Nov 1, 2021
October Overview of Crypto Market
Your Monthly Brief into the World of Digital Assets
Article by Lesia M.
- October in Review
- BTC Leverage Check - Will China Ban Hurt Crypto?
- Impact on Hong Kong - Zoom-in on Bitcoin Futures ETF
- Regulators on Crypto
- Further Institutional Adoption
OCTOBER IN REVIEW
The month of October was long christened ‘Uptober’ in twitter slang, and rightfully so. BTC was up 40% and ETH was up 43% this past month.
Other than historically being one of the strongest months for Bitcoin, this year’s Uptober brought the priceless news of an SEC regulated Bitcoin ETF launch — probably the highest degree of global regulatory acceptance that the crypto space has seen so far. The price of Bitcoin hit a new all-time-high of $67,000 on October 10. Same goes to Ethereum — the cryptocurrency reached an ATH of $4,460.89 on October 29 (Binance).
Since October 22nd, BTC consolidates back and forth after going through the catalyst of futures ETF launch, and hitting ATH levels. With the upcoming Taproot activation on November 16th, we are yet to see whether the uptrend will continue, or it will be another ‘buy the rumour, sell the news’ type of event so common in the crypto space.
BTC Open Interest
Open interest is on the rise, significantly growing on CME relative to Binance, FTX, Bybit and other large crypto exchanges, after the successful launch of the ETF tracking CME Bitcoin futures.
It is a common misconception, however, to claim that high Open Interest equals high leverage. In crypto markets, Open Interest positions are usually held in an in-kind asset. This means that the dollar value of an OI position naturally increases or decreases following the price action of its underlying. So what we look at instead, is the difference between the rate of change in BTC price and the rate of change in OI. Minimal difference would mean that OI grows in line with BTC price, and new leverage entering the market is minimal.
In the graph below we compare the weekly rate of change in Bitcoin Open Interest positions with the weekly rate of change in BTC prices. In a bull market, OI increasing at a faster rate than BTC would signify new leverage entering the market, and vice versa.
As the lower graph shows, new leverage was gradually accumulating throughout the whole month of October. This development increases the risk of a significant correction fuelled by long liquidations, or leverage flush. Compare to the bull run earlier this year, when periods of leverage accumulation were followed by long leverage flushing out, which almost always coincided with significant price corrections.
WILL CHINA BAN HURT CRYPTO?
Going into the month of October, China crypto ban remained amongst top questions we were receiving from our clients. Exchanges ceased onboarding new clients in mainland China onshore, as well as announced plans to offboard all Chinese clients by end of 2021. Market corrected around 15% end of September following these announcements, only to reverse to a strong recovery going into October.
So, will China crackdown effect the future of cryptocurrencies?
China banning all crypto activity did not come around as a surprise for industry participants. In fact, the country has been imposing strict regulations and restraints on cryptocurrencies for many years. Quantitative analyses conducted by Wharton School revealed that, in general, regulatory announcements did not affect the volume of transactions on cryptocurrency networks. In addition, experts have no doubt that the cryptocurrency market will be able to reach its peak with or without China’s participation, with Facebook (not operating in China) being a great example. (Read More)
And will China ban limit the crypto business in Hong Kong?
In her interview to Forkast, Angelina Kwan — former regulator for Hong Kong SFC — states the following: “Our view is that going forward, Hong Kong will continue to maintain its autonomy in managing its financial and administrative affairs… As the digital assets industry becomes increasingly regulated, Hong Kong becomes more attractive — not less — as a financial center governed by the rule of law.” (Read More)
ZOOM-IN ON BITCOIN FUTURES ETFs
Hopes for an SEC-approved Bitcoin ETF have been high beginning of the year — then low — then high again when the US SEC Chairman Gary Gensler hinted at the possibility of a Bitcoin and Ethereum futures ETF. Immediately, market was full of speculations and opinions on the matter.
BITO’s great success
And finally, mid-October, these hopes became a reality. Or as close as it could get. On October 15, SEC’s Office of Investor Education official twitter account tweeted about a bulletin SEC had issued back in June this year on Bitcoin futures. Later that day, Bloomberg published an article about the upcoming BTC futures ETF — both news confirmation enough of the final ETF approval. BTC price soared 10% in one day. (Read More)
$BITO, first-ever Bitcoin futures ETF launched by ProShares, is performing in line with the most optimistic expectations. It currently enjoys the first-mover advantage and traded over $1b on its first day, with over 24.4m transactions at a closing price of $41.94. This brought ProShares Bitcoin futures ETF to being the second-largest ETF ever by its first-day trading volume.
