WTF ETF?

 (What the fungible?)

(Exchange Traded Fund)

Now that we've gotten that cleared up, Hi! Hello! Dr. Freeman here with some thoughts about a crazy week of Monday 3/22/2021 (dates 'merican style).

As many have probably read, last Friday was the time of expiration for a record value of Bitcoin contracts; $6 Billion in fact. Thatsa lotta contracts!

For those who have no clue what that means, it's okay, we're here to talk about it. There's plain ole' vanilla buying Bitcoin on an exchange or simple swap site. We usually call that an instant buy or a spot trade. Then, there are contracts, which represent a pre-set $ value block per contract, and a person can purchase 'x' contracts with the intention to 'long' or 'short' the price. You are gambling on the future price of Bitcoin, and there are pre-determined goals for how much the price should go up or down. Unlike spot trading, where you may buy at market or with a limit order, and you can choose any price to sell, again either at market or limit, the idea of futures contracts is an agreement to settle a pre-determined price at a specific future date. That is, instead of perpetual contracts that operate similar to spot, but in contract blocks. Most people are going to apply a certain amount of leverage to contract trades, and this weighs against their trade value. There is a range between the number of contracts available, the rising or falling cost of Bitcoin, the amount of money available in the overall platform's lending pool, and how many 'x' leverage a user applies. All of these factor in to a set window of value. If they guess wrong, let's say they long Bitcoin to go up $1000 and it is headed downwards, there is a bit of a race against the clock, and the value of the contracts applying the leverage, where if the price goes too low, that position is liquidated. If the person guesses right, they stand to earn, or if we're talking gambling, to win more than the flat percentage the position represents, because the leverage ups the value of the trade by the multiple of the leverage chosen. So, higher leverage, higher risk if it goes the opposite direction.

People who buy contracts at whale level are fully aware of the risks involved, and anyone who has seen the fluctuations that Bitcoin does regularly, knows that the technical indicators can only get you so far. A lot is left to chance. When there are billions of dollars of contracts longing and shorting Bitcoin, it absolutely does affect the real market value.

Keep in mind, that emotion is a strong caliber for price, and even more, the bots do it too. Bots 'look' at many of the same indications of price movement and momentum that humans are watching, and they are programmed to make very similar educated decisions. So, yes, futures contracts have a huge weight on the current value of Bitcoin. With Bitcoin gradually diving from $61,000 to the mid $50,000's, there's a good chance that a lot of people using expiration-based contracts as opposed to perpetuals, were watching nervously to see if the price would go low enough to trigger their shorts, or whether it would rebound to rescue their longs.

That is where things got interesting, because as clever as it often is the case, in poured the pro-Bitcoin announcements. Elon Musk, as you must know, announced that you can now buy a Tesla with Bitcoin! WooHoo! Up goes the price about 4%. Hmmm not as much a rebound as hoped. This was followed by new market entrance movement from Morgan Stanley offering Bitcoin exposure to only their richest clients. Boom Bitcoin rose a few hundred dollars after starting to fall. Then, Fidelity announced filing for an ETF with the SEC. Boom! Still, very little full-on recovery of the Bitcoin price.

These announcements are clearly timed for a positive impact. Some speculate that there is a connection to protecting long positions, others guess that generally speaking, those who are investing heavily into Bitcoin HODL's are very anti-shorting, because of the effect it tends to have on downward pressure against Bitcoin's value. My guess is that both are equally true, and it doesn't take much analysis to assume this presumption correct, but I think it's also in protection of actual whale longs, and not just overall value.

