Why is Bitcoin's Price Sideways? SEC Closes Investigation into ETH, Anti-Tether Campaign Hits Times Square, Fed's Treasury Holdings to Double by 2034
News Block #42 (06/20/2024)
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Is Bitcoin Price Being Suppressed?
After shooting up to a new all-time high in early March, Bitcoin has pretty much been chopping sideways in the $60,000 to $70,000 range ever since.
This has many people scratching their heads. There have been many positive developments lately, but Bitcoin hasn’t moved. Why?
Who the heck is selling right now?
Well, there are a few theories out there. The first one is that the selling is coming from long-term holders. There’s evidence of this on-chain, as the percentage of bitcoin held for more than one and two years has been in decline.👇
We’ve seen this happen in the past, typically near previous all-time highs, as holders who bought close to the last cycle top exit their positions, and long-term holders take some profit.
The next theory focuses on miners. After the halving, Bitcoin miners saw their revenues cut in half, but Bitcoin’s price went sideways simultaneously. Miner profitability has gone down the drain, especially for miners who run old machines or have high electricity costs.
Many of them prepared for this moment—they built up a war chest of Bitcoin and are now selling off their holdings in the hope that they can survive until Bitcoin’s price goes up again. This dynamic has added some selling pressure to Bitcoin.
James Lavish echoed this theory in my recent Coin Stories macro hangout with him, Preston Pysh, Luke Gromen, and Susie Reilly. Make sure to check it out!
The last theory revolves around something else we discussed in that episode: the basis trade, which some people think could be suppressing the price of Bitcoin.
The basis trade is a strategy traders use to profit from price differences in the Bitcoin spot and futures markets. Right now, prices are higher in the futures market than in the spot market, which represents an arbitrage opportunity for traders.
To explain the trade, let’s use a little example:
Imagine you know that tickets to a popular concert are going to be in high demand. Right now, you can buy a ticket for $50. But you believe that in a few months, the same ticket will be worth $60 because as the concert gets closer, more and more people will want to go.
So, you decide to take advantage of this, and you buy a ticket for $50, but at the same time, you make a deal with a friend and promise to sell them the ticket for $60 in a few months. This way, you lock in a profit of $10, no matter what happens to the ticket price later.
This is what’s essentially happening with the basis trade.
Traders buy Bitcoin at a lower price and then sell futures contracts at a higher price. When the futures contract expires, they can collect the difference between the original Bitcoin they bought and the higher futures contract price as profit. This is just like the example above, where you sold the ticket for $60 in a few months when you only paid $50 for it originally.
Lately, hedge funds have been loving this trade because they can profit whether Bitcoin’s price goes up or down. If Bitcoin’s price declines, they’re protected because they have a futures contract that guarantees they can sell it at a higher price. If Bitcoin’s price increases, they’re also protected because they own the spot Bitcoin they purchased at the lower price and thus benefit from its price appreciation.
This is as close to a win-win trade as it gets, which is why hedge funds have been putting it on in droves using the ETFs and futures markets.
Evidence of this is clear — the number of shorts in futures contracts on the Chicago Mercantile Exchange is near record highs, and some of the largest holders of the Bitcoin ETFs have been hedge funds like Renaissance Technologies and Millennium. These are quant funds that likely are just putting on this arbitrage trade.
The important takeaway here is that this trade is designed to be market neutral. This means a hedge fund is simultaneously buying the ETF and shorting the futures, so any gains or losses on one side of the trade are offset by the opposite position. The end result? There’s minimal impact on Bitcoin’s price, aka no price suppression.
But there is one caveat here – James Lavish did say that if these hedge funds are using a ton of leverage to put on this trade, and are overshorting the futures, then this could potentially suppress Bitcoin’s price, but it’s unknown exactly how much leverage they’re using.
James also added that if this is the case, then a ton of leveraged short positions can also cause Bitcoin’s price to explode upwards. This would be the classic short squeeze scenario. GameStop, anyone?
All of these theories are just that – theories. The truth is – no one knows exactly why Bitcoin’s price is doing what it’s doing.
The important thing to focus on is the fundamentals that only seem to be getting stronger, such as Bitcoin’s increased institutional adoption and recent political acceptance. As such, this sideways price action represents a great opportunity for long-term savers to stack some sats while Bitcoin remains under six digits.
SEC Closes Investigation into Ethereum 2.0
The most surprising news of the week came when the SEC officially dropped its investigation into Ethereum 2.0.
This investigation was revealed after ConsenSys, a major infrastructure company for Ethereum that operates Metamask, sued the SEC for regulatory overreach after trying to regulate Ethereum as a security. In the lawsuit, it was discovered that the SEC had sent multiple subpoenas investigating the company’s role in Ethereum’s transition from Proof of Work to Proof of Stake. This new Proof of Stake Ethereum was dubbed Ethereum 2.0.