Contango & Tracking Error
One of the most quoted concerns surrounding Bitcoin futures ETFs is the tracking error. Tracking issue implies that the ETF futures contracts would not track the underlying Bitcoin so well, as far-month contracts clash against contango in futures prices. (Read More)
Because of the tracking error, ETF issuers (ProShare’s $BITO, Valkyrie’s $BTF, VanEck’s $XBTF) prefer front-month contracts, which track the underlying BTC better than longer-dated ones: e.g. October futures track BTC much closer than November or December contracts. So why don’t ETFs just stack up on October contracts then? CME limits the number of futures contracts per ETF issuer to 4,000 contracts, dropping to 2,000 three days before expiration. If an ETF’s demand exceeds this limit, they are obliged to dive into far-month contracts. As new ETFs enter the market, they open up access to more front-month CME futures. At the same time, if demand continues to grow, existing ETF issuers will be forced to shift assets into further-dated November and December contracts, amplifying the tracking error vs BTC. (Read More) How issuers construct their EFTs based on front- and far-month contracts will directly reflect institutional investors flow.
ProShares have already applied for the extension of the CME futures contracts limit — to have access to more near-month futures contracts. CME’s response will provide an answer to whether the tracking error will remain a large issue for the Bitcoin futures ETF product. (Read More)
Circling back to Bitcoin spot ETF, probabilities remain rather low as it currently stands. Even with the successful entry of Bitcoin futures ETFs, analysts are not optimistic about a spot equivalent being approved any time soon. Not until we will see an introduction of a new regulatory regime overseeing the crypto spot market.
CRYPTO REGULATIONS
§ SEC Chair Gensler told the House Committee that the SEC has no plans to ban crypto. (Read More)
§ Fed Chair Powell Says He Has ‘No Intention’ of Banning Crypto. (Read More)
§ A team of U.S. bank regulators is devising ways in which banks may hold crypto on their balance sheets, provide custody and facilitate client trading. (Read More)
§ Australia’s Senate releases long-awaited crypto report, hoping to transform the country into a global industry leader. (Read More)
§ Financial Action Task Force releases finalized crypto guidance with clarifications on DeFi, NFTs. (Read More)
INSTITUTIONAL CRYPTO ADOPTION
At JKL Capital we are seeing an more institutions coming into the crypto space. An uplift in institutional interest comes at the time when basis is high, ensuring an attractive “cash and carry” opportunity. In the month of October, JKL Capital’s arbitrage “Basis Spread Mean Reversion” market neutral strategy generated over 30% in market-neutral annualised returns.
Financial Institutions
§ NYSE Arca Files to Convert Grayscale Bitcoin Trust into a Spot ETF (Read More)
§ George Soros’ fund owns bitcoin, CEO confirms (Read More)
§ Société Générale, one of the largest banks in France, applies for $20M MakerDAO loan using bond token collateral (Read More)
§ U.S. Bank partners with NYDIG to offer bitcoin custody services (Read More)
Corporates & DeFi
§ Bakkt Partners with Google to Introduce Digital Assets to Millions of Consumers (Read More)
§ Mastercard and Bakkt Partner to Offer Innovative Crypto and Loyalty Solutions (Read More)
On the back of the above news, it’s important to introduce Bakkt Holdings Inc — a trusted digital marketplace, which facilitates payments for merchants who want to enable their customers to use crypto. Company was formed by Intercontinental exchange (also parent to NYSE) in 2018, and has only gone public on NYSE on October 18. Bakkt Holdings rallied as much as 451% following the Mastercard partnership news to bring cryptocurrency payments mainstream. (Read More)
§ FTX Raises $420 million in a Series B-1 funding round from 69 investors. (Read More)
§ Huobi Japan gets regulator’s approval to offer crypto derivatives. (Read More)
§ Bloomberg publishes an in-depth research in an attempt to find Tether’s Billions. (Read More)
§ US Senate warns Facebook to hold back from launching Diem currency and Novi wallet. (Read More)
§ New Adobe Photoshop Feature to Support NFT Verification on Marketplaces (Read More)
§ Metaverse Tokens Soar Following Facebook’s Rebrand to Meta (Read More)
DISCLAIMER
The contents of this material have not been reviewed by any regulatory authorities. You are advised to exercise caution in relation to the contents of this material. Although information contained in this material has been compiled from sources believed to be reliable, JKL does not represent or warrant the accuracy, completeness or reliability of the information contained in this material. If you have any doubt about any of the contents of this material, you should obtain independent professional advice. Neither JKL nor any of its affiliates, nor any of its or their respective directors, officers, employees, and representatives will accept any responsibility or liability whatsoever for any direct, indirect, or consequential loss arising from the use of or the reliance upon any information contained in this material. This material does not constitute an offer or an invitation to subscribe for or purchase any financial product. It is not intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation to purchase any financial product.
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