Summary: A big squeeze was imminent because of last week’s favorable macro events. A lower CPI print next week could reinforce the market’s view that interest rates have peaked. The combination of the Bitcoin ETF announcement, Santa Claus rally, better macro data, and the Fed pausing, combined with Bitcoin being overbought, provided the ingredients for a massive rally. Tether was busy minting USDT since mid-October – in total $3 billion fresh capital came into the market. This is a golden period for market-neutral crypto hedge funds as basis trades offered juicy returns. In this environment, allocators will be knocking on their door. But then BlackRock filed for an Ethereum ETF…

Analysis

Our Monday, November 6, 2023 report titled ‘ The Santa Claus Squeeze is coming’ turned out timely.

The Ethereum/Bitcoin ratio had hit support and appeared to start rebounding. Our thesis that a big squeeze was imminent was due to the favorable macro environment where we had three supportive events last week: 1) the U.S. Treasury issuing more short-term and less long-term debt which indicated expectations for lower bond yields, 2) Fed Chair Powell being dovish in the post-FOMC meeting press conference and 3) a weaker U.S. employment report which reinforces the first two points.

Next week, we will receive U.S. inflation data on November 14, which could start to decline again after four months of higher inflation. Oil prices have declined by – 20% during the last three weeks. A lower CPI print could reinforce the market’s view that the U.S. interest rates cycle has ended.

Previously, we suggested ‘Buy the Fed’s Pause but Sell the Fed’s first rate cut’ which is expected for June 2024. Historically, when the Fed paused after an extensive rate hiking cycle, Bitcoin saw a massive rally – as we wrote on October 3, 2023.

Despite Bitcoin being overbought – based on an RSI above 70% – since October 19, we warned that an overbought condition actually sees Bitcoin rallying further – as much as +24% over the next 20 days when the RSI climbed above 85%. On October 19, Bitcoin traded at 28,719; today, we are +27% higher. A quite remarkable performance.

But it was not unexpected, considering the 2017 squeeze when the Chicago Mercantile Exchange (CME) announced the planned listing of the Bitcoin futures. From the announcement until the launch, Bitcoin prices rallied +288% – as we wrote in our report ‘Echoes of 2017: CME Bitcoin Futures Launch Hints at +288% Returns!’.

This led us to believe we would be entering the FOMO – fear of missing out – stage. Our report ‘FOMO is back! Crypto Traders are panicking’; we looked forward to this scenario as the combination of the Bitcoin ETF announcement, Santa Claus rally, better macro data, and the Fed pausing, combined with Bitcoin being overbought, provided the ingredients for a massive rally. We also noticed that stablecoin issuer Tether has been busy minting USDT since mid-October – in total, $3 billion in fresh capital came into the market. This showed that someone is pre- positioning themselves for a big rally.

Exhibit 1: Tether USDT market cap reached $86bn, trading volume reached nearly $70bn

On Monday, November 6, our data mining indicated that weekly revenue data for Ethereum was improving while, at the same time, Bitcoin’s dominance was declining while trading volume in Ethereum relative to Bitcoin was on the rise. Our ETH/BTC greed and fear risk index signaled ETH outperformance and Ethereum’s funding rate started to skyrocket. This made us bullish on Ethereum – and alts.

On Wednesday, November 9, BlackRock registered an Ethereum Trust in Delaware, signaling their intention to launch a BlackRock Ethereum ETF. A few hours later, BlackRock filed a spot Ethereum ETF with Nasdaq. This could support Ethereum to the same extent as Bitcoin into year-end.

This announcement caused a panic. Deribit’s trading volume was $12 billion during the last 24 hours; crypto traded well over $100 billion, with Bitcoin $35 billion and Ethereum $44 billion being traded. Short-covering in Ethereum perp futures brought the funding rate above 54% annualized. This is a golden period for market-neutral crypto hedge funds. In this environment, allocators will be knocking on their door.

Exhibit 2: Ethereum’s annualized funding rate spiked to +54.6% on short covering

Some argue that the listing of the CME Bitcoin futures was at the top of the 2017 bull market – this is correct. But Bitcoin futures traded at massive premiums, which could be arbitraged away. An ETF listing will have zero-premium and real- money inflows for months to come. Therefore, even when the ETFs will start trading, the bull market could continue. This is no longer the time for market neutral crypto funds, this is the time of the beta funds.

With the potential approval of a BlackRock Bitcoin ETF and suddenly a BlackRock Ethereum ETF being filed, we can see that FOMO goes into overdrive. Crypto is truly in a new bull market, and people will only sell ahead of the actual launch of those ETFs.