19th November 2020

Six questions institutional investors are asking to look beyond bitcoin $18k

Institutional interest is rapidly picking up as the price of bitcoin approaches its previous all-time-high of $20k from December 2017. 

Many investors are now able to easily track the price of bitcoin but still see this new asset class as somewhat a black box and are keen to learn more. Below is a collection of the frequently asked questions we receive at skew:  

How liquid is bitcoin?

Bitcoin spot trades north of $500mln on most days against the US Dollar on fiat on ramp venues Coinbase, Kraken, Bitstamp, Gemini, LMAX Digital and ItBit. 

An interesting data point is publicly listed Square purchased on the 7th of October 4,709 bitcoins for $50mln. The purchase was executed using a TWAP algo in a single day without visibly impacting the mark, doing approximately 20% of the volume traded on that day.

Bitcoin futures are traded with high leverage on offshore platforms. It’s common to see days where they trade in total north of $10bln. CME bitcoin futures traded on average $500mln notional a day in the last three months. Most bitcoin futures contracts are cash-settled using BTCUSD and BTCUSDT spot indices. 

This market was almost non-existent in 2017 (CME launched in December 2017) and has developed tremendously since then to the point where it’s an order of magnitude more active than the spot market today.

Bitcoin options is a more nascent and fast growing market, trading on average north of $100mln notional a day. It is now liquid enough so that implied vol levels and expiries are worth reading into for market participants including non options traders.

When is the bitcoin market most active?

One of the surprising features of the bitcoin market is that it trades 24/7 all year long. However, we see behaviour similar to the equity markets with mostly quiet weekends and a substantial pick up in activity around the US open. This is true for CME and Coinbase for instance (UTC time).

Bitcoin is also exhibiting interesting seasonality on a quarterly basis with usually strong Q2s and historically poor Q1s.

Why is the bitcoin futures curve so steep?

Many institutional investors have noticed the steepness of the bitcoin futures curve and the attractiveness of simple cash and carry strategies to take advantage of the high basis between spot and futures, including on CME. A common question we receive as a result is the ability to swap spot for futures through EFPs.

This is mostly a function of a structural shortage of US Dollar in the cryptocurrency industry where a high number of firms are crypto rich and cash poor. Banks have been so far largely absent of this market making the supply of US dollars scarce.  

It’s not uncommon as a result to see US Dollars being borrowed at 10%+ annualized. Lending products where you can borrow US Dollars by putting cryptocurrency in collateral have grown quickly in popularity.

Is there institutional interest for bitcoin or is this still a retail phenomenon?

Google trends for bitcoin globally are a fraction of what they were in December 2017 when bitcoin last traded around those levels. On the opposite CME bitcoin futures open interest broke $1bln for the first time this week. Participation seems to have rebalanced. 

It’s also interesting to see legendary hedge fund managers weighing on the merits of the cryptocurrency trade. Some recent quotes below from three gold bulls with different takes on bitcoin:

  • “I own many, many more times gold than i own bitcoin, but frankly if the gold bet works, the bitcoin bet will probably work better because it’s thinner and more illiquid and has a lot more beta to it”. Stanley Druckenmiller
  • “Also, unlike gold which is the third highest reserve assets that central banks own, I can’t imagine central banks, big Institutional investors, businesses or multinational companies using it.” Ray Dalio
  • "I came to the conclusion that #btc was going to be the best of the inflation trades--the defensive trades. Bitcoin has a lot of characteristics of being an early investor in a tech company...it's like investing with Steve Jobs and Apple." Paul Tudor Jones

Is bitcoin uninvestable because it’s too volatile?

Bitcoin is volatile otherwise it wouldn’t be up 145% year-to-date. However, the close to close realized volatility of bitcoin is half of what it was during the 2017 rally. Bitcoin moved less than 2% close to close in absolute value 207 days this year. It has been less volatile than many technology stocks or commodities this year. 

Implied volatility is also near historical lows despite the breakout in spot. The market is however expecting a potential regime change if bitcoin moves above $20k looking at the record cheapness of options skew.

Academic literature indicates a more mature futures market can help price discovery and reduce volatility. 

What is the options market thinking in terms of price forecasts?

Citigroup this week published a research note discussing the possibility of bitcoin going through $300k by the end of 2021. For bitcoin to match the total market cap of gold, $9tn, would mean a price of  $485k per bitcoin. It’s up to investors to decide whether bitcoin is digital gold and if digital gold has the potential to become larger than physical gold! 

Looking at options prices allows us to understand what scenarios market participants are currently pricing in. Currently, the probability of bitcoin being above $20k by year end is 25% and $40k by June 2021 is 7%. 

Find out more

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The skew. Team

Disclaimer: Past performance is not indicative of future results. All charts and graphs current as of 24 March 2021.
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