Market update - Dec. 8th 2023

Understand the many dimensions of Bitcoin's recent surge

In the following content, CoinShares Research provides their view regarding Bitcoin’s recent price surge and what could be next for the market as a whole, around four key reporter questions.

Watch the video above for a summary of our point of view.

What do you think is causing bitcoin’s price to rise? How do BTC inflows play a role in this?

We think there are a few fundamental and technical reasons as to why Bitcoin is rising.

Firstly, if we recall the “kick-off” of this rally to be on the 13th of October on the back of the decision of the SEC not to appeal the Grayscale court decision, which paved the way for the likely approval of a Spot based Bitcoin ETF in the United States, there has been increasingly positive developments on that front.

Filers have been in touch with the SEC and have amended their filings accordingly. It seems that instead of the conversation being around reasons to approve or deny the ETF, they have been more procedural, rather regarding things such as in-kind or cash create models as the underlying mechanisms for the ETFs.

Legal experts place a 90% chance of approval by January 2024, which is the final deadline for the earliest filing, being the ARK/21 Shares on the 10th January.

So we have seen tremendous buying for 2 reasons as a result of this: People frontrunning what they believe will be significant flows stemming from the potential launches of the ETFs (Galaxy has done an exercise projecting something in the realms of $14B which would be quite significant - namely 7x what we have seen in European ETP flows this year for all crypto assets.)

The second reason comes from the fact that if the SEC approves a Spot Bitcoin ETF, there is a “stamp of approval” for the asset class from the largest capital market regulator in the world. There are institutional investors in Europe that can buy Bitcoin today if they want to - but there is reputational and career risk: Worries of a crackdown or worries that their investors or fund administrators might frown upon exposure to crypto will shift tremendously should there be approval (with credibility stamps from large asset managers like BlackRock). And so there are a number of institutions that are already becoming more comfortable with the idea of buying Bitcoin, regardless of their underlying opinion.

The weekly fund flows numbers ran by James Butterfill do in fact support this notion.

For the last several weeks we have seen consistently high inflows into Crypto funds. 10-week total of $1.76 Billion, taking the total for the year to $1.84 billion. This has been largely dominated by Bitcoin, given the much stronger narrative - YTD flows of $1.683 billion.

An interesting data point to support the notion that institutional interest has been driving a large part of this move is the following:

The percentage of total market volume for Bitcoin for ETPs is much higher than in the previous rallies. It currently represents almost 20%. This is not the same retail-led rally we have seen in previous cycles (or at least less so).

What are other bigger trends backing bitcoin’s price rally? How have we seen this happen in previous situations?

Firsty, we seem to be near the end of the fed rate hike cycle, which is conducive to all risk assets, including stores of value like Bitcoin. CME futures have an 85% implied probability of a rate cut in May, and the potential easing of financial conditions has already been reflected by lower yields over the last 3 months. (i.e. US 10y yield).

The Bitcoin halving is estimated to happen in April of 2024, and although this is highly known information, it has been positively conducive to prices in previous cycles (although it should be noted that prices rally after the halving in most cycles - 6-12 months). Note: the red line depicts previous halving events.

On a more technical note, the Open Interest in CME futures has spiked to extremely elevated levels, indicating that market participants have increased their exposure hugely.

So on the technical side, there are also reasons as to why Bitcoin is rallying significantly. The long term trend for Bitcoin supply is that coins are increasingly being taken off the market. The data does in fact suggest this. The supply of illiquid Bitcoin is at all time highs.

15.3M Bitcoin are classified as illiquid - meaning they have not moved for significant periods of time. These factors contribute as when buying pressure comes in, a decrease of available coins means the impact of the Dollar demand to buy bitcoin on its price is greater. Some refer to this as a supply shock, and this applies to the options market as well. In a broad sense, when prices rally significantly, the upside liquidity becomes thin on order books and in the options market which can lead to even higher prices - a form of squeeze.

Realistically, where could we see bitcoin’s price going in the near term (by end of year) and in 2024? Will it retract? Go up further? What would push it there?

Bitcoin is a very volatile asset (although the long term trend for volatility is down), and so in the short term it would not be surprising to see $50k on the back of the technical factors that contribute to an upside squeeze. Conversely, in every significant rally for Bitcoin, prices can retrace 20%+ before resuming a longer positive trend. Looking at the weekly chart, we have seen 8 green candles in a row. It would be largely unsurprising to see prices cool down in the near term and pull back 10-15%.

But Bitcoin often doesn’t act the way it should. There are a number of market participants that have been caught off guard and are underexposed, so the base case would be that any dips could be bought by sidelined investors. Whilst some are predicting this is just part of a larger bull trap and that the bear market is over - we don’t share that opinion with the current factors (technicals, easing of financial conditions, increase in global liquidity, spot ETFs narrative). So unless we see a significant detriment to any of these conditions, Bitcoin seems poised to continue its rally in the medium term.

In 2024, given the ETF news has been largely priced by this rally, it would not be surprising to see a short term “sell the news” event in January should the ETF’s be approved/launched, like seen when the Bitcoin Futures products launched in 2021, which marked a local top for Bitcoin. But to reiterate, we would expect the medium term trend to be up and that any significant dip would be bought aggressively.

If the easing of financial conditions plays out the way the market is expecting, and we see rate cuts in the middle of next year, as well as an increase of global liquidity which seems likely - these factors would be positive to support a sustained rally and we very well could see $70,000 by year end ‘24 as a conservative estimate.

Overall, it’s key to keep in mind that predicting the Bitcoin price in the short and medium term is extraordinarily challenging as narratives and underlying fundamentals can change very rapidly.

How has bitcoin’s price increase impacted other cryptocurrencies? And do you expect it to impact other cryptocurrencies going forward, too? If so, how?

Bitcoin has been largely leading the rally, which is not uncommon to see in crypto cycles. The difference here is that this time around the Spot ETFs are driving enthusiasm around Bitcoin specifically. Bitcoin dominance has reflected this.

Bitcoin dominance is at a multi-year high of 54.96%, a reflection that we are in fact in a Bitcoin-led market.

When Bitcoin cools down, and eventually consolidates, we could see money flow aggressively into the broader crypto market - as seen in previous cycles. Given many altcoins are denominated in Bitcoin terms on exchanges, traders often rotate capital into those altcoins after Bitcoin rallies. We saw the early innings of that last month, when Bitcoin fluctuated in a tighter range for a couple of weeks.

Looking at the total crypto market cap excluding Bitcoin, we are still in the multi year range and have not breached new highs last seen in August of 2022. So it is safe to say that alt season has not started yet. We strongly believe that it eventually will come however, once the narrative around Bitcoin weakens and prices settle within tighter ranges.

What would be very detrimental to altcoins is if Bitcoin was to retrace to ~$35,000 or below, as this usually means altcoins retrace 20-30%, or even more. The broader crypto market is very linked to Bitcoin price and its short term trend. If Bitcoin rallies significantly, altcoins tend to underperform. If Bitcoin trades sideways after a rally, altcoins tend to outperform by orders of magnitude. If Bitcoin retraces sharply, altcoins tend to retrace much more.

It should also be noted that altcoin participation requires more confidence of a trend establishment for the crypto market as a whole. Given their higher beta in relation to Bitcoin, participants are more cautious about deploying capital into assets with smaller market caps and generally speaking, less liquidity.