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Welcome to Crypto Long & Short! This week, Vivek Chauhan and David Lawant, of FalconX, explain why more mature market structure in the form of Bitcoin ETFs will help to dampen volatility in crypto.
Then, Michael Nadeau, founder of The DeFi Report, compares the evolution of “value investing” in traditional markets with the development of crypto.
As always, get the latest crypto news and data from CoinDeskMarkets.com. – Benjamin Schiller, head of opinion and features at CoinDesk |
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We were surprised too. Coalition Greenwich's research, sponsored by Amberdata, shows that the U.S. regulatory environment remains crucial for digital asset investors, but other locations like Dubai and Switzerland also garner support. Check out the report to learn more. |
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How the Launch of Spot ETFs Could Dampen Bitcoin’s Volatility |
One of the critical ingredients for Bitcoin’s success has been the emergence of new trading infrastructure and investment wrappers that open access to new investors. This trend is now in overdrive with the recent launch of spot BTC ETFs. Beyond the circles of liquidity providers and trading desks, we haven’t quite appreciated how these monumental changes will change the Bitcoin market structure. We can expect reduced inherent volatility as this market structure matures. Here, we will explore how a couple of important shifts associated with the launching spot ETFs are poised to facilitate this change. ETF Fix as a Market Price Reference? It is no secret that the recent ETF launches have yielded a meaningful uptick in the underlying spot BTC trading volumes. Notably, a disproportionate share of this volume increase has happened mostly between 3 p.m. and 4 p.m. ET, or close to the ETF price fix.
The chart below shows the daily BTC trading volume percentage in the 30-minute buckets starting at 3:00 p.m. and 3:30 p.m. ET for the leading trading pairs. Activity from these two buckets, which regularly accounted for less than 5% of the total daily volume in aggregate, now represents 10-13%. |
By providing a transparent and consistent reference point recognized by increasing market participants, the ETF fix allows investors to aggregate large trades around a common time, reducing their market impact and overall market volatility. A New Options Market Around ETFs? All three exchanges that currently list spot BTC ETFs have already asked the SEC to allow them to list options on such ETFs. It could take anything between one and eight months for those applications to be evaluated by the SEC, and there are wrinkles related to their clearing and settlement processes.
The Bitcoin options market will likely get a significant boost if this new class of options is given the green light. The Bitcoin options market is currently split between investors who trade in offshore exchanges inaccessible to U.S. persons or on platforms accessible only to large institutions, such as the CME. Allowing options based on spot BTC ETFs could significantly expand the options market beyond these two markets.
Overall, the BTC options market should continue to increase in importance in 2024, even after the massive growth it posted last year. A more developed options market can yield lower volatility because it allows investors to express a broader range of investment strategies and make the most liquid ETFs even more liquid. It also expands the importance of events such as expirations and dealer positioning as price action drivers. 20-Year ETF Legacy Meets the Bitcoin Revolution It’s exciting to see the ETF revolution now benefit the bitcoin market. The launch of spot BTC ETFs has brought, and will likely continue to bring, an increase in investor participation, perhaps similar to the gold ETF launch in the early 2000s. More than two weeks into launch, the spot bitcoin ETFs are already clocking in at over $1.5 billion daily trading volume. For context, this volume is about 20% of what bitcoin trades in the spot market on a good day. As the innovation in crypto ETFs continues, we expect trading activity related to ETFs to continue, which should dampen Bitcoin’s volatility and contribute to the maturation of this emerging asset class. |
– David Lawant, head of research at FalconX; Vivek Chauhan, principal product manager, FalconX |
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From Speculation to Fundamentals: A New Paradigm for Crypto Markets |
As crypto networks and protocols mature, trusted, real-time on-chaindata now give market participants a view into the cash flows, active users, user retention, value locked, transaction volumes, and developer activity across a growing set of crypto protocols and applications. With this comes a new way to research and invest in crypto assets — by leveraging fundamental analysis (that is, measuring the value of a stock by investigating related economic and financial factors). If the past is any indication of the future, we should expect a maturation of crypto markets in the coming years. Value Investing & Fundamental Analysis: A Brief History “In the short run, the market is a voting machine. But in the long-run, the market is a weighing machine.” So said Benjamin Graham, the pioneer of value investing. Graham’s first book, Security’s Analysis, was published in 1934 — shortly after the Securities Act of 1933 and the Securities Exchange Act of 1934 were established