07 Sep 2023

September Outlook: The market is wrong

The market dramatically underestimates the impact of U.S. ETFs. A slow September favor strategic positioning ahead of an October packed with market-moving events. I favor a mix of increased ETH exposure and conservatively leveraged long exposure in BTC
Opinion Vetle
The market dramatically underestimates the impact of U.S. BTC ETFs and, in extension, futures-based ETH ETFs. In September, few catalysts await, offering a solid opportunity for strategic positioning ahead of an October packed with market-moving events. I favor a mix of increased ETH exposure and conservatively leveraged long exposure in BTC.

The market is wrong

Bitcoin trades at three-month lows of $25,700. Three months ago, BlackRock’s ETF filing was not yet public. Fidelity and others had not re-filed their ETFs. Grayscale had yet to crush the SEC’s arbitrary and capricious disapproval in the DC Circuit. The last three months have greatly enhanced the odds of an ETF approval, yet prices are far from reflecting this. Based on these facts alone, I firmly believe the market is wrong. This is, by all accounts, a buyer’s market, and it’s reckless not to aggressively accumulate BTC at current levels.

It is +EV to own BTC now

Scenario 1: Current filings are eventually denied
An ETF denial will have no material impact on the market structure. The crypto market will remain as is, Grayscale will stay close-ended, and market participants will have access to the same venues to trade as we do today. The initial market reaction to a denial will be negative, but over the medium to long-term horizons, rejections won't matter – new filings will continue to appear and will eventually be approved. It follows that the impact of an ETF denial on BTC should be negligible.
Scenario 2: Current filings are eventually approved
An immediate massive supply absorption will follow an ETF approval. The competitive environment from seven BTC ETFs, all launching simultaneously, will be immense. Flows are destined to be very bullish in case of approval. This is clear when comparing U.S. spot ETFs to flows from previously launched products. Costly futures-based ETFs with ProShares launching with a one-week head start against a far weaker competition managed to attract 20k BTC worth of inflows in its first ten trading days. With a far smaller addressable market than the U.S., Canadian ETFs managed to attract 60k BTC worth of inflows in its first four months after launching. Adding to that, BlackRock’s announcement in June was in itself sufficient to cause the largest global inflows to BTC ETPs since October 2021, and an actual launch would likely cause similar surges in global ETPs again. With the solid odds for ETF approvals, the market is fundamentally mispricing BTC. It is reasonable to assume that ETF approvals attract enormous inflows, absorb liquidity from the market, and be hugely positive for BTC prices. Do not underestimate either the ETF filings or Grayscale’s massive victory last week.

Inflows and Bitcoin strength go hand in hand

Inflows Bitcoin
Data confirms that net inflows to BTC investment vehicles are tightly connected to appreciating BTC prices. The chart below highlights BTC’s rolling 30-day return and rolling 30-day flows into BTC investment vehicles. The relationship between strong net inflows and strengthening markets is clear from a quick glance at the chart.
BTC vs flows Uptrend Downtrend
Bitcoin’s average 30-day return when BTC flows are on an uptrend sits at 8.2%, whereas BTC’s average 30-day return when BTC flows are in a downtrend sits at 2.4%. This tendency is logical; when investment vehicles see growing inflows, bitcoins are absorbed off the market, and net buyers fuel momentum. When flows trend lower, demand for BTC exposure through investment vehicles decreases, and supply is added to the market.
BTC vs strong flows
This relationship is even more significant when flows are extreme. In periods where investment vehicles have seen monthly positive flows of 20k or more, BTC’s 30-day return has averaged a massive 23.6% from 2020 to 2023. When 30-day monthly inflows have been negative, BTC has seen an average return of -4%. It’s clear that extreme inflows significantly contribute to lifting the market, whereas drought in flows and outflows negatively impact the market. In this week’s Ahead of the Curve, we argued that BTC spot ETFs in the U.S. would amass at least 30k BTC worth of inflows in its first 10 days of trading, based on BITO launch flows and Purpose BTC’s inflows. We also expect strong flows to ensue, with BTC investment vehicles combined seeing a 4-month growth in inflows in the range of 70-100k BTC fueled by U.S. spot ETFs and naturally growing inflows to ETPs domiciled in other countries.
BTC ETP simulation
ETF approvals could lead to a 66% rally to $42k. We base this simulated trajectory on the above-mentioned flow assumptions and 4 years’ of flow data. The assumed price path does not account for any other events that may directionally impact BTC and the crypto market.
Apathetic market and rinsed leverage
Adding leverage to the mix is less dangerous now than one month ago. Throughout August, BTC has tumbled lower, with momentum being heavily leaning towards the downside. In addition, open interest has plunged following the brutal August 17 crash. Structurally, the market is more robust after a massive clean-up in leverage. This increases the attractiveness of getting involved in the market with moderate leverage ahead, as underlying factors favor overweight exposure.
I like the BTC ETF trade, but I love the ETH ETF trade
September and October favor overweight exposure in ETH, as ETH carries stronger ETF momentum in the short term. Futures-based ETH ETFs are scheduled to receive their final verdicts in mid-October. In 2021, futures-based BTC ETFs facilitated a 3-week rally of 60% in BTC, as activity thrived on CME ahead of the launch. ETH filings were also live back then but got recalled quickly due to the nascency of CME’s ETH futures. This time is different; filings have yet to be recalled, and CME’s ETH futures have been live for 2.5 years. The odds are stacked in favor of ETH. Further, ETHBTC trades near 2.5-year range lows, with considerable wiggle room for relative upside. I view ETH as a strong relative buy, with ETHBTC at 0.063.
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