Week of Monday October 25th to Sunday October 31st
Market Commentary 💬
Economic Calendar Announcement 📣
As of next week, our Bitcoin Economic Calendar newsletters, blog and videos will be published on Tuesdays instead of Mondays. We hope you enjoy this issue and see you next Tuesday!
Bitcoin 🟠
Bitcoin closed its first losing week in October, finishing down -1.02% at $60,910. It was still bitcoin’s second highest weekly close ever. While many did expect that the market could go down last week (remember “buy the rumour, sell the news”) - the level of demand for the new bitcoin ETF surprised pretty much everyone.
Forbes described the reception of bitcoin ETFs on Wall Street as “nothing short of seismic” - and we would agree. Last week, not one, but two (2) bitcoin futures ETFs were approved.
The first fund to start trading was the ProShares Bitcoin ETF, $BITO. And it came out with a bang, breaking the speed record as the fastest fund to reach $1 Billion in assets.
As Bloomberg ETF analyst Eric Balchunas put it, it is almost poetic that the previous record was held by the Gold ETF $GLD, which went to market 18 years ago.
For context, this is the chart of the fastest-growing ETFs in history. While it does not include the bitcoin ETF, it is impressive to admire gold’s previous record, and the fact that the Bitcoin ETF just broke it.
Interestingly, the first futures-based ETF has been so popular that it is nearing the limit of contracts that it can hold. The ProShares ETF can hold 2,000 front-month contracts and a total of 4,000 contracts.
The ETF has purchased 1,900 October contracts - almost nearing the limit. It has also purchased 1,400 November contracts. This puts the fund near it’s 5,000 total contract limit.
Bloomberg reported that the CME is scheduled to increase the limit of front-month contracts to 4,000 starting with the November contracts - which is great news for the fund.
Once the fund reaches its limit, it has to match the additional unit purchases with cash as the underlying asset (instead of bitcoin futures contracts) - and so, the unit prices start tracking the price of bitcoin less efficiently.
There’s a few ways out of this: one is to increase the limit of contracts an ETF can hold, the other one is to make other futures ETFs available. Enter the Valkyrie Bitcoin ETF, $BTFD, which started trading on Friday.
The Valkyire ETF traded $80 million in its trading debut - placing it amongst the 15th most successful ETF launches of all time. There have been 3,500 launches in total. There is still no trading data available for Valkyrie’s $BTFD - but the structural limits imposed on the first bitcoin ETF by the SEC, may give others in addition to $BITO a chance to be relevant players.
The launch of both of these funds has caused the Bitcoin CME futures contracts to reach record open interest.
Open interest has more than tripled since September 30th, from $1.7 Billion to $5.6 Billion as of this Saturday.
It has also created an interesting trading opportunity as investors know that the ETF has to roll over its contracts. A perfect example of that will happen this week.
As you know, the Bitcoin ProShares ETF holds bitcoin futures contracts as it’s underlying assets. Because it cannot hold these contracts until maturity and take delivery, it must roll its contracts and purchase longer-dated ones.
Currently, it holds 1,900 October contracts, and 1,400 November contracts. We know that it has a limit of 2,000 front-month contracts, and we know that bitcoin futures contracts expire this week. This means that both bitcoin ETFs will have to load up on December contracts.
Not surprisingly, traders have “bid up” the December contracts in most venues outside the CME, While the premium on the CME contracts is not seen on this chart, It was trading higher than all of these venues, at 18% annualized as of market close on Friday.
Investors know that there is a forced buyer of these contracts - they can sell the December contracts high at the Chicago Mercantile Exchange, and buy the same maturity contracts low in other venues. This demand drives up the prices on all futures venues.
It’s also options expiration week - more on this in our What’s Ahead section.
S&P 500 📊
The S&P 500 made a fresh new all-time high last week, helped by a weaker U.S. dollar and strong earnings overall. It finished the week higher by +1.43% at 4,538.
While the S&P has been rising, we are seeing decreasing volume on the way up. This, combined with the fact that it closed within 3 points of it’s previous all-time high, are not a great sign going into the week. However, strong earnings could continue to propel the markets higher, despite pressures from rising bond yields.
The Dow Jones also finished the week at a brand new all time high, up +1.08%. Although it did not join the all-time high party, the Nasdaq finished the week up +1.37%.
As CNBC’s Rick Santoli says - drama could be on the way as bond markets brace for next week’s Fed meeting, and the potential start date of a tapering plan.
The yield on the 10-year U.S. treasury bond closed the week higher by +5.03% at 1.68%. The yield on the 30-year U.S. treasury bond also rose, but only by +1.93% and currently stands at 2.01%.
The gap between the yield on the 10-year Treasury note and the 30-year treasury note shows how the market is pricing in higher inflation in the short-term, but still believes it will be subdued in the long-term.
Earnings season may also splash into bitcoin this week, with McDonalds and Starbucks both reporting. The 2 companies have been accepting bitcoin since it became legal tender in El Salvador, and it will be interesting to see if they address this in their earnings calls. Details in our What’s Ahead section.
Gold 🥇
Gold had a strong week, finishing higher by +1.46% at $1,792/oz. It was helped, in part by a weaker dollar.
