The launch of the first Bitcoin ETF, BITO, even if based on futures, was the culmination of seven years of anticipation for bitcoin bulls and it certainly did not disappoint: the leaks and the actual news propelled the cryptocurrency to a new all time high above $66,000 (with some profit-taking to follow).
Yet despite the clear impact on the price of bitcoin, which has more than doubled from its July lows, not everyone is uniformly bullish on the impact of the first bitcoin ETF. As JPM's Nick Panigirtzoglou writes in his latest widely-read Flows and Liquidity note, "the bulls are seeing this ETF as a new investment vehicle that would open the avenue for fresh capital to enter bitcoin markets" while the bears "are seeing the new ETF as only incremental addition to an already crowded space of bitcoin investment vehicles including GBTC in the US, ETFs listed in Canada since last February which have been already accessible to US investors, regulated (CME) and unregulated (offshore) futures, and plenty of direct investment options using digital wallets via Coinbase, Square, Paypal, Robinhood etc."
For its part, JPM - not surprisingly - falls into the skeptics' camp (we say not surprisingly because for much of 2021, the largest US bank has been publishing bearish note after note, as we have repeatedly detailed, urging clients to ignore the largest cryptocurrency and if anything, to take profits. In retrospect, this has been a catastrophic recommendation for anyone who followed it).
According to the JPMorgan quant, the launch of BITO by itself will not bring significantly more fresh capital into bitcoin due to "the multitude of investment choices bitcoin investors already have. If the launch of the Purpose Bitcoin ETF (BTCC) last February is a guide, as seen in Figure 1, the initial hype with BITO could fade after a week."
Here, once again, JPM's superficial "analytical" approach shines through and we are confident that Panigirtzoglou, who has been dead wrong about bitcoin for the past year, will once again be wrong in his take on BITO. Instead, for a much more nuanced - and accurate - view of the daily happenings in bitcoin ETF land we recommend Bloomberg's inhouse ETF expert, Eric Balchunas who points to what is clearly an unprecedented, and rising demand for crypto ETF exposure (one can only imagine what will happen when Gensler greenlights an ETF based on the actual product not spread-draining and self-cannibalizing futures). Indeed, as Balchunas pointed out on Thursday, BITO - which is "maybe too popular for its own good", has already "used up 2/3 of its total bitcoin futures position limits, only about 1,700 contracts ($600m) left bf it hits 5k total. Could hit in next day or two."
$BITO has already used up 2/3 of its total bitcoin futures position limits, only about 1,700 contracts ($600m) left bf it hits 5k total. Could hit in next day or two. Great story on this from @kgreifeld https://t.co/xcVkw7Nbyl— Eric Balchunas (@EricBalchunas) October 21, 2021
But what about the ramp in bitcoin prices in recent weeks? Surely the anticipation of the ETF launch was the main catalyst? Well, according to JPM the answer is again no, and instead the JPM strategist writes that "while we accept that bitcoin momentum has shifted steeply upwards since the end of September, we are not convinced the anticipation of BITO’s launch was the main reason."
Instead, as the Greek quant explained before (see "JPMorgan: Institutions Are Rotating Out Of Gold Into Bitcoin As A Better Inflation Hedge") he believes that rising inflation concerns among investors "has renewed interest in inflation hedges in general, including the use of bitcoin as such a hedge."
As he further explains, "Bitcoin’s allure as an inflation hedge has been strengthened by the failure of gold to respond in recent weeks to heightened concerns over inflation, behaving more as a real rate proxy rather than inflation hedge." This is actually correct, and as we have shown previously gold indeed correlates much more closely to real rates that nominals, although in recent months, even real rates suggest that gold prices should be notably higher, perhaps confirming ongoing precious metal price suppression of the kind we have previously documented to be emanating from the BIS.
In any case, JPM also updates a chart we showed previously, the shift away from gold ETFs into bitcoin funds, which was very intense uring most of Q4 2020 and the beginning of 2021, has gathered pace in recent weeks.
In turn, by putting upward pressure on bitcoin prices, JPM argues that this shift away from gold ETFs into bitcoin funds likely triggered mean reversion across bitcoin futures investors which had reached very oversold conditions by the end of September. This is shown in Figure 3 via the bank's position proxy based on CME ethereum futures. Looking at Figure 3, JPMorgan now claims that "there had been a steep decline in our bitcoin futures position proxy" which pointed to oversold conditions towards the end of September triggering a bitcoin rebound. This rebound appears to have accelerated over the past days ahead of BITO’s launch with the blue line in Figure 1 fully recapturing all the previous months’ unwinding. In other words, the price ramp into the bitcoin ETF launch was just a coincidence. Yeah right, whatever.
Where JPM is however right, is in its assumption that a significant component of bitcoin futures positioning encompasses momentum traders such as CTAs and quantitative crypto funds. Previously, the bank had argued that the failure of bitcoin to break above the $60k threshold would see momentum signals turn mechanically more bearish and induce further position unwinds; it also claims this has likely been a significant factor in the correction last May in pushing CTAs and other momentum-based investors towards cutting positions. At the end of July, these momentum signals approached oversold territory at the end of July and have been rising since then in reversal to last May-July dynamics. The shor-tterm momentum signal has exceeded 1.5x stdevs, a z-score that we would typically characterize as overbought for other asset classes but still below the exuberant momentum levels of January 2021.
So with both With Figure 3 and Figure 4 pointing to exhaustion of short covering and more crowded bitcoin positioning in futures, Panigirtzoglou sees bitcoin relying more on other flows outside futures to sustain its upswing. To him, this elevates the importance of monitoring Figure 2, i.e. the importance for the current shift away from gold ETFs into bitcoin funds to continue for the current bitcoin upswing to be sustained.
In our opinion, the main problem for bitcoin over the previous two quarters had been the absence of significantly more fresh capital as shown in Figure 5 and Figure 6. Figure 5 shows our estimate of retail and institutional flows into bitcoin with an overall downshift in Q2 and Q3 of this year. Similarly, Figure 6 shows that the previous steepening in the pace of unique bitcoin wallet creation has largely normalized returning to pre-Q4 2020 norms, again implying an absence of significantly more fresh capital entering bitcoin.
And yet, despite this latest (erroneous) attempt to downplay the impact of the bitcoin ETF, which JPMorgan says "is unlikely to trigger a new phase of significantly more fresh capital entering bitcoin", by now too many JPM clients are invested in the crypto asset as Jamie Dimon (whose opinions on bitcoin have been an absolute disaster for anyone who traded on them) recently admitted, and so while tactically staying bearish on the impact of BITO, not even JPM's house crypto "expert" can objective stay bearish in general, and as he concludes, "istead, we believe the perception of bitcoin as a better inflation hedge than gold is the main reason for the current upswing, triggering a shift away from gold ETFs into bitcoin funds since September."
So with Bitcoin now perceived as the best inflation hedge among non-traditional assets, Pnaigirtzoglou concludes that this gold to bitcoin flow shift "remains intact supporting a bullish outlook for bitcoin into year-end."