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The introduction of the first Bitcoin futures ETF has sparked heightened market enthusiasm, resulting in new highs for Bitcoin prices and the overall market value of cryptocurrencies, establishing fresh records.
The introduction of Bitcoin futures ETFs has caused a significant surge in demand for Bitcoin and Ethereum futures among traditional institutions. This has positioned CME as one of the leading futures exchanges in the crypto market. The macroeconomic impact on the crypto market has been notably enhanced as a result.
Chairman Powell’s favorable comments on liquidity contraction led to a market pullback after reaching a new high. However, the persistent high inflation pressure, expected to last for several months, is anticipated to provide robust support for the recent performance of cryptocurrencies.
Bitcoin Futures ETFs “Have Finally Arrived”
ProShares Bitcoin Futures ETF debuted on the New York Stock Exchange on Monday with the second-highest trading volume ever recorded. The ETF saw over 24 million units change hands, amounting to nearly $1 billion in 24 hours, ranking second only to BlackRock’s carbon-neutral ETF. Following this, options contracts based on BITO commenced trading on the New York Stock Exchange’s Arca Options and the New York Stock Exchange’s American Options exchange on Wednesday. On Friday, the Valkyrie Bitcoin Strategy ETF initiated trading on the NASDAQ exchange. Additionally, Grayscale submitted an application to the SEC to convert its trust into an ETF.
As a consequence, Bitcoin and Ethereum prices have reached unprecedented levels, with the overall market value setting a new record at $2.66 trillion on October 21. The CME Futures Exchange’s market share has surged to 20.63%, with Bitcoin futures contract positions surpassing $5 billion and Ethereum futures contract positions exceeding $1 billion, solidifying its pivotal presence in the market.
In terms of volatility, the market has exhibited relative stability amid the frequent introduction of Bitcoin futures ETFs. However, the surge in market expectations has propelled Bitcoin’s implied volatility to approximately 150 in a short period, also elevating the skewness of Bitcoin’s near-medium-term options. It is noteworthy that a comparable scenario occurred previously on July 26 during the initial stages of the market recovery.
Examining the futures premium, the robust positive impact of the Bitcoin ETF on the market has led to near and medium-term futures premiums surpassing 20%, currently holding steady at around 12-15%. However, in terms of the term structure, investors’ inclination to invest in forward futures remains relatively low at about 12%, and concerns about a reduction in forward liquidity persist in the market.
Regulatory Views Differ, While Liquidity Risk Still Dominates the Market
While Bitcoin ETFs have gained approval in the US and received investments from compliant institutions, many countries remain cautious about crypto investments. Russia’s central bank has expressed its unreadiness to permit the trading of Bitcoin ETFs within the country. The Securities and Exchange Commission of India (SEBI) has announced a ban on investment advice related to unregulated instruments, including cryptocurrencies. On the other hand, the US Office of the Comptroller of the Currency (OCC) has quietly shown support for banks engaging in cryptocurrency trading, suggesting that the impact of regulatory risks on the crypto market is not currently apparent.
On the other hand, liquidity risks have once again heightened. During a panel discussion at the Bank for International Settlements-South African Central Bank Century meeting, Fed Chairman Jerome Powell suggested that the central bank should initiate a reduction in its economic support by tapering asset purchases. He clarified that interest rates did not need adjustment at the moment, but the Fed would act decisively if inflation persisted. Powell’s comments raised concerns about the Fed’s potential need to raise interest rates to prevent uncontrollable inflation, which could weaken job recovery.
The Fed has indicated a possible start to tapering its monthly purchases of $120 billion in Treasuries and mortgage-backed securities next month. Approximately half of Fed policymakers believe a rate increase may be necessary in 2022, with a minority suggesting it might happen before the summer of 2022. The anticipation of a rate hike has influenced market expectations, leading to a retreat in crypto prices from their recent highs. However, despite these fluctuations, crypto prices still have a relatively robust foundation amid the backdrop of persistent high inflation.
Certainly, the movement in Treasury yields reflects shifting expectations related to the Fed’s policy. The yield on the two-year Treasury bond, closely tied to the Fed’s policy, surged to 0.488%, reaching its highest point since March 2020. This suggests an increased likelihood of the Fed raising interest rates next year. In contrast, longer-term Treasury yields experienced declines, and the difference between the yields on the five-year Treasury and the 30-year Treasury bond dropped to around 85 basis points, the lowest level since April 2020.
The crypto market, with an expanding participant base, is increasingly attentive to liquidity risks, particularly as expectations of an imminent Fed interest rate hike could lead traditional market investors to exit the crypto space at substantial profits, potentially exerting a significant short-term impact on asset prices. Caution is warranted in light of these potential dynamics.
