short squeezes”, data from CryptoQuant suggests that the move was driven by a $1.6 Billion market-buy order. 

Needless to say, whoever is placing a market order at $1.6 Billion is no small fish. Circulating rumours suggest that it could be a large hedge fund or asset manager taking a position ahead of the possible ETF announcement. 

Looking further under the hood of last week’s move, we see some insightful trends. For one, we are seeing the implied premium on the 3-month bitcoin futures at the CME trade closely to those of Binance contracts. This is not the norm. 

As you can see, when the implied 3-month premium on the CME contracts (yellow line) trades close to that of Binance contracts (brown line), it typically coincides with a rally in the spot price (black line). It has been no different this time, and we expect that the CME futures premium could remain elevated until we hear the SEC’s decision on ETFs throughout the month. 

Remember, the ProShares bitcoin ETF could potentially be approved in just 7 days. 

The bitcoin ETF could be the biggest change in market structure for bitcoin infrastructure since the launch of the CME bitcoin futures. The ETF will create strong demand for CME futures contracts, which will certainly create investment opportunities vs. spot bitcoin and arbitrage opportunities with other ETFs, like the ones in Canada.

The other fascinating takeaway from the elevated bitcoin futures premiums vs. spot is that it will create a structural issue for a futures-based ETF. Remember, most bitcoin futures contracts on the CME, whether it is the front month, 3 months or 6 months out, trade at a premium to spot prices. Therefore, the fund will have to continuously pay a premium over spot, making the fund “bleed” as it has to roll over contracts that expire at “par”. 

The ETF excitement could also explain the recent price action, with bitcoin’s rally leaving ethereum and the DeFi index in the dust over the last week. 

To close out this section we want to highlight that in under 18 months, U.S. Bank went from closing client accounts who transacted with bitcoin, to this:

Life comes at you fast. 

S&P 500 📊

Major U.S. equity indexes finished the week mostly higher. The S&P finished higher by +0.62% at 4,390, the Dow Jones finished +1.22% higher at 34,746 and the Nasdaq finished +0.20% at 14,820.

As we discussed last week, the market focus was on the U.S. Senate  where a compromise was reached to extend the debt ceiling until December - preventing a potential government shutdown. 

The debt ceiling compromise helped markets finish higher. However, jobs and inflation data continue to make the case for the Fed to stay the course on its tapering plans. This dampened the forecast and made treasury yields soar.

U.S. unemployment data for September was mixed. The U.S. economy added only +190,000 new jobs,  the fewest number of jobs this year. In spite of that, so many people stopped looking for work in September that the unemployment rate dropped from 5.2% to 4.8%. The U.S. labour participation rate is currently at 61.6% - down almost 2% from its pre-pandemic peak. A lot of people are just not going back to work.

Last week we discussed how societal changes brought upon by the pandemic may have caused a structural shift in the U.S. labour market (hitting the restaurant and service industry hard, while uplifting technology, finance, and crypto - leading many to switch careers). 

This week, former U.S. Treasury Secretary Lawrence Summers made a similar statement, voicing that at 4.8% unemployment, the U.S. could already be below the “new” natural rate of unemployment. As a refresher, the Fed defines the natural rate of unemployment in the U.S. as 4.4%. 

Why is this important? Because when an economy is at or below its natural rate of unemployment, keeping interest rates below the rate of inflation creates inflationary pressures as companies have to overpay for talent and make up for it by driving prices higher. We are already seeing signs of this as average wages rose by 4.6% in September from a year ago.

Checking in on China - signs of contagion around real estate companies continue to emerge. Last week, another large property developer, Fantasia, failed to make a bond payment.

For context, Fantasia is about 20 times smaller than Evergrande in terms of revenue, but at $3.5 billion/year, it is not a “small company” by any means. Counterintuitively, the MSCI China Index ETF closed last week higher by +3.44% - however, this may be a “short covering” or “relief rally”. 

