- Bitcoin has underperformed the high expectations post-halving
- Large global liquidity supply increases have been strong upside catalysts for Bitcoin
- Policymakers have little reason at present to conduct such stimulative policies
- Bitcoin is likely to continue to trade in its range with interim volatility
- Consider writing cash-secured puts or using covered calls to reduce outsized Bitcoin positions
Related Insights
Are we there yet? As far as expectations go, this current Bitcoin halving cycle has disappointed many enthusiasts; one would think that a halving of supply and regulatory approval of spot ETFs would be a one-way ticket to the multi-bagger moon. Prices however, have struggled to break above the USD73k mark set in March this year, just a month prior to the halving in April. Compared to its own short history of halving events, this fourth cycle has seen the most muted movement thus far compared to its predecessors (Figure 1).
Figure 1: Fourth halving has yet to live up to expectations set by its predecessors
Source: Bloomberg, DBS
Feeling the pulse. There is a useful sentiment gauge that quite adequately explains the low directional conviction that the market has fluctuated in since the halving event. It employs a measure known as the “Realised market capitalisation” – the average price at which Bitcoin was last transacted on-chain (Coinmetrics), multiplied by the total circulating supply – essentially an estimate of the average entry price of the cohort of Bitcoin holders. Comparing this to the actual market capitalisation – specifically using the market value/realised value (MVRV) ratio, this gives an estimate of how “in the money” the average Bitcoin holder is.
Glass is half full/empty. At present, the actual market cap lies handily above the realised market cap, suggesting that Bitcoin holders on aggregate remain well in the money. Looking at the MVRV ratio however, the current ratio of c.2x is still far below the 3-4x multiples that were obtained in the previous two halving cycles. Therefore, the market presently sits in this conundrum where (a) holders are unlikely to add aggressively to their positions because valuations are not particularly cheap, but (b) neither are they willing to sell because the perceived upside has not been realised (yet).
In our CIO Perspectives – Beyond the Bitcoin Halving Cycle (4 Jun 2024), we highlighted that we would “likely see Bitcoin fluctuate sideways in a range till the next catalyst”, and that “the next catalyst would likely be centered around monetary policy easing in some form”. While the outsized 50 bps US Fed cut and People’s Bank of China’s reductions in Reserve Requirement Ratios (RRR) and adjustments to policy and mortgage rates in September do represent a shift in the global monetary policy direction, these only represent a change in the price of money, and relying on multiplier effects to indirectly increase the supply of money. We have observed Bitcoin performing much better under actions that directly increase the supply of money instead – such as QE or large deficit spending; stimuli that have yet to come to market en force.
Bitcoin has strong correlations with global liquidity. In fact, in no other asset do we see liquidity being such a positive driver for prices as it does with Bitcoin. There have been many representations of how ample global liquidity conditions have amplified the returns on risk assets, such as comparisons of Global M2 against the S&P 500 index (Figure 3, right); which is perhaps why investors still hang onto the words of central bankers with baited breaths till this day. More than the S&P 500 however, is the fact that Bitcoin has one of the highest directional alignments with global liquidity – with positive 12-month rolling correlations in c.88% of the time since 2011. It’s also uncanny to consider that the periods where such correlations break down occur under idiosyncratic risk events (crypto exchange collapses, rug-pulls etc.) generally unrelated to liquidity conditions.
Moving everywhere, going nowhere. Seeing as Bitcoin is likely to range trade due to (a) the MVRV ratio being neither cheap nor expensive, and (b) markets navigating the balance between policy support and slower growth, we believe that the conditions are likely to precipitate interim volatility, which makes volatility-selling structures an interesting proposition while the market awaits a larger liquidity catalyst.
How does one capitalise on uncertainty? Depending on one’s risk appetite, monetising volatility could come in two forms:
1. Writing cash-secured puts. For the bullish investor who feels that they “missed the boat” when Bitcoin first began its ascent early this year, writing puts is a good strategy to monetise premiums while awaiting to buy Bitcoin at a lower strike price.
2. Writing covered calls. For the investor that wishes to decumulate an outsized position in Bitcoin, writing call options is a good strategy to generate income while setting an acceptable profit-taking strike price to reduce overall holdings.
Making lemonade with lemons. The most common refrain with Bitcoin (and other cryptocurrencies in general) is its stomach-churning volatility that far exceeds those of other risk assets. Option structures allow investors to turn such drawbacks to advantages. In periods of high uncertainty, volatility can be capitalised for the benefit of investors through options structures, harvesting premiums on the side while waiting for a clearer trend to emerge for taking more directional bets.
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