New Era for Crypto Investing or Centralization Threat?
Seemingly insatiable Bitcoin ETF demand could cause prices to continue running in the face of increasing exuberance. We have just hit new All Time Highs (ATHs) but history suggests, this is another bullish signal. In this edition we touch on the continued resilience of long-term indicators and also outline the potential dark side to the ETFs. TLDR: ETFs are undoubtedly positive but Bitcoin’s core decentralization principle must be vehemently protected.
Bitcoin ETF Flows Shatter Expectations
BlackRock's IBITis reported to be the fastest ETF to reach the $10 billion mark. Many were comparing the launches to the advent of gold ETFs in 2005. This graph from Citigroup shows that bitcoin has completely blown gold out of the water
Performance Pressure drives RIA Adoption
Registered Investment Advisors (RIAs) are progressively adding these ETFs to their platforms, opening up a significant new investor market. Notably, Carson Group, a $30 billion Omaha-based RIA, started offering BTC ETFs to its clients on February 23 (source: Bloomberg). Additionally, Bank of America Corp.’s Merrill arm and Wells Fargo & Co.’s brokerage unit began offering access to ETFs on February 29.
We expect underperformance pressure to drive more RIA's in the same direction. The ETF has enhanced regulatory clarity and turned some of the largest investment managers into marketing machines for bitcoin. This is a big deal. Bitcoin adoption is scaling to a new market, which serves as a powerful strong foundation for this cycle.
Long-term indicators remain constructive
Market Dynamics and Future Outlook Net daily ETF inflows are >4X new daily bitcoin supply and supply will be cut in half in two months time. Added to this, existing supply remains illiquid with more than 60% of existing supply not having moved in more than 12 months. This number has dropped slightly showing that long-term holders have started to reduce holdings, which is normal at new All Time Highs. Other than long-term indicators are still constructive. For instance, bitcoin dominance is elevated and close to 60%.
Leverage has picked up in recent weeks but, when measured by open interest relative to market cap, leverage is still contained. In other words from a high time frame perspective, there is strong reason to remain bullish on the market heading into April's halving.
Shorter-term, froth is emerging
From a short-term perspective there are some signals suggesting caution. Funding rates on Perpetual Futures are particularly elevated. The one-way nature of price action over the past 3 weeks has resulted in significant liquidations of short interest and this can often cause the market to be a little one-sided with potential price weakness.
Meme coins have been performing particularly well which is also a signal of exuberance. In these conditions a pullback towards 52K is possible, but the bias remains firmly higher in the next 6 months. Pullbacks will likely be short-lived and a healthy corrective process, flushing leverage out of the system. The risk remains being under-allocated to this market, particularly given the potential for strong returns at this stage of the cycle
All Time Highs to Encourage Further Flows
If historical experience is anything to go by, Bitcoin having reached a new All Time High (ATH) in US dollar terms increases the prospects for further gains. In the past it hasn’t taken bitcoin long to double in price after reaching new cyclical ATHs. In Feb 2013 it took 28 days for price to double, in Feb 2017 it took 90% and in Feb 2022 only 70 days passed for a doubling in price from breaking the ATH.
These statistics seem crazy but the reality is that people wake up from their slumber when bitcoin reaches new All Time Highs. Perhaps “it is different this time” but that isn’t a scenario with wonderful expected returns.
Despite all this ETF positivity, it's important to balance this optimism by examining potential concerns associated with Bitcoin ETFs.
The Darkside of the ETFs: Centralization
We have written before that being "co-opted by Wall Street” is perhaps “Bitcoin’s Biggest Risk?"
Bitcoin Bitcoin's value proposition lies in its decentralization, making it resistant to censorship, nation-state attacks, and corporate interests. While not necessarily malicious, these special interests carry risks of corruption, inflation, politicization, and theft. Bitcoin's decentralized nature is expected to anchor a sounder and fairer financial system. However, decentralization is not static; it's a spectrum subject to change, and we must stay vigilant against potential centralization threats.
Particularly concerning is the decision by eight out of ten ETF issuers to custody their assets with Coinbase. While Coinbase is regarded as a top custodian, centralization risks cannot be ignored. If spot bitcoin ETFs were to control a significant portion of bitcoin issuance with Coinbase as the primary custodian, they could influence technical improvement proposals. Historical instances, such as Coinbase's stance during the block size wars of 2015-2017, underscore the need for cautious scrutiny of such influences.
Industry Watchfulness and Sound Money Capital's Stance
Coinbase's bitcoin holdings account for approximately 2.4% of the bitcoin supply, and all ETFs combined hold about 0.8% of supply (excluding coins inactive for over 7 years). While these figures don't present immediate concern, it's prudent to guard against potential risks to bitcoin's decentralization. Encouraging alternative custodians to Coinbase is vital, especially if these concentration figures rise. At Sound Money Capital, we advocate for multi-signature custody solutions that align with decentralization ethos. We're also transitioning our exchange-based assets from Kraken to a regulated, non-Coinbase, custodian to enhance security while maintaining seamless trading solutions.
Hero worship is another trap to guard against. Time and time again crypto participants bow down to famous influencers who have bought into bitcoin. However, we usually do not know the full reasoning behind these decisions and we have zero control over their future actions. Often we witness people fawning over famous individuals and businesses only for them to disappoint us later. Elon Musk is a great example. He put bitcoin on Tesla’s balance sheet which was a wonderful catalyst for price but his subsequent understanding of the technology has been disappointing. Elon Mush should not be a spokesperson for the technology or industry because it can be misleading. It is wise to remain cautious and treat these new participants sceptically, allowing them to show their stripes.
I.E. We should not roll out the red carpet for Larry Fink, BlackRock and the rest of the trad-fi crowd.
Call to Action: Protecting Bitcoin's Decentralization
As stakeholders in the crypto industry, we must remain vigilant about evolving decentralization and thought leadership dynamics. We encourage our readers to consider the implications of centralized custodianship in the crypto market and encourage you to either self custody your assets or choose responsible custodians that contribute towards decentralization. Net-net ETFs are almost undoubtedly positive due to the enhanced regulatory and institutional credibility, taking adoption into a new ballpark. However, we must guard our principles and goals closely in this ongoing battle for a better, sounder financial system.