Although gold price tends to be inversely correlated with the real return of U.S. treasury bonds, we are seeing gold rise in the face of rising U.S. bond yields. We also know that the Fed is heavily involved in the U.S. bond markets - in order to keep bond yields where it wants.
In other words, the market could be saying that U.S. treasury bond yields are not representative of market conditions, and that the real return of them is becoming even more negative, despite their headline interest rates rising. The answer? Soaring inflation.
The word “transitory” is all but gone from the narrative, and now Fed officials are admitting that inflation could last well into 2022.
In theory, gold should remain under pressure as U.S. bond yields continue to rise - if inflation stays the same. If inflation is perceived to rise faster than U.S. bond yields, then investors should continue to seek shelter in gold.
DeFi 🔄
The DeFi index came back to life this week, rising 9.33%. Ethereum also had a good week, closing higher by +6.17% at $4,082. While ethereum did not reach a new all-time high last week, it was the first weekly close above $4,000 in ethereum’s history.
It was a relatively quiet week on the DeFi front as most of the focus was around the bitcoin ETF.
Now that a bitcoin futures ETF has been approved, an ethereum futures ETF should be a matter of time. Remember that ethereum futures already trade on the CME. The anticipation could drive eth prices higher in the near term.
Checking in on Compound, the token price continues to struggle to keep up with other crypto assets, dropping by -0.83% last week and finishing at $308. It is still down significantly since the $160 million bug.
Difficulty Commentary ⛏
China made news once again last week as it is looking to add the mining of bitcoin and other cryptocurrencies into its blacklist of industrial activities.
As part of the process, the National Development and Reform Commission is asking for comments from the public until November 21st. While some took this as a glimpse of hope that the Chinese government may be softening its policy- a further read reveals that this is just part of the protocol when the CCP wants to ban an industry.
Not much has changed on the difficulty front. Last Monday’s difficulty adjustment brought difficulty up +0.95% to 20.08 THs. We are crawling back to our all-time high of 25 THs, but still have some ways to go.
The mempool remains quiet and next-block confirmation costs have remained under 10 sats/vbyte throughout most of the weekend. Surprisingly, we did not see any congestion when bitcoin reached its new all-time high last week. A testament to how efficient the network is becoming.
What's ahead for the week 📰
It’s a big week for bitcoin. For one, we may get to see whether McDonalds or Starbucks have decided to keep any of the bitcoin they have been accepting in El Salvador.
Additionally, it is Bitcoin options and futures expiration week. Both types of contracts expire on October 29th. There are options contracts representing over 57k worth of bitcoin set to expire. And there is also a record number of October futures contracts open in the Chicago Mercantile Exchange. This could introduce volatility in the markets.
We also wanted to spend a minute to break down how demand to hold a bitcoin futures ETF turns into demand to purchase spot bitcoin in one way or another.
For example, when an institution wants to own a unit of the fund, the ETF operator can purchase the equivalent amount of futures contracts and sell the units.
The ETF fund operator purchases the futures contract from a seller on the Chicago Mercantile Exchange. To hedge his or her risk, the seller of the futures contract must purchase exposure to the underlying asset that it must deliver at maturity. To do this, the investor selling the contract can purchase spot bitcoin.
As always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:
Monday:
4.30 PM EST - Facebook reports after market close. It may reveal further details about its stablecoin plans which in turn could impact crypto prices.
Tuesday:
9 AM EST - S&P Case Shiller Home Price Index. Last month saw a 19.7% increase in U.S. home prices. If this number continues to climb, it may spark a more heated public opinion debate that could push politicians, and the Fed to temper this market. Equity markets may interpret a higher number as a bad sign and sell off.
10 AM EST - New Home Sales in the U.S. The focus here will be on the pace of price appreciation. With 2 key data points on Tuesday, the real estate market will likely be the focus of the conversation.
4.30 PM EST - Google (Alphabet Inc.) reports after market close.
Wednesday:
8.30 AM EST - McDonalds reports earnings before market open. The company, or at least one of its franchisees, has been accepting bitcoin for payment in El Salvador since bitcoin became legal tender. It will be interesting to see if this is addressed in the earnings call. Any plans announced by McDonalds could be a potential game changer for bitcoin.
Thursday:
8.30 AM EST - U.S. GDP Growth for the third quarter. Expectation is for a 3% increase. However, the previous reading showed the U.S. was growing by 6.7% in Q2. It would not be surprising to see this number come in higher - which the markets could celebrate.
4.30 PM EST - Amazon reports earnings after market close.
4.30 PM EST - Starbucks reports earnings after market close. Similar to McDonalds, it has been accepting bitcoin for payment in its El Salvador locations since it became legal tender. Interestingly, Starbucks does not use a franchise model, so a decision to hold or sell bitcoin must have been made at the corporate level. We will find out on Thursday.
Friday:
8.30 AM EST - Core Inflation. Expectation is for a month-over-month increase of +0.3%, which would correspond to an annualized inflation rate of 3.6%. This excludes food and energy costs, which are sectors experiencing some of the highest price inflation.
8.30 AM EST - Employment Cost Index. While this is a less popular indicator, it is interesting to note that it is expected to rise from a 0.7% month-over-month increase last month, to 0.9% this month. This represents a 10.8% increase in employment costs for businesses! A potential omen of future consumer price inflation.
It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.
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