Bitcoin
It was a quiet Easter Week for Bitcoin. It continues settling around $28,000 with low volatility and thinly traded volumes. As we’ve been tracking, this is consistent with historical behaviour after a large move like the one we saw on the week of March 13th.
Looking at the derivatives markets, the futures curve continues to trade in a healthy contango - with prices moving higher as contract delivery dates go further into the future.
The funding rates for Bitcoin perpetual futures contracts are also in the positive, and short interest remains near historic lows. Both of which suggest that there is not a lot of investor appetite for being short bitcoin in the current environment.
While previous price action would suggest that Bitcoin should continue to trade within a narrow range this week, there are significant events that could introduce volatility this week. These include:
- The Ethereum Shanghai upgrade on Wednesday
- Inflation data from the U.S. and China
- 7 Fed Speeches and the release of the last FOMC meeting minutes
The market indicators that we’ve covered above suggest that there are not a lot of investors that are positioned short going into this week. Meaning, that the potential for a “short-squeeze” move higher is low.
Conversely, the open interest in Bitcoin futures jumped from $8.7 Billion on March 12th, to the current $12 Billion in less than a month. The $3 Billion increase over the course of the rally suggests that some investors used leverage to buy on the way up. This means that there could be a risk to the downside if we get a negative surprise during the week. This may present a buying opportunity to investors that have been waiting for a “dip” in the current rally.
In terms of key technical support and resistance levels, we continue to monitor the 200-week moving average price as support at $25,755. The next key resistance levels to the upside we are traking are $30k and $35k, as highlighted in the chart above.
Digital Asset Markets:
1. A Spot Bitcoin ETF could be closer than you think
As many of you already know, Digital Currency Group, one of the largest crypto conglomerates in the world, has been in hot water since Genesis Capital, one of its subsidiaries, filed for bankruptcy back in November.
Genesis and DCG have been embroiled in a legal battle with its creditors since then, garnering negative headlines throughout. But this isn't the only legal battle that DCG has been fighting.
On October 19th, 2021, Greyscale filed an application with the Securities and Exchanges Commission to convert GBTC into a bitcoin spot ETF. But the SEC has repeatedly denied the application over the last 15 months. The most recent rejection came on June 30th, 2022.
But the SEC did approve a bitcoin futures ETF on October 18th, 2020 - one day before Greyscale filed its application for a spot ETF.
Naturally, many investors at the time believed that the SEC would look favorably to a spot bitcoin ETF after having approved a futures-based one. However, this did not happen. The SEC went on to approve several futures-based Bitcoin ETFs, but it continuously rejected a spot ETF on the premise of “market manipulation”. And so, Greyscale made a decision to sue the SEC by appealing their decision to reject their application on June 6th, 2022.
In simple terms, Greyscale’s argument is strong: “how can the bitcoin spot market be manipulated, but _not_ the futures market price?”.
And after the both groups presented their oral arguments on March 7th, the judges seemed to agree with Greyscale.
This bodes well for GBTC, and for bitcoin. Since the oral hearing was heard, the GBTC discount to its net-asset-value has been shrinking. From a -46% discount at the time of the hearing, to the current -36%.
A decision could be made as soon as this summer, but the Greyscale team believes a ruling is most likely to come in the fall of this year. A good way to see how the case is tracking is to monitor the discount to Net Asset Value over the course of the next few months.
What happens if Greyscale wins?
A win from Greyscale could result in one of two outcomes. Either:
- A Bitcoin spot etf gets approved, or
- The Securities and Exchanges Commission can determine that “all markets” are manipulated, and unwind all existing futures-based ETF products on bitcoin and digital assets.
Each option would have radically different implications for the bitcoin industry. The first one would be wildly positive, for many reasons. The latter would be negative as it would drain important institutional instruments from the market.
While DCG, Greyscale’s parent company, is still embroiled in legal battles, an approval of a bitcoin spot ETF would be beneficial in that:
- It would close the “discount” between the GBTC units and its underlying bitcoin - therefore allowing all investors in the GBTC fund to realize the true value of their holdings.
- It would be a catalyst to resolve the DCG legal battle with its creditors, as the value of Greyscale would theoretically increase, putting DCG in a better financial position to negotiate a resolution.
- It would set the precedent for other regulators to approve spot bitcoin etfs internationally. Creating a much more efficient vehicle for investors to invest in Bitcoin for the long term vs. futures-based ETFs. These ETFs would also qualify for most investors’ retirement portfolios - which is difficult to with spot bitcoin.
On March 13th, the U.S. Treasury announced that they were close to releasing a risk assessment analysing the “criminal use” of decentralized finance technology
The news flew somewhat under-the-radar until the final report was published last week.
Here are a few of the most consequential claims made in the report:
- Decentralized Finance Protocols have “Know-Your-Client” and “Anti-Money-Laundering” obligations under the Bank Secrecy Act, and therefore must KYC their users. Most DeFi protocols do not require KYC to-date.
- Most Protocols are NOT decentralized. They point out that in most cases, an individual or small group of individuals retain administrative access to the smart contract code and can make changes to upgrade the code or troubleshoot. As such, these individuals have control over the participants’ assets.
- They also point out that “Decentralized Autonomous Organizations” that govern these protocols are also NOT decentralized, as in many cases, the issuers or developers will grant themselves a large amount of governance tokens, therefore having de facto control over the protocol.
- The U.S. Treasury believes it is imperative to work with regulators internationally to “close the gaps”, and to ensure that DeFi operators won’t just be able to relocate internationally.
- Actors from the Democratic Republic of North Korea, and other scammers, are able to exploit noncompliance from DeFi protocols to launder dirty money.
You don’t need to be a genius to start imagining the second order effects that these decisions will have. DeFi protocols who wish to comply will have to KYC their users. Most developers, multi-sig holders, or large holders of governance tokens could be in the crosshairs going forward. Having structured your project governance as a “DAO” is likely to provide little coverage against enforcement. And the U.S. is well aware that they will have to work with international regulators to prevent a “whack-a-mole” effect.
And a headline from Canada this weekend could be the first of many to come for DeFi protocols in the coming months:
And, while you think these types of announcements would be helping the case of Decentralized Finance protocols, the fact that a protocol can “decide to leave a country” and “make an announcement about it” should tell you a lot about whether it is decentralized or not.
The Week Ahead
There’s a lot of potentially market-moving data and events scheduled for this week - so things could get volatile.
Wednesday will be the biggest day of the week with the Ethereum Shanghai update, an interest rate decision from the Bank of Canada, U.S. inflation data for March, the U.S. treasury budget and the Fed’s FOMC meeting minutes.
Trading sessions on Thursday and Friday could remain volatile as investors digest the data from Wednesday and make decisions.
As always, here’s a summary of the events and data that could move markets in the week ahead:
Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans.As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.
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