Monday Market Outlook #7
The market-wide uncertainty is pervasive and unyielding. No one seems to know which way the market will go next with any semblance of conviction. This is why we must stay objective and look at every possible angle.
In today's Outlook, we'll go over some on-chain metrics, global news, fundamentals, and market technical analysis. We talked about the Bitcoin crash in last weeks Market Outlook, but now we must look forward to what this means from here.
Today we are going to talk about how the Bitcoin market moves and why I think the end of the year looks really good for Bitcoin investors.
The Grayscale Effect
If you aren't aware, Grayscale has played the largest institutional role for Bitcoin, going from $2 billion AUM to $24.7 billion AUM (as of January 13th) in ~12 months — the fastest growing asset manager in history.
How, though, does Grayscale attract investors?
For one, institutional investors (corporations, family funds, hedge funds, etc) have regulatory guidelines in which to follow that make it exceptionally difficult to allocate funds to the nascent and volatile crypto asset class. This is where the Grayscale Bitcoin Trust bridged the gap by offering their GBTC product. What made the GBTC product exceptionally more valuable for institutional investors who own BTC was what has become known as the 'Grayscale premium'.
This is the difference in value from the NAV (net asset value) of GBTC and the value of Bitcoin.
The Grayscale premium is what attracted Wall Street initially. This is because accredited investors (the type of money I listed above) have access to lucrative investment vehicles. The Grayscale Trust allows these wealthy investors to buy GBTC at a certain price; a discount. That money is then locked for 12 or 6 months depending on the time during Grayscale's Bitcoin Trust history.
Here's an example:
According to the Grayscale website, each share is worth 0.00095085 BTC. After the 12 or 6 month lock up, let's say the market price for GBTC is $10 dollars. The spot price for Bitcoin is $7,361 dollars which means the fair market value of GBTC is $6.99 dollars. This represents a 30% premium that goes straight to our accredited investor.
This also shows a clear monetary incentive to suppress Bitcoin price to keep the GBTC NAV at a premium. History has shown that after the unlock period the accredited investor buys back his Bitcoin with the spread he made on the premium. He then goes and purchases spot BTC at $7,361 dollars, so that he may send that BTC back to Grayscale to receive GBTC.
Rinse and repeat.
The premium goes down and the spot price goes up. Our accredited investor doesn't care about the USD value, either — only that he is stacking more BTC at a discount.
Now, this is where things get tricky and hard to follow, but I will try my best. There are different types of ways to buy GBTC shares, so lets define our types of accredited investors:
- Investor A: Uses cash to buy GBTC shares
- Investor B: Sends BTC to receive GBTC shares
- Investor C: Uses cash to get a BTC loan to send for GBTC shares
Investor A is our institutional investor who doesn't have a clear way to purchase spot Bitcoin. Investor B risks their Bitcoin asset to receive GBTC. Investor C risks USD via interest/possible unrealized premium to receive GBTC.
Now, because of natural economic pressures, the Grayscale premium game that has been used for arbitrage has run out, but investor's funds are still locked.
Grayscale managed to sustain the premium for so long primarily because it was the only option for these types of investors. At the moment, the Grayscale Bitcoin Trust is at a negative premium, or a discount, because other types of similar trusts have emerged, i.e Osprey.
Ever since the Grayscale Bitcoin Trust shifted to a negative premium, they have stopped accepting inflows, effective March 11th, 2021.
Let's discuss, now, why each of these types of investors who have different risk profiles have to now manage their downside risk and play the GBTC discount game while their funds are locked for 6-months, and thus create market manipulation.
Investor B is what we consider a HODLer, and who wont sell his levered BTC positions during a bull phase. So we need to discuss the competitive relationship between Investor A and Investor C who are risking USD, not BTC.
Locked Money is Scared Money
These are the prices Investor A and C are locked in from when they purchased.
This is when Bitcoin made its steepest climb as the Grayscale premium was still a viable trade, so this is where the most amount of money is currently locked and why the months of June and July will be the most manipulated.
Remember, the Grayscale Premium did not subside till March, so at the peak of Grayscale inflows, investors thought they were getting a risk-free 6 month 30% premium.
Now that they have to manage their downside risk aggressively, what does that look like?
Investor A and Investor C in June need to keep prices in particular ranges to maximize downside risk. The current Grayscale premium is negative, or at a discount of -11.6% (at time of writing). This puts Investor A in the month of June, with current BTC spot price at $35,698 (at time of writing) at a hefty 54% profit.
Investor C, however, is borrowing BTC and needs to purchase that BTC from the spot market back after their GBTC funds are unlocked. This means they are incentivized to keep the Bitcoin price down so that they can purchase more Bitcoin with their with the proceeds of selling their unlocked GBTC. Currently, with the prices at-writing, Investor C is at a 25% loss. This means that the lower the price of Bitcoin gets, the better for Investor C. Inversely this means that Investor A wants to keep Bitcoin above $25,000 because under that price, they will begin running at a loss.
