Bitcoin Decouples During Macro Concerns
After a year of strongly correlated moves with the S&P 500 Index corrections, in the last few days bitcoin has shown the beginnings of a long, awaited decoupling point during an increasingly uncertain macro environment. Over the last few weeks, bitcoin has rallied 34.86% while Gold, the S&P 500 and the market-weighted index of the U.S. Treasury debt with remaining maturities of 20 years or more (TLT) were all in negative territory.
Although one data point doesn’t give us statistical evidence that this narrative is now the new normal, every critic in the market will be watching today as bitcoin shows life as an asset that can gain momentum when there’s growing concerns and volatility in the markets.
During a period of great macroeconomic uncertainty, the price action of bitcoin is notable to say the least, with a very clear vertical accumulation taking place in spot markets.
What makes the bitcoin price action even more impressive is that it's occurring at the same time as a downgrade of forecasted GDP output happening around the world. Using the Atlanta Federal Reserve as an example, their 2021Q3 GDP estimate has declined from over 6.3% to 1.3% in just 70 days. The monetary and fiscal policy economic fuel provided to the market doesn’t seem to be having the same stimulative effects.
This is not a United States specific problem. For China, “Goldman Sachs has cut China's economic growth forecast for 2021 to 7.8%, from 8.2%, as energy shortages and deep industrial output cuts add "significant downside pressures".
While it is true that bitcoin remains mostly an uncorrelated asset, during periods of risk off, bitcoin historically has not been immune as USD strength means weakness for the BTC/USD pair, which is why the recent developments are so bullish.
Bitcoin Future ETFs Coming
October is the month for bitcoin future ETFs getting approved. Bloomberg ETF analyst, Eric Balchunas, is betting on a 75% chance that one gets approved this month. An approved, regulated futures ETF would put increased buying pressure on the front-month CME contracts. The increased buying pressure would increase the basis premium, otherwise known as the contango captured in the “cash and carry trade” which would then push more demand back into the spot market.
It is important to note that a bitcoin futures ETF would be quite different from a spot Bitcoin ETF due to the premium that the bitcoin futures curve often carries.
Above shows the bitcoin futures term structure across various exchanges, with the October 2022 contract currently trading at $60,600 highlighted as an example.
While it is no doubt bullish that a Bitcoin Futures ETF approval is likely in the cards in the coming weeks, investors should be wary about allocating funds to any product that is launched.
Due to the futures premium that we covered above, a Bitcoin Futures ETF would be allocating out on the futures curve on a rolling basis, which would mean that if bitcoin is trading with a contango (futures premium to spot), they would be underperforming a spot index. A back test conducted by Eric Balchunas of Bloomberg shows that from the beginning of 2018 to 2021 a rolling futures index underperformed spot bitcoin significantly, with returns of 91.39% compared to 167.55%.
So, while the potential of a Bitcoin Futures ETF product is bullish in the sense that it will increase in the premium that futures contracts trade with on the market, thus incentivizing capital to enter the market to arbitrage the difference, it is highly likely to underperform spot bitcoin by a fair margin over a long period of time.