MacroTactical Crypto #23
3.4% of the Bitcoin(s) Are 34% Off
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Today’s note is 2,600 words (11-minute read)
3.4% of the bitcoin(s) are 34% off
I have been mostly bearish crypto since November 2021 and mostly bullish the USD since January 2022 on the back of higher US rates and accelerating Fed normalization. I think we might be near the peak of the Fed fear trade for a while. I have flipped bearish USD and bullish crypto for now, though I reserve the right to change my mind whenever I want.
My daily note, am/FX, provides much more detail on my USD view but in a nutshell: The US is becoming much less exceptional vs. the rest of the world. Whether you look at interest rates, equity performance, or valuation… The dollar looks like it might be ready to peak here. I mention this because there is a meaningful relationship between the USD, crypto, and all risky assets… It’s generally easier for crypto and risky assets to rally when the USD is weak.
My mantra is “be nimble.” There are going to be times when I flip from bearish crypto to bullish… And then give up on it. And there will be times when I stick with it for months on end. I was bullish into 20k/22k on the chart setup but the blowoff to 17500 took me out. Now, I think the best strategy is to wait until close to month end and average into longs. More specific detail later.
As discussed in MTC22, liquidation is a risk for the next 10 days. Funds with gates and various rules are getting month-end, quarter-end and half-year-end redemption requests right now. I presume these requests will be large. One particularly interesting liquidation play into month end is GBTC. That is the Grayscale Bitcoin Trust. It holds spot bitcoin and currently owns 654,885 BTC or 3.4% of all the bitcoin in circulation.
Pedantic sidenote: The plural of bitcoin can be bitcoin or bitcoins. It should be one or the other. I vote bitcoin.
The problem with GBTC is that it cannot be converted or redeemed into BTC and therefore it can trade at any premium or discount to net asset value. There is no mechanism to convert GBTC into BTC or to make GBTC trade near net asset value (NAV). So, the value of GBTC is correlated to, but also completely unanchored from its NAV.
In theory, one share of GBTC is worth NAV, eventually. But since there is no way of converting GBTC into BTC, the price of GBTC reflects some combination of two things: The price of bitcoin, and the overall demand for an exchange-traded bitcoin proxy.
When crypto is hot, GBTC trades at a premium because people will pay anything to get exposure. When crypto is wintery, like now, GBTC trades at a discount because demand disappears. Here is the GBTC discount / premium to NAV over time:
GBTC premium or discount to NAV
Before we get to why the GBTC story is heating up right now, you want to see something really stupid? This is the premium on the Grayscale Litecoin Trust. It’s a product similar to GBTC, but for Litecoin. Complete lunacy.
LTCN premium / discount to NAV
Anyone that bought LTCN in 2020 or the first half of 2021 was making an epic and obvious mistake. That’s not hindsight, LTCN NAV is well-known and published daily. Buying a trust at 60X NAV is stupid. Here is the market price of LTCN since launch:
LTCN price, 2020 to now
People bought this thing at $400 when it was worth $25. And now it’s worth $4.15 and it trades at $2.53. Lulz.
As I say in Alpha Trader: Markets are extremely, but not perfectly efficient.
Anyhoo, there are two interesting plot points in the ongoing GBTC saga. First, guess who the biggest holder of GBTC in the world is… Three Arrows Capital. AKA: 3AC. That’s the multibillion-dollar looks-to-be-insolvent crypto fund that is likely to be entering (or in) liquidation right now. Here is a snip from Bloomberg, showing the top holders of GBTC:
Top holders of GBTC
That is a huge position! Average daily volume in GBTC is 6.1 million shares so a rapid sale of Three Arrows GBTC holdings would surely leave a Sasquatch-sized footprint.
Not all liquidations are done in a panic. Sometimes another fund will show a bid and the liquidating entity (3AC) will pass the entire stake off to that fund and nobody ever has to touch the market. There is no guarantee that a huge chunk of GBTC must hit the market.
But if I was going to bet on the timing, if there is a sale, it would be between now and the end of the month. Therefore, there could be an opportunity to buy GBTC at an even wider discount into month end. My guess is that once the liquidation ends, the discount will compress as people buy the lottery ticket into plot point number two: the July 6 ruling on whether GBTC can convert to a spot bitcoin ETF.