Let's look at the month of July.
The month of July shows drastically different numbers because the difference of the prices of BTC and GBTC 6 and 7 months ago when the funds became locked were drastically different, as you can see from model A3.
The incentives remain the same though. Investor A needs to keep Bitcoin prices above 40k to stay in profit (with current Grayscale discount). Investor C needs to keep prices as low as possible to minimize downside risk.
Investor C can short sell, sell BTC calls, buy puts, or short BTC futures. Investor C also has a massive incentive to spread FUD and suppress market sentiment and therefore price.
Does this mean our Wall Street arbitragers who got stuck in a trade while the market turned on them are forced to find external ways of FUDing the market? Does the asset managers who sit on the board of Tesla, that have subsidiary funds have a say in the recent Elon Twitter FUD?
Wall Street is hyper-connected in a mesh network of billionaires with money all intra-connected, it would be of no surprise that this is the powerful people who have monetary incentive to suppress prices.
However, there is a caveat to this.
Remember the GME and AMC short squeezes? A very similar scenario could play out here where Bitcoin prices are rising and Investor C has already exhausted all efforts to hedge downside risk via the above ways (short sell, buy puts, etc) and the only way to then manage their downside risk is to long BTC and realize profit on the upswing to cover losses on the Grayscale discount. That will compound the Bitcoin price towards the end of the summer potentially sending us back to retest the ATH.
Remember, the Grayscale Trust stopped accepting inflows in March which means the last set of GBTC unlock will take place sometime in October. After that, the largest vehicle for institutional money will no longer be the instrument for market manipulation. Furthermore, after the months of June and July, the remaining unlock months are vastly minimal because inflows dropped off drastically after January when Bitcoin prices began rising and the premium began slowing down.
This means the these summer months could be peak manipulation/suppression.
Now let's say that Investor C and all monetarily interested parties had a hand in the recent FUD. How do we sift through and understand the vastly overblown narrative they initially ignited?
We got some clarification on the most recent FUD, spread by crypto and mainstream media outlets alike, that India is not set on criminalizing the holding and exchanging of digital assets. After deeper discussion with India's emerging startup entrepreneurs and the Finance Minister, Anurag Thakur, the central government agreed that a panel of experts need to discuss regulation before banning.
India FUD has a long history, gaining the most traction in 2018 when the Reserve Bank of India banned all banks from allowing customers to trade in cryptocurrency. That bill was overturned by the Supreme Court in February of 2020 after a petition headed by Indian entrepreneurs and financial startups argued over the importance of the coming digital asset economy.
The China FUD is a lot more nuanced and frustrating, so let's start from the beginning. In 2013, China’s central bank barred financial institutions from handling bitcoin transactions, according to a notice from China Securities Regulatory Commission. Then, in 2017 China declared Initial Coin Offering's (ICOs) as illegal. The recent Reuter's article was just a reiteration of the 2013 and 2017 legislative direction from the Chinese government and held no breaking or current news value, yet it was spread as such.
More recently, however, another article surfaced of a Chinese mining ban. This seemed to have really been the icing on the cake, but again, it needs to be dispelled.
The belief was that China banned all Bitcoin mining operations across China, which was far from reality. The truth is that China banned Bitcoin mining in one region of the Middle Kingdom: Inner Mongolia.
This specific region accounted for 8% of the Bitcoin hashrate, and also shares its geographical space with the country's largest coal producer. This puts a skewed image of the energy efficiency of the region and therefore resulted in ban on the operating Bitcoin mining companies, who have already relocated to other prominent mining sites such as Sichuan and Xinjiang.
Centralized media plays a huge role in the external efficacy of financial markets. This is power that can be squandered for clicks, ad-revenue, and misleading titles. The decentralization of media is coming and with it hopefully a more trustworthy source of news — one that is not funded by ad-revenue but by community participation.
The most recent news has been profoundly bullish:
- Texas governor signing a law to embrace blockchain.
- Miami mayor discussing digital identity on blockchain and digital city-economies where cities can be assets used in futures-based markets.
- El Salvador, the nation state, moving to pass Bitcoin as legal tender for the country, making the first transition of Bitcoin from a digital store of value (personal property) to being considered money.
This specific scenario about Grayscale that we discussed in detail actually reinforces the most prominent Bitcoin macro-models like the NUPL and the S2F models, which show a blow off top towards the end of the year.
The market manipulation looks like it will provably subside just around the time that in 2013 the Bitcoin market began its second massive price surge. Could this be the source of truth that provides validity to that theory? Only time will tell. In the meantime, keep HODling.