Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
The Metaversal Evolution Will Not Be Centralized™
BTC ETFs - Futures vs. Spot vs. GBTC
With the Proshares bitcoin ETF on deck, if the SEC does not respond by October 18, they are free to launch. In consequence, we have had a number of questions on the differences between an upcoming spot (traditional) bitcoin ETF, futures bitcoin ETF, and Grayscale ETN GBTC. The prices of bitcoin futures and the market price of bitcoin can diverge based on the prevailing settlement of futures traders. If more people are betting on the price of bitcoin to rise, the value of the contract would naturally be higher than the market price of bitcoin. The reverse is the case when more traders are projecting that the price of bitcoin will fall in the future. In most cases, the prices of bitcoin futures contracts and bitcoin on spot exchanges converge as the expiration date of contracts nears.
A bitcoin ETF is backed by real bitcoin, while bitcoin futures ETFs are backed by derivatives of bitcoin (futures contracts). The price of bitcoin futures may diverge from the spot price of bitcoin due to the prevailing market sentiment so bitcoin futures ETFs might also occasionally track the price of bitcoin inaccurately. In the case of a bitcoin ETF, there is no risk of price divergence, thanks to the fact that the ETF is backed by real bitcoin.
That said, ETFs all carry minor fees so it is better to own real bitcoin. If you want the convenience, a bitcoin ETF once it is available in the U.S. is perhaps a simpler way to own bitcoin. The ease of buying bitcoin in this manner could accelerate the ascent of bitcoin much as the launch of the GLD gold ETF in the 2004 when gold was trading around $400 pushed the price of gold to nearly $2000 in 2011.
The disadvantage with a bitcoin futures ETF is that its price trackers can deviate. When the futures price of bitcoin is higher than its spot price, we can say the ETF is inaccurately tracking the price of bitcoin. This situation is known as “contango,” and it is detrimental to investors holding bitcoin futures ETFs. The opposite of this is known as “backwardation” and occurs when the futures price is lower than bitcoin’s spot price.
At the expiration of the bitcoin futures contracts, the company issuing the bitcoin futures ETF must roll the contracts over (that is, the process of renewing contracts by selling the almost expired ones and using the revenue to purchase new contracts with a farther expiration date). In a scenario where the prices of the bitcoin futures contract are lower than the price of the new contract, the proceeds generated for selling the contracts nearing expiration will not be enough to purchase the same number of contracts that would expire at a later date. This situation will adversely affect the performance of the ETF.GBTC can trade at a discount or premium which can vary widely. Demand in GBTC may falter as the ease of buying a bitcoin ETF supercedes that of buying GBTC, thus GBTC may trade at a sharp discount. Of course, the deeper the discount, the more attractive GBTC will be to buyers so this counterbalancing effect should be considered. More importantly, it is likely GBTC will be turned into an ETF as they have roughly 650,000 BTC on hand as of this writing.
NFTs started a few years ago as collectibles. This year, we see their rise and application to the world of art and music. Gaming is next, then brands and culture. NFTs will flip art since art is but one small facet of the NFT metaverse. NFTs will start eating brands, culture, meat-space life. The decentralized alternatives will win the day through economics, efficiencies, and hypergrowth. On-chain fresh-minted NFTs are decentralized, truly, thus they protect free speech. They are a bullseye in the non-fungible world. Their use cases are nearly limitless. One key example is how they will build DSOs (decentralized social organizations). More on this topic in a future report.
Stock & Bond Markets
Spiking inflation is making Fed officials nervous. The tap dance around tapering continues which is unsettling to markets. The yield on the 10-year Treasury continues to move higher in anticipation of higher rates. But the Fed has little choice but to continue to print baby print. The multi-trillion dollar stimulus packages are inevitable.
It has been said the major averages are due for their typical -20% correction. All corrections since March 2000 have been typically -8% to -12%. The current correction in the NASDAQ Composite is -7.7% and -4.4% in the S&P 500.
The Market Direction Model remains in cash though this signal could change depending on a couple of major issues. It will come down to the market's perception of the Fed. Should Fed Chair Powell become more hawkish, expect a deeper correction. But Powell knows he has to remain as neutral as possible, walking the QE tightrope. Should stimulus remain in heavy debate and delay much as the earlier stimulus package was delayed in late 2020 when Trump was trying to get it through, we would likely see more downside. That said, the consumer price index report rose a more benign 0.2% in September, keeping the year-over-year growth rate at 4%, sending the yield on the 10-year Treasury lower. Of course, we know these numbers are cooked so again, expect more QE and more inflation. But as the saying goes, dont fight the Fed. The U.S. is in the position to print far more than people expect, so QE for the time being should win over doctored inflation figures, thus stocks, bitcoin, and hard assets should continue to benefit over the longer term.