Bitcoin Public Markets, 5/2/22: $118mm Weekly Fund Outflows, CME 13.6% of Futures Open Interest; Crypto May be Diverging from Equities

We focus attention this week on institutional fund flows, as well as on the futures markets. The week saw $118 mm in fund outflows across our tracked basket of funds, including $91mm redemptions for the BITO Proshares Futures ETF (slide 6, slide 8). BITO redemptions have been 12.5% of peak share count. These redemptions bear watching as one indicator of regulated / institutional flows to crypto. Please click here to read the full report.

Bitcoin Futures volumes and open interest are heavily weighted towards Binance, but CME OI of $1.9B still represents 13.6% of overall top 10 exchange OI (slide 10). However, CME represents just 3.3% of trading by value (slide 11). Overall, Binance open interest is just 0.23 days worth of trading, while in aggregate, taking 10 crypto exchanges including both Binance and the CME, OI is 0.40 days worth of trading value. CME itself has open interest worth 1.62 days of trading, slightly more in line with more institutional markets like Oil (~2.4 days) and Gold at ~3 days (slide 13).

CME open interest fell 13% week on week, with the active contract growing significantly as the roll was completed (slide 14). However, June contracts are still well below recent May levels pre-April expiry. Further, the futures term structure is backwardated through August and flat through October. Overall non-commercial net length remains firmly on the long side, at 426 lots (slide 16). Net length has been consistently long YTD.

Bitcoin and Ethereum have both been among the underperforming assets over the past week, along with a lot of risk assets (slide 18). However, they are in the green since 2/23/2022, just prior to the Russian invasion of Ukraine. While most risk assets are below pre-invasion levels, Natural Gas, US treasuries, Oil, Wheat, the dollar index, Bloomberg Commodity Index and the VIX join the two crypto assets in the green. Is this an anomaly, or is crypto diverging from equities and risk assets? It is too early to tell, but well worth monitoring. We have been skeptical of this divergence narrative, and the correlation of Bitcoin to the Nasdaq composite at 62% (slide 29) is higher than it has been for a long time. The relationship strengthens in weak, risk-off markets, but in general despite intraday volatility, Bitcoin has remained relatively range-bound even as equities have sold off. Slide 19 shows that both implied and realized volatility for Bitcoin has come down meaningfully in recent weeks, with 30-day realized volatility now at 46%, 1.85% below the 47.9% 30-day 10%% moneyness implied volatility.

The equity sell-off has also applied to the Bitcoin miners. As a group, they are down 67% since Bitcoin peaked on 11/10/21, while Bitcoin is down 44% (slide 28). Over the past few weeks, Bitcoin has remained range bound, while miners have continued to slide, extending the underperformance to 23% from 15% 5 weeks ago.

We have received numerous questions regarding our Bitcoin Mining Reserve valuation framework , which we will be diving deeper into in the coming weeks. As we had previously identified, some miners exhibit a gap between pure mining fair value and market capitalization. This can be understood in the context of a scarcity of institutionally-investable options for getting exposure to Bitcoin within fund mandates and constraints. In addition, some miners have additional lines of business — including hosting, repair centers etc. — as well as different risk profiles based on a growing interest in exploring hedging solutions.

Key Takeaways

•Institutional fund flows turned firmly negative last week, with $118 million in outflows across our selected funds; BITO at $91mm represented the bulk of outflows

•CME futures dynamics are closer to traditional Oil and Gold markets in terms of Open Interest to Trading Value, vs. crypto-only retail-oriented exchanges like Binance that have disproportionately high trading value relative to open interest

•The performance of Bitcoin and Ethereum since the Russian invasion raise the possibility of an emerging divergence from equities (a 62% correlation to the Nasdaq Composite notwithstanding) that bears following closely

•However, Bitcoin miners have underperformed by a widening margin, which underscores the broader divergence we have noted