This issue covers various aspects of the Bitcoin market, including ETF liquidity, the impact of difficulty cuts on miner economics, the classification of asset managers, Bitcoin price and hash rate declines, etc. The recent launch of spot ETFs has changed the trend of traders reducing long positions, but the difficulty cut may lead to a decline in hash rate and affect miner revenue. The stability of Bitcoin prices and the release of the April Consumer Price Index will be watched by investors. The stock and bond markets performed well, and gold and oil prices also rose.
Original title: Research Weekly – Futures Data Highlights Trader Positioning
Original author: NYDIG Research
Original source: NYDIG Research
Compiled by: Mars Finance, MK
This issue contains the following:
Futures reports highlight the positions of major investors, however, media and sell-side descriptions are often misleading.
Ownership-based data reports revealed that ETF liquidity may be mainly driven by retail investors, and as a result, Grayscale decided to suspend daily fund outflows.
The impact of difficulty reductions on miner economics is discussed.
What CME Futures Reveal About Open Interest
The CME’s weekly Commitment of Traders (COT) report provides key insights and rich analytical perspectives for market participants. However, the industry’s tendency to focus only on net positions and ignore total long and short positions, coupled with the fact that some sell-side brokerage firms ignore trader classification, has led to misunderstandings and one-sided conclusions for the market and its participants. We recommend that readers refer to the explanatory notes in the COT report and recognize that these reports are usually two weeks behind the market (for example, the latest data is as of 4/30), which is extremely critical. This week, we will take a deep look at the report and explore more accurate data analysis methods.
Traders reduce long positions as ETF inflows slow
Dealers (sellers in the market, usually banks) usually tend to short futures, which is a strategic choice. However, the launch of spot ETFs has slightly changed this dynamic. As funds flowed into spot ETFs, many market makers and authorized participants began to use Bitcoin futures as a hedge for their shorts. As funds increased, dealers short ETF shares in the market and bought futures to hedge. Therefore, with the launch of ETFs and the increase in inflows, we witnessed a significant increase in dealers' long positions (which also explains the asymmetry between longs and shorts). Now, as inflows have slowed or even reversed, we observe a corresponding decrease in long positions.
Asset managers are positively correlated with Bitcoin prices
The asset management company category is mainly composed of futures-based ETFs, which are almost entirely long. Their open interest (number of futures contracts) is closely correlated with the spot market. This is not surprising, as Bitcoin is generally an asset driven by price momentum. As Bitcoin prices have cooled in recent weeks, we have also noticed a slowdown in the growth of futures contract holdings in the asset management category.
Leveraged funds tell a tale of two investors
Leveraged funds include commodity trading advisors (CTAs) and hedge funds, and employ two different strategies: directional trading and arbitrage activities. Directional trading (outright long or short) tends to be driven by CTAs and price momentum strategies. As the price of Bitcoin rises, long positions increase in tandem, and vice versa. As the price of Bitcoin has been flat or falling since March, we also observe a decrease in long positions, which is consistent with the changes in these momentum strategies.
Leveraged funds' short positions are mainly driven by arbitrage activities and should be positively correlated with the basis between futures and spot prices. Considering that the basis usually increases as the spot price rises, short positions have the potential to grow taking advantage of this price dynamic. Now, as the spot basis narrows, we see a corresponding decrease in short positions.
The information gleaned from other reports is relatively limited
To ensure completeness of the report, we include some other reportable traders that are not in the three categories mentioned above. Although the information obtained from these traders is limited, the positions are generally small in size and their investment motivations are difficult to interpret due to the all-encompassing nature of this category.
GBTC halts streak of outflows as retail investors may drive ETF demand
GBTC broke its single-day outflow record since January 11 last Friday, ending a 78-day outflow streak and seeing its first single-day inflow. During this period, investors redeemed a total of $1.75 billion, converted to cash, and likely reinvested in lower-cost competitor funds. Although we cannot know the specific reasons for the sudden $63 million in inflow, based on the 13F filings of holder reports, the demand for ETFs appears to be driven primarily by investment advisory firms, brokerage firms, and retail investors. Investment managers that manage more than $100 million in free assets are required to file 13F position reports and should do so within 45 days of the end of the quarter, which is by May 15. Although the filing deadline has not yet arrived, a quick analysis of the filings so far shows that most of the cash ETF holders (more than 95%) are unknown, indicating that they have not triggered the 13F filing requirement. We plan to conduct a comprehensive analysis of holders after the filing deadline.
As uneconomical hashrate may go offline, the difficulty is adjusted down accordingly.
Bitcoin’s difficulty adjustment dropped 5.6% Thursday morning, suggesting that some hashrate has been taken offline. This is the first full difficulty adjustment since the halving, and may more accurately reflect miners’ adjustment behavior following the 50% reduction in the block subsidy. Previous difficulty adjustment windows covered the halving event, providing an incomplete view of possible hashrate adjustments by miners. Additionally, the surge in fees with the introduction of Runes made our view of miner revenue destabilizing. Now that hash prices have settled into a more predictable range, miners have a clearer picture of the economics.
While the downward adjustment in difficulty should increase daily revenue for the remaining miners, the hash price has fallen significantly since the halving. This is almost entirely due to the 50% reduction in the block subsidy as a direct consequence of the halving. Another factor is the normalization of fees, as the introduction of Runes is a thing of the past. The Bitcoin price has also stopped its previous sharp rise, which is a positive for the hash price in the first quarter.
Why would miners go offline? Based on an estimated network hash rate of 620 EH/s and ~1MW of power (assuming an Antminer S19 Pro (110 TH/s) is used), the reduction in hash rate is ~35 EH/s. Possible reasons include operational and economic factors, and while factors such as extreme weather may affect mining operations in the short term, we speculate that the reduction is primarily due to economic reasons. Halvings result in lower hash prices, less value miners receive from the hash they provide, and raise the breakeven price level for mining machines to be profitable. Past post-halving difficulty reductions have ranged from 5.4% to 14.7%.
Market dynamics
Bitcoin has continued to bounce around the low $60,000 this week, lacking a clear direction as traders are keeping an eye on the next catalyst after the slowdown in ETF flows. Investors may find clues in the April Consumer Price Index, which will be released on Wednesday next week, with slowing inflation seen as a positive sign for rate cuts, while higher-than-expected inflation could be a reason to keep rates on hold for longer. Risk assets such as stocks performed well this past week, with the S&P 500 up 3.0% and the Nasdaq Composite up 3.2%. The bond market outperformed this week, with investment-grade corporate bonds up 1.0%, high-yield corporate bonds up 0.5%, and long-term U.S. Treasuries up 1.9%. Gold rose 1.3% this week to a record high, and oil prices also rose 0.4%.
