BlackRock’s Bitcoin ETF hits $1B AUM in one week

What’s next for the crypto markets?
Team Halogen
January 22, 2024

Market Movements


Global Macro Highlights

🇨🇳 China misses fourth-quarter GDP estimates, resumes posting youth unemployment data
🇺🇸 Trump wins Iowa caucus by a large margin and hence is frontrunner for Republican presidential pick
📈 Strong US retail sales underscore economy's momentum heading into 2024
📉 US Weekly jobless claims fall 16,000 to 187,000
📊S&P 500 rallies 1% to all-time high, surpassing previous record set in 2022
Source: CNBC

Risk assets in major markets started the week on a soggy note. The ongoing events in the Red Sea have raised fears of resurgent inflationary pressures, while Fed speakers also pushed back against expectations of the first rate cut by March - Raphael Bostic notably said the Fed may consider the case for cuts in July. And, as usual, with the beat in US retail sales this week (0.6% vs. 0.4% expected MoM), good news equals bad news for risk. Longer duration treasury yields surged in bear steepening fashion, with the 10Y yield rising 11 bps to 4.08 on Tuesday and closing the week near 4.13.

Things also went poorly for Chinese assets and correlated proxies. Donald Trump’s overwhelming win at the Iowa Caucus puts him at the forefront to win the Republican party’s nomination. All of a sudden, the future for US-China relations looks uncertain once again. That, and continued worries of an economic slowdown in China with the latest GDP numbers of 5.2% vs expected 5.3%,  served up another blow to the Chinese recovery story. The Hang Seng Index gapped lower on Wednesday following Trump’s victory, and closed the week down 5.76%. Meanwhile, offshore Yuan weakened past 7.20 vs. the Dollar, though volatility remained under control as the market remained wary of intervention by the People’s Bank of China.

Despite starting the week poorly, US equity indices did rebound strongly to close things off. Led of course, by the tech sector. After favourable earnings guidance by Taiwan Semiconductor Manufacturing Co., NVDA and AMD led stocks in an impressive rally. Both the S&P 500 and the NASDAQ-100 closed the week at a new all time high, despite a backdrop of higher treasury yields and a stronger Dollar. Most impressive indeed. The VIX Index, which was close to 15 during the middle of the week, closed on Friday at 13.3 instead.


Malaysia Market Highlights

🛑 Govt agrees to exempt unit trusts from CGT, taxes on foreign-sourced income
📉 Multiple stocks tank as sell-off spreads
🇲🇾 Ringgit ends flat against US dollar
📊 Malaysia's economy likely expanded in Q4 but outlook cloudy
Source: Bloomberg

This week’s most prominent news is non economic in nature but about policy instead and definitely something that Malaysian investors will receive favourably. Last Tuesday, the government agreed to exempt taxes on capital gains and foreign sourced income for unit trusts (yes, this also applies to all of Halogen’s funds as well). This is much needed clarity given that the prior uncertain impact was threatening to weigh on the domestic capital markets as well. Unfortunately, the exemption has an expiration date: 31 Dec 2026 and 31 Dec 2028 for foreign sourced income and capital gains respectively.

A slew of macroeconomic data was released, with exports falling more than expected in December 2023 (-10% YoY, est. -5.0%) and 4Q23’s 1st GDP reading following suit (+3.4% YoY, est. +4.1% YoY). The releases confirmed the economic slowdown that was apparent from the malls to the ports with weaker external demand. Exports to China, Singapore and the US, Malaysia’s top 3 export destinations, extended declines. The import of consumption goods fell after growing in October and November 2023 clouding the outlook for domestic demand.

Despite some overhang about the weak 4Q data, most economic pundits are still forecasting Malaysia to grow at a rate of >4% in 2024 driven by green shoots in the electronics cycle and expanding domestic demand. Despite this outlook, the Ringgit ended the week slightly weaker against the US Dollar, perhaps owing to the flaring up of geopolitical risk with Pakistan-Iran tensions rising. Week over week, USDMYR closed at 4.7187 on the interbank market, vs. 4.6490 the previous week.

Amidst this backdrop, the Malaysian Government Securities yield curve saw mixed moves with the short end and belly a few basis points higher:

Source: Bond Pricing Agency Malaysia

This resulted in a tepid week for government bonds and a reversal from the previous week’s strong showing:

Corporate bonds continued to record another week of steady returns owing to their higher coupons (a.k.a. “carry”). This also benefited the Halogen Shariah Ringgit Income Fund which further underlined its low volatility credentials.

Although Halogen does not have any equity offerings (yet), we must make mention of something we haven’t seen in the local stock markets in a long time. There’s blood on the streets for small cap counters with several hitting limit-down on Wednesday. Despite the most acute sell-offs being confined to the small caps, the benchmark KLCI dropped 0.22% during the week but is still up +2.29% since the start of the year (source: marketwatch.com). The sell off seems to have been started by a handful of counters linked to transparency issues and has since spilled over to other counters with similar question marks hanging over them. This is a situation that is worth monitoring lest it devolves into further contagion that affects investor confidence on a broader basis.


Crypto Market Highlights

📈 BlackRock's Bitcoin ETF Hits $1B AUM in One Week
📊 Ether Could Soar in 2024 on the Back of Dencun Upgrade & ETF Narrative
📉 Bitcoin Plunges Below $41K as 'Sell the Bitcoin ETF News' Wins the Day

After the volatility of last week, crypto markets have taken a breather. Bitcoin still remains the focus of major news outlets, with coverage on the performance of the ETFs launched on 11 Jan continuing to be a talking point. And by many metrics, these newly launched ETFs have outperformed. Blackrock’s IBIT and Fidelity’s FBTC have even made it into the top 2% of all ETF’s by daily volume, pretty impressive for funds that are just over a week old.