In the letter, the SEC noted that it does not agree with ConsenSys's factual statements or legal conclusions but said that it will not seek enforcement actions related to the investigation into Ethereum 2.0.
It should be said that the SEC has also indicated it will seek enforcement actions against ConsenSys for offenses related to its Metamask products, which is still ongoing.
Many wondered what would become of the Ethereum 2.0 investigation after the SEC surprisingly approved Ethereum ETFs last month, and now we know. Many are interpreting this as the SEC giving up its fight against Ethereum and will instead pursue other actions.
Anti-Tether Campaign Hits Times Square
On Tuesday, if you happened to be walking around Times Square, you might have noticed a huge billboard accusing the world’s largest stablecoin provider, Tether, of corruption and fraud.
It was later discovered that this was the work of a multi-million dollar campaign launched by Consumers’ Research, a non-profit whose goal is to protect consumers from bad actors.
Consumers’ Research accused Tether of being a Ponzi scheme and highlighted that it’s today's most-used stablecoin for criminal activity. He pointed out that Tether refuses to undergo an independent audit to assure that its stablecoin is fully backed, which signals that it’s a fraudulent operation similar to FTX.
A spokesperson from Tether responded by saying, “Not only have the repeated criticisms concerning Tether’s reserves been thoroughly disproven, but the company has led the industry in its commitment to combating the illicit use of stablecoin technology.”
I have some mixed feelings about this. The argument that Tether is the most widely used stablecoin for illicit activity seems more a result of its size than of its negligence in stopping criminals.
Tether’s market cap has exploded to $116 billion, controlling more than 65% of the stablecoin market today.👇
So, of course, it’s going to be the most-used stablecoin for both licit and illicit activity. Plus, Tether has taken active steps to combat illegal practices like blocking and freezing transactions and cooperating with the FBI, DOJ, and Secret Service.
But in my opinion, the critique that Tether hasn’t undergone an audit is completely fair. This has led to rampant speculation on whether Tether is actually fully backed, and it’s why some people call it a Ponzi scheme.
Tether does give quarterly attestations of its reserves and claims that 90% of its reserves are backed by cash and cash-like equivalents, but these reports are all done by the company.
It should be noted that back in January, Cantor Fitzgerald CEO Harry Lutnick did say that Tether has all the funds it claims saying, “I manage many of their assets…From what I've seen – and we did a lot of work – they have the money they say they have.”
Still - it confuses me why Tether refuses to get an audit to squash any doubts about its legitimacy. It seems like this would be a great business decision, given that more people would use Tether if they knew with certainty it was fully backed. But still – no audit. Until an audit happens, I think individuals and entities like Consumers’ Research will continue to think the worst of Tether.
Personally, I believe that regardless of Tether’s backing, U.S. regulators will not let an offshore stablecoin provider continue to issue dollar-backed stablecoins without more regulatory oversight. What exactly that looks like and how that all plays out is anyone’s guess.
CBO Estimates Fed’s Treasury Holdings to Double by 2034
But will the US ever outright shut down Tether? To me, that seems unlikely. Why? Because stablecoins like Tether are quickly becoming meaningful buyers of U.S. debt at a time when the Treasury is desperate for buyers.
In a recent article, former Speaker of the House Paul Ryan shared this sentiment in which he explained how stablecoins could stave off a U.S. debt crisis. He wrote that stablecoin buying is already significant, saying, “If fiat-backed dollar stablecoin issuers were a country, it would sit just outside the top 10 in countries holding Treasuries—smaller than Hong Kong but larger than Saudi Arabia.”
It’s almost inevitable that the Fed will eventually be tapped again to buy up the debt. That’s what the Congressional Budget Report seems to believe, at least. In the CBO updated projections, it estimates that the Fed's holdings of US Treasuries will more than double to more than $9.2 trillion by 2034.👇
Another large buyer of U.S. debt will be welcomed with open arms by our government, considering the massive deficits they have to fund for the foreseeable future. Ryan noted that the U.S. has been able to sell its debt to the international market for years but that this is changing. Large foreign buyers like China and Saudi Arabia are now retreating from the market.
He argues that stablecoins are one solution to our debt problem.
One thing that should be noted is that Paul Ryan does have some affiliations with the crypto industry, leading to some criticism that he’s just talking his own book. Ryan is a Senior Advisor at the crypto VC fund Paradigm, which invests in multiple stablecoin protocols.
Regardless, this is a big idea coming from a former House Speaker and further evidence of the shift in sentiment occurring in Washington DC. The broader crypto industry is starting to be taken seriously.
At the same time, Trump continues to back Bitcoin on the campaign trail. Listen to his latest sound bite.👇
Check out my interview with Bitcoin Magazine’s David Bailey to learn about Trump’s recent pro-Bitcoin pivot.
Major political players seeing the value of the broader cryptocurrency industry is undoubtedly a positive development for Bitcoin, and I think it will only continue to gain steam heading into the election.
Until next week, keep stacking.
- N₿
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