Opening bell │ #22 │ 22nd July
Report highlights:
Pattern observations
Possible breakout test in Bitcoin’s market value to realized value Z-score.
Copper has discussed the Bitcoin MVRV Z-Score and its importance as an indicator of market peaks (OB#7). This metric typically moves in tandem with price appreciation, with markets historically peaking only when the MVRV Z-Score surpasses 6. The score tends to change more rapidly than the market itself, appreciating or depreciating faster than the price. Currently, the score is at 2.1, having recently bottomed out and made a significant jump, breaking towards the trendline since Bitcoin’s peak.
2024: MVRV Z-score, BTC/USD (RH-AXIS ) and trendline since peak
Stablecoin reserves
Cash firepower as USDC exchange stablecoin reserve balances hits new high.
In the past few weeks, exchange reserves of stablecoins have reached new highs for the year, surpassing $22.6 billion. Despite a slight dip in USDT, this gap has been filled by USDC, with investors moving over $800 million since the start of this month.
On derivative exchanges, cash-margined positions represent a substantial 78% of open interest. There is $4 billion more sitting on exchanges now than when Bitcoin peaked in March, providing plenty of firepower for investors.
2024: USDC and USDT (RH-AXIS) exchange reserves
Ethereum ETF
Ethereum ETF: Inflation, inflow expectations and portfolio strategies weigh-in.
Ethereum ETFs are set to start trading this week, marking another milestone for crypto investors looking to diversify portfolios.
The Bitcoin ETF has proven to be a powerhouse, with ETF investors purchasing 144k coins this year, costing over $8bn (see chart). This amount is more than twice the new supply from miners this year.
2024 BTC and ETH inflation YTD
With Ethereum turning inflationary in mid-April, similar principles are expected to apply. To keep prices steady, investors would need to buy a minimum of $330mn monthly (the average monthly inflation value since May).
Ether exchange supply drops 63% since 2020 peak reserves
Current estimates suggest flows could range between $5bn within the first six months to an optimistic $45bn in the first year (see table). JP Morgan’s estimates are more conservative, sitting at just $3bn until the end of the year.
Ethereum ETF flow estimates
Even if the lower estimates materialize, Ethereum’s new supply, like Bitcoin’s, would be about half of the estimated inflows.
The larger question, however, is whether investors will bring in fresh liquidity or begin to adjust their crypto portfolios through weighted strategies.
A thorough analysis by ASXN uses Europe and Hong Kong as comparisons to understand Assets Under Management (AUM) dynamics, where Exchange Traded Products (ETPs) for Ether already exist. A key finding is that, while the relative market cap of Bitcoin to Ethereum is 75:25, the AUM for Bitcoin and Ethereum ETPs is skewed more heavily towards Bitcoin, with an 85:15 ratio.
If investors purely diversify from their current Bitcoin holdings, this implies an inflow range of $2.5-4.2bn, much lower than most estimates.
However, if one was to assess the European ETPs, investors have diversified Bitcoin to just 53% of total AuM across various products.
Accounting for just BTC and ETH, the weights would be 70:30. Should similar dynamics play out, estimates might be just spot on.
European ETP AUM (BN) and distribution
Economics and historical perspectives
The Elephant Trade: Economic policies, not politics, boon for Bitcoin investors.
Election cycles are always a battle of showcasing the good, the bad, and the ugly.
The economic state of the US often plays a crucial role in determining who might win the White House, why they might win, and what economic policies will drive the economy over the next four years.
A recent example is the Great Financial Crisis, which helped the Democrats gain office. They returned to power again after the COVID-19 pandemic.
Conversely, the Republicans took office in 2016 following the stock market recovery to new all-time highs. This cycle has repeated over decades (see diagram).
Simplified US election cycle journey
When economies recover, investors shift back into riskier assets, and the Republicans often take back Washington with promises of lower tax rates, deregulation, and favorable trade policies.
The stock market, frequently seen as a barometer for the economy’s future health, cannot be claimed as a success by any one party (see chart).