As a parting note for this section, although it may not come as a surprise to long-time readers, the IMF signalled last week that supply input shortates could “keep inflation elevated” for a prolonged period. 

However, it thinks that it “should subside” by 2022. 

Remember the word “transitory”? 

The word has been gradually dropped from the narrative when describing the current inflation situation. It’s search interest is marking lower highs since January and is projected to go back to just 9% relative to its peak. This is how things become normalized.

Gold 🥇

U.S. treasury yields soared last week on the back of an improving unemployment rate in the U.S. As we covered here last week, positive data keeps the Fed’s tapering plans on track and treasury yields have a bias to the upside until the end of the year.

The yield on the 10-year note rose by +9.41% to 1.60% last week. Similarly, the yield on the 30-year note rose by +6.03% and sits at 1.23%. 

The U.S. Dollar index finished the week flat but looks like it wants to continue moving higher. While this typically presents headwinds for commodities, we are seeing oil and natural gas prices move higher in tandem.

This is in part due to supply concerns, as countries replenish reserves for winter. 

With the Fed marching steady towards tapering, the trend for higher bond yields and downward pressure on gold is likely to continue until something changes. 

DeFi 🔄

The DeFi index finished the week lower by -7.57%, whereas ethereum finished essentially flat, up just 0.13% at $3,422. 

Check in on the price-action of DeFi tokens, we may be seeing a rotation out of DeFi tokens and into bitcoin - as evidenced by the relative outperformance of bitcoin vs. the DeFi index and ethereum. This could not just be due to the ETF, but also to the large bug that Compound experienced. 

Two weeks ago we reported that the bug had caused a $90 million error. Last week that number grew to $162 million and could potentially be growing.

Not insignificant, and it could be leading investors to reconsider their risk exposure to these types of protocols. The value of the COMP token dropped by -7.06% last week. It closed the week at $303 - it was at $375 on September 27th.

This DeFi to bitcoin flow could continue given the bitcoin ETF backdrop. 

Difficulty Commentary ⛏ 

Last Monday’s adjustment saw difficulty move higher by +4.06% to 19.89 THs. While still 25% away from the all-time highs, we have been consistently moving higher since July 17th. 

Checking in on the mempool, it continues to be relatively smooth sailing. With next-block confirmations in the single-satoshi/vbyte range. 

What's ahead for the week 📰 

We continue our seemingly inevitable march towards higher interest rates. Equity markets could remain under pressure as treasury yields continue to rise. 

Knowing this, politicians will do their best to keep markets appeased and will try to support the Fed in a “smooth landing”. After extending the debt ceiling last week, we could see Biden’s $1.4 Trillion infrastructure bill get passed soon. 

Democrats are aiming to have the bill passed by the end of this month. This should provide a catalyst to the markets, and help neutralize some of the tapering fears. 

The increased spending from the infrastructure bill may not have the same inflationary effect as previous stimulus. The spending is not going directly into people’s pockets (demand-side stimulus). Instead, it is going into the budgets of corporations so that they can hire and invest (supply-side stimulus). However, it will still provide a boost to inflation. Particularly in an already tight labour market as we described above. 

The market may continue to trade sideways or lower until the infrastructure bill gets formally passed.

As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:


10 AM EST - Job Openings in the U.S. - expectation is for 10.9 Million. 


8.30 AM EST - Consumer Price Index and Core CPI. Expectation is for +0.3% month-over-month CPI and +0.1% for Core CPI. 

2 PM EST - FOMC Meeting Minutes. We may get more tapering details. The risk here is that if Fed officials show an aggressive acceleration of their tapering plans, this may precipitate a move down on equity markets. 


8.30 AM EST - Producer Price Index. This one will be interesting as the expectation here is for a +0.7% month-over-month increase. This represents an +8.4% annual increase! Remember, Producer Price Index moves are often seen as predecessors of Consumer Price Index moves. We are already way above the Fed targets on inflation. 

It's a big week coming up, and as always, we'll keep you posted on any relevant news from the week right here and on our Twitter account.

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