All of this is back-story to the topic, which is the ETF and its affect on the market. In some countries ETF's are finally making their way through, and many people are excited about the connection that makes to the mainstream investment world. Since Bitcoin broke $20K against in 2020, investors have been hearing about Bitcoin in brief news blurbs for the first time since 2017's end. They are asking their brokers and financial advisors for ways to gain exposure to Bitcoin price speculation without having to go on those risky exchanges everyone tells them about. Exposure still means risk, but the aim is for investors to be able to keep their same earnings and savings accounts already established, while adding that Bitcoin ticker to their portfolio. With more whale loud mouths spouting to investors that it is now suddenly okay to start adding 1-3% of their portfolio to that wacky wild west crypto-world, the ETF is a preferred financial mechanism to do so. A fund places the exposure item on the investment firm's side, allowing clients to buy into that fund's value. So, let's say Fidelity invests $1 Billion to launch their Fidelity Bitcoin Exchange Traded Fund, their clients will purchase 'x' shares of Fidebitcoin or whatever it's called. The price value of that ETF will rise and fall with the market price of Bitcoin, and the investor will get the same profit or loss from the market movement of Bitcoin as they would get from setting up a separate account and buying Bitcoin directly. They have the confidence in someone overseeing their investment and letting them know how it's performing, under the 'safety' of a familiar account. 

So, why does the banking world want this so badly? Michael Saylor buys Bitcoin and adds it to Microstrategy's earnings. In his mind, it is a conversion upward from a fiat that is steadily tanking in value, into a highly volatile speculative tool he believes will continue to go up 100% in value multiple times. Elon Musk is buying Bitcoin and now converting cash inflows into Bitcoin, creating purchase on-ramps to their crypto through customers who can now pay with their Bitcoin if they wish. These are massive market signs of confidence in Bitcoin's future, and lack of confidence in fiat. So, why the ETF? Or, WTF ETF?

If a bank investment firm is allowed to list their fund and provide market exposure to an asset, they can charge a fee to customers who invest in the fund. Customers will have the same win-loss experience with Bitcoin, but the investors in the fund will earn profits that otherwise would not pass through their platform. What's the incentive in offering Bitcoin as a listing if they only interact with the client with withdraw fees and custody? The ETF provides the lending agency all sorts of tax impact perks, and in some cases investor clients are able to use loop-holes in American capital gains that would apply if purchasing and selling profits in Bitcoin directly. There's more to the story, but that is the basic flow of interest. Matching the market price through an ETF may give great exposure to Bitcoin and invite more people in, but it is a way for banks to earn on Bitcoin whether it rises or falls, placing more of the risk on clients, while earning fees based on value.

Much of the purchase and hold affect of an ETF can still have a positive impact on Bitcoin's market price, but something more important to understand is the underlying feature that most people believe gives Bitcoin such a strong store-of-value appeal. That limited supply of 21 million Bitcoins is the end game to the entire structure of it's value. People assume that when thousands of Bitcoins are being purchased by Saylor, Musk and others, and now we'll see more and more 1-3% whale portfolios diving in, these coins will get purchased and stored into safe wallets off-exchange, where they will sit for years. When thousands of already-expensive units of Bitcoin are removed from the market, it puts a higher pressure on the sell positions that already exist on resting order books, and it gives more incentive for people to FOMO buy-in, meaning they will purchase at market, saying "I'll have what Elon's having, please".

So again, what about the impact of the ETF? Technically, if an ETF is doing well, and is getting approved, more countries will follow those legislative decisions and pile in. It will be good business for banks and lending platforms, and again more groups will file to add their own. More ETF's mean more interest, more capital, and more exposure to Bitcoin, but it does something strange to that all-important scarcity model. The more financial tools that exist which allow someone to bid on the current value of Bitcoin without actually buying Bitcoin, the more it is leaving the actual asset untouched. That means technically, more Bitcoins can be available in circulation at market. Maybe that's the entire point? The more ETF's laying around, and the more people prefer loopholes and new ways to earn off the same instrument, the less the original source is getting pressed against its own limited supply. This can easily cause a leaky faucet valuation, which is also one of the ways that a slightly lower price, for a slightly longer time, can provide a means for more ultra-whales to grab Bitcoin for cheap. Eventually, no matter what anyone says or does, the wealthiest will keep acquiring the real principal until it does have a permanent, lasting effect on price, unless the governments of the world blow it up first.

Those are Gordon's heroic thoughts on ETF's and their fun-fungible effect on a scarce intangible.

And for now, Gordon Freeman, the Free Man, out.