Bitcoin and the Public Markets, 2/22/22: $98mm in Weekly Fund Inflows; Inverted Term Structure of BTC Volatility at 7.5% Realized less Implied

This report has four sections: Bitcoin vs broader markets, the public miners, institutional fund flows, and CME Futures. Click here for the full report.

The correlation of Bitcoin to the Nasdaq is ~57%, climbing over the past week. As we noted, a large down day in the Nasdaq is a strong predictor of large Bitcoin price declines. We do not expect the relationship to stay uncorrelated when investors need it to be uncorrelated. The Russia-Ukraine developments exacerbate the inflation / risk off trade underway. In this regard, BTC has diverged from gold, which is up ~4% YTD.

BTC drawdowns are deep and prolonged. Slide 7 shows that Bitcoin is only rarely within 20% of all time highs since 2014. In the same period, the S&P and Nasdaq have had only two short-lived bear markets.

The 18 publicly listed mining stocks trade at an average adjusted Enterprise Value per YE 2022 PH/s of planned capacity of $130k, down $20k since last week. Adjusted EV = Market Cap + Debt — Cash — Market Value of Crypto Holdings. Technically, pending capital expenditures needed to pay for future deliveries of announced rig purchases and ancillary equipment should be added back, but the lack of data led us to exclude this adjustment for consistency.

Notably, miners like Hive that have relatively modest expansion plans, or Greenidge and Riot that have low power and operating costs, trade at a premium to the group. We also examined financials based on Bloomberg analyst consensus, finding that the companies that do have estimates trade at 3.1x 2022E EBITDA and 6.7x 2022E Contribution (Gross Profit + Depreciation). Considering our 327EH/s year end network Hashrate estimate, we suspect that consensus EBITDA estimates may need downward revisions unless Bitcoin price accelerates to new highs. The multiples now look reasonably accommodative of a downward EBITDA recalibration.

Our institutional fund flow section covers 19 funds with $23B of AUM (down $5B Week on Week). GBTC, an ETP, is 75%+ of the group, and has seen no inflows recently. The others are mostly crypto-exposed equity ETFs with a broader innovation focus — ProShares BITO Bitcoin futures fund excepted.

Over the past week, funds have seen a $98mm in net inflows (slide 19). BITO continued to garner funds, with $27mm inflows last week, while ARKW also saw $51mm of inflows (slide 20). Year-to-date, ARKW had $360mm redemptions, though inflows elsewhere helped the category see $209mm in outflows (slide 21).

Realized volatility of 63.9% dipped vs 69.5% a week ago and is 7.5% above implied volatility (slide 25). While we expect these occasional inversions to occur in the depths of a selloff, the disconnect between a somewhat illiquid, regulated US institutional asset (CME Futures) and a global, liquid, largely retail driven asset (Bitcoin) suggests these inversions are reactive in nature rather than, as yet, predictive of price turning points.

The futures curve is flat through June, and then in contango — but with no liquidity (slide 26). According to the Commitment of Traders report from 2/15, Non-Commercial net length increased slightly to 213 from 189 lots, with Other Reportables increasing their net short to 324 lots, vs. 286-lot net short position on 2/8 (slide 27).

Key Takeaways

•Bitcoin’s correlation to the Nasdaq increased to 57%; the relationship is strongest when the Nasdaq is down a lot

•On our preferred adjusted EV per PH/s metric, the miners trade at an average of $130k, down $20k from last week

•Our YE network Hashrate estimate of 327 EH/s implies that either BTC price needs to accelerate, or that consensus EBITDA estimates need to be recalibrated down — but a modest 3.1x Adj EV / EBITDA multiple should be accommodative

•Over the past week, funds have seen $98mm in inflows, reducing YTD outflows to $209mm year-to-date, led largely by ARKW (outflows of $3.1B over 12 months / $360mm YTD)

•Implied volatility (100% moneyness for the active contract) is now 7.5% below realized 30-day volatility, although we don’t view it as predictive of price turning points

•Overall non-commercial net length on the CME increased to 213 lots, while Other Reportable investors increased their net short position to 324 lots