Hello and welcome to the FT Cryptofinance newsletter.
Ripple Labs said on Thursday it would launch a stablecoin and within hours bitcoin pulled out of its slumber, rising as much as 4.5 per cent. The reaction underlined that, frequently, it’s not the heft of US exchange traded funds that drive bitcoin’s price.
Since the arrival of US spot bitcoin ETFs in January, a widely accepted narrative has appeared that attributes the cryptocurrency’s 57 per cent price rise this year to large-scale purchases by investors such as BlackRock and Fidelity.
The argument runs along these lines: $12bn of inflows has been chasing a scarce asset that will only get more scarce after this month’s quadrennial “halving” event in the bitcoin system, when the rewards for miners for verifying a block halve to 3.125 bitcoins. There are about 6,300 tokens issued weekly by bitcoin but the ETFs have bought around 50,000 coins in that period. QED.
But that broad brush depiction and handy explanation hides a far more nuanced picture. The reality is that the consequential activity in bitcoin generally takes place outside US trading hours.
Since the US Securities and Exchange Commission approved the ETFs, average daily returns for bitcoin outside US trading hours are 0.31 per cent. That stacks up against 0.13 per cent in the six and a half hours that the US stock market is open, according to CCData.
Cumulative average daily returns while Wall Street is closed come to 26.4 per cent, against 9.9 per cent during US trading hours, CCData said.
Markets also tend to be more choppy when the US has clocked off. CCData found that the average 30-day rolling annualised volatility during non-US trading hours is just over 40 per cent, compared with an average of 36 per cent in US hours.
This week has been a textbook example of the pattern.
On Tuesday, the price of bitcoin dropped heavily on little news during Asian market hours. The price continued to be depressed as the global trading day progressed and bitcoin was down 7.2 per cent at the point US markets opened.
Several media outlets noted that there were some heavy liquidations of positions on crypto exchanges, as traders with leveraged bets on the price going up and not enough funds in their accounts were removed from the market. As much as $457mn in positions were liquidated in a 24-hour period, data from Coinglass showed. But this is more likely a symptom, not a cause, of the price moves.
One theory holds that Asia is often the starting point for the declines because it is the first region to see the previous day’s daily flows from the US ETFs. Algorithms scrape websites for the latest data and then buy and sell bitcoin automatically. This theory doesn’t really hold water. If the algos are setting the bitcoin price based on historic inflows, then price action would be far more predictable than it actually is.
More than that, it doesn’t seem a particularly smart trading strategy. Buying or dumping en masse is a huge signal to the market. Other traders can use their own algorithms to quickly work out where and when automated trading is happening and front-run it. It’s been a feature of electronic trading for decades. Anyone blundering into the market with the finesse of a drunken sailor won’t stay in profit for long.
There is further evidence that US ETF providers aren’t the only drivers of price, or the most active players in the market. The biggest trading volumes in the bitcoin market are bitcoin against tether, the world’s largest stablecoin. This week Tether, the operating company, minted another $2bn of USTD — as its coin is known — to take it up to $106bn in circulation.
However, Tether is also a significant actor in its own right. Last year it set out plans to diversify its reserves away from US Treasuries by spending up to 15 per cent of its net operating profits buying bitcoin.
According to The Block, Tether bought around $627mn of bitcoin in the first quarter, meaning it has around 75,354 bitcoins squirrelled away and it is now the seventh-largest holder of bitcoin, up from 11th.
The US influence is most felt in the weight of trading it brings. Average daily volumes are around $1.04bn during US stock market opening hours, compared with $1.11bn in the much longer period they are closed, CCData found.
It “suggests that, although the market remains active globally throughout the day, trading activity intensifies significantly during US hours, likely due to the established patterns of traditional financial markets and the role of spot ETFs in influencing total volumes,” said Joshua de Vos, research lead at CCData.
However, the market’s relative thinness outside US hours, its greater volatility and propensity for greater returns also open up another possibility: that the price of bitcoin is more influenced by smaller investors and high-speed traders who profit from a market’s volatility, not its direction.
The success of BlackRock and Fidelity in drawing in billions of dollars may rely largely on a small army of day traders and a bunch of quants.
What’s your take? Email me at philip.stafford@ft.com
Join me and my colleagues at the FT’s flagship Crypto and Digital Asset Summit on May 8-9 in London. Hear from some of the leading players in the industry including Julia Hoggett, chief executive of the London Stock Exchange; Bim Afolami, economic secretary to the Treasury and City minister; Michael Sonnenshein, chief executive of Grayscale Investments, and many more. Secure your seat now at crypto.live.ft.com
Weekly highlights
-
It was the second anniversary of UK Prime Minister Rishi Sunak’s declared ambition to make Britain into a global hub for crypto. My colleague Nikou Asgari looked at how it’s going.
-
Ripple, the cryptocurrency group accused of selling unregistered securities, is to launch a stablecoin later this year. As yet unnamed, it’ll take on Tether’s USDT and Circle’s USDC. The market’s inspiration for names seems to be lacking so what are the chances it’ll be called USDR?
Soundbite of the week: Physician, heal thyself
While Ripple Labs was launching its stablecoin, the company was still battling the SEC over its hostile stance towards crypto. Stuart Alderoty, its chief legal officer, took issue with some of the SEC’s interpretations of law, saying they ignored the judgments in Ripple’s recent legal case against the agency. He wrote on X:
“If this Agency wants to honestly repair the institutional damage inflicted (both to itself and the industry) over the last many years in this misguided war on crypto, it needs to get off its soap box and own up to these truths.”
Data mining: Helter skelter
For all the talk of a new world ushered in by the arrival of US spot bitcoin ETFs, some things have not changed. Crypto is a 24-hour global market and most trading of the underlying asset takes place on lightly regulated or unregulated exchanges. As CCData shows, the biggest gains and falls happen outside US hours.
Cryptofinance was edited by Tommy Stubbington. To view previous editions of the newsletter click here.
Your comments are welcome.
