Bitcoin (“BTC”) – the millennial gold - continues to outshine traditional gold. BTC prices have climbed higher after the listing of spot ETFs. A wider bull rally in the cryptocurrency markets is also underway. ETH touched its highest level since 2022. The total cryptocurrency market cap is 14% higher YTD.
A diverging outlook between BTC and Gold is emerging. After reaching all-time-high in December 2023, gold prices have pulled back this year. Stronger dollar fuelled by delayed rate cut expectations are taking shine off gold.
Halving event and bullishness from spot ETFs make for shining prospects ahead for BTC. In sharp contrast, macro backdrop dragging gold down leading to potentially lacklustre price performance. Collectively, this makes for a compelling spread positioning comprising long BTC and short Gold.
BTC RALLY HAS MORE STEAM
BTC is 12% higher YTD. It has marched higher with solid momentum post the spot ETF launch. Multiple factors point to further gains in store. For one, sustained net inflows to spot ETFs signal strong demand from US investors for BTC.
Volumes in spot ETFs reached its highest level since its launch on 21 February 2024. Participation was broad across several investors with 32,000 individual trades (sixty times the average), indicating widespread demand across investors.
BTC halving is due in a little less than a month, fuelling additional bullish sentiment. Lower supply of newly mined coins is expected to drive prices even higher.
BTC is currently trading 15% below its production cost, calculated by Capriole Investment using power consumption figures from the Cambridge Bitcoin Electricity Consumption Index. This index has served as a strong price floor over several years. Miners are unlikely to sell their BTC holdings below their cost of production, consequently reducing selling pressure below this key support level.
While BTC production cost acts as an indicative support level, BTC may continue to trade below this level. For one, miners have built up BTC holdings over the past year, which they can opt to sell for a substantial profit below the new production cost.
The surge in BTC over 2023 has started to spill over to other digital assets. A broader digital asset rally is under play with ETH retesting its highest level since 2022 this month.
The potential for further appreciation in BTC is high if markets are currently at the cusp of a wider crypto rally.
Finally, traders have been avoiding substantial short positions. As Bitfinex highlighted, the short-squeeze ratio is lower this year, compared to previous years which suggests large whale investors have not been taking substantial short positions.
However, institutional positioning in CME BTC futures paints a contrasting picture. Asset managers have built up record long positioning while leveraged funds have built up record short positioning on CME BTC futures.
DELAYED RATE CUTS TAKING SHINE OFF GOLD
Delayed rate cut expectations have led to a resurgence in the dollar causing a pull-back in gold prices.
Gold faces a double whammy in terms of asset rotation as both equities and the dollar remain strong.
RECESSION IS OFF THE CARDS
Mint Finance described gold performance during recessions and soft-landings in a previous paper. In summary, while gold prices rally sharply during recessions, performance is flat during soft landings, a situation where inflation subsides, and economic growth remains resilient. Over the past two soft landings, gold delivered flat returns.
While a soft landing is yet to be realized as both inflation and rate outlook for 2024 remains uncertain, a recession in the US has become a remote possibility. In fact, the Consumer Board has abandoned its long-running call for a recession in the US.
Consumer Board’s (“CB”) Leading Economic Indicator (LEI) signals turning points in business cycles and near term economic outlook. Since July 2022, the LEI signalled a US recession with the LEI in decline.
LEI fell to 102.7 in January 2024, its lowest level since 2020, yet CB has stated that it no longer anticipates a recession in the US.
CB still anticipates a slowdown this year with growth expected to be near zero in Q2 and Q3. Yet several LEI components have turned positive over the last six months, including equity performance.
An overly hawkish Fed makes the much expected Fed pivot less likely, for now, but the strength in the broader economy across businesses and consumers makes a slowdown unlikely.
FUND FLOWS – TALE OF TWO ETFs
Fund flows for BTC and Gold ETFs also suggest a vastly diverging picture. Investors have responded exceedingly well to spot ETFs. Cumulative flows for spot ETFs have exceeded USD 3 billion in a month.
For reference, it took GLD - the first Gold ETF - two years to get to this point. Though, as a counterpoint, the ETF market and money supply are much larger now compared to when GLD was launched.
Net fund flows for BTC ETFs were close to zero for the first few days after launch as GBTC outflows shifted towards lower-cost ETFs. Since February, inflows to spot ETFs (excluding GBTC) have accelerated while GBTC outflows have slowed. The result is sharp growth in net inflows suggesting strong and positive investor response to spot ETFs.
While BTC Spot ETFs has been enjoying consistent net inflows, Gold ETFs have been awash with fund withdrawals and redemptions.
Contrasting cumulative net flows into BTC ETFs & Gold ETFs shows a stark divergence in expectations ahead for the price of these two similar assets.
Outflows from gold ETF’s represent asset rotation out of gold with some of those assets going towards equities and bonds.
HYPOTHETICAL TRADE SETUP
An unfavorable macro outlook is weighing on gold while BTC faces a positive outlook with tailwinds likely to push prices higher. A position combining a long position in BTC and a short position in Gold benefits from both rising BTC and falling gold prices.
This spread does not compromise on performance as past rallies have yielded similar performance in the BTC/Gold ratio. BTC/Gold spread has not been an effective hedge as the ratio does not perform better during downturns.
A hypothetical spread trade consists of long four lots of Micro Bitcoin futures (MBTH2024) and short one lot of Micro Gold futures (MGCJ2024).
