Massively deleveraged market sees big bounce; Elon Musk & Michael Saylor making Bitcoin "greener" bodes well for ESG narrative and institutional adoption
We’re writing a bit more often as of late given the recent market volatility. In our blast yesterday, we highlighted how forced liquidations may be coming to an end and asked if we could see a short-term bounce on seller exhaustion – today that’s what we got. Crypto bounced massively with Bitcoin and Ethereum up ~15% and ~25%, respectively, while many “alts” rallied even harder.
Why do we think we bounced? Two reasons:
- Supply: We think investors may be nearly done unwinding cash and carry trades. Folks who were betting on basis (premium of futures over spot price) to contract ahead of the sell-off were short futures and long spot. Closing this trade over the recent week has meant selling spot and closing futures positions. If folks are nearly done unwinding, it may have helped lower spot pressure and helped stop the bleeding on futures liquidations.
- Demand: We are hearing from trading desks that institutions are stepping in and buying higher quality blue chip crypto assets at these levels. We also think retail traders are entering the market and some are rebuilding leverage positions.
But how sustainable is this move and how much room is there for leverage to build again?
There’s a lot of ways to estimate leverage, none are perfect, but one metric using futures Open Interest (OI) against exchange BTC holdings is shown below. The data indicates Bitcoin hasn’t been this de-levered the entire bull market run and leverage would have to double before getting back to where we were at Bitcoin’s ATH in April.
Source: Cryptoquant
Now, just because the market is deleveraged doesn’t mean it has to go higher. We need catalysts and capital flows to make that happen.
One piece of positive news we saw today was an announcement from Elon Musk and Michael Saylor stating they were working with miners to effectively make Bitcoin “greener” and more sustainable for the environment.
This is a notable U-turn from the headlines we saw two week ago where Elon Musk’s criticism of Bitcoin’s impact on the environment helped spark the massive sell-off that we just witnessed. But we’re not surprised by the move. In our note two weeks ago, we wrote how we thought Elon Musk may actually have plans to help make Bitcoin “greener”. Folks may not be mining in mass with solar yet, but it’s a step in the right direction.
Source: Twitter
More importantly, this may open the door for more institutional investment in crypto via ESG (Environment, Socially Responsible, Corporate Governance) friendly funds. Now, we don’t exactly subscribe to the Bitcoin is bad for the environment narrative as it’s told, but the narrative exists nevertheless, and we think changing this view many have could be an important catalyst for making the asset more investable for institutions with ESG mandates.
In the U.S. alone, roughly 34% of the $51.7T of managed assets follow ESG mandates. Now, making Bitcoin look greener doesn’t mean these funds will automatically have the capacity to invest or will, but removing the ESG constraint at least opens the door to a $17T Total Addressable Market (TAM) that may have been previously unaccusable to Bitcoin and other crypto’s.
Breakdown of U.S. assets professionally managed
Source: Fundstrat, US SIF Foundation
We think Wall Street is continuing to enter the crypto markets. Similar to the phase of crypto funds that sprung up during 2017, we think many traditional institutional investors are entering the space during this cycle.
We think the recent note out from Goldman Sachs exemplifies the shifting tide we’re seeing where more and more Wall Street investors are wading into crypto.
Source: Goldman Sachs
Today, even the former crypto skeptic, Ray Dalio, entered the ring – announcing that he owns some Bitcoin.
Source: Coindesk
We think more announcements like this could be on the come and they could help turn the tide of bad news that we’ve seen in crypto as of late.
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