Look at BTC, I'm the ETF now
Trading With Titans 5 — 8/20/24
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On: cryptocurrency, ETFs
A couple emails ago, I mentioned my “Newton’s Third Law” way of looking at markets:
“It’s useful to look at financial markets similarly to Newton’s Third Law — for every move in a financial product, there is some partially equivalent product that will adapt to that movement.”
While I was talking then primarily about the relationships between ES, NQ, and its heavy components, it’s also important to talk about how Bitcoin ties into the equation, as it has an interesting relationship with some of the higher beta elements in the “traditional” stock market.
If we look at the relationship between BTC and QQQ leading up to the “yen carry trade” incident,
we notice an interesting relationship similar to the “magnet” effect I was talking about re: GOOGL and ASTS from the prior newsletter
“Much like orderflow “nodes”, in low volume intraday drift, the index acts as sort of a “magnet” as passive arb between basket and stock “enforces” beta (more to come on this later.) Today’s a good example — as volume dies down, the “underperforming” element (as long as it’s of sufficient weight) tends to converge to the “magnet””.
Indeed, in my postmortem of the “VIX 60 affair”, it appeared that there was another crypto liquidation that went on alongside the “carry trade” blowing up, and BTC has been muted since.
BTC didn’t always fold into the market complex so cleanly. Indeed, why BTC had such a Sharpe-efficient runup mechanism was due to the fact that its mechanics were significantly different from even the basket stocks (primarily the ARKK complex) that “tracked” it, as I wrote about over a year ago:
“Beyond pure "inflows and outflows", here's the model I use for crypto, and why the moves are so rapid: While tokens are built on 'hot air' - there isn't an underlying cash flow/debt to coins - the fact that there is liquidity *is* fundamental value. I think of tradable crypto as essentially a put on central bank stability - <1 delta in, say, the U.S., much higher delta in, say, Turkey. Specifically, they are far dated, far otm puts. This would imply that the extrinsic 'value' crypto has (bc there's no intrinsic for these options, obviously) is almost entirely IV (given that they're on the extremes of the volatility smile), and there is no 'exercisability'. As a result, crypto "inflows and outflows" are more akin to rapid bidding/crushing of the implied volatility of an option rather than normal delta one products, which exponentiates the nature of the move when it comes due to the nonlinearity of option movement itself.”
The introduction of BTC into the spot ETF complex, however, changed all of this. From “This is Flow” (1/09/24):
…what is going to happen to BTC after a spot ETF starts trading? (Note that I’ve looked at the legal side of things prior and assume that this is going through.) While the product is not necessary, it certainly should be allowed to trade, but I can’t see what exactly the purpose is for anyone who actually wants to long or trade BTC:
Currently, there are essentially these “approved” channels of easily gaining exposure to Bitcoin in the US if one desires so:
You can buy Bitcoin directly through an approved exchange, such as Coinbase
You can buy shares in a company who has tied their stakes to Bitcoin, either by holding a lot (a la MSTR) or by tying their business’ future to it (COIN)
You can buy a futures Bitcoin ETP, which tethers to CME Bitcoin futures (or buy those futures directly, of course)
You can buy a “pot” of Bitcoins held in a trust for you, which cannot be liquidated directly themselves, which leads to a divergence of the value of the “pot” relative to the actual Bitcoin value held, as I’ve written about before
If I was long the crypto industry or trying to make a lot of money fast, I don’t think I’d ever want to purchase BTC through an ETF, nor would I want it directly tied to the actual spot price itself. BTC (and crypto) is particularly unique in that it’s positive skewed without passive inflows…
The core problem is, with a spot ETF, due to how create/redeem works, all of a sudden you have actual selling. People do not trade crypto to passively invest or make bips — they’re looking to multiply their initial sum. Thus, given the fact that you are allowed much, much more leverage in the crypto markets, there’s no actual reason to ever short a crypto unless you’re the one about to hit the tape (and this is why fake news is particularly effective in crypto — selling big blocks on no news means sharp money moves out of the way, while if the ‘news’ is proven ‘fake’, people will bid things back up into your sell, creating book depth.) Markets don’t drop due to “massive selling”; they drop due to lack of bid. The biggest fear anyone long the crypto industry or BTC should have is that BTC trading moves closer to delta one than to option-esque — you’re not doing 200% on a ludicrous Sharpe YOY on something that’s just levered beta.
After the initial surge of volume that came after the approval of a spot ETF on January 10th, “levered beta” is certainly what this trading pattern looks like to me:
The lynchpin between the high beta elements of NQ and the cryptosphere tend revolve around TSLA and COIN, two major holdings of the “ARKK complex” when those set of ETFs were still relevant. Indeed, we see a pretty nice pattern unfold once we overlay the three tickers:
The concept of enforced beta that I repeat so often is pretty much just an extension of “he who knows the flow knows the movement” — “real flow” is what we should be trading around if we speculate on a move. Consequently, BTC, without some sort of fundamental, direct inflow, should trade as a quasi-high beta ETF in relation to the stocks that either are tethered to it (COIN, HOOD) or hold it (TSLA, MSTR, SQ) during RTH, even though it is some sort of nebulous entity itself — it didn’t replace bonds, but it did become a more liquid quasi-ARKK, which we can use for our own benefit. More to come on this later.
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