If Grayscale wins approval, the discount would almost instantly close to zero. The probability of an SEC approval is extremely low, but not zero. You can read Grayscale’s side of the story here. If there is no approval, I doubt the discount will widen much given there is so little expectation priced in.
Given I am bullish bitcoin here, and there is a good chance of liquidation flows into month end, and there is a low-probability lottery ticket event on July 6… Scaling into GBTC from June 27 to July 1 (20% per day) makes a ton of sense to me. This can either be a trade, or it’s something you can do in your 401k if you are a long-term BTC bull and don’t mind wearing some mark-to-market if and when the discount goes from “crazy” to “non compos mentis”.
Buying trusts at a discount is the ultimate “no stop loss, unlimited time horizon” trade. You are buying $100 worth of assets for $66. But because there is no arbitrage, there is no theoretical limit to how wide the discount can go, or how long it can last. Furthermore, if bitcoin goes to 10000, you still lose money, even if the discount goes to zero.
There is no free lunch, but there is a certain margin of safety to buying something like GBTC at a 35% discount—just like there was an extra margin of danger in buying it at a premium.
None of this is investment advice, the point of MTC is to sautée a variety of ideas, share them with you, and allow you to use your personal brain to make independent investment and trading decisions that fit your investment goals, preferences, and time horizon. There is no such thing as a risk-free trade (not even LUNA).
To be clear, there are two ways of looking at this setup.
1. A tactical trade to take the other side of month-end and half-year end liquidations and the potential for some lotto ticket GBTC buying ahead of the SEC decision. In this trade, you square up before July 6, so it’s purely tactical. Upside is 10% to 20% in ten days, if it works perfectly.
2. Scale in and HODL. No stop loss, unlimited time horizon. Ride it until the discount closes to zero or BTC trades at $100,000.
MSTR fun facts
Before it converted itself to a bitcoin proxy, MicroStrategy’s pre-COVID annual net income from operations was:
2017 $18.2 million
2018 $22.5 million
2019 $34.3 million
They are currently $1.25 billion underwater on their BTC.
This is what all in looks like (MSTR)
y-axis in millions
On some level I respect Saylor’s decision to go all in on BTC. It represents a particular Wall Street strategy that can be fun and hugely profitable (when it works). This strategy can be employed by both fund managers and market gurus. The strategy is:
1. Pick a theme, asset, or security
2. Go all in
3. Pound the table until your fist breaks or you end up on the right side of the coin toss and the right side of history.
It’s how legends are made.
You see it all the time, for example: ARKK, MSTR, Paulson & Co., Alameda, Do Kwon, Hussman Funds, permabear equity haters, permabull gold lovers, etc. Sometimes it works, sometimes it doesn’t.
Pick one thing and bet your career on it is not my style, but I admire the beautiful simplicity of that metagame. Saylor has made one of the great moral hazard bets of all time. Get rich or die trying.
I am not betting against Saylor. I think he’s dancing with one foot on each side of the genius/madness line and a coin, once flipped, can come up heads or tails. Some coin flippers will win! I simply presented that ludicrous bar chart to give you a sense of the scale of Saylor’s bet, relative to the company’s software operations.
To pre-hedge pushback from people that say long bitcoin is not a coin flip. OK, that’s fine. What is it? 55/45? 65/35? Nothing in this world is 100/0. Betting everything on one outcome, even if it’s positive EV, is not optimal to me, but I can still respect someone who does it.
I’m always probabilistic and I don’t think all-in determinism works on average, even if it sometimes works when n=1. In other words, my philosophy is that overconfident, deterministic decisions that succeed fall into the “bad decision, good outcome” bucket or “fooled by randomness”.
Lost in the Funhouse
It’s amazing to contrast the genesis of crypto, and its anti-bailout, decentralized ethos with the current bailouts of various crypto hedge funds, projects, and ecosystems. Score another point for the bitcoin maximalists as much of crypto just looks like a poorly-regulated, worse-functioning, fraud-plagued version of the TradFi system (with a terrible UI).