in the aftermath of the stock market collapse and the Great Depression. Graham’s work helped lay the foundation for fundamental analysis and emerging concepts such as intrinsic value. This work planted the seeds for the market to come to a consensus on the best way to value equities and do a comparative analysis. These ideas were later popularized by Warren Buffett in the 1950s and 60s after Graham published his second book, The Intelligent Investor. Academic and corporate acceptance further pushed these concepts into mainstream consciousness in the 70s, 80s, and 90s as the market achieved consensus around financial data and core metrics such as price-to-earnings ratio. “Price to book.” “Dividend yield.” “Debt to equity.” “Free cash flow.” “Return on equity.” “Net margins.” All these concepts came of age in this era. And along with this came investing concepts such as “economic moats,” and “durable competitive advantages.” Of course, none of this was possible without quality data. Without the data, stocks would trade on speculation, narratives, and brand. Hmm. That sort of sounds like crypto today. Crypto: From Speculation → Utility → Fundamentals Just as the traditional markets came to a consensus on the best ways to value equities using data, we expect the same to occur with crypto networks and protocols. Of course, it’s important to recognize that speculation is at the core of every innovation throughout history. It takes speculative capital to birth new industries. We saw this with the Age of Steel and Electricity. The Age of Oil. Automobiles & Mass Production. We saw it with Railways. More recently, we’ve seen it with the introduction of the Age of Information and Telecommunications. With history as our guide, speculation ultimately leads to productive capital finding its way to its highest and best use. Ultimately, the market achieves consensus concerning the best ways to use, and value the new technology (and the businesses utilizing it). We see this playing out today with the Age of Blockchain Technology or Web3 — which is installing a new data layer into the internet, one that introduces the concept of shared, global accounting ledgers and digital property rights. For example, below we can observe active users on Ethereum L1 vs its top L2 networks: |
Data: Token Terminal This data could inform projected value accrual at the L2 vs L1 level within the Ethereum ecosystem. And here we have Ethereum’s “GDP” — the sum of the fees generated by the most prominent protocols and applications built “on top” of the L1 infrastructure. |
Data: Token Terminal This data could inform comparative analysis of alternative layer 1 networks. Eventually we expect consensus to form around key KPIs and metrics informing valuation of various sectors within Web3 — just as we saw in traditional finance. With quality data providers setting the table for fundamental analysis, we should expect to see new products coming to market leveraging this data — such as fundamentals-based indices and new investment frameworks. The takeaway? As fundamental analysis of crypto networks becomes more understood with new and improving data, we should expect the next wave of “smart money” to find the highest-quality projects. Gaining an investment edge will require access to quality data before the rest of the market has it. This also gives regulators the necessary tools to monitor the markets and create sensible new investor protection rules. After all, the granularity and near real-time delivery of data within crypto networks is unprecedented in finance. The future of crypto investing will be fundamentals-based. And it all starts with quality on-chaindata.
If you’re interested in learning more about how on-chaindata can inform fundamental analysis, check out the Q4 issue of The Ethereum Investment Framework.
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From CoinDesk Deputy Editor-in-Chief Nick Baker, here is some news worth reading: |
- LARGE GAP: I don't know if it annoys me exactly, but I do know I have an aversion to price predictions. First of all, I'm very much from the Warren Buffett–influenced field of thinking that accurately forecasting prices, at least over the short term, is impossible. And I wonder about the motives and incentives for people who make them. Are they just doing it for attention? Anyway, they keep on coming. Anthony Scaramucci thinks bitcoin (BTC) will quadruple to $170,000 after the halving, the April event in which miners' reward for creating new BTC will get cut by 50%. Meanwhile, many retail investors see a more than 50% plunge in BTC's price to below $20,000 by year end. Maybe they'll both be right. Maybe they'll both be wrong. Who knows? At least we know Buffett probably won't be involved. For more reading, economist Torbjørn Bull Jenssen just explained why he's a long-term bitcoin bull.
- CHEAPER GOLD: There's gold, the precious metal, and then there's digital gold, aka bitcoin. For about two decades, the relatively easy way to invest in the original gold was to buy an ETF like GLD. Now, as has been repeated ad nauseam, digital gold comes in the same convenient package given the recent approval of bitcoin ETFs. The biggest gold ETF, the aforementioned GLD, has an expense ratio of 0.4%. All but one of the bitcoin ETFs (Grayscale's GBTC is the exception) have a lower expense ratio. "*Nobody* expected that to happen this quickly," ETF Store President Nate Geraci posted on X.
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