S&P 500 compound annual growth rate
GDP growth by party | Democrat AVG: 3.5% | Republican AVG: 2.5%
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Unemployment rate change by party
However, as the diagram shows, the risk premium during a Democrat-led White House leads to noticeable differences. Average annual S&P 500 returns under a Democratic president are 11.4%, compared to just 7% under a Republican president.
You might have already come across these charts, but we include them here as a general reminder of what can ultimately influence financial markets, particularly Bitcoin.
One might assume that Bitcoin, with its high correlation to equities, would fare less favorably under a Republican president. However, the correlation is a simplistic view, as the dynamics at play, much like elections, are far more complex.
Institutional investors are keenly aware of Bitcoin’s tendency to move in the opposite direction of the US dollar’s strength or weakness. And this is where party policies have made historical differences.
BTC/USD vs UD dollar index (DXY)
Bitcoin and crypto investors have been given a substantial lifeboat this year, powered by two significant engines.
First, the launch of Bitcoin ETFs has been a major narrative, and it has proven to be true. ETFs have been an incredible success story for Bitcoin, driving substantial inflows and boosting investor confidence.
The second narrative now unfolding is the high probability, at least according to betting markets, that the now crypto-friendly former US President Donald Trump will win the US elections this November. Bitcoin has rallied significantly in response to this possibility.
However, the reasons for this rally might have less to do with favorable crypto policies and more to do with market expectations that the US dollar will lose ground against other currencies, as it has historically under a Republican White House (see chart). A research study titled “US Presidential Cycles and the Foreign Exchange Market” found that “the U.S. dollar tends to start at a high value for Republican presidents and then depreciates, while the opposite pattern is true for Democrats.”
DXY index change under party
Although many debate whether Bitcoin is a currency, it certainly trades like one on markets. In its short history, Bitcoin has reached new all-time highs as the US Dollar Index (DXY) begins to decline.
A weak DXY in 2017 and 2021 marked Bitcoin’s all-time highs, with both bull runs gaining traction as the US dollar began to lose value.
Interestingly, relative to when the current Democratic party took over the White House, the DXY has increased by a massive 14%, and yet, Bitcoin still made new highs.
What is notable is the direction the DXY took after hitting its peak (and marking Bitcoin’s bottom) in 2022.
This indicates that it’s not the absolute strength of the DXY at any given point that matters, but rather the market’s expectations of its future direction.
Should markets continue to anticipate a Republican win this year, there might be an assumption of potential for the US dollar to weaken, especially considering it is currently trading at its highest level since 2002.
Bitcoin ETF AUM & flows
Bitcoin ETF: Can investors build on inflows, speed and taker enthusiasm?
Momentum is a significant driver in financial markets, and Bitcoin is no exception, having just closed an 11-day streak of positive inflows. With over $2.3 billion in inflows, the market has rebounded close to the $70k level, jumping over 17% in two weeks after the German government spooked the market by selling around 40k BTC.
However, data indicates that the market dynamics for cryptocurrency are not always straightforward, despite inflows and prices often following a similar step-lock pattern. For instance, a 19-day streak with over $4 billion in inflows pushed prices up by only 13%. Similar trends are observed in other top streaks relative to total inflows, such as the all-time high reached after $4.8 billion flowed in just 10 days.
Since Bitcoin’s all-time high, ETF investors have purchased an additional 70k coins, with the total surpassing 900k BTC last week.
Average BTC/USD relative to total ETF holdings in Bitcoin (10k increments)
Revised estimate ETF BTC holdings to reach $100k avg. Price | BTC 10k increments
ETF weekly flows and cumulative flows | USD bn
Currently, relative to ETF holdings and their average trading price in that range, Bitcoin is trading well below the trendline since markets began buying in late January.
In June, Copper’s calculations showed that Bitcoin could hit the $100k mark if $17 billion in inflows were to come in, taking holdings above 1.05 million BTC (OB#16)).
However, with the German supply added to the market, our figures now indicate 1.1 million BTC, implying an additional $17.5 billion in inflows. At this year’s rate, ceteris paribus, this might be achieved by Feb-2025.
Economic calendar
Key events this week: US note auctions, Michigan expectations, core PCE.
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