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Hello and welcome to the FT Cryptofinance newsletter.
It’s often said that the most dangerous phrase in financial markets is “this time it’s different”. But as bitcoin shot to a record high this week, it briefly felt like the cryptocurrency was moving on after two years of scandal and vicious sell-offs. Its rapid tumble thereafter was a reminder that volatility is never far away.
The common consensus is that bitcoin’s rally in recent months, up 60 per cent this year to an all-time peak of just over $69,000, is driven largely by institutional investors.
As analysts from Deutsche Bank noted, the new spot bitcoin ETFs have attracted nearly $8bn in funds since US regulators approved them on January 10.
BlackRock’s fund alone has received more than $9.2bn in inflows and Fidelity nearly $5.3bn. The overall total would be higher were it not for outflows from Grayscale, the long-standing bitcoin trust that converted to an ETF and has since lost nearly $10bn — a chunk of which has presumably headed to its new, lower-cost rivals.
Deutsche analyst Marion Laboure wrote: “The crypto world is gradually moving towards greater institutionalisation as traditional financial players enter the market.”
The huge trading volumes in the ETFs also hint that activity is shifting towards marketplaces that cater to large institutions, rather than the more lightly regulated exchanges that appeal to retail traders and have dominated bitcoin trading in the past.
Coinbase’s regulated futures exchange had a single-day record, in terms of notional volume, at the end of February. It has also been one of the venues of choice when large investors have sold blocks of bitcoin.
This wall of money suggests a market being wrenched from its roots. Regulated investment vehicles, which include funds run by BlackRock and Fidelity, now hold more than 1mn bitcoins, according to K33 Research. That is up by 161,700 this year alone, driven by the US ETFs.
The total is equivalent to more than 5.13 per cent of bitcoin’s circulating supply. The losers are existing crypto exchanges, which held about 20 per cent of all bitcoins for customers a few years ago but now hold around 11 per cent, roughly 2.3mn tokens.
Certainly, the ground has shifted since the Securities and Exchange Commission threw in the towel on its long-running battle to prevent the launch of bitcoin ETFs. When a court ruling forced the SEC’s hand, a decade of delays had given Wall Street’s biggest players ample time to mobilise, meaning the likes of BlackRock and Fidelity were ready to pounce in January.
K33 estimated that 843,000 of those bitcoins under management were in the control of US-based investment firms, if US futures-based ETFs were included in the calculations. Rather than forcing crypto away from America, it appears that the market is gravitating towards it.
Gary Gensler, the SEC chair, may have lost the fight but delayed long enough to tip the balance in favour of US-regulated onshore investment vehicles.
From this perspective there appears to be little room for the retail investor, who drove bitcoin to its previous peaks in 2013, 2017 and 2021. There have been some flickers of the old bullishness from crypto’s retail crowd. One indication is the interest in meme coins or alt-coins — tokens that are usually a knowing joke. Some have done well in recent days.
Dogecoin, Elon Musk’s meme coin of choice, has doubled in the past month while current meme favourite dogwifhat has surged 800 per cent in that period, albeit from a very, very low base.
These are minor returns though. “It’s not a full-blown retail bull market until Coinbase is the #1 app in the Apple app store,” said Alex Svanevik, co-founder and chief executive of Nansen, the data analytics group. “We are nowhere near that yet. Meme coins do show that retail activity is picking up but coins like Doge have a lot of catching up to do on the bitcoin price.”
But as the bitcoin price dropped and rebounded this week, the action seemed less like a tamer, institutionalised crypto market and more like a continuation of the wild old ways — albeit with investment flowing via different channels.
In any regular trading market, price formation has to happen somewhere. Even over-the-counter markets require input from cash or futures to inform traders and establish a benchmark.
That bartering, or price discovery and setting, takes place on crypto exchanges, which run spot trading. Looking at data from last week — when the market was equally frothy — analysts at Kaiko Research noted that trading volume in bitcoin exceeded $40bn, its highest level since the May 2021 sell-off. “Binance saw net buying of nearly $1bn over the past 10 days [until Monday] while US exchanges saw significantly less buying activity,” its analysts said.
For several years the most important trade in the bitcoin market has been transactions between bitcoin and Tether, the stablecoin. This week the volume of USTD — as Tether’s coin is known — in circulation hit $100bn for the first time, suggesting there has been little breakdown in the relationship. Tether trading volumes have been equally buoyant.
One explanation for bitcoin’s rise has been due to ETF buying. But this seems to be back to front. An ETF is a passive investment, offering shares of a fund that tracks the bitcoin price. It buys bitcoin to keep up with the pace of customers buying its ETF. Bitcoin’s rise this week began outside US stock market trading hours — when the ETFs trade — on Monday.
Finally, high demand is hitting a market where trading volumes remain thin, meaning flows have an outsize impact on prices. Data from The Block shows that the percentage of bitcoins that has changed hands in recent weeks has ticked up a little but no sharp deviation from long-term averages. Most of the market is held for the long term and not traded.
Taken together, the past week suggests that bitcoin’s price action still remains tied to crypto exchanges, but the popularity of the ETFs means there is a greater weight of money tied to it. Trying to work out why bitcoin goes up and down, however, remains as tricky as it ever was. The more things change, the more they stay the same.
What’s your take on the drivers of the bitcoin price? Email me at philip.stafford@ft.com
Weekly highlights
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Montenegro’s highest court has ruled that Do Kwon, the fugitive crypto entrepreneur, should be extradited back to his native South Korea. Kwon is wanted by both the US and South Korea to answer questions about the collapse of the TerraUSD stablecoin, which wiped out the value of $40bn of digital tokens in days.
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Spain plans to block Sam Altman’s cryptocurrency project Worldcoin because its data protection regulator has reservations about information being collected by scanning an eyeball into an orb. The regulator described it as a “precautionary measure” and cited concerns that Worldcoin was collecting data on minors. Worldcoin said the Spanish agency was circumventing EU law.
Soundbite of the week: Headline-worthy scapegoat
Crypto conglomerate Digital Currency Group this week filed to dismiss a lawsuit brought by the New York attorney-general. Last October the regulator alleged DCG, its chief executive Barry Silbert, and the Winklevoss twins’ crypto exchange Gemini, had defrauded investors out of more than $1.1bn.
DCG on Wednesday said the NYAG was:
“in search of a headline-worthy scapegoat for losses caused by others”.
Data mining
The share prices of crypto mining companies underscore that the boom times aren’t back for everyone. While bitcoin has soared the economics for miners are expected to be devastated by the so-called halving, which will cut the rewards for verifying a block from 6.25 down to 3.125 bitcoins.
The Valkyrie Bitcoin Miners ETF (its ticker is WGMI — get it?) is down nearly 10 per cent year-to-date and its holdings include chipmakers Nvidia and AMD. But even within this niche area, it seems like the market has already picked its winners and losers. To survive, some may need to find more government subsidies that pay them not to mine bitcoin.
Cryptofinance is edited by Tommy Stubbington. To view previous editions of the newsletter click here.
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