07 Feb 2024

February Outlook: The market rewards the patient

Few near-term catalysts, continued structural adjustments, and a new bulk of GBTC outflows point towards February being a period for holding and accumulating.
Outlook Cover Feb PNG

The ETF launch has been huge

2024 has started with a bang, with the nine new ETFs amassing BTC holdings of 185,000 BTC after 17 days of trading. As anticipated, BTC peaked at the ETF launch as sellers with various motivations flooded the order books. Event traders’ positioning in the quarter ahead of the launch reduced exposure, as did GBTC discount traders. The opening of Grayscale saw FTX’s bankruptcy estate sell $1bn worth of BTC, while active traders on CME effectively reduced its exposure by 38%. Still, bitcoin closed the month higher than the monthly open – singlehandedly carried by extremely solid flows to the new spot ETFs. Chapeau!

ETF inflows gradually stabilizing

Inflows to the new spot ETFs have trended lower since launch. The week-over-week net inflow to the new ETFs is naturally on a downward trend, seeing an average week-over-week decline of 21% since its launch week. With bitcoin consolidating and material capital allocations originating throughout January, there are few imminent reasons to expect the downward trajectory of net ETF inflows to change soon.

GBTC outflows have fallen faster than spot ETF inflows

For now, inflows to new spot ETFs overshadow GBTC’s outflows. GBTC outflows have fallen at a more rapid week-over-week rate following its conversion than its peers of 38%. This has caused the past few weeks to see significant net positive flows from U.S. spot ETFs, amounting to 38,000 BTC since the ETF conversion. For the remainder of February, this trend may shift. Grayscale’s asset base consists of many sad artifacts from the past, and negative flows of 27,600 BTC stemming from Genesis and Gemini are due to affect flows negatively ahead. This event may also shake up market sentiment, as the market reigns highly sentient to ETF flows. Per the Genesis motion, the estate intends to pay creditors in kind, making the flows net neutral for the market as spot BTC gets purchased at a 1:1 rate to GBTC share redemptions. For now, it remains uncertain whether this process will be approved. Even if approved, less transparent spot purchases compared to daily ETF flow updates may suffice to spook the market into de-risk mode.

Significant decline in CME exposure in January, trend to persist in February?

CME’s open interest has fallen by 26.7% since ETFs launched – and more remarkably, the exposure held by active market participants has fallen by 38%. Even after this decline, active CME traders maintain an exposure of 10k BTC higher than the historical norm, supportive of further decline in CME OI onwards. Outflows in futures-based ETFs have also accelerated over the past week, which is reflected in reduced CME longs. This dynamic reduces CME’s futures premiums and, in turn, reduces the profitability of arbitraging the CME basis, limiting BTC spot demand from a certain subgroup of market participants. High premiums are often interpreted as froth in the market but also accommodate further spot demand due to the sweet yields. Contracting yields reduce spot demand, further pointing towards consolidation ahead.

February reeks of consolidation

Alongside ETF flows and CME adjustments, spot markets and the offshore market have seen activity drying up. Options price in low volatility ahead, and the frenetic days in perps are behind us. This, alongside a few near-term narratives, points towards continued consolidation in February.

The market rewards the patient

According to the plan, long exposure was reduced amidst the ETF launch. With no imminent catalysts, continued structural market adjustments, and more GBTC shares due to flooding the market, my view for February remains neutral to cautious. With that being said, my year-end outlook remains unchanged and very positive. The halving, increased global liquidity, political turmoil, and enhanced access to BTC via ETFs support higher highs by year-end. Thus, the next months are not a period for selling but rather a period for holding and accumulation.
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