Novum Alpha
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Novum Alpha

Can Bitcoin Scale to US$40,000 Again?

  • Slowing of fund inflows to Grayscale Bitcoin Trust is putting downward pressure on Bitcoin price as the “Grayscale Premium” is being eroded
  • Erosion of the disconnect between price of Grayscale Bitcoin Trust and underlying Bitcoin price may be more a sign of greater choice for institutional investors

Doubts are emerging whether Bitcoin can rally to US$40,000 again as the key level of resistance has failed to be tested in any meaningful way since it scaled those heights in the early part of January.

Fueling those doubts, JPMorgan Chase (-1.25%) has noted that demand for the biggest fund tracking Bitcoin has faltered in recent days,

In a note last Friday, JPMorgan Chase strategist Nikolas Panigirtzoglou wrote that the pace of flows into the US$20 billion Grayscale Bitcoin Trust “appears to have peaked” based on four-week rolling averages.

Grayscale Bitcoin Trust slid 22% over the past two weeks, outpacing a drop of 17% in Bitcoin over the same period.

To be fair, the steeper decline in Grayscale Bitcoin Trust was merely the erosion of the “Grayscale Premium” that many investors pay for in exchange for the institutional protections of Grayscale’s Bitcoin Trust, above the purchase price of the underlying asset Bitcoin.

Ideally, a derivative that represents an underlying asset should track the price of the underlying asset as closely as possible.

A disconnect between the tracker and the underlying asset suggests inefficiencies in an immature market, which justifies the premium that clients are paying.

But the appointment of Janet Yellen as U.S. Treasury Secretary as well as the impending confirmation of crypto-savvy Gary Gensler to head up the U.S. Securities and Exchange Commission are contributing to the erosion of the Grayscale Premium.

Increased expectations of more comprehensive regulation directed towards digital assets is raising the possibility that investors, specifically institutional investors, will also have more choice.

Last week, BlackRock, the world’s largest asset manager, added Bitcoin futures as an eligible investment for two funds, the first time the money manager is offering clients exposure to cryptocurrencies.

And last year, Fidelity launched its inaugural Bitcoin Fund for wealthy investors.

In other words, rich investors now have more choice than ever before, when it comes to participating in Bitcoin and helps to explain to some extent why the Grayscale Premium is evaporating.

But the risk is that the momentum caused by unwinding bullish Bitcoin futures position will act as a downward pressure for Bitcoin in the short term at least.



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