Bitcoin ETF approval

What does this mean for investors and crypto?
Team Halogen
January 15, 2024

Crypto Market Highlights

🎉 US SEC approves bitcoin ETFs in watershed for crypto market
📈 Bitcoin Briefly Tops $47,000 in Cool Response to US ETF Approval
📊 Ether Surges, Bitcoin Nears $49K, then Retreats to $46K Post-ETF
💰 US bitcoin ETFs see $4.6 billion in volume in first day of trading

Source: Bloomberg

Last week, history was made - the SEC approved applications from 11 large fund management companies to list spot Bitcoin ETFs in the US. Ever since BlackRock filed its application back in June 2023, cryptocurrencies have been driven heavily by that narrative. Bitcoin has rallied almost 100% from when that news first broke last year. 

Over the week, the market has been volatile and filled with quite a bit of drama. As industry observers have said, the hype around the approval and launch of said ETFs has been unprecedented in recent history. Not even the launch of the GLD ETF garnered such attention and trading activity. As such, we’ll be focusing this week’s recap on a day by day recounting of the week’s highlights (trust us, there’s plenty to talk about).

Monday 8/1/24

As highlighted previously, the window for an approval decision would likely fall between the 8 and the 10th of January. This window narrowed further to the 10th, as applicants publicly stated that they expected the decision to fall on the 10th, and the SEC’s voting committee was reported to only hold its vote on that day. Nonetheless, Monday itself saw heavy buying volumes starting in the London trading session. Bitcoin broke out of its consolidation area around $44,000 to hit a Monday high of $47,250. 

Tuesday 9/1/24

Unlike the strong buying activity on Monday night though, Tuesday’s trading sessions felt a lot more jittery and volatile. Mini dumps and crashes were observed during the Asian trading session. The market certainly felt on edge, and this was evident in the Bitcoin options market. January 11 at-the-money expiries were trading above 100 volatility points, implying at least a 6% move over the event. 

Around 5.11 am (local) on Wednesday though, a tweet appeared on the SEC’s official X account. It said that it had approved the listing of spot Bitcoin ETFs on registered US exchanges. Naturally, the market reacted. Bitcoin jumped, immediately trading 3% higher to test the $48,000 resistance level.

Minutes later, it was discovered that the SEC account had been compromised. A tweet from SEC chair Gary Gensler denied the ‘official post’. The SEC then regained control of their account and removed said tweet (shown above for context). Naturally, the news introduced volatility into the market, and Bitcoin subsequently retreated in fairly dramatic fashion. Bitcoin flashed down to a $44,500 low before returning to consolidation.

Theories still abound around the exact nature of the event. Some theorise that the hacker had stumbled upon a prepared tweet for the eventual decision, and decided to post that instead. The SEC is of course launching an investigation into the whole debacle. 

The official X safety team has also chimed in, stating that the source of the compromise was a mobile device that did not have 2-factor authentication enabled. The SEC has since been the victim of ridicule from various sources (arguably justified), with many X accounts digging up old tweets from the SEC themselves reminding users to choose strong passwords, and that the best source of information about the SEC is from the SEC. 

The market reaction over the fiasco was somewhat telling though. Bitcoin didn’t actually sell off on the news of the hack, but BEFORE that. This seemed to confirm what we and several industry experts had expected would happen; that this event would lead to ‘buy the rumour, sell the fact’ price action in Bitcoin.

We had also expected a rotation out of Bitcoin into Ether, and wow did that party start with a bang. The ETH/BTC pair had just broken a long term support level in the hours leading to the fake approval tweet. Over that event, the pair reversed all losses to post a strong 5.7% gain in that hour alone. 

Wed 10/1/24

Sadly, the fake news ended up stealing Bitcoin’s thunder, when the actual event came to pass. And pass it did. The SEC voted 3-2 to approve spot Bitcoin ETFs in the US, in what had become the most probable outcome, on the 10th of January after the official close of the US trading session. Hilariously, that decision was also leaked 15 minutes early, and the official link to the SEC statement was taken down several minutes later.

Nonetheless, it was official. Surprisingly, Chair Gensler, who had championed the anti-crypto cause at the SEC since his appointment to the seat, was the deciding vote. It was also revealed that the reason the SEC’s stance had changed on the approval of a spot Bitcoin ETF was, would you believe it, due to Grayscale’s victory in its suit vs. the SEC. Fittingly, Grayscale’s ETF was also approved in this wave of applications.

