IBIT: Carry Trade Casualty

Summary Bitcoin has not been immune from weakness in global financial markets as the yen strengthens against the dollar. The market expects the Federal Reserve to cut rates by 50 bps in September. Easing conditions should be a tailwind for fiat-hedge assets. August and September are historically weak for Bitcoin seasonality. If you liked Bitcoin ( BTC-USD ) at $68k, you love it at $55k, right? Maybe. When I covered BTC for Seeking Alpha at the end of July, investors were fresh off the emotional highs of a Bitcoin 2024 conference that had everything from multi-million dollar price targets to lofty US fiscal policy propositions that would put BTC into a production deficit immediately if actually enacted. We are less than a full week from that article, and the emotional read on the market is quite a bit different from it was when that piece was published: Fear and Greed Index (Alternative.me) On July 29th, the Crypto Fear and Greed Index was comfortably in “greed” at a 74 reading. As of article submission just six days later , that reading is now near its lowest “fear” reading in the last 52 weeks. What Changed? That depends on what your expectations are. If you’re a HODLer who wants BTC exposure purely for the dollar debasement angle, nothing changed. If anything, the setup for that thesis may actually be better given the CME FedWatch rate probabilities for September: September Rate Probabilities (CME FedWatch) A week ago, there was just an 11% chance of a 50 bps cut in September. As of 5p on August 5th, the market is assigning an 83% probability of a 50 bps cut, and potentially for good reason. Since my July 29th Bitcoin article, we’ve seen unemployment trigger the Sahm-rule, the near un-inversion of US 10s and 2’s, July employment miss by 71k jobs, and ISM manufacturing disappoint. The equity market reaction to all of this was negative, as the S&P 500 closed the last week of July down over 2%. Thus, the market expects the Federal Reserve to cut. With the S&P 500 just 9% off its highest levels in human history a few weeks ago, there have even been calls from some for the Fed to do an emergency rate cut before the next FOMC meeting. While a cut is by no means a return to ZIRP or stimmy checks, it does theoretically incentivize a rotation out of t-bills and back into risk assets like Bitcoin, equities, or precious metals. However, I suspect rate cuts may actually exacerbate one of the underlying problems; namely, the potential unwinding of the Japanese Yen carry trade. USDJPY Daily Chart (TrendSpider) After topping out at 162 in early July, the Yen has been an absolute wrecking ball and has now gained over 12% against the dollar in just three weeks. For investors who borrow in Yen at virtually no cost and then deploy the cheap capital in Dollar-denominated assets, Yen strength against USD is bad because it can lead to the opposite of the intended carry trade strategy. The Bank of Japan hiking coupled with Yen strength are just one part of what can unravel the capital invested in this strategy. Data by YCharts The Federal Reserve cutting theoretically hurts the carry trade as well because the spread between BOJ rates and Fed rates gets tighter and therefore less attractive. I realize that the spread is still quite large, but BOJ hiking while the US debt yields fall is not what Yen carry traders want to see. What Does This Have To Do With Bitcoin? As is often the case when there is panic in global markets, indiscriminate selling of assets helps traders who are offsides raise capital quickly to cover any potential margin calls they’re facing. Given that the $20 trillion carry trade is debt-based, margin calls on such a massive short-term move in the Yen against the Dollar are highly likely to be driving these broad market selloffs. We saw instances of panic selling just about everywhere on August 5th: The S&P fell by 3.0% The Nasdaq shed 3.4% Gold dropped by 1.5% Bitcoin fell by 6% and it was much worse intraday Pearson Correlation (The Block) Only Gold actually had a positive Pearson Correlation with Bitcoin on August 2nd, yet everything went down together on Monday, August 5th. If you believe BTC is ‘digital gold,’ this selloff was perhaps a ‘baby out with the bathwater’ kind of session. BTC Daily Chart (TrendSpider) It’s worth noting, Bitcoin recovered over $5k from the intraday low of $49k on Monday, August 5th. In the chart above, I’ve added the aforementioned Crypto Fear and Greed Index to the chart of Bitcoin. We can observe how closely it has resembled the daily moves in the RSI going back to the approvals of the spot ETFs in mid-January. The last time the index was this low, it preceded a 20+ percent rally over June and July. Weak Seasonality Back in early-July, I highlighted the seasonality for Bitcoin via the Grayscale Bitcoin Trust ( GBTC ). At that time, I made the case that July was historically a good month for GBTC, and we saw that generally hold up, with BTC gaining 3.1% in the month. It now bears mentioning that the seasonality story is much less rosy for Bitcoin for August and September: BTC Seasonality (TrendSpider) Going back to the last decade, August and September are typically the worst months of the year for BTC, both from a mean change standpoint and a positive period standpoint. August is typically close to flat historically for BTC, but that’s largely skewed by two large outliers. The best August return for Bitcoin was 64.7% back in 2017. The next best August performance was 13.6% in 2021. In each of these instances, the Augusts in the years following the Bitcoin halving years have been phenomenal times to own BTC. 2024 is a halving year. Meaning, it would be August 2025 rather than August 2024 that should be the trend outlier, judging from history. Of course, there is certainly the argument that spot ETFs change the supply/demand structure that we’ve typically seen following Bitcoin halvings. I’m actually of the view that there is something to this, given BTC making a new all-time before the halving this time around. iShares Bitcoin Trust We have long since passed the point of the iShares Bitcoin Trust ETF ( IBIT ) offering a full fee waiver on the 0.25% expense ratio. The waiver, which was good for the first $5 billion in AUM, is essentially immaterial at this point since the $21 billion in AUM puts the weighted average expense ratio closer to 0.22%. To be clear, this still makes IBIT among the cheapest ways to get exposure to Bitcoin in the market: Data by YCharts Compared with the other spot BTC ETFs that were approved in January, IBIT ranks closer to the top than the bottom based on total return. That said, with the exception of GBTC, most of these spot funds have a total return within about 50 bps of each other. If one cares deeply about long-term holding, there are cheaper funds than IBIT. However, if trading BTC in a tax-advantaged account is the primary goal, IBIT is arguably the strongest offering of the group given its AUM and liquidity. Spot ETF Volume Share (The Block) It is far and away the largest spot Bitcoin ETF by AUM, after having passed Grayscale’s flagship fund earlier this year. But perhaps the most important feature of IBIT is the fund’s share of spot BTC ETF market volume. When the funds launched in January, IBIT came strong out of the gate, with 15-20% volume share in a typical trading session. That share of volume has continued to grow as the months of progressed. Now, it’s rare to find a session where IBIT doesn’t make up more than half of spot BTC ETF volume share. Investor Takeaways While jarring, the recent weakness in BTC has not been an isolated incident. The global financial markets are broadly experiencing stress in what is a bit of a perfect storm of events; a clearly weakening US economy, the Yen carry trade, and recessionary indicators flashing warning signs. In my opinion, it’s important to remember what Bitcoin represents to the people who believe in its digital gold narrative. In spite of its downsides, of which there are several , Bitcoin is indeed a decentralized network with a supply capped asset that isn’t state-issued or managed. Owning Bitcoin has proven to be a terrific way to express perceived flaws in the fiscal/monetary system as an investment thesis. A market thesis over a business thesis perhaps, but a thesis, nonetheless, just like long or short any commodity. Bitcoin made a new all-time high with t-bill rates at 5.5%. With cuts likely on the way, I suspect we’ll see any further weakness in BTC scooped up by the HODLers. I think IBIT is still a buy.

Source: Seeking Alpha