Excell with Options: Is it time to be optimistic about bitcoin?
Executive summary
In this article, Rich Excell discusses the current state of the Bitcoin market, including catalysts such as the potential Bitcoin ETF approval. He then compares two overlay strategies traders may want to consider for their Bitcoin futures positions.
Over the last few weeks, new headlines around the Cryptocurrency market have been fast and furious. Initially, there were rumors about the imminent approval of a Bitcoin ETF. This has led many to think that widespread adoption of the asset class by major market players is finally about to happen, delivering a wave of inflows into the market. This would potentially mark an end of the “crypto winter,” though the price action this year may already suggest that we’ve crossed that point. Other signs of a crypto spring continuing is Celsius Network being cleared to exit bankruptcy and agreeing to a payout to investors in that network. Also, a year into the FTX bankruptcy, and with the trial of its founder Sam Bankman-Fried now completed, we may be past the peak of the negative news cycle that engulfed the market for all of 2022 and early 2023.
Image 1: CME Group takes the top spot in Bitcoin futures open interest signaling increased institutional interest
Perhaps no headline was more important than the one from Coindesk.com titled “Bitcoin ETF Excitement Drives Wall Street Giant CME Above Binance in BTC Future Rankings,” which discusses how CME Group has taken the top spot in Bitcoin futures rankings. The chart above shows the open interest in Bitcoin futures with CME Group now on top. This has major ramifications in my opinion. This signals, as the headline suggests, that Wall Street (by which we mean institutional investors) are finally getting on board. These investors likely favor the common clearinghouse they can get at CME Group. This comes with more regulations, but after the headlines we saw in 2022, this added layer of security is not only comforting but integral for any institutional investor that wants to fully enter the market. This is a signal that institutions are preparing for a major push into the space in 2024.
Image 2: CME Group Bitcoin futures volume and open interest
In the above chart, we can see this in the volume and open interest chart for Bitcoin futures from CME Group. I can see the higher and higher peaks in volume around the expiration months but also, most importantly, we can see the slow and steady progression of open interest. The suggests to me that traders are getting more comfortable with the futures market, whether used for hedging purposes or for tactical directional trading. The patterns suggest we may continue to see higher highs in volume and open interest as we move into 2024a new year.
Image 3: Premium or discount to Net Asset Value for Grayscale Bitcoin and Ether products
Another place I can see that enthusiasm is returning to the Ccryptocurrency markets is by looking at the discount to net asset value for the Grayscale products. The bBitcoin discount is on the left and the eEther discount is on the right. Both discounts peaked last fall at the time of the FTX bankruptcy and the peak of the crypto winter at more than 50% discount. It took some time for these discounts to start to narrow, but over the last two months, both have narrowed sharply to the low double digits. While it is not uncommon for a closed- end fund to have a discount of approximately 10%, if these funds are able to convert into spot ETFs, there still may be scope for this to fully collapse. While I am not making a comment on where these discounts should end up, the closing of the discount from more than 50% to about 11% tells me enthusiasm is returning to crypto.
Image 4: Coin market capitalizations – total market on the left and alt coins on the right
Another way one may discern this investor enthusiasm is by plotting the market capitalization for crypto. On the left is the market capitalization for all coins, and while it is well off its highs from 2021, there has been a steady march higher all year long. The graph on the right excludes Bitcoin, Ether, Binance Coin, Ripple, and the stable coins. This is my proxy for the alt coins. We can see an even steeper climb in the market capitalization of these products. I think of this as the riskier asset space within cryptocurrencies and to see renewed interest in these coins suggests traders are really warming to the story. That being said, there may be more room to run as we are still well off the highs on both accounts.