Over the actual event, the price action in Bitcoin was lacklustre. Sell the news traders had already played their hand prematurely. And the market had already been shaken out yesterday. Bitcoin traded relatively quietly in consolidation around the $46,000 level. However, attention then shifted to a new focus: the day 1 trading performance of the 11 newly approved (and subsequently listed) ETFs. 

Thursday 11/1/24

In a surprise to many, day 1 of trading would be the following day from approval (11 January). The speed of launch really was unheard of. Expectations for day 1 of trading were lofty - around $4 billion of volumes were expected, even if the majority of such were rotation plays out of spot and more expensive ETPs (like BITO and GBTC) into the new ETFs.

Before the start of the US trading session, listing of the various tickers took place. A key question for market participants though, was just how much impact on circulating supply would the ETFs have. Unlike futures, spot Bitcoin supply is a major factor in determining price. And early on in the pre-market session, BlackRock did some seed funding - trading about 2 million of units, and pumping its IBIT premium to 6% over implied holdings.

Given those metrics, an initial supply shock seemed likely. Bitcoin started to wake up, breaching above $47,000 in the run up to the official US market open. And when the official open came, there was a flurry of buying that pushed prices even higher above $48,000. 

Liquidity in crypto has always been fragmented across various exchanges, though OTC trading using large market makers (some of which are AP partners to the various ETFs) makes up for this. Coinbase, as the preferred exchange venue for US participants, saw a surge in volumes, and prices did diverge several basis points from other exchanges at certain points in the frenzy.

The first 30 minutes were explosive, with Bitcoin trading to a high just shy of $49,000 on Binance, and near 49,200 on Coinbase. Volumes already hit $1 billion within that period. It certainly did look like a supply shock would be pushing Bitcoin to breach above $50,000 on this day. 

Source: Okotoki

However, it was not to be. Orderbooks had thick offers in the $49-$50k region, and a wave of selling started to hit the market from there. The initial supply shock could have been attributed to seeding requirements (and perhaps retail flow). Once that had been cleared, selling flows started to be seen, and they mainly came from GBTC, which currently charges 1.5% in fees and has legacy holders who have been locked up there for ages.

Bitcoin ended the day almost flat, around $46,500. By all accounts, though, day 1 of trading was a huge success, notching $4.3 billion in total volumes and what looks like around $625 million of new inflows into the space. 

From a price perspective though, things didn’t look as rosy. The biggest day 1 ETF launch in history, and prices did not close higher? Things continued to point towards a ‘sell the news’ event.

Friday 12/1/24

Friday morning’s price action following the event looked rather lacklustre. Bitcoin continued to consolidate with a minor bias lower, as we awaited day 2 of trading. The start of the US session did get a bit interesting, with Blackrock’s Larry Fink reported as saying there’s value in having an Ethereum ETF. ETH prices, already lofty from the ETH/BTC rotation play, got another boost from there.

The start of day 2 of trading did not make a huge splash, unlike the day before. By all accounts, trading volumes were still lofty at about $3.09 billion. Unfortunately, Friday’s trading ended poorly for BTC bulls, with a price crash down to below 41,500 before closing around $42,700. This was attributed mainly to a wave of redemptions from the GBTC ETF again, and potentially some reduction in Open Interest from BTC futures. 

The flash crash pushed down most crypto majors as well, but none to the extent of Bitcoin. The Bitcoin dominance index has since fallen from a high of 55.25% to stand at 51.2% near Friday’s close. Meanwhile, the ETH/BTC pair continues to outperform, hitting a high of 0.061 during Friday’s crash, and notching a low to high move of 27% over the week.

What does all of this mean? Our thoughts 

That wraps up the week in crypto. It was explosive, exhausting to follow, but also exhilarating and momentous. We just witnessed history and perhaps the start of a new era of institutional adoption. 

Where do we go from here though? First, we think that the price correction in BTC is not quite over yet. There is likely to still be huge outflows of GBTC into other equivalent products, owing to the high fees that GBTC charges and angst over how GBTC had performed back in 2022 - which some might recall contributed to the collapse of Three Arrows Capital.

Do outflows from GBTC matter if they will be replaced by inflows into alternate products? Unfortunately, yes, because of the cash-only creation and redemption method forced upon the ETF issuers by the SEC. Via this mechanism, the fund’s spot BTC must be sold first to honour redemptions, before the equivalent buying flows can take place. Given the amount still left locked in GBTC, there could be a large amount of selling flow still waiting to take place.

