Vol Commentary: A Changed Political View?

Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.

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It was an active weekend for Bitcoin, as prominent politicians took the stage at the Bitcoin Conference in Nashville. RFK was the most aggressive, promising to sign an order which would both halt selling of seized BTC and also establishing a buying program to be used for a strategic reserve. Cynthia Lummis announced a legislative proposal to purchase one million BTC over the course of the next five years. But all eyes were on Trump; a similar announcement from the front-runner would mean much more than from a third-party candidate or from a senator who has been supportive of crypto for years. Trump announced that he would remove Gary Gensler on day one, that he would establish a crypto advisory council, and suggested that the US should not sell their current BTC. He presented a general message that, under his administration, the crypto industry would be encouraged to remain in the US. Tonally, the market was underwhelmed; BTC had rallied to just shy of 70k ahead of the speech, but it pulled back immediately after. At the moment, it seems as if the market was slightly over-positioned long ahead of the speech and was disappointed by the tone, but looking at the actual content, it seems substantial, so we may see Monday’s market treat it more positively than the weekend warriors who stayed on the desk to trade the event.

It will be interesting, over the coming months, to watch the Democrats’ stance on crypto come into clarity. In Nashville, Trump presented Democrats as out to kill crypto. In May, we saw strong suggestions that Democrats realize they’ve been on the wrong side of the issue; with a new candidate, they may seek to reposition themselves. This was the message from Wiley Nickel at the conference, and a group of Democrats, including a dozen members of the house, has written a letter calling for the DNC to change its stance on digital assets. The DNC, taking place in about three weeks, may be another event closely watched by crypto traders.

The other major impact here is that, whether or not the US ends up holding BTC in its strategic reserves, the Overton Window has now shifted, probably permanently. Just weeks after Germany sold a meaningful amount of seized BTC into the open market, there is now even more of a permission structure, globally, for governments to openly discuss actually purchasing BTC. El Salvador was an outlier when it became the first country to purchase BTC as a treasury asset in September of 2021; it seems as if the conversation in the US has set the stage for multiple other countries to take the same actions over the course of the next year.

ETH is down about 5.5% since the launch of Ethereum ETFs last Tuesday. General estimates across the market suggested the eventual size of the Ethereum ETFs would be between 12-18% of the AUM of BTC products. From a volume standpoint, it has been a successful launch, with $3b in volume over the first four days, 27% of the first four days of BTC. However, the reason for the market selloff is the net flows; there have been about 1.2b of flows into new ETFs, but 1.5b of Grayscale’s ETHE fund has been redeemed, a net outflow of 341m. This contrasts with BTC, which saw a net inflow of about $1.2b in the first four days. It’s worth noting that BTC performed poorly from a price standpoint in the first few weeks following the launch, and the AUC of BTC ETFs didn’t really accelerate until nearly a month after launch; after launching on Jan 16, between Feb 5 and Mar 18 the size of BTC ETFs increased from 1.5b to $12b, and BTC rallied nearly 90% during that period. This period feels very similar to the initial period of BTC, where inflows are either a) very small, or b) only driven by traders unwinding Grayscale and purchasing Blackrock, Fidelity, or Bitwise to maintain their exposure. If ETH flows flip from negative to positive as they would be expected to do, ETH could have the opportunity to see a rally of a similar magnitude.

Amidst all the attention on BTC and ETH at the top, SOL has been quietly rallying, up 30% in July with most of crypto down small. SOL has broken itself in a convincing way out of the alts conversation, and could be one of the coins with the most to gain if US regulations were to become more accommodative; there are already filings for SOL ETFs, from VanEck and 21Shares.