Bitcoin ETFs Subdued, ETH's Supply Tight, and HK's Eastern ETF Gateway

• Hong Kong is set to approve its first spot bitcoin ETF in April
• Etherfi maintains its lead in the liquid restaking niche with over $3.8 billion in deposits
• Monad Labs raises $225 million in a funding round led by Paradigm

Bitcoin spot ETF flows quiet, ether's supply squeeze in sight

Crypto markets traded in green territory this week, with the collective market capitalization of the crypto space just shy of $2.6 trillion, while Bitcoin maintained its dominance above the 52% mark. 

Among the blue chips, both bitcoin and ether rallied 7% compared to the previous week. Turning our attention to the US-listed spot bitcoin ETF sector, activity was marked by a blend of restrained inflows compared to the earlier part of March, alongside a couple of days of outflows. 

Since their inception, Blackrock and Fidelity have attracted a cumulative net inflow north of $22.99 billion (as of April 10), in contrast to Grayscale, which experienced net outflows totaling $15.98 billion. 

Despite these fluctuations, the collective ETF universe has amassed a noteworthy $12.49 billion in cumulative daily net inflows since the approval in January. 

The Securities and Exchange Commission (SEC) has announced a 45-day extension for deliberation on whether to approve the New York Stock Exchange (NYSE) to introduce options trading on spot bitcoin ETFs. 

In a notice issued on Monday, the SEC designated May 29, 2024, as the deadline by which it will either approve or disapprove the proposal, or initiate further proceedings to consider disapproval. The proposed options trading would involve ETFs such as the Bitwise Bitcoin ETF and the Grayscale Bitcoin Trust, while also extending to any trust holding bitcoin. The NYSE submitted the request to the SEC on February 9, seeking authorization to commence options trading. 

As a self-regulatory organization (SRO), the NYSE was required to file for a rule change and allow for public commentary. Following the filing, the regulator had a 45-day window to receive comments and render a decision, failing which it could opt for an additional 45-day extension, as it has now elected to do.

This past week stood out as a rare instance where ether did not underperform compared to bitcoin, with the ETH-BTC pair currently at its lowest range since April 2021. Despite the market's tempered expectations regarding positive news on spot ETH ETF application decisions expected in May, Ethereum's ecosystem growth continues unabated. 

Notably, Blackrock chose to launch a tokenized fund on Ethereum instead of utilizing private chains, a move that underscores the legitimacy of public smart contract chains and bolsters Ethereum's position among Layer 1 solutions. Data from The Block reveals that the active supply of Ether, representing the supply that has moved between wallets within specific time frames, is currently at historically low levels for periods exceeding one year. 

The active supply over 30- and 90-day periods is also near all-time lows, having dropped significantly from their peaks. Apart from HODLing, a potential factor contributing to this limited supply could be the substantial amount of ether locked in staking.

Liquid staking gained traction during the last bull run and remains a significant force in the cryptocurrency landscape. However, we are currently observing a noteworthy surge in the adoption of liquid restaking, driven primarily by increased deposits on EigenLayer. 

EigenLayer aims to utilize ether deposits to fortify third-party protocols, thereby enhancing the ecosystem's resilience. This surge in adoption has led to a corresponding increase in the total value locked (TVL) in Liquid Restaking Tokens (LRTs), with Etherfi playing a pivotal role by managing a substantial portion of this value. 

With over 1.07 million ether under management, representing approximately $3.7 billion in user deposits, Etherfi continues to lead the liquid restaking market. Restaking offers users the opportunity to utilize their staked ether or corresponding liquid staking tokens on platforms like EigenLayer for restaking purposes. EigenLayer then allocates these assets to support other Ethereum-based applications, bolstering the security and functionality of the network. Furthermore, LRT protocols offer an accessible avenue for users who may not possess the requisite 32-ETH for native or direct restaking, thereby democratizing access to the platform. This accessibility contributes to the substantial accumulation of assets by the top LRT protocols, which collectively account for over two-thirds of EigenLayer's $15 billion TVL.

While the Ethereum ecosystem continues its expansion, the network's speed—or lack thereof—has prompted numerous initiatives aimed at providing a faster, decentralized finance (DeFi), environment. 

