Report highlights

Bitcoin adoption, transactions per day

It is never straightforward for a lot of people to understand or know “what drives bitcoin.” For me, one of the more fundamental ideas is “how much do people use the bitcoin blockchain?” A higher number of daily transactions reflects greater use of bitcoin for payments, transfers or other purposes. As bitcoin's utility increases, so does the confidence in its value as a medium of exchange or store of value. As more people use bitcoin, it becomes more valuable to each participant in the network. The "network effect" implies that the value of a network increases as more participants engage in it. More transactions often suggest that more people are adopting and utilizing the network. A higher transaction volume generally increases the liquidity of bitcoin, making it easier for people to buy or sell without significant price fluctuations. Greater liquidity tends to stabilize and potentially increase the asset's perceived value. When daily transactions grow, it can signal broader acceptance of bitcoin as a payment system or investment, encouraging new users and investors to participate, further boosting its price. However, other factors, such as regulatory developments, technological improvements and market speculation also play crucial roles in bitcoin's valuation. But, generally, more daily transactions can reflect rising adoption, which positively impacts its value.


Generic front month Bitcoin futures overlaid vs. the betting odds of Trump winning in November

Speaking of changing regulatory developments, the crypto community has seemed to embrace Donald Trump (and vice versa) as the candidate for President that will be the most crypto-friendly. To wit, former President Trump did speak at the Bitcoin 2024 Conference, among other outreach measures taken.  Whether this works in reality remains to be seen, however, this certainly may be the market perception. However, have traders seen bitcoin move with the odds of a Trump second term? On that front, the story is a bit more mixed. Certainly, when Trump’s odds fell from mid-July until mid-August, in between party conventions, the bitcoin price fell with it, suggesting there is some causation. However, since Labor Day, while Trump’s odds have remained roughly flat at 50%, Bitcoin futures have rallied from a low of $54,000 to a high of $66,000 and remain closer to the highs. Thus, maybe there is not as direct a correlation, much less causation, as appeared at first glance.


Bitcoin ETF retail shares outstanding in three popular Bitcoin ETFs overlaid vs. Bitcoin futures (top), Bitcoin price chart with the average price line drawn (bottom)

The bigger story for bitcoin in 2024 as we all know is the creation, finally, of Bitcoin ETFs back in January. As these ETFs were approved in mid-January, there was an explosion of interest moving into the products, which has been suggested to be the most successful ETF launch in history. In the top chart, I show the shares outstanding of three of the biggest ETFs from Blackrock (IBIT), Fidelity (FBTC) and Bitwise (BITB). These charts are not the price of the ETF but the shares outstanding, which are created and grow as new investors come into the product. One can see as the products grew, there was a direct relationship with the price of Bitcoin futures. However, since August, the shares outstanding have essentially stayed flat, suggesting a stability in demand as new investors replace investors who are getting out of the product. While shares outstanding has flat-lined and the market has digested the large move at the start of the year, Bitcoin futures over the last three months have edged lower. 

The question on many people’s minds may be “have these retail investors made any money?” In the bottom chart, I draw the average line of the price from the time the ETFs were launched until the day I wrote this, approximating whether retail and institutional investors in ETF products have made any money. The average is approximately $61,500, so the current price resides just above that level, telling me that investors are neither up nor down considerably. Though it has been a bit of a wild ride for sure, having hit a high of $75,000 and a low of $50,000 over that same time.  I think it is important to ask this question to understand the possible psychology of these traders. If there were large gains or losses, that may impact future price action. Now at roughly flat, the market appears to be more neutral.


Bitcoin futures compared to Gold futures (top) and compared to Nasdaq futures (bottom)

Stepping back, it may be fair to ask whether bitcoin is acting more like an inflation or geopolitical risk hedge like gold or if it is acting more like a risk asset like Nasdaq. Either one might be a fair expectation. However, as shown from the overlay of bitcoin vs. gold and Nasdaq for most of the year, the moves are relatively indistinguishable. A more discerning eye might suggest that there have been a couple of times when bitcoin has disconnected versus Nasdaq than  versus. Gold.. Looking at January into February, bitcoin initially fell before the ETF surge. At this time, Nasdaq was still marching higher as all risky assets were. Then, looking at mid-June through mid-July, bitcoin again shows a downside move, while Nasdaq continues to march higher. Since that time, there seems to be more of a connection again. When compared to gold, bitcoin had a very similar move for much of the year, really through the end of July. Since then, however, gold has continued to new all-time highs while bitcoin has churned in a sideways pattern. While one might make the case that bitcoin is responding to the same stimuli as either of these markets, there is enough dislocation at times to suggest that bitcoin is really moving more on its own drivers than those impacting these other risky asset or store of value markets. It just so happens that all of the markets are generally moving in the same direction over the course of the year.


Bitcoin daily candle chart for 2024

If bitcoin is marching to the beat of its own drummer, it is important to look at the bitcoin chart and draw one’s own opinion. I look at a daily candlestick chart for all of 2024 and I can draw a support line from the breakout in February until now. I can see three separate times when the market has pulled back and tested this breakout/support line. One might suggest that it broke that line in early August on the de-risking event around the yen carry-trade unwind, but the closing price that day was back above support, so the violation of support wasn’t validated. I also see that prices have been making a series of lower highs since March, which is leading to the development of a pennant pattern forming in price, with the upside resistance at $65,000 and the downside support at $53,000. From a technical standpoint, there would be no trade until prices move either above $65,000 or below $53,000, waiting for the consolidation pattern to either break out or to break down. Another interesting feature of the chart above is the bottom panel, which is the open interest in the contract. I have drawn a radius on this chart to help more clearly identify that open interest has steadily been rising in Bitcoin futures throughout 2024 and right now it sits near the highs of the year.


