When movement?

Volatility and trading volume have dramatically tapered off as crypto winter continues to drag on.

Published in

The Dark Side

7 min readJul 22, 2021

The most striking thing about the current period in crypto is the sheer lack of meaningful catalysts. Volatility and trading volume have dramatically tapered off, and despite a brief foray below 30k in BTC this week, there have been scant few market-moving events to point to, other than a slow and painful grind lower and relatively range-bound trading thereafter.

Typically, the longer the period of consolidation, the more explosive the move when the break out from the price range occurs. With the onchain indictor — Stablecoin Supply Rate — flashing a bottom reversal and the macro backdrop of inflation running hotter than expected with US CPI at 5.2%, the highest in 13 years, a bottom in price should/could be expected if the inflation hedge narrative holds. However, as we highlighted before in this Weekly, traditional TA seems to be providing greater accuracy with price action, and the Relative Strength Index on the daily time frame continues to act as near perfect resistance, albeit with more frequent and persistent tests on the 6-month downtrend.

BTC:USD chart showing a classic Bollinger Bank pitch and the RSI providing extremely precise resistance. Note there has now been 9 tests of this 7-month trend

Chart showing BTC price in USD Vs the SSR. The SSR is the ratio between the total market cap of Bitcoin and the total market cap of USD stablecoins. The lower the ratio, the greater the purchasing power potential of the stablecoins that have been issued that could potentially be deployed to buy BTC.

With 2 lackluster months of consolidation behind us and in search of news, we are very aware that we are approaching the much-hyped EIP-1559 release date, which has recently been confirmed for August 4th at Ethereum block height 12,965,000. This is a landmark event for the Ethereum protocol and its London hardfork, as the controversial Improvement Proposal will fundamentally change the issuance schedule of Eth and the way users pay for gas fees and miner rewarded (discussed in May’s Weekly). If all goes to plan, EIP-1559 will pave the way for the transition from Proof of Work to Proof of Stake 7 months later, and provide further deflationary pressure to the ETH issuance schedule. We note that the narrative is shifting amongst Ethereum proponents as ETH becomes less inflationary and the concept (meme) of Ethereum becoming ‘’UltraSound Money’’ is gathering pace and legitimacy. The stars seem to be aligning for the Ethereum protocol, with NFT volumes at an all-time high and DeFi becoming more and more established and recognized by legacy finance investors. Ethereum is also on course to settle over $8 trillion in value transfer on-chain by year-end, a staggering achievement. Finally, with the ESG narrative fast becoming front and center for global policymakers (we note that the ECP are incorporating ESG into their wider mandate), transitioning to the less energy-intensive Proof of Stake, Ethereum may enjoy significant tailwinds going into 2022 as the woke crowd continue to seek ESG-friendly crypto exposure.

Chart from Messari Crypto / Coinmetrics showing the progression of settlement value occurring on the Ethereum blockchain. Q2 saw over $2.5 trillion of value settled.

The current price action, however, tells a different story…. with ETH/USD trading below the 200-day moving average for the first time in over a year. For the traders who were very publicly long ETH for much of 2021, perhaps we are seeing some ‘’sell the news’’ action here as EIP-1559 draws closer. Furthermore, the weakness runs contrary to what we are seeing in equity markets, where even a modest 3% pullback in SPX and NDX is bought aggressively, largely on the assumption of infinite FOMC profligacy and government stimulus. The lack of buying in crypto concerns us and lends itself to the thesis that the market is likely to go lower from here before it can go higher, so we are looking for further weakness, in both ETH/USD and ETH/BTC in the coming weeks.

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Grayscale nailed the first-mover advantage in the institutional BTC investment product category and now absolutely dominates the industry. In the absence of a long-awaited but never-quite-there ETF approval by the SEC, and almost without competition, GBTC became the go-to Bitcoin exposure product for many private wealthy and intuitional clients who or did not want (or legally couldn’t) custody their own cryptographic private keys.

Investors piled into the trust and certainly contributed to some of the momenta that saw BTC move up aggressively in late 2020 and early 2021. Demand was so high that GBTC shares traded in the market at significant premiums to the Net Asset Value (NAV) of the investment trust, almost entirely the result of being the only regulated game in town. Analysts and the media regularly reported on the impressive growth of the trusts holding in BTC, which now stands at over $20bn AUM, and for many, the growth of the trust was confirmation that institutional adoption had arrived.

However, it is worth digging a little deeper here, especially in light of the recent chatter on social channels surrounding the unlocking of subscriptions of GBTC, which have 6-month lock-ups before investors can sell. Unlocks are nothing new with GBTC, these are known events, and for the EMH advocates out there, this unlock should have no impact on the market. That said, this will be the first major unlock that will occur whilst GBTC is trading at a discount to NAV, so is this story is worth unpacking.

Chart from Ycharts.com showing historical discount/premium of GBTC to NAV of the Grayscale BTC Trust. GBTC traded at discount to NAV for the first time at the end of February.

The consistent premium to NAV that GBTC traded at through 2020 created an opportunity for professional arbitrageurs with the ability to subscribe via a private placement. These arbitrageurs would typically borrow BTC from the market and purchase GBTC units via an “in-kind” subscription — that is, sending BTC to Grayscale, Grayscale in turn, creates new shares in the GBTC trust representing that amount of BTC. Following a 6-month seasoning process where the newly created shares are restricted and cannot be moved or sold, these traders would then unwind the position by selling GBTC shares directly into the market and simultaneously purchasing BTC to repay their loan. The profit on this trade is simply the premium received on their sale of GBTC (vis a vis the simultaneous purchase of BTC) minus Grayscale’s 2%pa mgt fee and 6–8%pa BTC borrow costs over the term of the loan. Total costs over a 6-month period come out to circa 5–6%, so with premiums regularly exceeding 20% for most of last year, there was a substantial opportunity to be exploited by those with access to BTC borrow and the risk appetite to hold an entirely illiquid instrument for 6 months.

As is the case with most arbitrage opportunities, there eventually comes a tipping point where the number of participants chasing the same trade exceeds the amount of liquidity available for that trade. In the case of GBTC, this tipping point arrived in February as a large number of shares that had been subscribed to via private placement last year all seasoned in quick succession, with the resulting unwind causing a significant contraction of the premium and eventually a flip to a discount. The long-held view that GBTC “always trades at a premium” was well and truly debunked, and the discount has since widened as more and more shares season each week, and selling pressure on GBTC continues.

What happens to the GBTC premium going forward will likely be a product of how (or even if) Grayscale fully pivots towards an ETF, or if they choose to intervene with additional share buybacks or both. From Grayscale’s perspective, they are sitting on a perpetual annuity of 2%pa on a HUGE AUM, so it is difficult, from a purely commercial standpoint, to envision that they are in a hurry to make any meaningful changes, despite all proclamations to the contrary. The recent agreement between BNY Mellon and Grayscale is encouraging, however, a timeline for conversion, as well as the likelihood of success, is still uncertain. We are believers in efficient markets (sometimes) and the market is telling you quite conclusively (via the persistent double-digit percentage discount in recent months), that it does not see conversion to an ETF as particularly likely in the near term. However, one cannot help but think that Grayscale, of all the contenders, has perhaps the best chance of securing approval from the SEC… if they truly want it.

Note from the editor…….

We hope you enjoyed this edition. Going forward, we will be transitioning to a monthly newsletter — An Auros Monthly. See you all in August!