Despite these successes, Bitcoin still trades some 15% off the post ETF launch high. Structurally, GBTC redemptions seem to continue weighing on price, with the GBTC price discount to AUM ratio widening to 90 bps on Thursday. It was also reported that wallets identified as belonging to Grayscale had been sending Bitcoin over to Coinbase, in what is likely to result in a divestment of those holdings. So far, GBTC has bled nearly $2.8b in AUM since launch, with $590 million coming on Friday alone (though partially offset by inflows into the other cheaper ETFs).

Bitcoin traded with a downside bias throughout the week, though with nothing that constituted a major selloff unlike the previous Friday’s one, where Bitcoin sold down some 7.5% into the NY close. Of course, crypto majors still maintain a degree of correlation to BTC, and generally traded softer in tandem. The ETH/BTC pair still held up well though - consolidating at the top end of its recent range between 0.0585 and 0.0600.


What are we monitoring for the week ahead


Looking Ahead: Our Insights

US equity outperformance in the face of higher yields and a stronger Dollar bucks the usual correlations. While last year showed the folly of fading the momentum in a Magnificent 7 led rally, the recent price action might be put to the test this week. Provisional US Q4 GDP numbers will be released on Thursday 25 Jan, which might cause another ‘good news is bad news’ type of reaction.

Another reason for such is the typical behaviour of US equity barometers post the monthly Option Expiry event (which happened last Friday). From a structural perspective, the event has on average resulted in ‘buy into, sell out of’ behaviour. This stems from the nature of market participants, the majority of whom either sell out of the money calls (for yield) or buy out of the money puts (for protection). The resulting position requires market makers to typically sell spot inventory as a hedge, which can cause a dip.

Another event to watch this week will be the New Hampshire Republican primaries. Should Trump produce another strong showing there, he is expected to be a shoe-in for the Republican party’s candidacy (lawsuits notwithstanding). In that case, we can once again expect further weakness in Chinese assets and the Yuan. Unfortunately, the latter likely means that correlated USD/Asia pairs, including our Ringgit, will be caught in that crossfire. 

As mentioned earlier, most economic pundits are still forecasting Malaysia to grow at a rate of >4% in 2024 despite the weak 4Q23 showing driven by green shoots in the electronics cycle and expanding domestic demand.This view is not without risks: 1) cost push inflation from subsidy rationalisation locally, 2) new taxes introduced in 2024; 3) continued growing pains in key external economies e.g. US, China.

The uncertain domestic inflation quagmire is one that we feel is underestimated by a market that is too focused on pricing rate cuts in the developed economies, and the realisation of potentially higher domestic inflation and a “higher for longer” approach to US monetary policy may result in pain for the local bond market. Fortunately, there is a place for your safe yield seeking funds to seek refuge: short term bond funds like the Halogen Shariah Ringgit Income Fund which aims to deliver returns of around 3.5 - 4.0% per annum whilst taking minimal market risk.

On the crypto front, we continue to monitor the dynamics in Bitcoin closely. The introduction of the 11 new ETFs certainly does put a new spin on things. While news portals largely make reports over the volume traded, the net growth or decline in AUM is more impactful for BTC’s long term price appreciation. So far, there’s been a net inflow of around $1.1 billion into these ETFs, according to BitMEX Research

Despite this, we are still a bit more cautious on the outlook. As previously penned, the cash-only mechanism means that GBTC outflows can shock the market lower as a single point of large selling flow can be felt in one go. Even if this gets distributed in full to the other 10 ETFs, the net buying flows end up being distributed amongst them and do not immediately offset the GBTC redemption impact. And there is still a significant amount, specifically 566.97K BTC, held by Grayscale.

Furthermore, while positioning metrics show that outstanding OI in BTC futures has come off, there is still a potential for more position liquidations to occur. CME futures OI has reduced from $6.2 billion at its zenith last week to a ‘mere’ $4.7 billion. It is still the largest contributor to OI though, with Binance only at $4.1 billion. A further unwind, perhaps in line with more GBTC redemptions, could see BTC prices break the $40,000 level and trade closer to the $35,000 mark.

What’s the playbook here? First, if you have yet to dip your toes into crypto at all, the $41,000 mark is really not a bad level to start with. After all, time in the market is better than timing the market. While there is still some downside risk, it is much less a danger than compared to before last week’s event. Despite the GBTC pressure, Bitcoin has not actually sold off materially. Bitcoin options volatility continues to fall as well, indicating that option market makers are not too worried about a volatile sell off.

One could also wait for Bitcoin to trade below $40,000 to scale in. We do think that’s a definite possibility, though the market is holding up surprisingly well and we would not put all our hopes on that happening. In the event $40,000 does give way, the $35,000-$37,000 levels could see some support for the token. 

If you are overly worried about more ‘sell the fact’ price action to come, there is the alternative of buying Ether instead (via the Halogen Shariah Ethereum Fund, of course). 

While correlated to BTC, ETH has so far outperformed Bitcoin, thanks to hopes that an Ether ETF is next on the cards for BlackRock (and they have a record of 576-1 in approved ETF applications, with the latest one being the IBIT ETF). Hence, we think the downside volatility on a correlated market selloff is likely to be less severe for Ether, at least in the near term. On a month-to-date basis, ETH is up 10.3% vs. BTC.

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 21, 2024
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