Coinalyze shows that aggregated Bitcoin OI levels remain lofty. Expectations of further selling by GBTC could be exacerbated by another liquidation cascade, potentially pushing BTC below 40k in the near term. And this is OI without taking into account CME futures positioning, which still remains the largest outstanding OI and has been since the ETF narrative started to gain momentum.

Source: Coinglass

The market is likely dismayed now as most retail crypto was hoping for an up-only scenario to take place. We expect sentiment in Bitcoin to take a hit (naturally). However, once these flows taper down, we expect more bullish tailwinds to take hold, and any liquidation to the downside does present a buying opportunity for those who are patient.

Next, we continue to expect near term outperformance by Ether and its ecosystem. While affected by correlation with Bitcoin, we think that ETH has momentum to stay supported through any further correction in BTC prices. Focus now shifts to the spot Ethereum ETF narrative, and if the price cycle will be anything like how it was for Bitcoin, ETH has a pretty long runway.

While the regulatory clarity around ETH’s status as a potential security is still a bit murky, Bloomberg analyst James Seyfartt has opined that the SEC’s approval of an ETH futures ETF previously strongly implies they have accepted ETH as a commodity. Given what we know now about the Grayscale suit playing a huge role in the final vote, we think the SEC is likely to be extremely careful going forward. His colleague Eric Balchunas, who has been spot on with most of his predictions, pegs chances of an ETH ETF approval at 70% by May in the current climate.

Is there a risk that prices in ETH become overheated? Yes, of course. However, we do not think we are there yet. A comparison with the state of OI to that of BTC shows that there’s still some room to go before things get really frothy. Especially if cross liquidations from BTC related positions keep a lid on ETH prices. A key indicator for that might be when CME futures OI for ETH starts to eclipse that of Binance. 

Source: Coinglass

Third, beyond the outperformance of ETH, we see some hints that herald the coming of ‘altcoin season’, where certain altcoins start to outperform with their own idiosyncratic narratives. Certain projects like Celestia and Ethereum Name Service have been extremely robust despite the Bitcoin price backdrop, with both the above hitting new 1 year highs over the weekend (all time high in TIA’s case). The former is the current poster boy for the modular blockchain narrative, in the Cosmos ecosystem, while the latter is the highest beta in the Ethereum infrastructure development play currently taking place.

Provided that Bitcoin does not crash materially, the backdrop looks favourable for a resurgent alt season.

Finally, as a post-mortem, how did we do at Halogen?

Going back to Q4 last year, through our webinars, research papers, and other initiatives, we had, at least at the high level, correctly identified the playbook for this event. Sell-the-fact was indeed the eventual outcome, even though its timing was hard to nail down and the magnitude still unforeseen. We also noted that $48,000 would be the first level of resistance into the $50,000 psychological area. Into that area, we sold some Bitcoin and conducted some rebalancing across our funds and mandates. 

We also identified that traders would be rotating into Ether following a spot BTC ETF approval. That rotation has started in earnest, beginning from the ‘fake approval’ tweet and all the way into Friday’s close. Despite being affected by some correlation to BTC, ETH has held up well, only closing down -3.65% on Friday to BTC’s -7.67% change. We were a little surprised by the speed of the rotation, but early investors into our Halogen Shariah Ethereum Fund, which launched nearly 2 weeks ago, would have caught this move despite some initial volatility.

Going forward, while perhaps future calls may not be so on point, we will continue to approach crypto markets with the same framework that underpins our fund management philosophy: with sound decision making and robust risk management processes.

Thank you for reading and we’ll see you next week!

Team Halogen

Disclaimer: The information, analysis, and viewpoints presented here are intended solely for general informational purposes and should not be construed as personalised advice or recommendations for any specific individual or entity. For personalised investment decisions, individual investors are advised to consult their licensed financial professional advisor. The opinions expressed by the Manager are based on certain assumptions or prevailing market conditions, and they are subject to change without prior notice. This material is being distributed for informational purposes only and should not be regarded as investment advice or an endorsement of any particular security, strategy, or investment product. While the information provided herein may include data or opinions from sources believed to be reliable, its accuracy and completeness are not guaranteed. Reproduction of any part of this material in any form or reference to it in other publications is strictly prohibited without the express written permission from Halogen Capital Sdn Bhd. Halogen Capital Sdn Bhd and its employees assume no liability regarding the use of this material or its contents.

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Team Halogen
January 15, 2024
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