Bitcoin (BTC) experienced a surge of 26.5% in October, accompanied by several indicators hitting a one-year high. These indicators include the BTC futures premium and the Grayscale GBTC discount. The post-FTX-Alameda Research collapse recovery period, along with the recent increase in interest rates by the U.S. Federal Reserve, contributed to the positive data. However, despite these positive indicators, Bitcoin’s price remains around 50% below its all-time high of $69,900 reached in November 2021. In contrast, gold is trading only 4.3% below its $2,070 level from March 2022. This stark difference highlights that Bitcoin’s adoption as an alternative hedge is still in its early stages.
Analyzing the macroeconomic environment becomes essential for investors before determining whether the recent improvements in Bitcoin futures premium, open interest, and the GBTC fund premium signal a return to the norm or the initial signs of institutional investors’ interest.
One factor contributing to Bitcoin’s institutional hope is the U.S. budget issue. The U.S. Treasury announced plans to auction off $1.6 trillion of debt over the next six months. The size of the auction and the balance between shorter-term Treasury bills and longer-duration notes and bonds are crucial factors to monitor. Billionaire and Duquesne Capital founder Stanley Druckenmiller criticized Treasury Secretary Janet Yellen’s focus on shorter-term debt and praised Bitcoin as an alternative store of value. This criticism and the unprecedented increase in debt rates by the world’s largest economy have contributed to institutional investors’ interest in Bitcoin.
The surge in Bitcoin futures open interest, reaching its highest level since May 2022 at $15.6 billion, reflects institutional demand driven by inflationary risks in the economy. The Chicago Mercantile Exchange (CME) has become the second-largest trading venue for Bitcoin derivatives, with $3.5 billion notional of BTC futures. Additionally, the Bitcoin futures premium, which measures the difference between 2-month contracts and the spot price, has reached its highest level in over a year. This indicates that sellers are requesting more money to delay settlement.
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Furthermore, institutional demand speculation is strengthened by the narrowing discount of Grayscale’s GBTC fund to its equivalent underlying BTC holdings. This instrument was trading at a 20.7% discount on Sept. 30 but has reduced it to 14.9% as investors anticipate a higher likelihood of a spot Bitcoin exchange-traded fund (ETF) approval in the U.S.
However, caution is necessary when interpreting exchange-provided numbers, particularly in dealing with unregulated derivatives contracts. The U.S. interest rate has surged to 5.25%, and exchange risks have increased post-FTX, making the 8.6% Bitcoin futures premium less bullish. Comparatively, the CME Bitcoin annualized premium stands at 6.8%, Comex gold futures trade at a 5.5% premium, and CME’s S&P 500 futures trade at 4.9% above spot prices.
Although the Bitcoin futures premium is not excessively high in the broader context, considering the speculation of a 95% chance of approval for a Bitcoin spot ETF by Bloomberg analysts, investors remain mindful of the general risks in cryptocurrency markets. U.S. Senator Cynthia Lummis’s call for the Justice Department to take “swift action” against Binance and Tether highlights these risks.
The approval of a spot Bitcoin ETF could trigger sell pressure from GBTC holders. The $21.4 billion held in GBTC could finally exit their positions at par after years of limitations imposed by Grayscale’s administration and 2% yearly fees. Therefore, the positive data and performance of Bitcoin can be seen as a return to the mean rather than excessive optimism.
In conclusion, the positive indicators and performance of Bitcoin in October suggest a recovery period accompanied by institutional demand. However, various risks and uncertainties remain, such as the macroeconomic environment, interest rates, and regulatory actions. These factors need to be carefully analyzed by investors before establishing a comprehensive thesis for Bitcoin’s future performance.
