Crypto Weekly: 3/11/2021

Crypto markets are rebounding from last week’s rate rise tantrum

Bitcoin and crypto have rallied over the last several days after crypto and the broader markets have started to shake off rising rate fears.

Easing investor concerns, the quick move upward in the 10 year has slowed, but what could interest rates tell us about the possible direction of Bitcoin prices? First let’s revisit what’s recently happened:

• The COVID pandemic took interest rates to unprecedented lows during 2020 and we’re now recovering off that lower bound.
• Over that time, Bitcoin has rallied ~18x to $55k from the $3k low it hit during the post pandemic start sell off in March 2020. 
• Many high growth and momentum tech stocks saw spectacular returns as well over that time frame but have been falling out of favor as rates have been rising and the economy has started to reopen.
• In such an environment, some investors are asking – has the Bitcoin rally ran its course?

We think the answer remains no and the Bitcoin bull market cycle has room to go.

Source: Tradingview, Fundstrat

Bitcoin investors shouldn’t be concerned about further treasury rate rises

What if rates continue to rise to 2% or higher as some expect? Would that be negative for Bitcoin? Historically, the answer has been no. Bitcoin prices during the past three cycles – and thus far this cycle – have been able to rise in the face of rising U.S. 10-year treasury rates.

Source: Fundstrat, Bloomberg, Coinmetrics

10Y Treasure PEs have lead Bitcoin PB valuations by 6M-18M & if trend holds BTC would top $250k

One reason we think prices have room to go, as we highlighted in our 2021 Crypto Outlook, 10Y treasury bond PEs (inverse yield) and Bitcoin PB valuations have moved in inverse fashion – making Bitcoin look cheap as treasuries look expensive and visa versa. What could this tell us about how much further Bitcoin prices may have to go?

Source: Fundstrat, Bloomberg, Coinmetrics

Historically, 10Y treasury PEs (inverse yield) have been a leading indicator of where Bitcoin Price to Book (Market Cap / Lifetime Mining Costs) valuations have topped out at during that cycle. The below chart shows the 10Y treasury PEs lagged by 18 months forward to illustrate how closely its matched the prior cycle tops.

If Bitcoin were to follow a similar pattern as the first three bull market cycles it could mean the run we’ve seen during 2020 and 2021 could only be the effects of the rate environment we saw pre-COVID and the unprecedentedly low rates of 2020 may still be working their way into the crypto economy.

Source: Fundstrat, Bloomberg, Coinmetrics

High yield rates are much more important than treasuries for predicting crypto market tops

We view high yield as the most important interest rate metric to watch for predicting Bitcoin cycles. Despite many analogies to gold, Bitcoin & crypto are risk on assets that are highly related to investors moving in or out on the risk spectrum into assets like high yield bonds. As credit risk rises driving high yield rates higher, Bitcoin falls and visa versa.

Source: Fundstrat, Bloomberg, Coinmetrics

High yield PEs turning slight but with economy reopening shouldn’t credit risk conditions improve?

Partially due to the recent rise in risk free rates, we’ve seen high yield rates turn slightly higher as well (higher rates = lower Bond PEs). If this trend were to continue, especially with a sharp rise, it would be very concerning for Bitcoin and crypto prices. It seems logical that if the economy is about to reopen and see strong GDP growth, it will be good for businesses, credit risk and as a result crypto prices.

Source: Fundstrat, Bloomberg, Coinmetrics

Recent market conditions have pushed GBTC premium negative but we expect it will be temporary

GBTC, the largest publicly listed Bitcoin trust stock, has seen its premium to net asset value (NAV) contract sharply since the recent rate driven sell off.

Reminder: 1) the NAV is the market value of the underlying Bitcoin held in the trust, but 2) GBTC investors are not able to redeem shares for the underlying BTC like with an ETF and must instead sell shares on the open market to gain liquidity, 3) the price of GBTC is set by supply/demand for the shares and can differ materially from the underlying BTC NAV. 

We think there is a few possible explanations for why GBTC has seen its price dip below NAV:     

• Canada recently approved a Bitcoin ETF and investors may view this as competition for GBTC that could deflate the premium.
  • We think this partially impacted the decline, but since no ETF has been approved in the US, we don’t think this is the main driver. We think in the future when a US ETF is approved GBTC will trade at a slight premium, around the ~2% management fee, but not at the 10% lows it hit the other day.
• Investors holding GBTC shares believe the Bitcoin market has topped and are willing to take a loss getting out quickly because they expect BTC will see an even greater price fall.
  • We think some retail investors may have been scared by the recent (all be it normal for the crypto market) sell off and not fully understanding how the product works and may have sold at a loss but do not see this as the main driver.
• Many GBTC investors are institutional funds who have been arbitraging the premium spread by committing BTC to the trust at NAV, waiting for the 6M lock up to expire and selling the shares for a profit. Many of these investors use leverage on their trade by either borrowing the BTC being committed or borrowing cash and using their GBTC shares as collateral.
  • We think its most likely that some market participants needed to raise cash to meet collateral calls due the simultaneous BTC sell off and GBTC NAV premium decline.

Source: Fundstrat, Bloomberg We think the natural trade is for market arbitrage to step in and buy the GBTC shares and offset that risk by selling BTC on the spot market or simply waiting until the premium normalizes. Today, we saw Digital Currency group announce that they may purchase up to $250M of GBTC shares. This should help bring the market back into order in our view.