These efforts include the development of alternative layer-1 blockchains such as Solana and Cardano, as well as layer-2 chains that bundle or roll up transactions for quicker processing before validation on Ethereum. Monad Labs, seeking to create a swifter iteration of the Ethereum blockchain, announced a successful fundraising round of $225 million led by Paradigm. This influx of capital will enable Monad to expand its team and allocate resources towards transitioning the test version of its blockchain into production. Notably, Monad's layer-1 blockchain remains compatible with the Ethereum Virtual Machine (EVM), ensuring compliance with Ethereum's transaction and smart contract execution rules. According to Monad, over 96% of the capital flowing through DeFi is processed by the EVM. In contrast to Ethereum's limited throughput of fewer than 20 transactions per second (TPS), Monad asserts that its testnet, launched in March, can handle approximately 10,000 TPS. To achieve this milestone, Monad revamped the blockchain code, implementing techniques such as parallel execution to optimize performance across all protocol levels and enhance throughput.

Hong Kong's ETF traverse, BTC's convexity to diverse

Switching back from blockchain to ETFs, the Hong Kong subsidiaries of multiple China-based asset management firms have submitted applications or explored ways to offer spot bitcoin ETFs in the administrative region. Harvest Fund and Southern Fund, both located in Hong Kong and each managing assets worth more than $200 billion, have shown interest in offering such ETFs, according to the Chinese state newspaper Securities Times. 

Due to severe restrictions on cryptocurrency trading and mining, asset managers cannot offer bitcoin ETFs in mainland China. The news follows reports that Harvest Fund's Hong Kong arms had submitted an application for a spot bitcoin ETF in January. Southern Fund, which offers bitcoin futures ETFs and ether futures ETFs in Hong Kong, could also be interested in launching a spot bitcoin ETF. Crypto investors have waited months for spot bitcoin ETFs' debut in the Hong Kong market. Last year, the Hong Kong Monetary Authority and the Securities and Futures Commission announced that they would accept applications for the crypto-based ETFs. The funds’ rollouts would allow Hong Kong investors to gain exposure to bitcoin. According to a Reuters report, spot bitcoin ETFs could potentially debut in Hong Kong this month, with the initial approvals expected to be announced as soon as next week.

While premature to draw conclusions or establish definitive patterns, traditionally, the first and last weeks of the month exhibit heightened activity in subscription and redemption processes. However, the latter part of March and the initial days of April witnessed relatively subdued levels of daily net inflows compared to the daily inflows observed during the final week of February and the initial week of March. Additionally, as we approach the conclusion of the Bitcoin Halving in a few weeks, market participants have already begun factoring in the likelihood of the rejection of the ETH spot ETF application scheduled for May. There appears to be a prevailing consensus among many observers that the path to ETH ETF approval, alongside staking, will be fraught with challenges and could be protracted.

In the absence of any significant macroeconomic or geopolitical developments, the market currently lacks clear short-term cues. Notably, investors are paying a high funding rate to maintain leveraged long positions. If the market remains stagnant for an extended period, the cost of maintaining such positions could become prohibitively expensive. Historically, summers tend to be slower in terms of market activity, with risk returning typically in late July or August. On the longer time horizon, this is the first time the backdrop aligns favorably with the inflation hedge thesis. Heightened market concerns over escalating US debt levels are evident. Gold recently attained fresh all-time highs in the last quarter, solidifying its status as a longstanding choice for inflation protection. In contrast, bitcoin, still in the process of gaining broader acceptance, offers distinctive convexity benefits within a portfolio framework, reflecting its potential as a digital alternative to traditional stores of value.

Macro pulse 

Among the TradFi assets, US equities extended their losses in April, posting a weekly decline of 1%, primarily in response to hotter-than-expected inflation data. 

The March US consumer price index exceeded expectations, particularly due to significant increases in rents and transportation costs. This development has raised concerns that inflation may be solidifying its grip as the economy continues to gather momentum. Core CPI, which excludes food and energy costs, has risen by 0.4% from February. The year-over-year rate remained unchanged at 3.8%, contrary to expectations of a decrease. 

Given the persistent upward pressure on prices and the strong jobs report from last week, Fed swaps are now indicating expectations for only two rate cuts throughout the entire year. Oil futures rose by 1% week on week as traders anticipate a possible strike by Iran or its proxies against Israel. Elsewhere, the US Dollar index rose by 0.9%, the 10 year US Treasury yields edged 20bps higher and the Gold and Silver index gained 1.8% compared to previous weeks.

*Note: Weekly (7 calendar day) performance figures are as of 8am SGT on April 11, 2024 

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