When we hold up Satoshi Nakomoto’s Genesis Block text side-by-side with recent headlines, we see Nakomoto’s utopian vision, twisted and co-opted into a dystopian fever dream featuring the worst of late capitalism, exactly as Ben Hunt predicted in his famous essay: “In Praise of Bitcoin”.
It seems to me like bitcoin (and even Bitcoin™) are functioning as a fiat debasement / MMT hedge while the rest of crypto is like looking at Satoshi’s original vision in a funhouse mirror (with a scary clown standing beside you).
Related sidenote: If you want to read one of the great short stories of all time… Lost in the Funhouse by John Barth.
Bitcoin is not an inflation hedge, it’s not a store of value, it’s not a useful form of money for commerce, and it’s not (yet) a simple monetary solution for wealth inequality or any other societal ill. But it does seem to work as an MMT hedge. And we are eventually in for more, not less MMT in the future.
QE and MMT* are the new orthodox playbook for central banks. When they started QE and MMT, bitcoin went up. When they stopped, it went down. When they start QEMMT up again (which they will) bitcoin will probably go up again**.
*I feel like QEMMT should be a term. Pronounced “Quempt”.
**Web3 will have its day, too, but I’m not sure any existing Web3 tokens / altcoins / securities will have any lasting value, even when Web3 finds its way.
Watch for falling corrs
I think crypto correlation to NASDAQ should drop from here as crypto’s market cap is now sub $1T after trading above $3T at one point. The systemic or contagion aspect of falling crypto should be less pronounced as the asset class is just much smaller than it was six months ago. That said, crypto correlation to NASDAQ is mostly a function of market stress and high volatility, not crypto market cap, so I don’t want to overstate this.
Given the mega extreme level of stocks to BTC correlation right now, it’s not a hero call to think it might come off.
Here is NASDAQ vs. BTC corr mapped with VIX. You can see that mid-2017 is the only exception to the general rule that rising tradfi market volatility increases NASDAQ/BTC correlation. This makes sense as explained in MTC 22… Higher vol almost always leads to higher corr.
Correlation of 5-day change in NASDAQ to 5-day change in bitcoin vs. VIX
Another reason I think that correlation will drop from here is that much of what is going on in crypto has progressed from exogenous to endogenous.
Some of the exogenous factors pushing crypto lower since November 2021 have been:
· Fed tightening
· transition from FOMO to fear
· liquidity sponges no longer necessary to mop up ludicrous monetary and fiscal easing that continued long after the COVID emergency ended
· new paradigm rejected as disruptor stocks crash to earth
· real interest rates significantly higher
Now, the pressure in crypto is often coming from more endogenous forces such as:
· DeFi collapse
· “stable”coin attacks
· institutional liquidations
· bailout rumors
The forces are now less systemic global macro and more crypto-specific. As such, I expect to see more days of crypto/NASDAQ dispersion going forward.
Market and Trade Ideas Update
The ETHBTC short (see MTC20) is decent in the money now, even after the big rebound in ETH. I think recent liquidations and centralized decision making across various crypto ecosystems reinforces the thesis that the bitcoin maxis are on the right track and ETHBTC is heading back toward 0.33.
My bullish BTC trade into 20k got stopped out sub 18k, which is annoying, but I am always willing to do the same trade two or three times until tactics work out. Long GBTC into month end is my next attempt to get long BTC (via proxy). I’ll update the exact parameters next week once I know the entry point. This is the kind of trade I might do in my 401k with no stop loss, too. That’s the only place I don’t use stop losses.
Get ready for month end madness!!
The SEC continues its rigorous investor protection as it allows a short bitcoin ETF at the lows after greenlighting a long bitcoin ETF at the highs. You have got to be kidding me on this timing:
And here’s their investor protection in 2017:
And finally finally: I could stare at this video all day. Nature is so lit.
That’s it! Thanks for reading.
MTC is still a new product. Please let me know what you are enjoying and not enjoying so far. Feedback, questions, and criticism are always welcome. My goal is to make MTC better and better over time. Thanks!
Don’t follow the crowd. Don’t fight the crowd. Think for yourself.
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