Seasonality of bitcoin over a long-term (13 years) time on top and a shorter-term (five year) time on the bottom chart

What might the seasonality of bitcoin suggest for the possibility of a move outside of this consolidation pattern? I began by looking at a longer-term time horizon back to 2013, which is the first year I have 12 months of data. However, this data set may be a bit biased by some very large moves in excess of 100% in the early years of bitcoin. Thus, in the bottom panel, I narrow in on the last five years only to give perhaps a more realistic view of bitcoin seasonality. From this, I can see that markets are exiting the seasonally weak for the August and September period and entering into the seasonally strong for the Q4 period (followed by an equally strong Q1 period). This may give a possible catalyst for identifying in which direction Bitcoin futures may break in their pennant pattern formation.


Bitcoin implied volatility matrix of volatility by expirations and deltas

While I might be leaning toward a directional view as to which way to trade bitcoin from here, I really wouldn’t look to do so in the futures market until it breaks out (or breaks down) on a closing basis. I might normally look to do it if I felt there was a catalyst to drive it coming from the election or moves in other correlated products like Nasdaq or gold, however, I do not feel strongly enough that the relationship exists. I might still want to have some exposure before there is a clear technical signal simply because of the sharply positive seasonality bitcoin has exhibited over the last five years. With enough uncertainty, I look to the options market to structure an idea with the hope of finding a structure that can give me limited downside if I am wrong but help me participate in the upside if I am right. 

As there is no CVOL for bitcoin, I instead look at the implied volatility of Bitcoin options. I look across a range of maturities and deltas to see if I can identify any relative value opportunities. The first thing I notice when looking at this matrix is the upward-sloping nature of implied volatility. This tells me the market sees no near term catalysts but is instead impacted more by the consolidating nature of the price action. This could present some opportunity to look at options in the front part of the curve. The other thing I notice is that out-of-the-money call options tend to trade at a similar implied volatility as the at-the-money options while the out-of-the-money put options trade at a premium. This is a skew more typically seen in the equity market and not the skew typically seen in the bitcoin market prior to the institutionalization of bitcoin, maybe not starting this year, but happening perhaps more in earnest this year. There is nothing wrong with this as skew is impacted by end-user supply and demand. In fact, this may present an opportunity for a trader who is looking to use options to set up a bullish idea, as I am in this case.


Expected return of short a P2EX4 62,000-55,000 put spread to fund a long P2EX4 70,000 call

CME Group now offers Friday futures contracts on Bitcoin, referred to as Bitcoin Friday futures (BFF), and these products may in fact become a trader’s BFF. The futures offer a precise and flexible way to trade bitcoin exposure, as they represent 1/50 of a bitcoin, ensuring capital efficiency and accessibility. Thus, I looked at options that will trade at a similar expiration, settling on the P2EX4 contracts that have 32 days to expiration at the time of this writing.  I wanted to express a long directional view, while limiting my downside into a fixed-risk structure because I will be putting it on before any strong technical signal is given. Yet, while I want to cap the downside risk, I do not want to cap my upside potential, since the seasonality is strong, and a break above $65,000 could easily bring the all-time highs into focus on a measured move basis. I have to take some risk to do this, and the risk I am taking is the fixed risk, which I need to set nearer to the futures price in order to get unlimited upside. 

I have put together a zero-cost idea to give me the ultimate potential leverage, but while the initial cost is zero, my max risk is that we move lower and I lose the difference between the strikes. However, if positive seasonality and an upside breakout occurs, I make money one for one above my upside strike. The structure I have chosen is a short 62,000-55,000 put spread that I sell, using that premium to buy a 70,000 call, all with futures currently at 64,000. I chose those strikes on the put spread because I need to sell some meatier put option to take in some premium, but I want to cover the downside exposure should markets trade through the downside break down level. I chose my call strike to be the one where I can do the entire trade for no cost, though people willing to spend some money on premium can use a similar structure, but either move the put spread strikes lower or bring the call strike lower so profitability kicks in earlier. 

Compared to futures, the downside is limited for this structure. Compared to futures, the upside is the same once I get above the call strike. Between 62,000-70,000, at expiration, I would have no exposure and not gain or loss, which is also different from futures. Thus, while the entire structure is long deltas, it is a 55-delta spread, the payoff is quite different at several nodes versus the futures. However, I prefer it because it is more of a set-it-and-forget-it structure that would allow me to participate in upside price moves driven by seasonality that may trigger a technical breakout. If I wait for the futures, I may be chasing a strong market by the time it breaks out. 

It is never easy to know if one should be patient and wait for the signal or have some skin in the game just in case. I see the value of waiting for the technical signal, however, for me, the overwhelmingly strong Q4 seasonality was a reason to look for bullish ideas that would give me exposure ahead of a signal. 

CME Group tools and products give traders the flexibility to consider these different ideas and pathways. BFF may just become a trader’s new BFF.

Good luck trading!



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