Putting Bitcoin Futures in Perspective
November 19, 2021
"Science really does advance one funeral at a time," proclaimed a 2019 headline in the trade magazine Chemistry World.1 It explained the phenomenon by which superstar academics often hoover up outsized funding, thereby crowding out potential disruptive ideas, which often flourish after the demise of the superstar. The idea is not so different from that of German theoretical physicist Max Planck, who famously observed in 1950 that "a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it." There are lessons for Bitcoin in these insights.
Many have observed that COVID helped accelerate digitalization trends and spurred innovation, amidst a massive intergenerational wealth transfer expected to total $68T over the next 25 years.2 New business formation in the U.S. is running 50%+ above 2019 levels, and more Americans quit their jobs in August than during any month in history.3 And yet despite that rapid turnover, the broad unemployment rate remains elevated at 8.5%.4 How is it possible to have both a worker shortage and high unemployment?
Perhaps, rapidly changing consumer preferences in the face of sticky government support for failing institutions might explain some of this phenomenon, which the below chart of Bitcoin + Ethereum market cap ($1.66T) vs. that of the top six U.S. banks ($1.41T) helps illustrate. The banks' $1.4T market value derives from the gap between their $12.4T in assets and $11.2T in liabilities, and the market's expectations of the return to be earned on that spread.5 Bitcoin's $1.2T market value, on the other hand, is derived from no such liability, and requires no such spread to sustain it. Thermodynamic energy, code and silicon suffice.
Still, total Bitcoin futures open interest, of which the CME has an 8% market share6, has exploded in the last week, reaching $105B, up from $42B on the day before any Bitcoin futures ETFs began trading.7 For comparison, gold futures total $98B and copper futures at $90B.8 Seen from this vantage point, perhaps the $1B in assets accumulated by the world's first Bitcoin (futures) ETF in two trading days may be less surprising.9 Yes, the futures-based structure is hardly ideal due to the costs of rolling futures contracts (see VanEck Bitcoin Futures primer here). But these ETFs nevertheless provide differentiated access points for institutions and individuals looking for a hard-money alternative to a classic balanced portfolio.10 Indeed, in the wake of recent acceleration in global inflation, Merrill Lynch recently declared "the end of the 60/40 portfolio," noting that since 2009, both a 60/40 mix and a 100% equity portfolio had Sortino ratios11 of about 1.6, meaning annual returns were 1.6 times the downside portfolio volatility. In other words, the lower volatility gained by owning some bonds didn't make up for significantly lower total return in bull markets.12 We should also note that Merrill Lynch followed up that "end of 60/40" report with 150 pages on digital assets titled "Only the First Inning."
As for the impact of the Bitcoin futures ETF on the prospects for an Ethereum futures fund or other physically backed crypto ETFs: November 14 is the date by which the SEC must rule on VanEck's physical Bitcoin ETF application. While we have no reason to believe a different result this time around, please read again the quotes at the top of this page. According to Morning Consult's just-released "State of Consumer Banking Q4 2021," 35% of Americans age 18-34 own cryptocurrencies; among those aged 65 and older, the number is just 4%.13
VanEck has long believed that investors should have the ability to get direct exposure to Bitcoin through regulated investment products. Today, a 64-year old SEC Chair and a 75-year old Treasury Secretary object. And yet someday soon, I believe Ethereum futures' liquidity may surpass where Bitcoin futures were on the day Chairman Gary Gensler blessed them in his Aspen Security Forum speech. By then, there will likely be more Ethereum users and more Bitcoin users on each network. In the absence of an enforcement action against Ethereum, which would represent a change in precedent, it will get increasingly harder for the older generation to deny the youth what they already hold. Successful execution of the futures ETFs only reinforces this view.
Market Cap: Bitcoin + Ethereum vs. Top 6 U.S. Banks
Source: Bloomberg, as of 10/21/2021. JPM: JPMorgan Chase, BAC: Bank of America; WFC: Wells Fargo; C: Citigroup; USB: U.S. Bancorp; TFC: Truist Financial Corp; BTC: Bitcoin; ETH: Ethereum.
Younger Adults More Likely to Be Crypto Owners: Share Reporting Crypto Ownership
Source: Morning Consult, State of Consumer Banking Q4 2021.
Notional Futures Outstanding: Bitcoin vs. Ethereum Futures
Source: Bloomberg, as of 10/21/2021. Notional futures outstanding refers to the value of all futures contracts concluded and not yet settled on the reporting date.
Average Trade Ticket, 10/19/2021-10/20/2021
Source: Bloomberg. GDX: VanEck Gold Miners ETF; BITO: ProShares Bitcoin Strategy ETF; GBTC: Grayscale Bitcoin Trust; ARKK: Ark Innovation ETF; GLD: SPDR Gold Trust; SPY: SPDR S&P 500 ETF Trust; TSLA: Tesla.
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2 Cerulli Associates
3 Bloomberg, US Census Bureau (BFMSSAUS Index)
4 BLS, U-6 includes workers marginally attached to the labor force or working part-time because of economic reasons
5 Source: Bloomberg
6 Skew, as of 10/21/2021
8 Bloomberg, LME, CME, COMEX, SHFE, as of 10/20/2021
10 That said, early trading in the BITO ETF has been dominated by small ticket sizes, indicating a high proportion of retail traders. See figure 4, Source: Bloomberg.
11 Sortino ratio is a measure of the risk-adjusted return of an investment asset, portfolio, or strategy.
12 BofA Global Research "It's not quite that '70s show" October 12, 2021
13 Morning Consult, "State of Consumer Banking Q4 2021"
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