What We See in the Markets: January 8, 2024

This is anticipated to be an historic week for the crypto industry, as it is extremely likely that a spot ETF for BTC will be approved. To put this in historic context, this is the culmination of an effort that has been underway since 2018, when VanEck first filed an application. (Yes, I’m 100% certain there were earlier efforts as well.) This Wednesday is the deadline for SEC action on at least one ETF application, by Ark 21 Shares, and it’s expected that the commissioners will vote on multiple applications this week. The first week of the year saw a frenzy of formal filings, i-dotting and t-crossing, and signals of confidence from the issuers themselves. As of writing, prediction markets are placing an 83% likelihood of an approval this week.

Calling the market confident, however, would be an overstatement. The market is trading skittishly ahead of what will be the largest event (one way or the other) since the Merge (or longer). BTC oscillated over the past week, ended up 3% but with a 8.5% range and a 55% realized vol. BTC options expiring at the end of the week are trading for roughly 90 vols; even looking past this week, we’re seeing high implied vol in BTC, at 70 vols for the March expiry, slightly higher than ETH’s. The skew is putting calls significantly over; the March risk reversal is about 2 vols over for the call. All of this spells “optimistic but nervous” at the start of an historic week.

Interestingly enough, even with BTC up 3% over the past week, the rest of crypto is uniformly down, with ETH down 3.5%. The recent big winners, SOL AVAX and NEAR are down 13.5%, 14.5%, and 16.5% after significant rallies to end 2023. BTC dominance is back to 54%, which is a high since 2021 if you exclude its brief visit to 55% at the beginning of December. Alts had an excellent Q4, but they face challenges in the next few weeks, as an ETF approval will have BTC consuming most of the oxygen in the market for at least a few weeks. Typically, on BTC-specific headlines we tend to see a BTC-only rally (and on an ETF approval we would expect to see BTC dominance over 55%, and it could easily pass 60%). It’s usually after BTC has settled that other coins tend to catchup. Even recent history shows this pattern, where the market got early signals in December that an approval was imminent, taking the dominance to 55%, but that market confidence eventually fed back to alts, pushing SOL above $100 and AVAX above $45.

ETF market shares tend to be winner-take-most, and the jockeying between different issuers is expected to propel BTC markets. We’re already seeing this competition play out, with mainsteam BTC advertisements (you know what’s interesting these days? Bitcoin.) and competition playing out on fees, with Fidelity already announcing 39 basis points annual fee. VanEck is making an appeal directly to crypto-natives, adopting the HODL ticker and committing to give 5% of the ETF’s profit to Bitcoin Core Developers. Crypto will benefit as some of the largest financial firms in the world put their salesforce muscle into selling BTC products, and selling them to the world’s largest investors with whom they’ve been working for decades.

Happy Trading, and Stay Thirsty, my friends!