Bitcoin is Officially Back

Hi everyone happy weekend!

Welcome to your weekly Alpha newsletter. Let’s get into it.

It looks like your weird cousin at Christmas was right - HODL was the winning strategy. 👀

Bitcoin has been on an absolute tear and is now near all-time-highs not seen since the end of 2021 when rates were cut to zero and free money was everywhere.

Revitalizing a lot of the hype around crypto was the introduction of several new ETF products, as the suits have entered the chat. The SEC approved the first US-listed ETFs to track bitcoin on January 10th. This provided a structured vehicle for gaining exposure to Bitcoin without directly holding the cryptocurrency itself.

This also allowed your grandmother to board the wagmi train by buying a bitcoin ETF in her registered retirement account (hop on board grandma!).

What has been interesting to track over the approval of these ETFs is flows, where we can see a dominant winner emerging:

IBIT from Blackrock iShares has just passed $10 Billion in assets in under 2 months. This is the fastest-ever ETF to hit $10B, and only 152 ETFs out of 3,400 have reached this mark.

We also have to talk about Grayscale’s GBTC outflows. YTD, there has now been $8.5B pulled from GBTC. Following its conversion to an ETF, many investors, including hedge funds, decided to cash out their positions.

Hedge funds had previously bought into GBTC, anticipating that its conversion to an ETF and the approval of spot bitcoin ETFs would close the discount at which GBTC shares traded relative to the underlying Bitcoin value. Once this arbitrage opportunity was realized post-ETF conversion, significant selling ensued, driving outflows from GBTC.

Finally, we have to talk about net flows. If we sum up the columns from above, we have about $7B in net positive flows amongst ETF products. However, this doesn’t fully represent how much net new demand there has been for BTC because those who previously held in direct wallets and other means may also have just switched their holdings to an ETF product.

While introducing Bitcoin ETFs increased flows - does it move the needle overall? From a flows-only vs. market cap perspective, NO. Bitcoin’s current market cap is $1.2T. The net inflow of $7B represents only 0.58% of total marketcap.

What changes here is overall sentiment. The introduction of ETFs has widely opened up mass adoption and the “growing up” of Bitcoin (not necessarily other cryptocurrencies) as an asset class. When demand > supply, the price goes up. That simple.

So, we know that the underlying is surging. Let’s now check in on the other corollaries that trade in the public markets: Miners and on-balance-sheet BTC holders.

In my January 6th post, I looked at Marathon (MARA) and Microstrategy (MSTR) as a proxy for the two sides of the story, mining and on-balance-sheer holders. I shared a chart showing that MARA trades like a heavily leveraged play on the underlying, and MSTR trades like a leveraged play, but to a lesser degree. This relationship has mostly remained intact:

However, What I also recommended back on January 6th was a pair trade: Long the underlying bitcoin ETFs (Green) and Short MARA (Yellow). While this trade has done OK, I think it is just now starting to become even more attractive:

Note: MARA posted disappointing earnings on 02/28, hence the gap-down.

With the halving coming up, theoretically, it should be more expensive for miners to farm the same amount of bitcoin (lower margins), therefore relatively underperforming the underlying.

What do you think about revisiting this trade? Long IBIT, Short MARA? Is there something I’m missing?

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Happy investing,

The GRIT Alpha Team

An insider to GRIT currently holds ownership positions in Bitcoin (BTCC-U). The insider to GRIT Capital Corporation does not guarantee they will maintain their ownership interest in Bitcoin (BTCC-U) and may increase or sell such interest at any time.

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