This position requires margin of 4 x USD 1,120 (=USD 4,480) on the BTC leg and USD 830 on the gold leg:
• Entry: 25.32
• Target: 30.60
• Stop Loss: 21.30
• Profit at Target: USD 4,310
• Loss at Stop: USD 3,285
• Reward/Risk: 1.3x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
A diverging outlook between BTC and Gold is emerging. After reaching all-time-high in December 2023, gold prices have pulled back this year. Stronger dollar fuelled by delayed rate cut expectations are taking shine off gold.
Halving event and bullishness from spot ETFs make for shining prospects ahead for BTC. In sharp contrast, macro backdrop dragging gold down leading to potentially lacklustre price performance. Collectively, this makes for a compelling spread positioning comprising long BTC and short Gold.
BTC RALLY HAS MORE STEAM
BTC is 12% higher YTD. It has marched higher with solid momentum post the spot ETF launch. Multiple factors point to further gains in store. For one, sustained net inflows to spot ETFs signal strong demand from US investors for BTC.
Volumes in spot ETFs reached its highest level since its launch on 21 February 2024. Participation was broad across several investors with 32,000 individual trades (sixty times the average), indicating widespread demand across investors.
BTC halving is due in a little less than a month, fuelling additional bullish sentiment. Lower supply of newly mined coins is expected to drive prices even higher.
BTC is currently trading 15% below its production cost, calculated by Capriole Investment using power consumption figures from the Cambridge Bitcoin Electricity Consumption Index. This index has served as a strong price floor over several years. Miners are unlikely to sell their BTC holdings below their cost of production, consequently reducing selling pressure below this key support level.
While BTC production cost acts as an indicative support level, BTC may continue to trade below this level. For one, miners have built up BTC holdings over the past year, which they can opt to sell for a substantial profit below the new production cost.
The surge in BTC over 2023 has started to spill over to other digital assets. A broader digital asset rally is under play with ETH retesting its highest level since 2022 this month.
The potential for further appreciation in BTC is high if markets are currently at the cusp of a wider crypto rally.
Finally, traders have been avoiding substantial short positions. As Bitfinex highlighted, the short-squeeze ratio is lower this year, compared to previous years which suggests large whale investors have not been taking substantial short positions.
However, institutional positioning in CME BTC futures paints a contrasting picture. Asset managers have built up record long positioning while leveraged funds have built up record short positioning on CME BTC futures.
DELAYED RATE CUTS TAKING SHINE OFF GOLD
Delayed rate cut expectations have led to a resurgence in the dollar causing a pull-back in gold prices.
Gold faces a double whammy in terms of asset rotation as both equities and the dollar remain strong.
RECESSION IS OFF THE CARDS
Mint Finance described gold performance during recessions and soft-landings in a previous paper. In summary, while gold prices rally sharply during recessions, performance is flat during soft landings, a situation where inflation subsides, and economic growth remains resilient. Over the past two soft landings, gold delivered flat returns.
While a soft landing is yet to be realized as both inflation and rate outlook for 2024 remains uncertain, a recession in the US has become a remote possibility. In fact, the Consumer Board has abandoned its long-running call for a recession in the US.
Consumer Board’s (“CB”) Leading Economic Indicator (LEI) signals turning points in business cycles and near term economic outlook. Since July 2022, the LEI signalled a US recession with the LEI in decline.
LEI fell to 102.7 in January 2024, its lowest level since 2020, yet CB has stated that it no longer anticipates a recession in the US.
CB still anticipates a slowdown this year with growth expected to be near zero in Q2 and Q3. Yet several LEI components have turned positive over the last six months, including equity performance.
An overly hawkish Fed makes the much expected Fed pivot less likely, for now, but the strength in the broader economy across businesses and consumers makes a slowdown unlikely.
FUND FLOWS – TALE OF TWO ETFs
Fund flows for BTC and Gold ETFs also suggest a vastly diverging picture. Investors have responded exceedingly well to spot ETFs. Cumulative flows for spot ETFs have exceeded USD 3 billion in a month.
For reference, it took GLD - the first Gold ETF - two years to get to this point. Though, as a counterpoint, the ETF market and money supply are much larger now compared to when GLD was launched.
Net fund flows for BTC ETFs were close to zero for the first few days after launch as GBTC outflows shifted towards lower-cost ETFs. Since February, inflows to spot ETFs (excluding GBTC) have accelerated while GBTC outflows have slowed. The result is sharp growth in net inflows suggesting strong and positive investor response to spot ETFs.
Data Source: TradingView and ETFDB
While BTC Spot ETFs has been enjoying consistent net inflows, Gold ETFs have been awash with fund withdrawals and redemptions.
Data Source: TradingView
Contrasting cumulative net flows into BTC ETFs & Gold ETFs shows a stark divergence in expectations ahead for the price of these two similar assets.
Data Source: TradingView and ETFDB
Outflows from gold ETF’s represent asset rotation out of gold with some of those assets going towards equities and bonds.
HYPOTHETICAL TRADE SETUP
An unfavorable macro outlook is weighing on gold while BTC faces a positive outlook with tailwinds likely to push prices higher. A position combining a long position in BTC and a short position in Gold benefits from both rising BTC and falling gold prices.
This spread does not compromise on performance as past rallies have yielded similar performance in the BTC/Gold ratio. BTC/Gold spread has not been an effective hedge as the ratio does not perform better during downturns.
A hypothetical spread trade consists of long four lots of Micro Bitcoin futures (MBTH2024) and short one lot of Micro Gold futures (MGCJ2024).
This position requires margin of 4 x USD 1,120 (=USD 4,480) on the BTC leg and USD 830 on the gold leg:
• Entry: 25.32
• Target: 30.60
• Stop Loss: 21.30
• Profit at Target: USD 4,310
• Loss at Stop: USD 3,285
• Reward/Risk: 1.3x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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